The Warnaco Group, Inc. ("Warnaco Group" and, collectively with its subsidiaries, the "Company") is subject to certain risks and uncertainties that could cause its future results of operations to differ materially from its historical results of operations and that could affect the market value of the Company's common stock. This Quarterly Report on Form 10-Q, including the following discussion, but except for the historical information contained herein, contains forward-looking statements that involve risks and uncertainties. See "Statement Regarding Forward-Looking Disclosure."

The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with: (i) the Consolidated Condensed Financial Statements and related notes thereto which are included in this Quarterly Report on Form 10-Q; and (ii) the Company's Annual Report on Form 10-K for Fiscal 2011.

The Company operates on a 52/53 week fiscal year basis ending on the Saturday closest to December 31. As such, the period from January 1, 2012 to December 29, 2012 ("Fiscal 2012"), the period from January 2, 2011 to December 31, 2011 ("Fiscal 2011") and the period from January 3, 2010 to January 1, 2011 ("Fiscal 2010") each contained 52 weeks of operations. Additionally, the period from April 1, 2012 to June 30, 2012 (the "Three Months Ended June 30, 2012") and the period from April 3, 2011 to July 2, 2011 (the "Three Months Ended July 2, 2011") each contained 13 weeks of operations and the period from January 1, 2012 to June 30, 2012 (the "Six Months Ended June 30, 2012") and the period from January 2, 2011 to July 2, 2011 (the "Six Months Ended July 2, 2011") each contained 26 weeks of operations.

The Company has three operating segments: (i) Sportswear Group; (ii) Intimate Apparel Group; and (iii) Swimwear Group. These groupings reflect the manner in which the Company's business is managed and the manner in which the Company's CEO, who is the chief operating decision maker, reviews the Company's business.

During the Three Months Ended June 30, 2012, the Company began to consolidate its sourcing/design/merchandising functions related to Calvin Klein Jeans, which are currently located in both Europe and New York, entirely to New York. As a result, during the Three and Six Months Ended June 30, 2012, $0.3 million of related costs have been classified as unallocated corporate expenses and such costs have not been allocated to the Sportswear Group (see Note 6 of Notes to Consolidated Condensed Financial Statements for further details). The total amount of these costs is expected to be approximately $6.5 million.

References to "Calvin Klein Jeans" refer to jeans, accessories and "bridge" products. References to "Core Intimates" refer to the Intimate Apparel Group's Warner's®, Olga® and Body Nancy Ganz/Bodyslimmers® brand names and intimate apparel private labels. References to "Retail" within each operating Group refer to the Company's owned full-price free-standing stores, owned outlet stores, concession / shop-in-shop stores and on-line stores. Results related to stores operated by third parties under retail licenses or distributor agreements are included in "Wholesale" within each operating Group. References to "sales mix" refer to the channels of distribution in which the Company's products are sold. For example, an unfavorable sales mix in a current period relative to a prior period refers to an increase in the percentage of sales of products in low margin channels of distribution (such as the off-price channel) to total sales. References to "allowances" refer to discounts given to wholesale customers based upon the expected rate of retail sales and general economic and retail forecasts.

References to the effects of fluctuations in foreign currencies reflect the following factors:

(i) the translation of operating results for the current year period for entities reporting in currencies other than the U.S. dollar into U.S. dollars at the average exchange rates in effect during the comparable period of the prior year (rather than the actual exchange rates in effect during the current year period);

(ii) a transaction effect related to entities which purchase inventory in currencies other than that entity's reporting currency. The transaction effect represents the effect of the following differences in the foreign currency exchange rates on cost of goods sold: (a) the foreign currency exchange rate in effect at the time of purchase of inventory sold in the current period and (b) the foreign currency exchange rate in effect at the time of purchase of inventory sold in the comparable prior year period; and

(iii) gains and losses recorded by the Company as a result of fluctuations in foreign currency exchange rates and gains and losses related to the Company's foreign currency hedge programs (see Note 11 of Notes to Consolidated Condensed Financial Statements).

Overview

Introduction

The Company designs, sources, markets, licenses and distributes sportswear, intimate apparel, and swimwear worldwide through highly recognized brand names. The Company's products are distributed domestically and internationally in over 100 countries, primarily to wholesale customers through various distribution channels, including major department stores, independent retailers, chain stores, membership clubs, specialty, off-price, mass merchandisers and other stores, and to retail customers, through the Company's owned full-price free standing retail stores, outlet stores, concession/shop-in-shop stores and the internet.

