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 July 1, 2012 to September 29, 2012 (the "Three Months Ended September 29, 2012 ") and the period from July 3, 2011 to October 1, 2011 (the "Three Months Ended October 1, 2011") each contained 13 weeks of operations and the period from January 1, 2012 to September 29, 2012 (the "Nine Months Ended September 29, 2012 ") and the period from January 2, 2011 to October 1, 2011 (the "Nine Months Ended October 1, 2011") each contained 39 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 Nine Months Ended September 29, 2012, the Company continues to be in the process of consolidating 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 Nine Months Ended September 29, 2012, $1.0 million and $1.3 million, respectively, 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 $5.5 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

On October 31, 2012, the Company announced that it had entered into an Agreement and Plan of Merger, dated October 29, 2012 (the "Merger Agreement"), with PVH Corp. ("PVH") and Wand Acquisition Corp., a wholly owned subsidiary of PVH ("Merger Sub"), pursuant to which, and subject to the terms and conditions therein, Merger Sub will merge with and into the Company and the Company will become a wholly owned subsidiary of PVH. At the effective time of the merger, each outstanding share of the Company's common stock, other than dissenting shares or shares held by PVH, the Company or their respective subsidiaries, will be converted into the right to receive $51.75 in cash and .1822 of a share of PVH common stock (equivalent to $20.04 based upon a closing price of PVH stock of $109.99 on October 31, 2012).

Certain costs related to the proposed merger, such as advisor legal and accounting fees, are payable by the Company whether or not the proposed acquisition is completed, and in certain circumstances, the Company could be required to pay a termination fee of $100 million if the merger does not occur. The Merger is subject to the approval of the stockholders of the Company, regulatory approvals and other customary closing conditions. For a more detailed description of the Merger Agreement, please refer to the Current Report on Form 8-K filed by the Company on November 2, 2012.

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's mission is to become the leading global apparel and accessories company by growing its powerful brands and by being consumer, brand and product focused. In order to accomplish its mission, the Company has identified the following key strategic objectives.

•            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 Nine Months Ended September 29, 2012, the Company increased the number of Calvin Klein retail stores in Europe, Asia, South America and the U.S., net of store closures, by 92 retail stores (consisting of an addition of 4 outlet stores, 65 concession /shop-in-shop stores and 24 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 September 29, 2012, the Company operated (i) 1,851 Calvin Klein retail stores worldwide (consisting of 409 free-standing stores (including 287 full-price and 122 outlet stores), 1,441 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 decreased $5.3 million to $178.9 million for the Three Months Ended September 29, 2012 compared to $184.2 million for the Three Months Ended October 1, 2011 and represented 29.2% and 28.5% of the Company's net revenues for those respective periods. Retail net revenues from sales of Calvin Klein products increased $3.5 million to $525.4 million for the Nine Months Ended September 29, 2012 compared to $521.9 million for the Nine Months Ended October 1, 2011, and represented 29.3% and 27.5% 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 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 and filled 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 $33.6 million, or 5.2%, to $611.5 million for the Three Months Ended September 29, 2012 compared to $645.1 million for the Three Months Ended October 1, 2011 and decreased $107.7 million or 5.7%, to $1.8 billion for the Nine Months Ended September 29, 2012 compared to $1.9 billion for the Nine Months Ended October 1, 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 $30.7 million and $65.6 million, respectively. Thus, on a constant currency basis, net revenue for the Three Months Ended September 29, 2012 decreased $2.9 million from net revenue for the Three Months Ended October 1, 2011 and for the Nine Months Ended September 29, 2012 net revenue decreased $42.1 million from net revenue for the Nine Months Ended October 1, 2011 (see Non-GAAP Measures, below).

On a business segment basis, the decrease in net revenues for the Three Months Ended September 29, 2012 compared to the Three Months Ended October 1, 2011 was due to:

•            a decrease of $20.6 million in the Company's Sportswear Group (which
             primarily reflects the negative effect of fluctuations in foreign
             currency exchange rates in Europe, and Mexico and Central and South
             America combined with poor macroeconomic conditions in the Company's
             operations in those geographies as well as in the U.S.); and


•            a decrease of $15.7 million in the Intimate Apparel Group (which
             primarily reflects macroeconomic weakness in Europe, the U.S.,
             Mexico and Central and South America and Canada and the negative
             effect of fluctuations in foreign currency exchange rates in all of
             those geographies, partially offset by strong sales of Calvin Klein
             Bold brand of men's underwear, which was launched in March 2012);


