Chaps Gaffes Lead Warnaco to Restate, Terminate

by MR Magazine Staff

NEW YORK – Accounting improprieties at Chaps menswear precipitated the termination or resignation of three of the unit’s officials and will lead parent company The Warnaco Group Inc. to restate earnings for fiscal 2005 and the first quarter of 2006.

Warnaco released the news after the closing of the markets on Tuesday and didn’t disclose the names of those no longer with Chaps. However, the firm did say that the three didn’t qualify as “executive officers” according to the guidelines of the Securities and Exchange Commission.

The errors concerned “accounting for certain returns and vendor allowances” at Chaps and came to light during the company’s second-quarter closing review. They were reported to the firm’s audit committee, which engaged outside counsel, which in turn engaged independent forensic accountants, Warnaco said. The restatements will reflect adjustments for the Chaps numbers as well as for an error resulting from a new systems infrastructure at Warnaco’s Swimwear Group.

The restatements are expected to reduce net income from continuing operations per diluted share to between $1.05 and $1.07, from $1.12, for 2005, and cut 4 to 6 cents from the 34 cents per diluted share reported for the first quarter.

“Warnaco is committed to maintaining an internal culture and external reputation for practicing the highest standards in all of our business affairs and has zero tolerance for violations of our code of business conduct and corporate ethics,” said Joe Gromek, Warnaco’s president and chief executive officer, in the company’s statement on the matter. “We are deeply disappointed by the recent events at our Chaps menswear division and believe, based on information provided to date by the outside counsel to the audit committee and forensic accountants, that the inappropriate behavior was confined to that division. We remain confident in the potential of our brands and the prospects for our businesses.”

The company will address the effectiveness of its internal accounting controls when it releases its earnings for the second quarter ended July 1 and files its quarterly report with the SEC on Aug. 15. Amendments to the company’s annual report for 2005 and its report for the first quarter are expected “shortly thereafter,” Warnaco said.

In connection with the restatements, Warnaco is seeking a waiver of certain technical defaults under its credit agreement and said it was confident it will receive one “in a timely fashion.”