Sirena Apparel Group, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SIRN)") else Response.Write("(NASDAQ: SIRN)") end if %>
10333 Vacco Street
South El Monte, CA 91733
(818) 442-6680

UNION CITY, Ca., September 5, 1996/FOOLWIRE/ --- Sirena Apparel Group reported Q4 and FY 1996 results this morning. Net sales for fiscal 1996 were $49,206,000, exactly the same as net sales for fiscal 1995. During FY 1996 the company experienced a loss of $4,411,000 or $1.05 per share, as compared to net income of $2,887,000 or $0.93 per share in FY 1995.

Net sales for Q4 1996 were $11,336,000, compared with $16,034,000 in Q4 1995. The company had a loss in Q4 of $5,764,000 or $1.24 per share compared with net income of $400,000 or $0.12 per share in Q4 1995.

In FY 1996 the company recorded a tax expense of $15,000 representing minimum state and foreign income tax. No tax benefit was recorded in accordance with the provisions of FAS-109. The company has approximately $7.2 million of operating-loss carryforwards available to offset taxable income in future periods.

The company's operations were severely impacted throughout 1996 as a result of a very weak swimwear retail environment due to adverse weather conditions, which resulted in a significant reduction in wholesale orders and a build-up of retail inventory. As a result, sales during Q4 which historically has been one of the company's strongest selling period continued to be negatively impacted by conservative buying patterns of major retail accounts, resulting in current-season Q4 bookings declining 36% compared to the same period last year.

In addition, the 1996 merger of two of Sirena's largest customers for close-out merchandise adversely affected, at the end of its selling season, both the volume of sales and the pricing of such merchandise.

The company is very disappointed by the negative impact this year's market conditions had on their business and that of their customers. While consumer demand for swimwear increased in the June-July period, the absence of consumer demand for swimwear earlier in their 3rd and 4th quarters made it difficult to place additional product into the distribution system and to effect reduced inventory levels. The effect of these conditions and the impact on their ability to liquidate excess inventory at cost was much greater than they had anticipated.

The company's operating results were also adversely impacted by the unilateral cancellation of a Mexican production contract by the contractor, which resulted in the company sourcing additional product elsewhere, including domestically, at additional cost. This matter is currently being litigated.

Management has responded to these conditions by effecting cost reductions and adjusting production schedules to best control inventory in this difficult environment. In that regard, the company's management and board of directors have implemented an overhead reduction plan and have provided receivable reserves and inventory write-downs of $1.6 million, and have recorded a charge of $200,000 relating to employee severance and costs associated with the consolidation of overlapping product lines.

Under the plan, they have reduced overall non-piecework employee headcount and initiated cost-control measures aimed at reducing SG&A expenses by 20%. In addition, total SKUs have been reduced to better control inventory both in selling and manufacturing.

As a result of these necessary actions, the company enters FY 1997 with continued confidence about the long-term fundamentals. Their liquidity and capital resources remain sound.

With the addition of a juniors label, the company now offers products for the complete age and demographic spectrum. This recent product introduction is in keeping with Sirena's strategy of positioning its diversified portfolio of brands with the goal of increased profitability and reduced risk.

UPDATE ON BOOKINGS/PRODUCT LINE BREAKDOWN

Taking all of their businesses -- branded swimwear, private label swimwear, and resort swimwear -- their overall booking pattern for this year compared to last year is down 5.9% for the same period. 1995 was the same in terms of revenue dollars, but had very high profits. If they compare their bookings this year to 1994, where they hit the same volume and profits, they are ahead 20% in overall bookings this year. So their booking patterns still remain very strong.

Private label swimwear bookings are down 4.3% this year over last year. They have seen some trouble in getting orders earlier this year due to one store -- K-Mart, at this point, does not have a buyer in place where last year they did, so Sirena is working with their management team next week in their stores to regain their orders for the private label division. So, they know they will have a wonderful surge in business in private label. Also, in private label they have reviewed their customer base and eliminated their low-margin/high-maintenance accounts to better concentrate on their higher margin/higher volume accounts. This will enable them to produce net much closer to the needs of what their accounts want in private label.

