Payless ShoeSource, Inc. posted diluted earnings per share of 43 cents for the third quarter, up from 32 cents in the year-ago period. The company recorded net earnings of $28.9 million during the quarter, a 32.0% increase from $21.9 million reported one year ago. The company has presented the operations of Japan for fiscal years 2006 and 2005 as discontinued operations.
Third quarter 2006 results include a loss of 3 cents per diluted share relating to discontinuing retail operations in Japan. The company is substantially complete with the exit process. In addition, results for the third quarter include a favorable income tax impact of 3 cents per diluted share for changes in the effective income tax rate.
During the first nine months of 2006, net earnings were $97.4 million and diluted earnings per share were $1.45. This compares with net earnings of $72.0 million and diluted earnings per share of $1.06 in the first nine months of 2005, a 37% increase in diluted earnings per share year-to-date.
Third quarter and year-to-date results include expenses relating to the company's adoption of SFAS 123®, “Share Based Payment,” effective at the beginning of fiscal 2006. The incremental impact of SFAS 123® on net earnings for the third quarter 2006 was approximately $2 million pre-tax, or 2 cents per diluted share. For the first nine months of fiscal 2006, the incremental impact of SFAS 123® was approximately $6 million pre-tax, or 6 cents per diluted share. The company currently estimates that the incremental impact of SFAS 123® on full year results for fiscal 2006 will be approximately $8 million pre-tax, or 8 cents per diluted share.
Net earnings from continuing operations were $30.6 million in the third quarter 2006, compared with net earnings from continuing operations of $22.4 million in the third quarter 2005. Diluted earnings per share from continuing operations increased during the third quarter 2006 to 46 cents from 33 cents in the third quarter 2005.
During the first nine months of 2006, net earnings from continuing operations were $100.4 million, compared with net earnings from continuing operations of $77.1 million in the first nine months of fiscal 2005. Diluted earnings per share from continuing operations increased to $1.49 in the first nine months of fiscal 2006, compared with $1.14 per diluted share in the first nine months of fiscal 2005.
Discontinued Operations
Discontinued operations include the performance of Japan retail operations as well as disposal costs relating to the exit of retail operations in the country. The company incurred a loss from discontinued operations of $1.7 million, net of income taxes and minority interest, or 3 cents per diluted share in the third quarter fiscal 2006 compared with a loss of $0.5 million or a penny per diluted share in the third quarter fiscal 2005. Losses from discontinued operations were $3.0 million, net of income taxes and minority interest, or 4 cents per diluted share in the first nine months of fiscal 2006, compared with a loss of $5.1 million or 8 cents per diluted share in the first nine months of fiscal 2005.
CEO's Comments
“We are pleased with our results in the third quarter,” said Matthew E. Rubel, Chief Executive Officer and President of Payless ShoeSource, Inc. “We saw gains in sales and earnings, driven both by an increase in average retail and an increase in footwear units sold. Our new product, store format and service initiatives are clearly resonating across all customer types and store sizes.”
Results from Continuing Operations
Sales during the third quarter 2006 totaled $703.4 million, a 5.5% increase from $666.5 million during the third quarter 2005. Same-store sales increased 5.2% during the third quarter 2006. Average unit retail for footwear increased by 5.9%, and footwear unit sales increased by 1.1% relative to the same period last year.
Sales during the first nine months of 2006 totaled $2.10 billion, a 2.4% increase over the first nine months of 2005. During the first nine months of 2006, same-store sales increased 2.6%.
Gross margin was 34.3% of sales in the third quarter 2006 versus 32.8% in the third quarter 2005. The increase was driven primarily by higher initial mark-on relative to last year. During the first nine months of 2006, gross margin was 35.2% of sales versus 34.0% in the first nine months of 2005.
Selling, general and administrative expenses were 28.0% of sales in the third quarter 2006 versus 27.5% in the third quarter 2005. The increase was driven primarily by increased costs for employee incentive programs. During the first nine months of 2006, selling, general and administrative expenses were 28.0% of sales versus 28.2% in the first nine months of 2005.
The company's effective income tax rate was 29.6% during the third quarter 2006, which included an adjustment to reflect the reduced projected effective tax rate for the year. For the full fiscal year 2006, the effective income tax rate is expected to be approximately 33%, excluding discrete events.
