Stride Rite Chalks Up Q2 Keds Decline to Repositioning; Hilfiger Continues Decline…

The Stride Rite Corporation got little help on the top line from most of its core brands for the fiscal second quarter ended June 3. But improving margins at Keds helped push total GM higher, nearly offsetting the increase in operating expenses for the period and holding the net income decline in check for the quarter. The company’s impending acquisition of Saucony, Inc. was mentioned little in the discussion of Stride Rite’s results, but another Wall Street voice sounded off against the deal on the table.

The Keds brand was the center of conversation as the company worked through a very difficult quarter in transitioning the brand out of the value channel and into broader placement in the better department store end of the spectrum. The result was a sharp decline in sales for the period, but a solid platform was built that could fuel quality growth in the future.

Keds sales decreased 15% for the period.

At issue is the shift away from the value channel and a firm grip on pricing strategies in the mid-tier channel and segmentation of product across the market. The result was a very healthy jump in average selling price for the brand as Keds pushed the everyday retail selling price on the Champion from $15 in the past to $25 for this spring. ASP at retail for the total Keds brand increased to $22.50 a pair from $17.50 year-on-year.

David Chamberlain, chairman and CEO of Stride Rite Corp., said he expects to see sell-through improve across all channels once consumers get accustomed to the pricing changes and a strategy that relies on less promotional activity at retail. He said that sales in department stores were “solid” for the quarter, but the mid-tier, which encompasses everything from JC Penney to Famous Footwear, experienced “some price resistance, particularly on Champion.”

The trend here appears to be more Nordstrom and less Costco going forward as SRR feeds the Keds brand with more aspirational imagery and product. The company is doing a test at The Finish Line and is “looking to do a test” at Journeys soon. The brand also has a solid presence in 110 Athlete’s World stores in Canada, a number they see expanding next spring. International is seen as a significant opportunity for the brand going forward.

A decline in closeout sales and fewer markdown allowances at Keds helped push total company GM higher for the period, but inventory levels suffered as the company committed to stay in-stock on core styles through fall. Chamberlain said the improved margins will enable the brand to keep advertising into the fall.

As for the balance of the Stride Rite portfolio, the Tommy Hilfiger Footwear business continued to track downward in the U.S. as sales fell 14% and the company offering little guidance on a turnaround strategy.

Most agree that this business will go the way of the Hilfiger apparel business, which has lost much of its cache in department stores and elsewhere.

Part of the decline can also be traced to the extraction of the PRO-Keds business from the business unit. Excluding the impact of the move to license PRO-Keds, the THFW business was down about 9% for the period. Chamberlain said the P-K line licensed to Damon Dash is seeing high-single-digit to low-double-digit sell-through at key “igniter” accounts.

The one bright spot mentioned for THFW was in the International arena where the brand is playing well in Central and South America. The International business as a whole is tracking very well, posting a 12% sales increase in Q2 and a 21% gain for the first half. Keds and Sperry in Europe are seen as the main drivers here, along with the Hilfiger strength to the south.

The other strong cog in the wheel is at Sperry Top-Sider, which saw revenues jump 17% for the quarter. The brand is playing well in a market driven by a move to preppy as a look, but is also benefiting from some good product on the tech side of the boat shoe biz.

At the Children’s group, total sales were up 3% in the quarter on the strength of the owned-retail business. The wholesale business was off 5% for the period, but the retail group posted a 7% revenue gain on a 1.9% comp store sales increase for the quarter. Total sales benefited from the addition of eight stores since year-end, bringing total store count to 259 doors at quarter-end. The group is on track to add 20 stores this year.

As for Saucony, writers at The Motley Fool’s Hidden Gems newsletter came out solidly against the deal in a piece entitled, “Shameful Self-Interest at Saucony.” Like the argument made last week (SEW_0526) by a minority investor, TMF appears to be taking issue with management’s rejection of a deal that appeared to be a better deal for investors, but not as good for management.