Collective Brands Sees Strong Q3 Wholesale Business Offset Payless Weakness

Excluding adjustments to year-ago results, earnings in the latest period rose 20.8% to $47.6 million, or 75 per cents a share, from $39.4 million, or 61 cents, a year ago. The wholesale strength drove better-than-expected operating margin improvement of 80 basis points, to 7.8% of sales for the period.

“We had wins across all of our businesses,” said Matt Rubel, Collective's chairman, CEO and president, on a conference call with analysts. “We again delivered strong results in PLG Wholesale and in Payless International. We had significant year-over-year improvements in PLG Retail. And we saw significant sequential improvements in Payless Domestic.”

In the PLG Wholesale segment, which includes Saucony, Stride-Rite, Keds and Sperry Top-Sider, revenues jumped 26.9% to $141.6 million on growth in all brands. Operating profits improved to $7.3 million from only $100,000 as the higher sales offset greater marketing costs. The division's operating margin rate improved to 5.2% of sales.

On the call, Rubel said Saucony “had another great quarter,” and was helped by winning 14 major trade and media awards. The Kinvara,  the brand’s entry into the minimalist category, “was a leading contributor to the brand's results,” he indicated. But strength across core models, Guide, Ride and Cohesion, helped Saucony continue to gain doors and shelf space at run, specialty and sporting goods channels. Saucony's international sales were also up, driven by Germany.

Sperry Top-Sider increased sales “significantly” while the bottom line benefited from a more profitable channel mix, with premium accounts “particularly strong.” Wet weather, casuals, women's boots, as well as boat shoes all showed strength among categories. A strong BTS season was seen as a sign that the brand is connecting with younger consumers, as well as women, who accounted for over half of Sperry's sales in the quarter.

Keds’ third quarter sales growth benefited from moves to “elevate its distribution base” to reach more specialty and pinnacle accounts. The brand was particularly helped by increasing its mix of first quality sales while reducing closeouts. Sales of Grasshopper branded toning shoes also boosted the Keds group's results.

Kid's wholesale segment sales increased as the company’s brands reached more doors in the family and sporting goods channel at both existing and new accounts. The gains were particularly driven by Saucony but Sperry and Keds also grew in kids' sizes. The Stride Rite brand's key programs of Slingshot, Glitzy Pets and Star Wars by Stride Rite were all received well.

Payless Domestic segment sales decreased 5.1% to $548.9 million due to a 4.6% comp decline and 31 fewer stores. The anniversary of a promotion tied to the Oprah Winfrey show unfavorably impacted the segment's comps by three percentage points. On a two-year basis third quarter comps increased 1%. Payless Domestic increased its average selling price, units per transaction and conversion rate, although traffic declined.  Rubel said Payless ” still faces challenges from a U.S. macroeconomic factor.”

Gains in boots, accessories, fitness footwear and women's flats at Payless Domestic retail were more than offset by declines in certain casual and dress footwear, as well as children's footwear. Fitness increased to nearly 3% of Payless' domestic sales due to the introduction of the Champion ACTIVELITE minimalist/lightweight line. The re-launch of Above the Rim, selling in about 2,500 doors, is “off to a good start,” Rubel said.

Collective's licensing division, included in Payless Domestic, increased sales due to Airwalk's growth internationally. Operating profit at Payless Domestic decreased 20.7% to $35.3 million due primarily to the sales decline offset in part by gross margin improvement. Operating margins declined 130 basis points to 6.4%.

Payless International segment sales were up 7.7% to $118.5 million. The gain was driven by comp growth of 4.9% led by Latin America, favorable foreign exchange rates in Canada, and 25 more net new stores primarily in Latin America.

Payless International’s operating profit surged 70.5% to $19.1 million due to sales growth combined with gross margin expansion in every region. Overall operating margins lifted 590 basis points to 16.1% for the quarter.

In the PLG Retail segment, which primarily consists of  Stride Rite stores, sales grew 8.2% to $72.8 million as a result of 1.6% comp growth and 17 more stores. Operating profit increased 36.5% to $7.1 million due to the sales increases, fewer markdowns, and cost improvement initiatives. Operating margins improved 210 basis points to 9.8% of sales for the period.

Gross margins increased 130 basis points primarily due to less promotional activity at retail and more first-quality sales at wholesale as well as lower occupancy costs.  Product costs didn't impact the margins in the quarter but management expects to see a mid- to high-single-digit percentage cost increase on like-for-like product in fourth and first quarters related to increases related to materials, labor, freight and currency.

Inventory at the end of the third quarter was ahead 22.1%, driven by lower than normal inventory last year due to sell-off related to the Oprah promotion, inventory to support the wholesale growth, and higher product costs per unit. Aged inventory as a percentage of total inventory decreased and overall inventory levels are in-line with expectations.

Looking ahead, Collective Brands reiterated its recently-provided goals calling for targeting earnings per share growth of approximately 12% to 16%. The gains are  expected to be driven by 3% to 5% net sales growth and 9% to 12% operating profit growth.