Payless ShoeSource, Inc. saw first quarter net earnings increase 8.1% to $38.9 million, or 59 cents per diluted share, from $36.0 million, or 53 cents per diluted share in the same quarter last year. The results for the first quarter of 2007 included costs related to the company's distribution center initiative, including the exit from one facility and temporary redundancies between facilities. Those costs totaled $6.1 million pre-tax or 6 cents per diluted share in the first quarter of 2007.
First quarter 2007 comparable store sales were up 5.0%, the ninth consecutive quarter of positive comparable store sales. Total sales were $729 million, up 4.9% compared to the first quarter of 2006. Average unit retails increased 2% and total unit sales grew 3%, compared to the first quarter of 2006. This was due primarily to strength in women's footwear and greater customer conversion. First quarter sales gains were offset in part by underperformance in sandals.
“Payless delivered a very respectable quarter of sales and earnings through continued execution of our strategy in spite of some challenging weather conditions during the period,” said Matthew E. Rubel, CEO and president. “Customers continued to respond to our on-trend and differentiated products, demonstrating the resilience of our business during the quarter. Our inventory is in excellent condition, and we are well-positioned for the remainder of the spring season.”
Gross margin rate was 36.9% in the first quarter of 2007 versus 36.8% in the first quarter of 2006, an increase of 10 basis points. The increase in gross margin rate was due primarily to higher initial mark-on partially offset by the costs related to the company's distribution center initiative.
Selling, general and administrative (SG&A) expenses were 28.8% of sales in the first quarter of 2007 versus 28.7% in the prior year period, an increase of 10 basis points. The rate increase was driven primarily by lower sales of sandals. SG&A expenses were $210 million in the first quarter of 2007, up 5% versus the prior year due primarily to higher advertising and credit card fee expenses.
During the first quarter of 2007, Payless repurchased 0.5 million shares for $15 million (including shares from stock option exercises) under its stock repurchase program. In accordance with its indenture governing its senior subordinated notes, the company may repurchase approximately $19 million more of its stock in the open market at this time. This limit will continue to adjust quarterly based on the company's net earnings.
Payless ended the first quarter of 2007 with $328 million in cash and short-term investments compared to $408 million at the end of the first quarter of 2006. The decrease was due primarily to the first quarter 2007 acquisition of Collective Licensing. Total inventory was $382 million at the end of the first quarter of 2007. Total inventory and inventory per store were virtually flat versus the prior year period.
Capital expenditures for first quarter 2007 totaled $56 million versus $23 million in the prior year period. The increase was due primarily to greater investments in the company's supply chain. During first quarter 2007, Payless added 15 new stores and relocated another 23. Net of closings, Payless ended the period with 4,564 stores down 38 compared to first quarter 2006. Fiscal 2007 capital expenditures for Payless are still expected to total approximately $160 million. The increase over 2006 will be primarily driven by spending on the company's supply chain. In 2007 the company has and will continue to invest, in stores, brands, and technology which support Payless' strategic imperatives of effective brand marketing, on-trend targeted product, a great shopping experience, and efficient operations.
Outlook
Last week, Payless ShoeSource announced the signing of a definitive agreement to acquire The Stride Rite Corp. The combined company, which will be renamed Collective Brands, Inc. subject to closing and to shareholder approval, is expected to have strong pro-forma financials:
-- The transaction is expected to be earnings per share accretive in
fiscal year 2008.
-- The 2006 - 2009 compound annual growth rate in operating profit is
expected to be in excess of 20%.
-- The debt leverage ratio for the new company is expected to return to
Payless' pre-transaction level within two to three years of the
acquisition's consummation.
The Payless business unit of Collective Brands should continue to achieve low single-digit positive same-store sales on a consistent basis through successful execution of its merchandising strategies. Over time, the Payless unit is expected to contribute operating profit percentage growth in the mid-teens.
PAYLESS SHOESOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(Dollars and shares in millions, except per share data)
13 Weeks Ended
May 5, April 29,
2007 2006
Net sales $728.6 $694.5
Cost of sales 459.7 438.7
Gross margin 268.9 255.8
Selling, general and administrative expenses 209.9 199.1
Restructuring charges 0.2 -
Operating profit from continuing operations 58.8 56.7
Interest expense 4.8 4.9
Interest income (4.7) (4.8)
Earnings from continuing operations before
income taxes and minority interest 58.7 56.6
Provision for income taxes 18.8 19.5
Earnings from continuing operations
before minority interest 39.9 37.1
Minority interest, net of income taxes (0.9) (0.3)
Net earnings from continuing operations 39.0 36.8
Loss from discontinued operations, net of
income taxes and minority interest (0.1) (0.8)
Net earnings $38.9 $36.0
Basic earnings per share:
Earnings from continuing operations $0.60 $0.55
Loss from discontinued operations - (0.01)
Basic earnings per share: $0.60 $0.54
Diluted earnings per share
Earnings from continuing operations $0.59 $0.54
Loss from discontinued operations - (0.01)
Diluted earnings per share $0.59 $0.53
Basic weighted average shares outstanding 64.7 66.6
Diluted weighted average shares outstanding 66.0 67.6