The Company has adopted a credo, which includes its role as a leading global apparel and accessories company, creating value for its stakeholders by growing its powerful brands and by being consumer, brand and product focused. In order to implement the tenets of its credo, the Company has identified the following key strategic objectives, which it intends to focus on over the next five years:

· Optimize and grow the international Calvin Klein businesses. The Company intends to continue the global expansion of its Calvin Klein Jeans and Calvin Klein Underwear businesses, particularly in Latin America, Asia and Northern and Eastern Europe. The key driver for this expansion is expected to be achieved via growth in the Company's retail business through a combination of new store openings, improving sales in existing stores and the selective acquisition of stores operated by distributors of the Company's products. The Company expects to concentrate its investment in new store openings in the faster growing regions of Asia, with a continued focus on the People's Republic of China, and Latin America. In Europe, in addition to expansion in Northern and Eastern Europe, the focus will be on improving productivity in existing stores and encouraging development of stores operated by distributors.

During the Six Months Ended June 30, 2012, the Company increased the number of Calvin Klein retail stores in Europe, Asia and South America, net of store closures, by 44 retail stores (consisting of an addition of 37 concession /shop-in-shop stores and an increase of eight full price stores, partially offset by the cessation of the Company's existing operations of its calvinkleinjeans.com e-commerce site in the U.S.). As of June 30, 2012, the Company operated (i) 1,803 Calvin Klein retail stores worldwide (consisting of 389 free-standing stores (including 271 full-price and 118 outlet stores), 1,413 concession /shop-in-shop stores and one Calvin Klein Underwear on-line store) and (ii) one Speedo® on-line store.

Retail net revenues from sales of Calvin Klein products increased 2.6% to $346.5 million for the Six Months Ended June 30, 2012 compared to $337.7 million for the Six Months Ended July 2, 2011, and represented 29.4% and 26.9% of the Company's net revenues for those respective periods.

· Gain market share in heritage businesses. The Company's heritage businesses include Chaps®, Warner's and Olga (both of which are included in Core Intimates) and Speedo® brands. During the past five years, the Company has focused on managing the existing product lines of the heritage businesses for profitability. The Company's strategy over the next five years is to achieve growth of the heritage businesses through gains in market share, while maintaining operating margins. The Company believes it can achieve gains in market share through expansion of the number of product lines, improvements in style of products, and increases in the channels, and to the customer base, in which the heritage brands are sold.

· Better alignment of organization with strategies. The Company believes that in order to achieve its strategic objectives it must build a more consumer-centric culture with strong customer relationships and an increased focus on product quality and style. To that end, the Company has recently made key organizational changes. Specifically, the Company created the positions of Chief Merchandising Officer and Chief Commercial Officer for its Calvin Klein Jeans businesses. In addition, the Company is in the process of centralizing its design and merchandising functions and streamlining its planning and production operations.

Net Revenues

The Company's net revenues decreased $27.5 million, or 4.6%, to $563.9 million for the Three Months Ended June 30, 2012 compared to $591.4 million for the Three Months Ended July 2, 2011 and decreased $74.1 million, or 5.9%, to $1.18 billion for the Six Months Ended June 30, 2012 compared to $1.25 billion for the Six Months Ended July 2, 2011. The decreases in net revenues for those respective periods include the unfavorable effect of foreign currency fluctuations, which resulted in decreases in net revenues of $27.2 million and $34.9 million, respectively. Thus, on a constant currency basis, net revenue for the Three Months Ended June 30, 2012 was effectively unchanged from net revenue for the Three Months Ended July 2, 2011 (see Non-GAAP Measures, below).

On a business segment basis, the decrease in net revenues for the Three Months Ended June 30, 2012 compared to the Three Months Ended July 2, 2011 was due to:

· a decrease of $21.3 million in the Company's Sportswear Group (which primarily reflects continued weakness in the Company's U.S. and European operations and the negative effect of fluctuations in foreign currency exchange rates in Europe, partially offset by increases in net revenues, primarily in Asia; and

· a decrease of $14.3 million in the Intimate Apparel Group (which primarily reflects macroeconomic weakness in Europe, Mexico and Central and South America and Canada and the negative effect of fluctuations in foreign currency exchange rates in Europe, partially offset by strong sales of the newly launched Calvin Klein Bold brand of men's underwear);

· partially offset by an increase of $8.1 million in the Swimwear Group (which primarily reflects the Company's strategy of focusing more on its higher margin customers and less on its lower margin customers).