Their branded swimwear lines are down 13.4% from last year. They go into market next week so they will see a nice reversal in this. Stores are placing orders in swimwear slower than last year due to the very slow selling periods through Q3-Q4 last year and they are left with extra merchandise at this time. They are trying to get rid of the merchandise at markdown prices way below their cost even. They will see a change in this. Stores will need merchandise and Sirena is on everyone's matrix list for next year.

Another reason they saw some reduced bookings or business in branded swimwear is that, at the end of the season they did not receive cutup orders with some of the major retailers. As an example, last year between Ross Stores, Marshalls, Newtons, and some of the other discounters they do business with, they had accounted for a total in all branded divisions of over $800,000 in bookings of merchandise to ship. These are bookings that they use on excess fabric that they have from Summer production. Because of the glut in excess inventory out there, these discounters did not do cutup orders with them this year which, obviously, resulted in an $800,000 loss in bookings year-over-year. These cutup orders are not necessarily profitable but do use up Summer production. Taking them out of the numbers for branded swimwear, Sirena's bookings are pretty much on schedule where they were planning to be.

Adding the junior line, consolidating other lines, going after the children's business very strongly, and their very strong retail performance with Sirena and Anne Klein even in a weak retail environment they believe will insure their bookings for branded swimwear going forward. According to the MPD report, they ended up exactly in the same place in 1996 retail performance as in 1995 -- third place with the Sirena brand out of all the stores in the country. So, their market share remained flat with the prior year even though their sales went down, indicating a rough retail environment.

The real star in Sirena's business is resort wear. When swimwear did not sell in the swimwear departments in Q3 and Q4, resort wear or coverups or leisure wear did very well and Sirena experienced some nice growth in that division. Right now their resort wear bookings are 56% ahead of last year. One thing they have seen is increases in major department stores. Federated Department Stores, as an example, have done a major program with Sirena this coming year in coverups or resort wear -- something brand new to Federated. Basically, by seeing the success of resort wear in their stores with the lackluster performance of swimwear, they have moved some of their dollars into resort wear and Sirena is experiencing some healthy increases there.

Among the other things Sirena has done, they have added a juniors division so that they truly are one-stop shopping for all the major retailers. Their junior line is on the matrix of May Company and Federated Department Stores. They have also worked with Sears, taking their products not only to the better department stores but also downstream to Sears at this point. The line called Hot Water has had a very strong reaction in the marketplace.

In branded swimwear, their kids division, which was really new last year and they got a very late start in Sirena Kids, this year is on the May Company corporate list and the Federated corporate list and have just received an opening order from Wal-Mart from $450,000 -- again, taking the products from the better department stores down immediately to the national chain stores.

FINANCIAL DETAILS

Net sales remained unchanged. Changes in the components of net sales included the following: First, a 6.4% decrease in the revenue of the branded division resulting from adverse weather conditions in the Spring which reduced customer traffic and limited reorders of branded merchandise; second, a 14.3% increase in the revenue of the private label division resulting from increased market penetration into the existing account base; and third, a 3.7% increase in the resort wear division resulting from the greater importance of the resort wear category at the company's major retail accounts.

Gross profit declined from $15,196,000 or 30.9% of net sales in FY 1995 to $10,816,000 or 22% of net sales in FY 1996, a decrease of 28.8%. This is due to a decrease in the gross profit margin. The decrease in the gross profit margin was primarily due to the following: first, a reduction in regular-price reorders due to reduced consumer traffic in the Spring as a result of the adverse weather conditions; second, additional reserves provided for inventory of end-of-season merchandise of $1.6 million due to lower than historical wholesale prices paid for close-out merchandise after the merger of two of the company's largest off-price retail customers; third, the unilateral cancellation of the Mexican production contract by the contractor; and fourth, the sales mix which included an increase in sales of private label division merchandise which generally has a lower gross profit margin than the company's regular branded products.

