Collective Brands, Inc. saw second quarter net income fall as litigation charges associated with the K-Swiss and adidas lawsuits ate into the upside from the inclusion of the Stride Rite business this year. Excluding the one-time charges, earnings rose 42.1% to $33.6 million, or 54 cents per share, from $24.9 million, or 38 cents, a year ago, outpacing the increase in Q2 revenues. 

 

The improved profit picture was driven by an improvement in gross margins for the quarter, due in large part to increased average unit retail prices, an increase in the direct sourcing of product and freight savings.  These factors increased the merchandise margin component of gross margin despite higher product costs coming out of China.  SG&A improved 30 basis points as Stride Rite’s lower SG&A rate partially offset increases in advertising.


Payless net sales were up 1%, driven in part by double-digit increases in Latin America. Payless International was up 9% for the period versus the comp period last year, while U.S. sales were down less than 1% for the quarter.  Comparable store sales, including Payless Latin America, increased 0.2%, as higher retail prices offset lower unit volume.  Average unit retails increased 5% on the strength of casual and canvas footwear. Units per transaction were flat, but average unit retail price was up. Traffic was down 4% but improved again sequentially compared to Q1. Inventories at Payless were down 6%.


On a conference call with analysts, company Chairman, President and CEO Matt Rubel said Payless continues to reap the benefit of planning and flowing product closer to need.  The chain also continued to benefit by changing the flow and allocation of product between low- and high-volume stores.  Rubel said the efforts produced stronger sales in higher-volume stores and reduced markdowns in lower-volume stores. 

 

The moves related to overall inventory helped drive gross margin dollars higher, noted Rubel. Rubel also said that stores converted to its new Hot Zone concept achieved significantly higher sales gains than the chain average due to improved traffic trends. Payless is also generating strong growth in the women’s accessory business.Payless posted a $3.9 million operating loss at its domestic unit in Q2, compared to a $26.6 million operating profit in the year-ago period.


The Stride Rite Group was up 6% overall on a pro forma basis with international sales up double-digits. The gains were led by double-digit growth at Sperry Top-Sider and Saucony. Saucony is growing across categories and channels and continues to gain market share in the running channel, according to Rubel.  He said the brand continues to benefit from winning awards in magazines, including the Runner’s World Editor’s Choice best trail running shoe for the Exodus. The gains at Sperry Top-Sider were led by continued acceptance of the women’s casual product offering, as well as investments in media for both fashion/lifestyle and performance.


Keds has reacquired its rights to the Pro Keds brand from its former licensee, Rocawear founder Damon Dash, and plans to position the brand in selective distribution channels with a marketing campaign targeting trend setters.  The new brand strategy includes product enhancement to classic styles with fresh materials, colors and other trend details, as well as a commemorative, limited edition collection to celebrate the brand’s 60th anniversary. 


The Stride Rite Children’s Group wholesale business is “doing well,” and has added Jessie Simpson and Airwalk to its offerings. The group now operates under one coordinated sales force for its core brands: Stride Rite, Robbies, Keds, Tommy Hilfiger, Sperry Top-Sider, and Saucony.


Stride Rite children’s group is testing a new store format, Collections by Stride Rite, on Manhattan’s Upper East Side, that features dedicated shopping areas for 7- to 10-year-olds in the front of the store along with an environment for baby, toddler and youth shoes. Rubel said the concept particularly enables Stride Rite to reach “a wider age range of children” with its many kid’s brands.


Stride Rite posted a $13.4 million operating profit for the quarter.
Looking ahead, Rubel said Collective Brands is starting to experience the effect of inflation from China for the first time in about 20 years and this impact has been compounded by the poor health of the U.S. economy. As a result, Collective anticipates traffic and units will continue to be lower this year. But Rubel said the company’s positioning in the marketplace has allowed it to gain share by using its size and scale to realize efficiencies. Collective is also focusing on a number of initiatives to improve margins.


Sixty-seven percent of its product was sourced directly in the second quarter versus 60% a year ago. Other ways Collective is working to improve margins include the use of preferred raw material suppliers, factory consolidation and transportation and integration initiatives.
“These mitigate the impact of inflation, and we are pleased with our progress to date,” said Rubel.