On a business segment basis, the decrease in net revenues for the Six Months Ended June 30, 2012 compared to the Six Months Ended July 2, 2011 was due to:

· a decrease of $59.9 million in the Company's Sportswear Group (which primarily reflects continued weakness in the Company's U.S and European operations, the negative effects of fluctuations in foreign currency exchange rates in Europe and a strategic decision by the Company to reduce sales in order to reduce royalty penalties during Fiscal 2012 associated with sales in the off-price channel, partially offset by increases in net revenues in other regions, primarily in Asia;

· a decrease of $12.5 million in the Intimate Apparel Group (which primarily reflects macroeconomic weakness in Europe, Mexico and Central and South America and Canada and the negative effect of fluctuations in foreign currency exchange rates in Europe, partially offset by strong sales of the newly launched Calvin Klein Bold brand of men's underwear); and

· a decrease of $1.7 million in the Swimwear Group (which primarily reflects the Company's strategy of focusing more on its higher margin customers and less on its lower margin customers). While this strategy resulted in lower net revenues during the first quarter of Fiscal 2012, net revenues have increased during the Three Months Ended June 30, 2012 and are expected to continue to increase in the future.

On a channel basis, the decline in net revenues for the Three Months Ended June 30, 2012 compared to the Three Months Ended July 2, 2011 includes decreases in:

· the wholesale channel of $25.3 million, in the Sportswear Group and the Intimate Apparel Group, primarily in the U.S. and Europe, which reflects a decrease of $14.7 million due to the unfavorable effect of fluctuations in foreign currency exchange rates; and

· the retail channel of $2.2 million, including (i) a decrease of $4.3 million (3.0%) in comparable store sales, primarily as a result of decreases in Korea and Spain, which the Company believes are primarily due to poor macroeconomic conditions in Southern Europe and a general decline in the retail apparel industry in those regions, partially offset by an increase in comparable store sales in Hong Kong; (ii) a decrease of $12.5 million due to the unfavorable effect of fluctuations in foreign currency exchange rates, partially offset by (iii) an increase in retail net revenues of $14.6 million due to the net addition of 191,500 square feet of retail space from July 2, 2011 through June 30, 2012. The increase in retail space includes space for both the Sportswear Group and the Intimate Apparel Group and includes the opening of additional Calvin Klein international retail stores and the acquisition of a controlling interest in the business of the Company's distributor in India during the third quarter of Fiscal 2011. The total amount of the Company's retail space was 1.1 million square feet worldwide as of June 30, 2012.

On a channel basis, the decline in net revenues for the Six Months Ended June 30, 2012 compared to the Six Months Ended July 2, 2011 includes:

· a decrease in the wholesale channel of $82.8 million, primarily in the Sportswear Group and the Intimate Apparel Group in the U.S. and Europe which reflects a decrease of $19.4 million due to the unfavorable effect of fluctuations in foreign currency exchange rates; and

· an increase of $8.7 million in the retail channel, which partially offset the decrease in wholesale net revenues. The increase in the retail channel includes: (i) an increase in retail net revenues of $29.6 million due to the net addition of 191,500 square feet of retail space in the period from July 2, 2011 through June 30, 2012. The increase in retail space includes space for both the Sportswear Group and the Intimate Apparel Group and includes the opening of additional Calvin Klein international retail stores and the acquisition of a controlling interest in the business of the Company's distributor in India during the third quarter of Fiscal 2011; (ii) a decrease of $5.5 million (2.0%) in comparable store sales, primarily as a result of decreases in Korea and Spain, which the Company believes are primarily due to poor macroeconomic conditions in Southern Europe and a general decline in the retail apparel industry in those regions, partially offset by an increase in comparable store sales in Hong Kong ; and (iii) a decrease of $15.4 million due to the unfavorable effect of fluctuations in foreign currency exchange rates.

Operating Income

The Company's operating income decreased $19.8 million, or 37.6%, to $32.8 million for the Three Months Ended June 30, 2012 compared to $52.6 million for the Three Months Ended July 2, 2011, reflecting declines in the Sportswear Group ($27.2 million) and in the Intimate Apparel Group ($8.5 million), partially offset by an increase in the Swimwear Group ($2.9 million) and expense reductions (primarily associated with reductions in employee compensation) in Corporate/other ($13.0 million). Operating income includes restructuring charges and other exit costs of $16.2 million for the Three Months Ended June 30, 2012 and $5.0 million for the Three Months Ended July 2, 2011 (see Liquidity and Capital Resources - Restructuring and Note 5 of Notes to Consolidated Condensed Financial Statements).