SG&A expenses increased from $11,134,000 or 22.6% of net sales in FY 1995 to $14,304,000 or 29.1% of net sales in FY 1996, an increase of 28.5%. This increase consisted primarily of increased costs associated with the expansion of the company's distribution operations; costs associated with the launch of the A-Line, Anne Klein, and Sirena Kids divisions; and costs for a national print advertising campaign for which there were no comparable expenditures in FY 1995.

Interest expense decreased from $1,033,000 or 2.1% of net sales in FY 1995 to $908,000 or 1.8% of net sales in FY 1996, a decrease of 12.1%. This is due to the use of proceeds from the secondary stock offering in November 1995, partially offset by additional working capital requirements.

As a result of these foregoing factors, net income declined from $2,887,000 or $0.93 per share in FY 1995 to a net loss of -$4,411,000 or -$1.05 per share in FY 1996. It is important to note that net income in FY 1995 reflected a 4% tax rate in the utilization of operating loss carryforwards. In 1996 they had a nominal tax rate. In other words, they did not book a tax benefit in accordance with the provisions of FAS-109.

In terms of liquidity and capital resources, net cash used in operating activities for the year was $7,935,000 compared to net cash used in operating activities of $2,269,000 in FY 1995. At June 30, 1996, their working capital was approximately $9.9 million, compared to $6,120,000 at the comparable period last year. This reflects capital raised in the November 1995 secondary offering, partly offset by funded operating losses and increased inventory.

With regard to inventory, net inventory increased to $7,713,000 at June 30, 1996 compared to $5,971,000 at June 30, 1995, an increase of 29%. Gross inventory before reserves increased to $9.6 million at June 30, 1996 from $6.4 million at June 30, 1995, an increase of 50%. This increase includes an increase in raw materials of $1.4 million and an increase in finished goods of approximately $2 million. However, by September 30, 1996 they expect finished goods levels to approach those of September 30, 1995 based on their success with an accelerated inventory liquidation plan.

They continue to believe that their financial condition remains sound and that, with the proceeds from the secondary offering and their working capital, they will have sufficient working capital to meet their requirements for the coming year.

FOURTH QUARTER FINANCIAL RESULTS

Net sales decreased in Q4 29.3% year over year. This resulted from a 35% decrease in the revenue of the branded division, their decision to discontinue the Preview line of Sirena Division which historically has generated high merchandise returns in subsequent quarters, a 15.9% decrease in the revenue of the resort wear division, and a 10.6% decrease in private label revenues resulting from the cancellation of certain orders from K-Mart which is undergoing an operational restructuring.

Their gross profit declined from $3,538,000 in Q4 1995 to a gross loss of $1,660,000 in Q4 1996, a decrease of 146.9%. The decrease in gross profit resulted from the decrease in net sales and gross profit margin. The gross profit margin resulted from deep discounting of merchandise late in Q4 as major retailers replenished stock later in the season as a result of reduced customer traffic in Q3 and Q4, additional inventory reserves as previously discussed, the sales mix in Q4 which was more heavily skewed to lower-margin private label merchandise, higher manufacturing costs due to the cancelling of the Mexican production contract, and lower plate utilization and efficiency due to curtailment of in-house production resulting from decelerating bookings.

SG&A expenses increased 64.7% year over year. The increase resulted from increased costs associated with the A-Line and Anne Klein division which didn't exist last year, increased costs of the company's distribution operation, and costs associated with national print advertising campaign.

Interest expense decreased 13.7% year over year as a result of lower average short-term borrowings due to the infusion of additional equity from the November 1995 secondary stock offering.

