Icahn's WestPoint Making Progress
By Don Hogsett -- Home Textiles Today, 11/13/2006 12:00:00 AM
New York —
Steering a slow course toward a turnaround, and building a platform for lower costs and future profits by beefing up its off-shore operations, WestPoint Home recorded a third-quarter operating loss of $24.1 million — five times the size of a year-ago deficit of $5.1 million.
But in one clear sign of improvement, the quarter's operating loss was only half the size of an even bigger loss of $48.3 million during this year's second quarter.
Blurring the year-over-year comparison, and sharply widening the gap, this year's third-quarter loss contrasts today's WestPoint Home — a company paying all its bills, still overhauling operations and making overseas acquisitions as it takes control of its own global sourcing — with yesterday's WestPoint Stevens, a company that had its debt wiped out and costs pared as it emerged from a painful bankruptcy under new ownership.
Last year's third-quarter loss covers only that portion of the quarter it was owned by its new parent, American Real Estate Partners (AREP), a diversified vehicle controlled by investor Carl Icahn. Other holdings include real estate and gambling, including three Las Vegas casinos.
In a further sign that WestPoint's business is stabilizing and growing after years of dwindling sales and punishing losses that accompanied a prolonged bankruptcy, third-quarter sales edged up by 1.4% to $240.5 million from $237.1 million during the second quarter as the major mill layered on fresh sales.
While sales, along with margins and costs, improved throughout the year, and its operating loss was reduced from the previous quarter, AREP said it is operating in a mode of waiting patiently — and cautioned that as it continues to streamline U.S. operations, shifting production overseas, a profit is not in the cards until some time in 2008.
A practical and complete comparison with 2005 WestPoint results is not possible since the company was acquired in the midst of last year's third quarter, and a full set of financials for the prior-year period is unavailable.
Releasing its own third-quarter financial results, the major mill's new parent provided a glimpse of WestPoint Home's current state, though not a detailed comparison with year-ago results.
Bedding sales in the quarter totaled $149.5 million, twice the size of terry sales of $71.8 million, marking a big shift from an era when bed and bath were in greater parity. Other sales, mostly from its outlet stores, brought in another $19.2 million.
Average gross margin has improved substantially moving through this year, coming in at 7.6% during the third quarter, a big improvement over the 6.4% for the first nine months of the year. While margins are improving, they were still hurt, the company said, by the carrying costs of some U.S. plants scheduled to close both this year and next.
Chipping away at its overhead, WestPoint's operating costs measured as a percentage of sales dropped to 16.3% during the quarter, improving on an even higher cost structure of 17.1% for the nine-month period.
Still acting as a drag, though substantially reduced, are restructuring and impairment charges as the company overhauls its manufacturing base and prepares to move its New York City headquarters 20 blocks south. Restructuring charges totaled $3.3 million during the third quarter, roughly a tenth of the $33.7 million through the first nine months of the year. Most of the quarter's total, $3.1 million, was tied to plant closings, while about $200,000 covered severance costs.
Laying the groundwork for more profitable future sales, AREP said in a conference call with investors last week that its previously announced buyout of a Bahrain bedding facility will close by the end of this year. Once completed, that plant will account for about 20% of WestPoint's bedding needs for its existing customer base.
Further ramping up its global capabilities, AREP said WestPoint's new Pakistan operation, Indus Home, closed on a $35 million financing package, purchased a newly built towel plant, and is now expanding capacity. That operation should be running at full power by mid-2007, replacing 35% to 40% of WestPoint Home's U.S. terry production at a substantial reduction in cost.
Moving much of its production out of the United States could result in savings of as much as 20% going forward, the company said.
WestPoint Home is by far the largest of AREP's holdings, accounting for almost two-thirds, about $241 million, of third-quarter sales of $373.3 million.
While bulking up its parent's sales, WestPoint has acted as a drag on its bottom line. Even so, the parent produced a profit of $103.1 million during the quarter, reversing a year-before loss of $126.1 million, and giving it the financial cushion and flexibility it needs as it positions WestPoint for a turnaround as a newly competitive, and hopefully profitable, global home fashions producer.
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