Collective Brands reported revenues in the fourth quarter rose 12.1% to $776.8 million as a result of the acquisition of Stride Rite. The period showed a net loss of  $46.6 million, or 73 cents a share. Excluding the impact of purchase accounting, the net loss was $19.7 million, or 31 cents.


Collective Brands noted that fourth quarter 2007 results included:
—  Purchase accounting expense of $29.0 million pre-tax or $0.42 per
    diluted share, resulting from the flow through of inventory recorded at fair value as well as incremental depreciation and amortization of certain other assets purchased in the August 2007 acquisition of Stride Rite.
    —  Incremental interest expense of $14.2 million pre-tax, or $0.14 per diluted share, on the debt incurred to finance the acquisition of Stride Rite.
—  The effect of repurchasing 1.8 million shares or 2.6% of the company's outstanding shares.
   

In the fourth quarter of 2006 (a 14-week quarter compared to a 13-week quarter in 2007), the company had net earnings of $24.6 million or 37 cents a share, which included a tax benefit of $14.3 million, or 22 cents, related primarily to the closing of income tax audits in various jurisdictions. In addition, the extra week in 2006 represented sales of $36.4 million.


In the quarter, net sales for Payless and Stride Rite were $611.6 million and $165.2 million, respectively, for the fourth quarter of 2007. Comparable store sales declined 6.8% on a comparable calendar basis. Comparable store sales were affected primarily by lower traffic as a result of a slowdown in consumer spending linked to the economic environment. Collective Brands recorded higher fourth quarter 2007 sales in three out of its four reporting segments compared to the fourth quarter of 2006. Payless International sales were $117.3 million, up 3.0%. Stride Rite Retail sales were $45.1 million, up 2.0%. Stride Rite Wholesale sales were $120.1 million, up 6.3%. Payless Domestic sales were $494.3 million, which was down versus the prior year period.


“The results in the fourth quarter of 2007 reflected a difficult domestic economic environment,” said Matthew E. Rubel, CEO and president. “In response to this, we have been prudently adjusting inventory and expenses. Our inventory levels are below last year at Payless and we are prepared with fresh product for the spring season.”



The gross margin rate for the fourth quarter of 2007 was 27.6%; excluding the impact of $29.0 million of purchase accounting(1), the gross margin rate was 31.3%. The Payless merchandise margin rate increased again in the fourth quarter of 2007 compared to the same period last year reflecting the successful execution of the Company's strategies to achieve higher average unit retail prices and increase direct sourcing of Payless products. Year-end 2007 aged inventory was lower than the prior three-year average of aged inventory, reflecting a clean inventory position and effective margin management. Collective Brands' fourth quarter 2007 gross margin rate declined from 33.9% last year due primarily to the de-leveraging of fixed costs such as rent and other occupancy costs as a result of lower sales, as well as higher distribution center expenses.


Selling, general and administrative (SG&A) expenses were 32.0% of sales in the fourth quarter of 2007 versus 31.6% in the prior year period, an increase of 40 basis points. Contributing to the higher rate was approximately $3.3 million of acquisition-related expenses (or 40 basis points) and de-leveraging of expenses due to lower comparable store sales. The Company was able to offset the impact of lower sales volume by taking action to reduce incentive compensation, other payroll costs, and certain other operating expenses to control SG&A. SG&A expenses were $248.9 million in the fourth quarter of 2007, up $29.8 million versus the prior year period due to the addition of Stride Rite.


Net interest expense in the fourth quarter of 2007 was $16.2 million compared to net interest income of $2.1 million in the same period last year. The change was due to the use of cash and short-term investments and increase in borrowings to fund the acquisitions of Stride Rite and Collective Licensing.


The fourth quarter 2007 income tax benefit was $7.8 million compared to an income tax benefit of $10.2 million in the fourth quarter of 2006. The full year 2007 effective tax rate was 14.6% resulting in a fourth quarter effective tax rate of 15.3%. The full year 2007 tax rate was impacted primarily by the reduction in annual pre-tax earnings in high-tax jurisdictions, due largely to purchase accounting and higher interest expense, offset by higher pre-tax earnings in relatively low-tax jurisdictions.