The Company's operating income decreased $37.3 million, or 30.5%, to $85.0 million for the Six Months Ended June 30, 2012 compared to $122.3 million for the Six Months Ended July 2, 2011, reflecting declines in the Sportswear Group ($52.2 million) and in the Intimate Apparel Group ($9.0 million), partially offset by an increase in the Swimwear Group ($3.7 million) and expense reductions (primarily associated with reductions in employee compensation) in Corporate/other ($20.2 million). Operating income includes restructuring charges and other exit costs of $22.8 million for the Six Months Ended June 30, 2012 and $11.4 million for the Six Months Ended July 2, 2011.

During the Six Months Ended June 30, 2012, although the decline in operating income was primarily related to a decrease in net revenues, certain of the Company's businesses continued to experience an increase in product and freight costs, which adversely affected the operating margins of those businesses. The Company expects that product costs will stabilize or decline during the remainder of Fiscal 2012. During the Six Months Ended June 30, 2012, the Company was able to partially mitigate the cost increases described above in certain geographic markets in Asia and in Mexico and Central and South America by selectively increasing the selling prices of its goods and by implementing other sourcing initiatives.

Earnings per Share

For the Three Months Ended June 30, 2012 compared to the Three Months Ended July 2, 2011, income from continuing operations per diluted share decreased 77% to $0.23 per diluted share (from $1.01 per diluted share). The effect of fluctuations in foreign currencies on income from continuing operations per diluted share was negligible. For the Six Months Ended June 30, 2012 compared to the Six Months Ended July 2, 2011, income from continuing operations per diluted share decreased 49% to $1.01 per diluted share (from $1.99 per diluted share), including an increase of $0.03 per diluted share due to the favorable effect of fluctuations in foreign currencies.

Balance Sheet

As of June 30, 2012, the Company's balance sheet included cash and cash equivalents of $295.3 million and total debt of $252.8 million compared to $ 294.8 million and $223.3 million, respectively, as of July 2, 2011.

Non-GAAP Measures

The Company's reported financial results are presented in accordance with GAAP. The reported operating income, income from continuing operations and diluted earnings per share from continuing operations reflect certain items which affect the comparability of those reported results. Those financial results are also presented on a non-GAAP basis, as defined by Regulation S-K section 10(e) of the Securities and Exchange Commission ("SEC"), to exclude the effect of these items. The Company's computation of these non-GAAP measures may vary from others in its industry. These non-GAAP financial measures are not intended to be, and should not be, considered separately from or as an alternative to the most directly comparable GAAP financial measure to which they are reconciled, as presented in the following table:

                                                 Three Months Ended             Six Months Ended
                                               June 30,        July 2,       June 30,       July 2,
                                                 2012           2011           2012          2011

                                                (Dollars in thousands, except per share amounts)

Operating income, as reported (GAAP)       $      32,800   $     52,599   $     85,019   $  122,253
Restructuring charges and pension income
(a)                                               16,157          4,645         22,693       10,822
Operating income, as adjusted (non-GAAP)          48,957         57,244        107,712      133,075

Income from continuing operations
attributable to
Warnaco Group common shareholders, as
reported (GAAP)                            $       9,625   $     45,566   $     42,507   $   90,098
Restructuring charges and pension, net of
income tax (a)                                    11,734          3,218         16,382        7,339
Lejaby loan receivable (b)                        12,040               -        12,040             -
Taxation adjustment (c)                           (3,204)       (11,788)        (3,346)     (10,137)
Income from continuing operations
attributable to
Warnaco Group common shareholders, as
adjusted (non-GAAP)                        $      30,195   $     36,996   $     67,583   $   87,300

Diluted earnings per share from
continuing operations attributable to
Warnaco Group common shareholders, as
reported (GAAP)                            $        0.23   $       1.01   $       1.01   $     1.99
Restructuring charges and pension , net
of income tax (a)                                   0.28           0.07           0.39         0.16
Lejaby loan receivable (b)                          0.29               -          0.29             -
Taxation adjustment (c)                            (0.08)         (0.26)         (0.08)       (0.22)
Diluted earnings per share from
continuing operations attributable to
Warnaco Group common shareholders, as
adjusted (non-GAAP)                        $        0.72   $       0.82   $       1.61   $     1.93