Net income, as a result of the foregoing factors as well as a reversal of tax provisions accrued earlier in the year, decreased from $400,000 in Q4 1995 to a net loss of $5,764,000 in Q4 1996.

WHAT HAPPENED AND WHAT ARE THEY DOING ABOUT IT

How did this happen? Obviously they had flat sales they had declining gross profit margins they had expanding overhead and these factors are not really a formula for success.

Why did this happen? They talked about the adverse weather conditions limiting consumer traffic. In their business, weather, they believe is a more compelling and important reason and has a much stronger impact on their business than other categories of apparel. The result of the adverse weather conditions is that they had minimal full-price re-orders this year. But they have gone through a lot of introspection of the company's performance this year and have identified other factors that had an impact.

They had very strong bookings the first half of FY 1996 that let them believe they are on track for a $60 million plus sales year. As they planned the increase in sales they also ramped up their overhead staff to support it. Another factor was the deceleration of bookings in the late 3rd and early 4th quarter, including a significant trough in bookings in May which were only 36% of last year, caused dislocation in their manufacturing function, caused them to lose some capacity utilization and overhead absorption. In addition, the loss of the Mexican contract caused significant dislocation of their sourcing plan, the impact of which was not quantified until the latter part of the year. In addition, the merger of Marshalls and Newton's reduced competition for closeout merchandise and depressed prices just at a time when they needed to liquidate excess inventory most. They did not fully appreciate the impact of this development until after year end when they went to liquidate the inventory. Lastly, they feel that their lines have become very broad this year. Some of the lines began to overlap and they had an increase in SKUs, SKUs proliferated. This put pressure on their ability to plan, manufacture, and ship goods timely and within the high standards their company has built its past success on.

What are they going to do about it? What they have discussed with the Board is simply going back to the basics. They are going to control that which is within their power to control. Weather is not something that is in their control. Managing the business, planning, executing -- all those things are in their control. They want to plan and execute their business so that in a good season they are very successful and in a bad season they are just plain successful.

More specifically, they are going to rationalize the business, for example eliminating marginal or overlapping labels. This Summer they merged A-Line Anne Klein brand into the Anne Klein division. They closed the Rose Marie Gladio segment of the Rose Marie Reid division. And they closed the Look and Sea division. These were brands that were taking up resources that they did not feel could capture a significant segment of that particular market. They just contributed SKUs so they closed them.

They are going to focus on their core business. They are going to insure that each existing brand has a distinct purpose and a market. They are going to reduce their SKUs. They have effected a 25% reduction in SKUs over fiscal 1995 both through the closure of these marginal divisions and through tighter lines in the existing brands. They are also, very importantly, going to reduce overhead. They have implemented a plan to reduce overhead by 20% over fiscal 1996 and have already reduced non-piecework headcount (office people) by at least 15% from peak 1996 levels and this is an area that they are going to be focusing on very clearly in 1997.

Secondly, they are going to expand their offshore manufacturing. They want to relentlessly lower their manufacturing costs. To that end they are going to be doubling their output of their Sirena Mex factory in Mexico compared to fiscal 1996 and they are going to increase the Mexican contract by another 30%.

Third, they are going to expand into untapped markets. They already discussed their entries into the juniors and children's markets. Juniors is a high-margin business and they intend to leverage their distribution network and their merchandising expertise to develop this into a highly focused and profitable business. In terms of the children's division, they feel they are filling a void for stylish merchandise for girls and pre-teens. What they intend to do is fill a merchandising need much like they've done for private label at the mass merchants.

Lastly, they are going to focus on maximizing the return on capital employed. Basically that relates to inventory management. They are going to concentrate on faster inventory turn. The way to do this is through better planning, more detailed planning, and developing quick-turn manufacturing methods (which is modular manufacturing) in their factory in Southern California so that they can respond quickly to the customers' needs and minimize capital that is tied up in the manufacturing process.

Based on what they've seen so far in bookings, they are cautiously optimistic for 1997.

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