Collective Brands Gets Bump from Saucony and Sperry Top-Sider in Q3

 

Payless division comp sales and net sales were both down 3% due to high-single-digits declines in store traffic, a 7% decline in units, and a decline in sales of athletic footwear.  These declines were partly offset by a 5% increase in average unit retail prices, higher sales in Latin America and strength in casual and girls’ footwear.

Net sales advanced 3.9% in the period, in part due to the additional 13 days Collective owned Stride Rite in this third quarter compared to last year's third quarter.

Excluding special items in both periods, gross margins in the period declined 110 basis points to 34.1% of sales due to Stride Rite Group's product costs and close-outs, along with promotional activities at the Stride Rite's Children's group, greater occupancy, depreciation amortization and hurricane costs, and the de-leveraging from lower comp store sales.

 

Payless' merchandise margins continued to increase in spite of higher product costs coming out of China due to higher average unit retail prices, more progress in cost of sales initiatives such as direct sourcing and better markdown optimization.  SG&A improved 40 basis points due to “disciplined expense management.”

Net earnings surged 86% in the third quarter, helped by $20.9 million in insurance and tax gains tied to two trademark infringement cases. Excluding litigation items in 2008 and purchase accounting inventory step-up in 2007, earnings slid 15% to $26.6 million, or 42 cents a share, from $31.3 million, or 48 cents, but were in line with Wall Street expectations.

Collective Brands agreed in June to settle a trademark lawsuit filed by K-Swiss Inc. for $30 million, while a federal jury in Oregon awarded $304 million to adidas AG in May for trademark infringement. The judge cut the adidas award in September to $65.3 million. By comparison, the year-ago quarter included a $5.8 million net loss from a change in inventory accounting and tax rates.

Commenting in greater detail on a conference call with analysts, Matt Rubel, Collective Brands' chairman, CEO and president, noted that Saucony continued to drive unit market share growth across all distribution channels, particularly run specialty, and the brand's bookings remain “strong.” 

 

For the fourth quarter, Saucony ended as the number one brand in market share in cross country spikes in run specialty and had four of the top eight models. He also noted that Saucony is “making real progress in the larger sporting goods marketplace where their athletic running shoes are continuing to gain momentum.” Saucony is particularly benefiting from grassroots initiatives with 220 events held during Q3, but also due to overall strength in running.

Sperry Top-Sider's double-digit sales growth was particularly helped by its strategies to increase sales to women's non-boat customers, to reach younger customers and to become more diversified in lifestyles as part of an overall effort to make the brand “more than just a boat shoe.”

Rubel described Keds as “still problematic,” but he said a new management team recently brought on “should help more affectively link Keds global brand strategy, product and marketing initiatives.” The division is also in the process of launching the Pro-Keds brand targeting “a 20-something independent consumer.”

The Stride Rite Children's group saw growth and picked up share with its diverse portfolio, although Rubel noted that overall wholesale customers “are managing their inventories much more tightly.” The kids gains were due in part to the strength of many licenses, including the Nickelodeon Slimers Fall launch. The Jessica Simpson Spring launch is generating double-digit weekly sell-throughs. Saucony and Sperry kids “are accelerating as well” in the group.

While traffic was down high-single-digits and conversion was down slightly due to overall weakness at retail, Payless customer satisfaction scores reached record highs in the quarter, noted Rubel.  According to a study by Lieberman Research Worldwide, Payless increased its affirmative scores by approximately 10 percentage points on statements such as, “a store you really enjoying shopping for children's shoes,” “a store you're proud to say you shop at,” and “a store that has terrific shoes for the price that you pay.”

The newest Payless format, Hot Zone, with 559 locations, had a significantly higher sales growth rate than the chain average, due to better traffic trends, and will be the standard format for the future of all new stores. On the merchandise side, brands grew to 52% of Payless footwear sales in the quarter from 49% a year ago, and is expected to reach 70% to 80% of the mix over time.