Warnaco Group (WRNC): Strategic slimming in progress

There is an outfit in New York with a foundation in corsets, but a current portfolio that encompasses a variety of well-known intimate and sports apparel brands. Lately, it is trying to lose a little weight.

The Warnaco Group (NASDAQ: WRNC) designs, manufactures, markets, licenses and distributes a range of intimate apparel, sportswear and swimwear. Items are offered under such owned and licensed brands as Warner's, Olga, Lejaby, BoDY Nancy Ganz, Speedo, Anne Cole, Cole of California, Catalina, Chaps, Ocean Pacific, Nautica, Michael Kors and Calvin Klein. The firm sells apparel to about 50,000 department, mass merchandise and specialty stores in North America, Europe and Mexico. Customers include Wal-Mart (NYSE: WMT), Target (NYSE: TGT) and Costco Wholesale (NASDAQ: COST).

The firm pleased investors last week, when it announced that it intended to sell its Catalina, Anne Cole and Cole of California swimwear brands. Management also said it engaged Goldman Sachs to explore strategic alternatives for its Lejaby, Rasurel and Elixir intimate apparel and swimwear brands. Further, the company boosted its 2007 EPS guidance to $2.05-$2.15 ($2.02 consensus) and 2007 revenue guidance to about $1.98-$2.03 billion ($1.99B consensus). JP Morgan subsequently raised its rating on the shares to "overweight." Lazard Capital reiterated its "buy" and boosted its price target to $47. The stock popped on the company announcement and then began defining a bullish "flag" consolidation pattern. Stocks often leave flags moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.

Brokers now recommend the issue with two "strong buys," four "buys" and four "holds." The WRNC P/E ratio (17.92), PEG ratio (1.04), Price to Sales ratio (0.92), Price to Book ratio (2.43), Price to Cash Flow ratio (11.63), Price to Free Cash Flow ratio (26.05) and EPS Growth rate (150.38%) compare favorably with industry, sector and S&P 500 averages. Institutional investors hold about 95% of the outstanding shares. The stock is one of those used to calculate the S&P 400 MidCap Index. Through the past 12 months, it has traded between $18.86 and $41.78. A stop-loss of $33.90 looks good here. Note that the firm is expected to report Q3 results in early November.

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.