WPS issues warning

Don Hogsett, July 13, 2001

Atlanta — With sales falling off about 13 percent in a continued weak retail environment, and margins coming under increasingly heavy pressure, textiles giant WestPoint Stevens warned Wall Street to prepare for a worse-than-expected second-quarter loss of 30 cents a share before one-time items, far deeper than an earlier forecast of a break-even quarter to a 10 cents loss.

Triggering the warning was a steadily eroding sales picture, at WestPoint as well as its competitors. Earlier WestPoint had forecast a sales drop of 2 percent to 3 percent but was forced to revise it in recent weeks to a 13 percent decline. The double-digit shortfall was felt "across all product categories and all distribution channels," said Lorraine Miller, senior vp of investor relations, in a conference call with investors.

Exacerbating the weakening sales was an increasingly promotional mix of business as the company cut its prices to work off stockpiles, she added.

Unnerved by the profit warning, Wall Street responded by driving down WestPoint stock by 36 cents a share, or 16.3 percent, to $1.85 a share, blunting recent gains made after the company cut a new financing pact, raising $165 million in a second-lien financing, easing a recent cash crunch.

Going forward, Holcombe Green Jr., chairman and ceo, said he sees no improvement this year in a consistently bleak retail environment. But finding something of a silver lining, he said new Disney and Ralph Lauren programs about to kick in, as well as plus business from the Chatham blanket acquisition, should help push sales higher during the third quarter and second half of the year. "Third quarter sales will be positive, and we will be profitable. We do anticipate a very good third quarter, with sales growth and a return to profitability," he said.

"Assuming no improvement in retail conditions for the balance of the year," but getting a lift from new the new programs coming on stream, Green said sales for all of this year should rise by 3 percent, falling short of an earlier forecast of 4 to 8 percent growth. For all of this year, Green said, WestPoint now expects to post a loss before one-time items of about 15 cents per share, compared with a forecast of a profit ranging between 90 cents and $1.20 per share.

Betting heavily on its new Walt Disney and Ralph Lauren programs, M.L. "Chip" Fontenot, president and coo, said in a conference call with investors that given the plus business from the two new programs, "We expect to outperform the competition moving into the second half."

At the same time, he said, WestPoint is picking up business left behind by the collapse of a smaller rival, Thomaston Mills. "We can pick up about $25 million in institutional business from Thomaston over the next six to nine months, and another $25 million to $30 million in bed in a bag. But we're going to pick through the bed in a bag business very carefully — a lot of it is very low-margin business."

Working hard to hold a lid on costs, Green told investors in last week's conference call, "We are eliminating some jobs in the corporate office in the next few weeks. We're going to run as lean and mean as possible."

And looking for further cost savings, Fontenot said WestPoint is aggressively stepping up its sourcing of lower-cost products from overseas. "We're sourcing about $120 million now, and we expect that's going to be closer to $200 million by the end of the year. Our domestic products aren't going to grow, and you can expect that in the future 20 percent, at the minimum, of our sales will be sourced, a lot of that yarn, a lot of that greige goods."

While conceding the outlook is muted for the balance of this year, Green told investors he's still bullish as he polishes up his crystal ball and peers into 2002. "We feel very good about the next 12 months — the sales, the new programs coming on, the cost structure. We'll be getting our inventories down and our debt down, and we'll be getting some help from cotton. So looking forward, we feel very good about things."

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