•            partially offset by an increase of $2.7 million in the Swimwear
             Group (which primarily reflects the Company's strategy in the U.S.
             of focusing its Speedo business 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 Nine Months Ended September 29, 2012 compared to the Nine Months Ended October 1, 2011 was due to:

•            a decrease of $80.5 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 $28.1 million in the Intimate Apparel Group (which
             primarily reflects macroeconomic weakness in Europe, Asia, Mexico
             and Central and South America and Canada and the negative effect of
             fluctuations in foreign currency exchange rates in all those
             geographies, partially offset by an increase in net revenues in
             Asia, primarily due to the expansion of the distribution network in
             the People's Republic of China, and worldwide strong sales of Calvin
             Klein Bold brand of men's underwear, which was launched in March
             2012);

•            partially offset by an increase of $0.9 million in the Swimwear
             Group (which primarily reflects the Company's strategy in the U.S.
             of focusing its Speedo business more on its higher margin customers
             and less on its lower margin customers). As a result of this
             strategy, net revenues have increased during the Nine Months Ended
             September 29, 2012. Those increases were partially offset by a
             decrease in net revenues of Calvin Klein swimwear in Europe.

On a channel basis, the decline in net revenues for the Three Months Ended September 29, 2012 compared to the Three Months Ended October 1, 2011 includes decreases in:

•            the wholesale channel of $29.0 million, in the Sportswear Group and
             the Intimate Apparel Group, primarily in the U.S., Europe, and
             Mexico and Central and South America, which reflects a decrease of
             $16.5 million due to the unfavorable effect of fluctuations in
             foreign currency exchange rates; and


•            the retail channel of $4.6 million, including (i) a decrease of $0.4
             million (0.3%) in comparable store sales, primarily as a result of a
             decrease in Spain, which the Company believes is primarily due to
             poor macroeconomic conditions in Southern Europe, and in Korea,
             partially offset by an increase in comparable store sales in Hong
             Kong; (ii) a decrease of $14.2 million due to the unfavorable effect
             of fluctuations in foreign currency exchange rates, partially offset
             by (iii) an increase in retail net revenues of $10.0 million due to
             the net addition of 138,400 square feet of retail space from October
             2, 2011 through September 29, 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 the businesses of
             certain of the Company's distributors in Macau, Malaysia and the
             People's Republic of China. The total amount of the Company's retail
             space was 1.2 million square feet worldwide as of September 29, 2012
             compared to 1.0 million square feet as of October 1, 2011.

On a channel basis, the decline in net revenues for the Nine Months Ended September 29, 2012 compared to the Nine Months Ended October 1, 2011 includes:

•            a decrease in the wholesale channel of $111.9 million, primarily in
             the Sportswear Group and the Intimate Apparel Group in the U.S. and
             Europe which reflects a decrease of $36.0 million due to the
             unfavorable effect of fluctuations in foreign currency exchange
             rates; and


•            an increase of $4.2 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
             $38.6 million due to the net addition of 138,400 square feet of
             retail space in the period from October 2, 2011 through
             September 29, 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 the businesses of certain of the
             Company's distributors in Macau, Malaysia and the People's Republic
             of China; partially offset by (ii) a 1.2% ($4.8 million) decrease in
             comparable store sales ($397.6 million for the Nine Months Ended
             September 29, 2012 compared to $402.4 million for the Nine Months
             Ended October 1, 2011, primarily as a result of decreases in Korea,
             the People's Republic of China and Spain, which the Company believes
             are primarily due to poor macroeconomic conditions in Asia and
             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, northern Europe and Mexico and Central and
             South America ; and (iii) a decrease of $29.6 million due to the
             unfavorable effect of fluctuations in foreign currency exchange
             rates.

Operating Income

The Company's operating income increased $1.9 million, or 3.0%, to $66.7 million for the Three Months Ended September 29, 2012 compared to $64.8 million for the Three Months Ended October 1, 2011, reflecting increases in the Intimate Apparel Group ($2.6 million), the Swimwear Group ($2.9 million) and expense reductions (primarily associated with reductions in employee compensation) in Corporate/other ($1.0 million), partially offset by a decline in the Sportswear Group ($4.6 million). Operating income includes restructuring charges and other exit costs of $8.0 million for the Three Months Ended September 29, 2012 and $7.5 million for the Three Months Ended October 1, 2011 (see Liquidity and Capital Resources - Restructuring and Note 5 of Notes to Consolidated Condensed Financial Statements). The effect of fluctuations in the U.S. dollar relative to certain functional currencies where the Company conducts certain of its operations resulted in a $0.2 million decrease in operating income for the Three Months Ended September 29, 2012 compared to the Three Months Ended October 1, 2011.