Balance Sheet
The company ended the third quarter 2006 with cash, cash equivalents and short-term investments of $472 million, an increase of $35 million over the cash, cash equivalents and short-term investment balance as of the end of fiscal 2005.
Total inventories at the end of the third quarter 2006 were $349 million, compared to $342 million at the end of third quarter 2005. Inventory per store at the end of the third quarter increased by 3.0% compared to the same period last year. The increase was primarily driven by an increase in raw materials due to a higher percentage of product sourced directly by the company. The company believes its inventory is well positioned, with a low level of aged merchandise.
Capital Expenditures
Cash used for capital expenditures was $36.8 million during the third quarter 2006. During fiscal year 2006, Payless expects capital expenditures to be approximately $127 million. This represents a $7.0 million increase over the previously estimated capital expenditures for fiscal 2006, primarily due to initial costs associated with the West Coast distribution center.
Store Count
In the third quarter 2006, the company opened 9 new stores and closed 19, for a net decrease of 10 stores. The company also relocated 21 stores. The store count as of the end of the third quarter 2006 was 4,574. During fiscal year 2006, the company intends to open approximately 65 new stores and close approximately 75, for a net decrease of 10 stores. The company also intends to relocate approximately 110 stores.
Share Repurchase
The company's capital allocation strategy is designed to fund both the necessary investments to improve the business and use available cash flow to return more immediate value to shareowners.
During the third quarter of 2006, the company repurchased $35 million, or approximately 1.5 million shares of common stock under its stock repurchase program. Under the indenture governing the company's 8.25% Senior Subordinated Notes, the company may repurchase approximately an additional $19 million of common stock. This limit will continue to adjust quarterly based on the company's net earnings.
Fiscal 2006 Outlook
Payless ShoeSource remains committed to its long-standing goal to achieve low single-digit positive same-store sales on a consistent basis, through successful execution of its merchandising strategies. The company does not provide guidance for sales, earnings or margins. However, the company's business model and strategy are designed to leverage sales performance, and the goal is to achieve earnings per share growth in the mid-teens over time.
Additional financial metrics for fiscal 2006 are expected to include:
-- Depreciation and amortization of approximately $90 - $95 million;
-- Cash used for capital expenditures is expected to be approximately
$127 million; and,
-- Working capital should be approximately neutral, subject to normal
seasonal fluctuations.
PAYLESS SHOESOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(Millions, except per share data)
13 Weeks Ended 39 Weeks Ended
October October October October
28, 2006 29, 2005 28, 2006 29, 2005
Net sales $703.4 $666.5 $2,104.0 $2,054.7
Cost of sales 462.1 447.9 1,362.9 1,356.6
Gross margin 241.3 218.6 741.1 698.1
Selling, general and administrative
expenses 196.8 183.0 589.4 578.6
Restructuring charges 0.4 1.2 0.7 1.9
Operating profit from continuing
operations 44.1 34.4 151.0 117.6
Interest expense 4.8 4.7 14.2 14.6
Interest income (5.6) (3.2) (15.6) (7.5)
Earnings from continuing operations
before income taxes and minority
interest 44.9 32.9 152.4 110.5
Provision for income taxes 13.3 9.3 50.1 31.9
Earnings from continuing operations
before minority interest 31.6 23.6 102.3 78.6
Minority interest, net of income taxes (1.0) (1.2) (1.9) (1.5)
Net earnings from continuing
operations 30.6 22.4 100.4 77.1
Loss from discontinued operations, net
of income taxes and
minority interest (1.7) (0.5) (3.0) (5.1)
Net earnings $28.9 $21.9 $97.4 $72.0
Basic earnings per share:
Earnings from continuing
operations $0.47 $0.33 $1.52 $1.15
Loss from discontinued operations (0.03) (0.01) (0.05) (0.08)
Basic earnings per share: $0.44 $0.32 $1.47 $1.07
Diluted earnings per share
Earnings from continuing
operations $0.46 $0.33 $1.49 $1.14
Loss from discontinued operations (0.03) (0.01) (0.04) (0.08)
Diluted earnings per share $0.43 $0.32 $1.45 $1.06
Basic weighted average shares
outstanding 65.4 67.7 66.2 67.4
Diluted weighted average shares
outstanding 66.4 68.1 67.2 67.6