(a) For all periods presented, this adjustment seeks to present operating income, income from continuing operations attributable to Warnaco Group common shareholders and diluted earnings per share from continuing operations attributable to Warnaco Group common shareholders without the effects of restructuring charges and pension income. Restructuring charges (on a pre-tax basis) were $16.2 million and $22.8 million for the Three and Six Months Ended June 30, 2012, respectively, and $4.9 million and $11.4 million for the Three and Six Months Ended July 2, 2011, respectively. Pension income (on a pre-tax basis) was $0.1 million and $0.1 million for the Three and Six Months Ended June 30, 2012, respectively, and $0.3 million and $0.6 million for the Three and Six Months Ended July 2, 2012, respectively. The income tax rates used to compute the income tax effect related to this adjustment correspond to the local statutory tax rates of the reporting entities that incurred restructuring charges or recognized pension income.

(b) For the Three and Six Months Ended June 30, 2012, this adjustment seeks to present income from continuing operations attributable to Warnaco Group common shareholders and diluted earnings per share from continuing operations attributable to Warnaco Group common shareholders without the effect of the adjustment to the loan receivable related to the Company's discontinued Lejaby business. This adjustment was recorded in other income/expense within income from continuing operations on the Company's Consolidated Condensed Financial Statements (see Note 18 of Notes to Consolidated Condensed Financial Statements). The reporting entity that recorded this adjustment has a 0% local statutory tax rate.

(c) For the Three and Six Months Ended June 30, 2012 and the Three and Six Months Ended July 2, 2011, this adjustment reflects an additional amount required in order to present income from continuing operations attributable to Warnaco Group common shareholders and diluted earnings per share from continuing operations attributable to Warnaco Group common shareholders at the Company's forecasted normalized tax rates for Fiscal 2012 (32.5%) and Fiscal 2011 (33.2%), respectively. The Company's forecasted normalized tax rates for both Fiscal 2012 and Fiscal 2011 exclude the effects of restructuring charges, pension income and certain tax adjustments related to either changes in estimates in prior period tax provisions or adjustments for certain discrete tax items. Adjustments for discrete items reflect the federal, state and foreign tax effects related to: 1) income taxes associated with legal entity reorganizations and restructurings; 2) tax provision or benefit resulting from statute expirations or the finalization of income tax examinations; and 3) other adjustments not considered part of the Company's core business activities. In addition, this adjustment for Fiscal 2011 excludes the effect of a benefit of $10.9 million recorded during the Three and Six Months Ended July 2, 2011 associated with the recognition of net operating losses in a foreign jurisdiction resulting from the successful petition of that country's taxing authority.

The Company believes it is valuable for users of its financial statements to be made aware of the non-GAAP financial information, as such measures are used by management to evaluate the operating performance of the Company's continuing businesses on a comparable basis and to make operating and strategic decisions.
Such non-GAAP measures will also enhance users' ability to analyze trends in the Company's business. In addition, the Company uses performance targets based on non-GAAP operating income and diluted earnings per share from continuing operations as a component of the measurement of incentive compensation.

Earnings per Share - As Adjusted

On an adjusted (non-GAAP) basis, for the Three Months Ended June 30, 2012 compared to the Three Months Ended July 2, 2011, income from continuing operations per diluted share decreased 12.2% to $0.72 per diluted share (from $0.82 per diluted share). For the Six Months Ended June 30, 2012 compared to the Six Months Ended July 2, 2011, income from continuing operations per diluted share decreased 16.6% to $1.61 per diluted share (from $1.93 per diluted share).

Net Revenues on a Constant Currency Basis

The Company is a global company that reports financial information in U.S. dollars in accordance with GAAP. Foreign currency exchange rate fluctuations affect the amounts reported by the Company when the Company translates its foreign revenues into U.S. dollars. Such rate fluctuations can have a significant effect on reported net revenues. As a supplement to its reported net revenues, the Company presents net revenues on a constant currency basis, which is a non-GAAP financial measure. The Company uses constant currency information to provide a framework to assess net revenue performance excluding the effects of changes in foreign currency exchange rates. Management believes this information is useful to investors to facilitate comparisons of net revenues and better identify trends in the Company's businesses.

To calculate the increase in net revenues on a constant currency basis, net revenues for the current year period for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average exchange rates in effect during the comparable period of the prior year (rather than the actual exchange rates in effect during the current year period).

These constant currency net revenues should be viewed in addition to, and not in isolation from, or as a substitute for, the Company's net revenues calculated in accordance with GAAP. The constant currency information presented in the following table for net revenues may not be comparable to similarly titled measures reported by other companies.

. . .