Gene Marcial’s Stock Picks April 22, 2009

Marcial: Finding Comfort in Clothier Warnaco Despite a recent runup, shares of the maker of popular Calvin Klein, Speedo, and intimate apparel lines remain promising

By Gene Marcial

Most investors are torn between pursuing a defensive strategy in these recessionary times and scouting for beaten-down shares of growth companies, many of which stumble during economic downturns.

To bridge the gap, long-term growth investor William Rutherford, president of Rutherford Investment Management, invests in companies that have consistent records of growth and, at the same time, possess defensive characteristics.

One company that tops Rutherford’s list: Warnaco (WRC), a leading global apparel maker, whose popular brands include Calvin Klein, Speedo, and Chaps. What distinguishes Warnaco from many other clothing companies is that it specializes in intimate apparel for both men and women. It also manufactures sportswear, such as jeans, and Speedo swimwear.

Demand for intimate apparel has been hot, helping propel Warnaco’s stock higher, to 27 a share on Apr. 21, from a 52-week closing low of 12.22 on Nov. 21. Despite the stock’s rise, it is well below its 52-week high of 53.89 reached on Aug. 11, 2008.

how much higher?

Regardless of the economic cycle, demand for intimate apparel remains strong, making it a good defensive play, notes Rutherford. So he expects Warnaco to participate in any consumer-spending recovery. At the same time, he adds, the company demonstrates an impressive growth profile, with a record of rising sales and earnings since it emerged from Chapter 11 bankruptcy proceedings in 2003. (It filed for bankruptcy protection on June 11, 2001.) New management took over and restructured the company.

There is concern, however, among some analysts that the stock may have little upside after its rapid advance.

Not true, says analyst David J. Glick of Buckingham Group (it owns shares), who rates the shares a strong buy. He raised his 12-month target from 28 a share to 32. Despite the stock’s “big bounce of 52% since early March, it is still trading at less than 10 times 2009 earnings estimate of $2.55,” says Glick. Since 2003 the stock’s annual average price-to-earnings ratio ranged from 14 to 30.5. The analyst says he is encouraged by the early momentum in Warnaco’s business so far this year.

“Our new valuation of 13 times [our] 2009 per-share earnings estimate still represents a discount to Warnaco’s five-year average of 15,” he notes. Warnaco’s own earnings forecast for 2009 is between $2.40 and $2.66 a share. Since reporting its quarterly earnings on Feb. 26, the company has indicated that revenue trends for 2009 have been running ahead of plan.

Strong Calvin Klein Prospects

Analyst Craig Sirois of independent investment research outfit Value Line (VALU) is impressed with the global growth potential of Warnaco’s Calvin Klein line. He notes that sales of Calvin Klein jeans and underwear have all increased at a solid double-digit pace year-over-year. And Warnaco’s intimate apparel business, he adds, is being driven by the successful launch of the Seductive Comfort line for women and strong sales of the men’s Steel offering. Sirois adds that the Speedo swimsuit brand has also gained key visibility, dominating the market with its LZRacer brand since it was introduced a year ago.

Not everything is hunky-dory, however. Because of the strength of the U.S. dollar, analysts expect headwinds from foreign currency translations could hurt earnings, which may also soften as consumer spending slows worldwide. Sales overseas accounted for 54% of Warnaco’s total last year. To offset part of the slowdown, Warnaco is pursuing a cost-cutting plan that would pare discretionary spending; selling, general, and administrative (SG&A) expenses; and capital spending,

Even so, analyst Eric Beder of investment firm Brean Murray Carret says that after beating analysts’ forecasts for fourth-quarter earnings, Warnaco provided proof in its 2009 guidance that the company “is poised to be a key winner in the current uncertain economic environment.”

Warnaco remains a “very appealing investment,” Beder says, because of its goal to expand its Calvin Klein brand significantly worldwide, aggressive expansion of square footage [at its retail outlets], and product rollouts “at a time when the rest of the retailing world has become myopically focused on the short term as opposed to a long-term strategy.”

The biggest Warnaco stakeholder is Fidelity Management, which owns 3.2 million shares, or 7.5%, as of Mar. 30, according to Bloomberg. And Wall Street is upbeat: Of the nine analysts who track it, eight tag it a buy and one rates it a hold.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial’s 7 Commandments of Stock Investing.