Collective Brands, Inc. Q2 Results Hurt by Payless Stores

Net earnings were up 17.0% to $22.0 million, or 32 cents per share, but that was sharply below Wall Street's consensus estimate of 45 cents per share. Sales inched up 0.6% to $841.3 million for the three-month period ended July 31.

At Payless Domestic, sales declined 7.1% to $508.0 million due to a 6.4% comp sales decline and 43 fewer stores. Lower store traffic, particularly in southwestern markets, contributed to lower sales as key categories such as sandals, casuals, and canvas declined.  Operating profits tumbled 71.8% to $6.8 million from $24.1 million.

“There are challenges with Payless' core urban and ethnic mass customer base as they continue to struggle with the sluggish economic recovery,” said Chairman, President and CEO Matt Rubel on a conference call with analysts.  “We're seeing lower traffic in areas where the economy is particularly challenging, such as the southwest and border markets.”

But Rubel also said Payless' subpar performance was due to “certain controllable company-specific factors,” including not maximizing on some footwear trends, not flowing in new styles on a timely basis, realizing lower-average selling prices for more promotional activity, and a greater mix of opening price points without unit gains.

On the positive side, sales gains at Payless were seen in accessories and fitness footwear (toning). Mid-single-digit percentage increases were delivered in conversion rates and units per transaction also increased.

To revive sales, Payless is emphasizing brands more in the context of fitness, minimalism, comfort and accessories, according to Rubel.
A particular emphasis will be women's boots. More “glitz and glamour” styles will be added to girls while more lights and other technologies will support boys. Shelf space devoted to children's extended sizes has been doubled.

In athletics, Champion toning shoes grew to 2.5% of Payless sales in Q2 and will be expanded in the second half. Champion will also introduce minimalist athletic shoes in the fourth quarter.

Spot-Bilt and Above the Rim will be launched in men's athletics this fall. The recently-acquired Above the Rim brand, managed by its Collective Licensing division, will also be building its distribution beyond Payless and has signed athletes such as the NBA's Martell Webster.

At Payless International, sales advanced 5.9% to $109.8 million, driven by a 3.3% comp increase as a result of both favorable foreign exchange rates in Canada and stronger business performance, most notably in Ecuador. Payless now has 49 stores in Columbia, up from 30 last year. Operating income for Payless International climbed 163.3% to $11.6 million from $4.4 million due to sales growth combined with gross margin expansion in every region.

PLG Wholesale sales, which includes the acquired Stride Rite business, climbed 26.9% to $174.7 million. Operating profit more than tripled to $22.9 million in fiscal Q2 from $7.3 million in the prior-year quarter due to the higher sales.

Both Sperry Top-Sider and Saucony sales growth were well above 30%. Saucony saw growth across all geographies and all selling channels.
At Sperry, non-boat and women's products performed well, along with the core boat business. The brand also benefited from a “much more profitable mix,” increasing popularity among younger consumers, and progress in positioning Sperry as a year-round lifestyle brand. Keds likewise delivered a “significant sales gain,” reflecting increased first-quality sales and fewer close outs. New programs and accounts, such as Bloomingdale's and Gap stores, continued to help Keds.

Stride Rite wholesale sales increased slightly as the brand returned to more doors in the athletic, family and sporting goods channels and saw a strong performance in Saucony for Kids. Its new Stride Rite branded program, Slingshot, and Glitzy Pets, as well as its new licensed program, Star Wars Clone Wars, are doing well.  International sales of the PLG Wholesale brand increased significantly in the quarter, driven primarily by strong results in Europe.

PLG wholesale third-quarter backlog is up 70%, reflecting strength across its brands.

“Customers are also ordering earlier to ensure adequate supply,” said Doug Treff, EVP and CAO, on the call. “This has resulted in a higher mix of future orders relative to reorders both year-over-year and sequentially from the start of the second quarter. As a result, our backlog has increased while the sales growth expectation near term remains similar to the second quarter.”

In its PLG Retail division, sales inched up 1.5% to $48.8 million. The addition of 25 more stores offset a 5.7% comp decline. Sales growth from new Sperry Top-Sider stores, e-commerce and the Macy's' store-in-store channel more than offset comp declines at Stride Rite Children's locations.

 

The division's losses in the period widened to $4.6 million from $3.5 million a year ago due to the comp decline, higher markdowns, and increased marketing expense. Rubel, nonetheless, said the PLG Retail segment is “poised for profitability.” Similar to PLG Wholesale, the BTS business for the division is “off to a good start led by Slingshot, Glitzy Pets and Clone Wars.”

Gross margin increased 140 basis points to 34.4% as lower product costs and lower occupancy costs offset the promotional activity and higher freight costs. Footwear costs are expected to see low-single-digit inflation in the third quarter and a mid-single digit rate in the fourth quarter.