Collective Brands, Inc. reported second-quarter EPS rose 42.1% excluding special charges, to $33.6 million, 54 cents a share, from $24.9 million, or 38 cents, a year ago. After including pre-tax expenses of $36.2 million, or 41 cents a share, related to litigation associated with the K-Swiss and adidas, net earnings in the quarter fell 67.4% to $8.1 million, or 13 cents, a year ago.
Sales in the quarter were $911.7 million, up 30.4%, and include the addition of Stride Rite. Net sales for Payless and Stride Rite were $704.4 million and $207.3 million, respectively, for the second quarter of 2008. Comparable store sales, including Payless Latin America, increased 0.2%, as higher retail prices offset lower unit volume.
“Our operating results in the second quarter of 2008 demonstrated the strength and resiliency of the hybrid business model we have created over the past 16 months. The success of our acquisitions, and the integration of those businesses into Collective Brands, is a strong testament to our people and their ability to accomplish that task while continuing to keep their focus on the business in spite of a difficult economy,” said Matthew E. Rubel, chairman, chief executive officer and president. “International and wholesale sales increased with particular strength in Payless Latin America, Sperry Top-Sider, and Saucony. In addition, we increased market share, effectively managed inventory, controlled costs, and generated positive cash flow. Our strategy is to continue to invest in growth opportunities that our retail, wholesale and licensing platforms provide.”
During the second quarter of 2008, the company recognized $36.2 million of litigation items related to the previously disclosed K-Swiss settlement and the adidas litigation in cost of sales. The K-Swiss settlement, net of insurance recoveries of $1.0 million, totaled $29.0 million while K-Swiss and adidas litigation costs, primarily attorney fees, amounted to $7.2 million.
Last week, Collective Brands entered into a binding agreement with one of its insurers to be reimbursed for an additional $7.5 million related to the company’s settlement with K-Swiss. This insurance recovery will be recorded in Collective Brands third quarter 2008 financial statements.
The gross margin rate for the second quarter of 2008 was 31.0%, which included $36.2 million of litigation items. Excluding the litigation items, the gross margin rate was 35.0%, up 60 basis points compared to the second quarter of 2007. Gross margin gains were driven primarily by higher average unit retail prices and more direct sourcing. This was partially offset by Stride Rite’s lower gross margin rate and higher merchandise and occupancy costs.
Selling, general and administrative (SG&A) expenses were 28.4% of sales in the second quarter of 2008, an improvement of 30 basis points compared to the second quarter of 2007. The lower rate was due to the mix of including Stride Rite’s lower SG&A rate in 2008. SG&A expenses were $259.2 million in the second quarter of 2008, up $58.2 million versus the prior year period due to the addition of Stride Rite.
Net interest expense in the second quarter of 2008 was $16.8 million compared to net interest expense of $0.8 million last year. The change was primarily due to an increase in borrowings to fund the acquisition of Stride Rite.
The second quarter 2008 income tax benefit was $2.8 million. The tax benefit was primarily due to a reduction in the 2008 effective tax rate driven by tax deductions for litigation items in the
Collective Brands ended second quarter 2008 with $451.4 million in cash and cash equivalents compared to $327.4 million at the end of second quarter 2007.
Collective Brands inventory was $483.3 million at the end of second quarter 2008, up $113.3 million compared to the same period last year due to the addition of $136.9 million of Stride Rite inventory. Average inventory in Payless stores was down 2.4% versus second quarter 2007. Payless aged inventory was also lower than last year reflecting a cleaner inventory position.
Total debt at the end of the second quarter of 2008 was $1.1 billion. The increase in debt of $932.5 million over the comparable period last year is primarily due to the bank term loan related to the acquisition of Stride Rite and the use of the revolving credit facility. Net debt at the end of the second quarter of 2008 was $682.3 million, down $6.8 million compared to the end of the first quarter of 2008.
Year-to-date capital expenditures for 2008 totaled $78.2 million compared to $93.0 million in the prior year period. The decline was primarily due to investments last year in store technology and supply chain. During the second quarter 2008, Collective Brands added 17 new stores (13 Payless and 4 Stride Rite), closed 29 stores (28 Payless and 1 Stride Rite), and relocated 12 stores (10 Payless and 2 Stride Rite).
At the end of the second quarter, there were 4,547 Payless stores versus 4,560 a year ago, and 351 Stride Rite stores against 330 a year ago.
Regarding its outlook for the rest of the year, Payless ShoeSource said:
Collective Brands anticipates an operating profit growth rate in the mid-teens over time. This long-term goal is predicated on low-single-digit comparable store sales growth. This year, as previously disclosed, 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 and expense control.
Excluding the impact of purchase accounting, the Stride Rite acquisition is expected to be accretive to earnings in 2008 as Stride Rite’s operating profit 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 $130 million.
The 2008 effective tax rate is expected to be approximately 21% excluding litigation items and discrete events associated with the resolution of outstanding tax audits.
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.
(Dollars and shares in
millions, except per share
data) 13 Weeks Ended 26 Weeks Ended
——————– ——————–
August 2, August 4, August 2, August 4,
2008 2007 2008 2007
——— ——— ——— ———Net sales $ 911.7 $ 699.3 $ 1,844.1 $ 1,427.9
Cost of sales 628.9 458.7 1,256.2 918.4
——— ——— ——— ———
Gross margin 282.8 240.6 587.9 509.5Selling, general and
administrative expenses 259.2 201.0 523.0 410.9Restructuring charges – 0.1 0.1 0.3
——— ——— ——— ———
Operating profit from
continuing operations 23.6 39.5 64.8 98.3Interest expense 20.7 4.8 39.2 9.6
Interest income (3.9) (4.0) (5.2) (8.7)
——— ——— ——— ———
Earnings from continuing
operations before income
taxes and minority interest 6.8 38.7 30.8 97.4(Benefit) Provision for income
taxes (2.8) 12.7 (0.5) 31.5——— ——— ——— ———
Earnings from continuing
operations before minority
interest 9.6 26.0 31.3 65.9Minority interest, net of
income taxes (1.4) (1.3) (3.0) (2.2)——— ——— ——— ———
Net earnings from continuing
operations 8.2 24.7 28.3 63.7(Loss) Earnings from
discontinued operations, net
of income taxes and minority
interest (0.1) 0.2 (0.5) 0.1Net earnings $ 8.1 $ 24.9 $ 27.8 $ 63.8
========= ========= ========= =========Basic earnings per share:
Earnings from continuing
operations $ 0.13 $ 0.38 $ 0.45 $ 0.98
Earnings (loss) from
discontinued operations – 0.01 (0.01) 0.01
Basic earnings per share $ 0.13 $ 0.39 $ 0.44 $ 0.99
========= ========= ========= =========Diluted earnings per share:
Earnings from continuing
operations $ 0.13 $ 0.37 $ 0.45 $ 0.96
Earnings (loss) from
discontinued operations – 0.01 (0.01) 0.01
Diluted earnings per share $ 0.13 $ 0.38 $ 0.44 $ 0.97
========= ========= ========= =========
