Payless ShoeSource, Inc. posted net income of $32.5 million for the second quarter, an increase of 63.3% from $19.9 million during the same period last year. Diluted earnings per share increased to 48 cents from 29 cents during the second quarter of fiscal 2005.
During the first six months of 2006, net earnings were $68.5 million and diluted earnings per share were $1.01. This compares with net earnings of $50.1 million and diluted earnings per share of 74 cents, in the first six months of 2005, a 36% increase in diluted earnings per share year-to-date.
Same-store sales increased 2.2% during the second quarter 2006. Company sales during the second quarter 2006 totaled $706.4 million, a 1.8% increase from $693.9 million during the second quarter 2005. Average unit retail for footwear increased by 12.3%, and footwear unit sales decreased by 8.3% relative to the same period last year.
Sales during the first six months of 2006 totaled $1.40 billion, a 0.9% increase over the first six months of 2005. During the first six months of 2006, same-store sales increased 1.3%.
Gross margin was 34.5% of sales in the second quarter 2006 versus 33.9% in the second quarter 2005. Merchandise margin improved 1.5% as a percent of sales, compared to second quarter 2005, driven primarily by favorable initial mark-on relative to last year, but partially offset by increases in markdowns in the quarter. The improvement in merchandise margin was also partially offset by increases in occupancy costs compared to last year. Gross margin as a percent of sales was also benefited 0.3% by a gain from insurance recoveries due to hurricanes. During the first six months of 2006, gross margin was 35.7% of sales versus 34.5% in the first six months of 2005.
Selling, general and administrative expenses were 27.5% of sales in the second quarter 2006 versus 29.0% in the second quarter 2005. The decrease was driven primarily by the $7.9 million in management transition costs incurred last year, or 1.1% of sales in 2005, and the receipt of Visa Check/Mastermoney Antitrust settlement proceeds of $2.3 million, or 0.3% of sales in 2006, partially offset by increased advertising expenses during the second quarter. During the first six months of 2006, selling, general and administrative expenses were 28.1% of sales versus 28.6% in the first six months of 2005.
The company’s effective income tax rate was 34.7% during the second quarter 2006. For the full fiscal year 2006, the effective income tax rate is expected to be approximately 35 percent, excluding discrete events.
CEO’s Comments
“We are pleased with our earnings growth in the second quarter,” said Matthew E. Rubel, Chief Executive Officer and President of Payless ShoeSource, Inc. “The combination of low single digit same-store sales growth, gross margin expansion and prudent expense control demonstrates that these factors working in concert can drive earnings improvements in the future. Our new product, store format and service initiatives are resonating with our consumer.”
International
The company is committed to refining its international business strategy, and is very pleased with its growth and operating performance in Latin America. In order to focus on additional opportunities for expansion in this region, the company will exit retail operations in Japan, closing its one test location. The exit of operations is planned to be substantially completed by the end of the third quarter of 2006. Total exit costs are estimated to be between $2 and $3 million, with virtually all costs incurred in the third quarter of 2006. Results of Japan retail operations for all periods will be reported as discontinued operations beginning with the third quarter of 2006.
Balance Sheet
The company ended the second quarter 2006 with cash, cash equivalents and short-term investments of $443 million, an increase of $5 million over the cash, cash equivalents and short-term investment balance as of the end of fiscal 2005.
Total inventories at the end of the second quarter 2006 were $351 million, compared to $362 million at the end of second quarter 2005. Inventory per store at the end of the second quarter decreased by 2.2% compared to the same period last year. The company’s inventory is well positioned, with a low level of aged merchandise.
Capital Expenditures
Cash used for capital expenditures was $29.8 million during the second quarter 2006. During fiscal year 2006, Payless expects capital expenditures to be approximately $120 million.
Store Count
In the second quarter 2006, the company opened 10 new stores and closed 28, for a net decrease of 18 stores. The Company also relocated 28 stores. The store count as of the end of the second quarter 2006 was 4,584. During fiscal year 2006, the company intends to open approximately 70 new stores and close approximately 70, for no change in store count. The company also intends to relocate approximately 120 stores.
PAYLESS SHOESOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(Millions, except per share data)
13 Weeks Ended 26 Weeks Ended
July 29, July 30, July 29, July 30,
2006 2005 2006 2005
Net sales $706.4 $693.9 $1,401.2 $1,389.1
Cost of sales 462.5 458.8 901.6 909.6
Gross margin 243.9 235.1 499.6 479.5
Selling, general and administrative
expenses 194.4 200.9 394.1 397.6
Restructuring charges 0.3 - 0.3 0.7
Operating profit from continuing
operations 49.2 34.2 105.2 81.2
Interest expense 4.5 5.0 9.4 9.9
Interest income (5.2) (2.6) (10.0) (4.3)
Earnings from continuing operations
before income taxes and minority
interest 49.9 31.8 105.8 75.6
Provision for income taxes 17.3 10.1 36.8 22.6
Earnings from continuing operations
before minority interest 32.6 21.7 69.0 53.0
Minority interest, net of income taxes (0.2) 0.1 (0.2) 0.5
Net earnings from continuing
operations 32.4 21.8 68.8 53.5
Gain (loss) from discontinued
operations, net of income taxes and
minority interest 0.1 (1.9) (0.3) (3.4)
Net earnings $32.5 $19.9 $68.5 $50.1
Basic earnings per share:
Earnings from continuing
operations $0.49 $0.32 $1.03 $0.79
Loss from discontinued operations - (0.03) - (0.05)
Basic earnings per share: $0.49 $0.29 $1.03 $0.74
Diluted earnings per share
Earnings from continuing
operations $0.48 $0.32 $1.02 $0.79
Loss from discontinued operations - (0.03) (0.01) (0.05)
Diluted earnings per share $0.48 $0.29 $1.01 $0.74
Basic weighted average shares
outstanding 66.5 67.5 66.5 67.3
Diluted weighted average shares
outstanding 67.6 68.0 67.6 67.4
