Collective Brands, Inc. second quarter, a period prior to the close of the acquisition of the Stride Rite Corporation, net earnings were $24.9 million, or 38 cents per diluted share, down 23% versus second quarter 2006 net earnings of $32.5 million, or 48 cents per diluted share. Results include the following:
— Second quarter 2007 expenses related to the company's distribution
center initiative, including the exit from one facility and temporary
redundancies between facilities. Those expenses totaled $3.6 million
pre-tax or $0.04 per diluted share.
— Second quarter 2007 expenses related to the integration planning of
Stride Rite. Those expenses totaled $1.8 million pre-tax or $0.02 per
— Second quarter 2006 income related to Payless's receipt of Visa
Check/Mastermoney Antitrust settlement proceeds. The income totaled
$2.3 million pre-tax or $0.02 per diluted share.
— Second quarter 2006 income related to Payless's insurance recoveries
due to hurricanes. The net incremental income over 2007 totaled
$1.6 million pre-tax or $0.02 per diluted share.
Total sales were $699 million, down 1.0% compared to the second quarter of 2006. Second quarter 2007 same store sales were down 1.4%. Sales declined due to weak sandals results and the later timing of the back-to-school season in certain key markets. These factors were partially offset by higher customer conversion, strength in athletic and casual footwear, and growth in average unit retails of 1%.
“Although Payless's second quarter sales and earnings under performed our expectations, we continued to pick up market share in a challenging industry environment,” said Matthew E. Rubel, chief executive officer and president. “In spite of short-term conditions, we believe Payless is firmly in a position of long-term strength due to our ability to consistently offer on-trend targeted product, our compelling brands, our highly efficient supply chain, and other initiatives that are key to serving our customers.”
Gross margin rate was 34.4% in the second quarter of 2007 versus 34.6% in the second quarter of 2006, a decrease of 20 basis points. The decrease in gross margin rate was driven by costs related to the company's distribution center initiative (50 basis points) and last year's hurricane insurance recoveries (23 basis points). Second quarter 2007 gross margin rate was favorably impacted by higher initial mark-on and more direct sourcing offset in part by higher markdowns on sandals.
Selling, general and administrative (SG&A) expenses were 28.7% of sales in the second quarter of 2007 versus 27.4% in the prior year period, an increase of 130 basis points. The rate increase was driven by lower than expected sales during the 2007 second quarter. SG&A expenses were $201 million in the second quarter of 2007, up 3.9% versus the prior year due primarily to higher payroll, last year's Visa Check/Mastermoney antitrust settlement (33 basis points), and acquisition integration costs (26 basis points).
During the second quarter of 2007, the company repurchased 141,000 shares of common stock for $4.6 million under its stock repurchase program. In accordance with its debt covenants, the company may repurchase approximately $32 million more of its stock in the open market at this time. This limit will continue to adjust quarterly based on the company's net earnings.
The company ended the second quarter of 2007 with $327 million in cash and short-term investments compared to $441 million at the end of the second quarter of 2006. The decrease was due primarily to the first quarter 2007 acquisition of Collective Licensing International.
Total inventory was $370 million at the end of the second quarter of 2007, up 5.5% compared to the second quarter of 2006. Inventory quality at quarter-end was better because aged units as a percent of total inventory was lower. The increase in inventory was driven primarily by greater investments in strong performing product categories for fall; a merchandise mix shift towards more footwear at higher average costs linked to higher average retail and initial mark-on; and an increase in raw material commitments associated with a higher percentage of products sourced directly by Payless.
Year-to-date capital expenditures at the end of the second quarter of 2007 totaled $93 million versus $53 million in the prior year period. The increase was due primarily to greater investments in the company's supply chain and Payless stores. During second quarter 2007, the company opened 15 new Payless stores, closed 19, and relocated 20. Collective Brands ended the period with 4,560 Payless stores down 24 compared to second quarter 2006. As of today, Collective Brands also has 327 stores through its Stride Rite business unit.
In 2007, capital expenditures for Collective Brands are expected to total approximately $175 million. The increase over 2006 will be primarily driven by investing in the company's supply chain. In 2007, the company has and will continue to invest in stores, brands, and technology which support its strategic imperatives.
As previously communicated, the company financed a portion of its acquisition of Stride Rite with a $725 million term loan B at a variable rate of 8.3% over 7 years. On August 24, 2007 the company entered into an interest rate swap arrangement for $540 million which provides for a fixed interest rate of approximately 7.75%, portions of which mature on a series of dates over the next five years.
Outlook for Collective Brands
Collective Brands is expected to have strong pro-forma financials:
— Excluding the impact of purchase accounting, the acquisition is
expected to be accretive to earnings per share in 2008 as the Stride
Rite unit's earnings contribution 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.
— Excluding purchase accounting, the 2006 – 2009 compound annual growth
rate in operating profit is expected to be in the mid-to-upper teens.
Including purchase accounting, the 2006 – 2009 compound annual growth
rate in operating profit is expected to be in the low-teens on a GAAP
PAYLESS SHOESOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS(UNAUDITED)
(Dollars and shares in millions,except per share data) 13 Weeks Ended 26 Weeks EndedAugust 4, July 29, August 4, July 29,2007 2006 2007 2006
Net sales $699.3 $706.1 $1,427.9 $1,400.6
Cost of sales 458.7 462.1 918.4 900.8
Gross margin 240.6 244.0 509.5 499.8
Selling, general and administrativeexpenses 201.0 193.5 410.9 392.6
Restructuring charges 0.1 0.3 0.3 0.3
Operating profit from continuingoperations 39.5 50.2 98.3 106.9
Interest expense 4.8 4.5 9.6 9.4
Interest income (4.0) (5.2) (8.7) (10.0)
Earnings from continuing operationsbefore income taxes andminority interest 38.7 50.9 97.4 107.5
Provision for income taxes 12.7 17.3 31.5 36.8
Earnings from continuing operationsbefore minority interest 26.0 33.6 65.9 70.7
Minority interest, net of income taxes (1.3) (0.6) (2.2) (0.9)
Net earnings from continuingoperations 24.7 33.0 63.7 69.8
Earnings (loss) from discontinuedoperations, net of income taxesand minority interest 0.2 (0.5) 0.1 (1.3)
Net earnings $24.9 $32.5 $63.8 $68.5
Basic earnings per share:Earnings from continuingoperations $0.38 $0.50 $0.98 $1.05Earnings (loss) from discontinuedoperations 0.01 (0.01) 0.01 (0.02)Basic earnings per share: $0.39 $0.49 $0.99 $1.03
Diluted earnings per shareEarnings from continuingoperations $0.37 $0.49 $0.96 $1.03Earnings (loss) from discontinuedoperations 0.01 (0.01) 0.01 (0.02)Diluted earnings per share $0.38 $0.48 $0.97 $1.01
Basic weighted average sharesoutstanding 64.5 66.5 64.6 66.5outstanding 65.7 67.6 65.9 67.6
Diluted weighted average shares