For the full year 2007, Collective Brands sales were $3.04 billion, up 8.5% versus the prior year due to the addition of Stride Rite. Comparable store sales (which include only Payless results) declined 1.9% in 2007 on a comparable calendar basis. Net earnings for 2007 were $42.7 million, or 65 cents a share, down from net earnings of $122 million, or $1.82. Excluding the impact of purchase accounting, net earnings for 2007 were $77.4 million, or $1.18 per diluted share.

Rubel continued, “The year 2007 was transformational for Collective Brands with the acquisitions of Stride Rite and Collective Licensing. Our diversified business model showed growth in three of its segments — Payless International, Stride Rite Wholesale and Stride Rite Retail.”


Collective Brands ended 2007 with $232.5 million in cash and short-term investments compared to $461.4 million at the end of 2006. Total debt in 2007 was $922.3 million up from $202.1 million in the prior year. Both the reduction in cash and short-term investments and the increase in debt were due primarily to the acquisitions of Stride Rite and Collective Licensing, as well as the repurchase of company stock. Net debt at the end of 2007 was $689.8 million.


Collective Brands inventory was $470.1 million at the end of 2007, up $108.2 million compared to 2006 due primarily to the addition of Stride Rite inventory. Payless in-store inventory at the end of 2007 was down 7% versus the prior year end.


Capital expenditures for 2007 totaled $167.4 million versus $118.6 million in 2006. The increase was due primarily to increased investments in the Company's supply chain and stores. During fourth quarter 2007, Collective Brands added 18 new stores (12 Payless and 6 Stride Rite), closed 17 stores (14 Payless and 3 Stride Rite), and relocated 16 Payless stores.



                              4th Quarter     3rd Quarter     4th Quarter
Retail Store Counts              2007            2007            2006
                            ————— ————— —————
Payless ShoeSource                    4,552           4,554           4,572
Stride Rite                             340             337             322
Total Stores                          4,892           4,891           4,894
Note: The Stride Rite stores in 4th quarter 2006 are not included in Collective Brands store counts because Collective Brands did not own these stores at the time.


The company repurchased 1.8 million shares for $27.0 million and 2.4 million shares for $47.0 million under its stock repurchase program during the fourth quarter and full year 2007, respectively.


Outlook for Collective Brands



—  Collective Brands anticipates an operating profit from continuing
    operations growth rate in the mid-teens over time on a base of $192 million in adjusted operating profit from continuing operations in fiscal year 2007 excluding the impact of purchase accounting. Adjusted operating profit from continuing operations is the sum total of Payless and Stride Rite operating profit from continuing operations, as if Stride Rite were in Collective Brands results throughout 2007.  This long-term goal is  predicated on low-single-digit comparable store sales growth.  In the next six-to-nine months, the company anticipates that comparable store sales growth may be below its long-term goal.  Collective Brands intends to mitigate the anticipated near-term sales environment with prudent inventory control and expense management, inclusive of occupancy costs.
   
—  During 2008, the pre-tax purchase accounting expense is anticipated to be approximately $22 million. The company anticipates approximately $9 million in the first quarter 2008, approximately $4 million of which is due to the flow through of inventory recorded at fair value. By the end of the first quarter of 2008, the flow through of inventory recorded at fair value is expected to be fully recognized in the income statement. Approximately $13 million of the pre-tax purchase accounting expense will be incurred ratably over the second, third and fourth quarters of 2008.
   
—  Excluding the impact of purchase accounting, the Stride Rite acquisition is expected to be accretive to earnings in 2008 as Stride   Rite's operating earnings contribution including synergies is expected to exceed the incremental interest expense. Due to the impact of purchase accounting, the Stride Rite acquisition is not expected to be earnings per share accretive in 2008 on a GAAP basis.
   
—  Capital expenditures in 2008 are expected to total approximately $145 million.
   
—  The 2008 effective tax rate is expected to be approximately 30% on a GAAP basis excluding discrete events.
   
—  Depreciation and amortization in 2008 is expected to total approximately $145 million, due to greater investments in supply chain and stores in recent years as well as the 2007 acquisition of Stride Rite.