The Company's operating income decreased $35.3 million, or 18.9%, to $151.7 million for the Nine Months Ended September 29, 2012 compared to $187.0 million for the Nine Months Ended October 1, 2011, reflecting declines in the Sportswear Group ($56.8 million) and in the Intimate Apparel Group ($6.5 million), partially offset by an increase in the Swimwear Group ($6.6 million) and expense reductions (primarily associated with reductions in employee compensation) in Corporate/other ($21.4 million). Operating income includes restructuring charges and other exit costs of $30.8 million for the Nine Months Ended September 29, 2012 and $19.0 million for the Nine Months Ended October 1, 2011. The effect of fluctuations in the U.S. dollar relative to certain functional currencies where the Company conducts certain of its operations resulted in a $0.7 million increase in operating income for the Nine Months Ended September 29, 2012 compared to the Nine Months Ended October 1, 2011.

During the Nine Months Ended September 29, 2012, the decline in operating income was primarily related to a decrease in net revenues. The decline in operating income was partially mitigated by (i) the stabilization or decline of product and freight costs during the Three Months Ended September 29, 2012 and (ii) the decline in selling, general and administrative costs, which resulted from the Company's focus on reducing those costs (see Selling, General and Administrative Expenses, below). The Company expects that product costs will continue to stabilize or decline during the remainder of Fiscal 2012. During the first half of Fiscal 2012, the Company was able to partially mitigate the increased product and freight costs 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 September 29, 2012 compared to the Three Months Ended October 1, 2011, income from continuing operations per diluted share decreased 13.3% to $0.98 per diluted share (from $1.13 per diluted share). For the Nine Months Ended September 29, 2012 compared to the Nine Months Ended October 1, 2011, income from continuing operations per diluted share decreased 36.0% to $1.99 per diluted share (from $3.11 per diluted share), including an increase of $0.04 per diluted share due to the favorable effect of fluctuations in foreign currencies.

Balance Sheet

As of September 29, 2012, the Company's balance sheet included cash and cash equivalents of $311.0 million and total debt of $254.7 million compared to $179.3 million and $257.3 million, respectively, as of October 1, 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                  Nine Months Ended
                                         September 29,       October 1,      September 29,      October 1,
                                              2012              2011              2012             2011
                                                 (Dollars in thousands, except per share amounts)

 Operating income, as reported (GAAP)  $         66,702     $    64,756     $      151,721     $   187,009
 Restructuring charges and pension
income (a)                                        7,974           7,238             30,667          18,060
 Acquisition expense (b)                            750               -                750               -
 Operating income, as adjusted
(non-GAAP)                             $         75,426     $    71,994     $      183,138     $   205,069

 Income from continuing operations
attributable to Warnaco Group common
shareholders, as reported (GAAP)       $         41,130     $    48,788     $       83,637     $   138,886
 Restructuring charges and pension,
net of income tax (a)                             6,096           5,486             22,479          12,825
 Acquisition expense (b)                            505                                505
 Lejaby loan receivable (c)                           -               -             12,040               -
 Taxation adjustment (d)                            375          (8,202 )           (3,171 )       (16,528 )
 Income from continuing operations
attributable to Warnaco Group common
shareholders, as adjusted (non-GAAP)   $         48,106     $    46,072     $      115,490     $   135,183

 Diluted earnings per share from
continuing operations attributable to
Warnaco Group common shareholders, as
reported (GAAP)                        $           0.98     $      1.13     $         1.99     $      3.11
 Restructuring charges and pension ,
net of income tax (a)                              0.15            0.13               0.54            0.29
 Acquisition expense (b)                           0.01                               0.01
 Lejaby loan receivable (c)                           -               -               0.29               -
 Taxation adjustment (d)                           0.01           (0.19 )            (0.08 )         (0.37 )
 Diluted earnings per share from
continuing operations attributable to
Warnaco Group common shareholders, as
adjusted (non-GAAP)                    $           1.15     $      1.07     $         2.75     $      3.03

(a) For all periods presented, this adjustment seeks to present operating income, income from continuing operations attributable to Warnaco Group . . .