Collective Brands Inc. took a big hit at the retail cash register at its Payless retail division in the fiscal first quarter ended May 3, but the acquisition of Stride Rite, which was not in the numbers in Q1 last year, provided a nice boost to the top-line for the period.  The company’s bottom line got hit by an extraordinary event as well, as the company started to put cash aside in response to the record $305 million judgment levied against them by an Oregon jury in an adidas trademark infringement case (see SEW_0819).


Excluding the $30 million, or 26 cents a share, pre-tax charge related to loss contingencies associated with the litigation, and a $3.5 million, or 4 cents a share, pre-tax charge for the flow through of inventory recorded at fair value, PSS net earnings were $44.7 million, or 71 cents a share, or a 15% improvement over net income in the year-ago period on a like-for-like basis.


Total sales were inflated for the company due to the Stride Rite deal, which added the Stride Rite wholesale and retail, Saucony, Keds, and Sperry Top-Sider businesses to the quarter.  The Payless domestic retail business fell 7.7% for the period to $588.5 million and comp sales were down 6.5%. The company attributed the comps declines to lower traffic and unit sales resulting from “a slowdown in consumer spending linked to the economic environment,” as well as the impact of an earlier Easter.  Payless international sales were up 14.2% to $104.3 million for the period, with Latin America leading the push with a 20% increase for the period, but the numbers this year also include the addition of the Stride Rite international numbers.   Stride Rite International sales were up nearly 19% on a pro forma basis compared to last year.


In the domestic Payless business, sales of women's dress and children's athletic shoes were said to be lower.  Payless did see strong sales in women's casual and canvas footwear, and Payless branded sales were said to be “up significantly.”  The product shift helped push average unit retail prices up 3% for the period.


Payless division operating profits fell more than 90% in the U.S., while Payless international operating profits doubled versus the year-ago first quarter.


Stride Rite Group sales were up 5% on a pro forma basis, led by double-digit increases at Sperry Top-Sider and Saucony.  The Saucony team launched a new website during the first quarter, and they launched Saucony apparel line in the run specialty channel.  The strong Sperry performance continues to be driven by the “fast-growing women's category and the boat shoe business.”  The Stride Rite Children's Group also contributed to the growth in the wholesale business segment in the first quarter. 

 

Management said the brand recaptured market share in the first quarter by “expanding distribution amongst its wholesale account base, particularly with high-end department stores.”


When pressed for details on Keds during a conference call with analysts, company Chairman and CEO Matt Rubel said the brand is not meeting expectations in the U.S.  “It's falling below our expectations,” he said.  “And it's actually the drag on the wholesale business in the U.S. for the Stride Rite Group.” He said the brand was primarily impacted by the performances turned in by some of the nation’s mainstream retailers. 


In Europe, the brand is apparently “exceeding expectations and doing quite well.” 


The Grasshoppers brand, which is part of Keds and was described as a “very small business,” was said to be “very profitable” and “starting to show nice growth.”


The Stride Rite Group also reported that backlog results were up in high-single-digits, again led by Sperry and Saucony.  Management said they are also starting to see improvement in the Stride Rite international business as well.


Stride Rite wholesale operating profits came in at roughly 23.1% of sales, while SRR retail profits were approximately 3% of sales.


Collective Licensing International, the licensing arm for the company, recently locked up separate multi-year deals for the use of Airwalk brand licensees in Mexico and Indonesia. Sell through in Indonesia was said to be “very strong.” CLI also recently signed an agreement with Junk Food, which is a division of Delta Apparel, for use of the Vision Street Wear brand.


The decline in the gross margin rate for the first quarter was attributed to the litigation reserve, which reduced the gross margin rate by 320 basis points. In addition, Stride Rite's lower gross margin, the expense from inventory step-up, which negatively affected GM by 40 basis points, de-leveraging from lower comp store sales and higher freight costs also contributed.   Management said merchandise margins increased again in Q1, but they also noted they are getting price increases out of Asia that are up mid- to high-single-digits.


Payless inventory was reportedly 8% lower at the end of the quarter, with inventories in Payless stores down 10%.