Payless ShoeSource, Inc. reported first quarter diluted earnings per share of 53 cents, up from 45 cents during the first quarter of fiscal 2005. The company recorded net earnings of $36.0 million during the quarter, a 19.2% increase from $30.2 million during the year-ago quarter.
Same-store sales increased 0.4% during the first quarter 2006. Company sales during the first quarter 2006 totaled $694.8 million, a 0.1% decrease from $695.2 million during the first quarter 2005. Average unit retail for footwear increased by 11.2%, and footwear unit sales decreased by 8.6% relative to the same period last year.
Gross margin was 36.8% of sales in the first quarter 2006 versus 35.1% in the first quarter 2005. The improvement resulted primarily from favorable initial mark-on relative to last year.
Selling, general and administrative expenses were 28.7% of sales in the first quarter 2006 versus 28.3% in the first quarter 2005. The increase was driven primarily by higher employee relocation and recruiting costs and an increase in advertising expenses, partially offset by a decrease in employee incentive costs relative to last year.
First quarter results include expenses relating to the company’s adoption of SFAS 123, Share Based Payment, effective at the beginning of fiscal 2006. The incremental impact of SFAS 123 on net earnings for the first quarter 2006 was approximately $2 million pre-tax, or 2 cents per diluted share. The company currently estimates that the incremental impact of SFAS 123 on full year results for fiscal 2006 will be in the range of $8 million – $9 million pre-tax, or 8 cents – 9 cents per diluted share.
The company’s effective income tax rate was 34.9% during the first quarter 2006. For the full fiscal year 2006, the effective income tax rate is expected to be approximately 35%, excluding discrete events.
CEO’s Comments
“Our strategy is beginning to gain traction, and we are pleased with our customer’s response to our new product offerings,” said Matthew E. Rubel, Chief Executive Officer and President of Payless ShoeSource, Inc. “We had a solid sales performance in the first quarter of 2006. In the categories where we invested in improvements to the quality and aesthetics of our product, we were able to raise average unit retails, which drove our gross margin growth in the quarter.”
Balance Sheet
The company ended the first quarter 2006 with cash, cash equivalents and short-term investments of $411 million, a decrease of $27 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 first quarter 2006 were $378 million, compared to $384 million at the end of first quarter 2005. Inventory per store at the end of the first quarter decreased by 0.6% compared to the same period last year. The company’s inventory is well positioned, with a low level of aged merchandise.
In April 2006, Payless amended its $200 million Senior Secured Revolving Credit Facility. The amendment extends the term of the Revolving Credit Facility until January 15, 2011 and reduces the associated borrowing fees and unused line fees. The company may borrow up to $200 million through the Revolving Credit Facility, subject to a sufficient borrowing base. There were no borrowings on the company’s Revolving Credit Facility outstanding as of the end of the first quarter 2006.
Capital Expenditures
Cash used for capital expenditures was $23 million during the first quarter 2006. During fiscal year 2006, Payless expects capital expenditures to be approximately $120 million.
Store Count
In the first quarter 2006, the company opened 21 new stores and closed 24, for a net decrease of 3 stores. The company also relocated 31 stores. The store count as of the end of the first quarter 2006 was 4,602. During fiscal year 2006, the company intends to open approximately 80 new stores and close approximately 60, for a net increase of approximately 20 stores. The Company also intends to relocate approximately 130 stores.
Share Repurchase
The company’s capital allocation strategy is designed to fund both the necessary investment to improve the business and, when cash reserves are adequate, to use free cash flow to return more immediate value to shareowners.
During the first quarter of 2006, the company repurchased $26 million, or approximately 1.2 million shares of common stock under its stock repurchase program. Under the indenture governing the company’s 8.25% Senior Subordinated Notes, the company may repurchase approximately an additional $26 million of common stock. This limit will continue to adjust quarterly based on the company’s net earnings.
Fiscal 2006 Outlook
Payless ShoeSource remains committed to its long-standing goal to achieve low single-digit positive same-store sales on a consistent basis, through successful execution of its merchandising strategies. The company does not provide guidance for sales, earnings or margins. However, the company’s business model and strategy is designed to leverage its sales performance, and the goal is to achieve earnings per share growth in the mid-teens over time.
Additional financial metrics for fiscal 2006 are expected to include:
-- Depreciation and amortization of approximately $90 - $95 million;
-- Cash used for capital expenditures are planned at $120 million; and,
-- Working capital should be approximately neutral, subject to normal
seasonal fluctuations.
PAYLESS SHOESOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(Millions, except per share data)
13 Weeks Ended
April 29 April 30
2006 2005
Net sales $694.8 $695.2
Cost of sales 439.1 450.8
Gross margin 255.7 244.4
Selling, general and administrative expenses 199.7 196.7
Restructuring charges - 0.7
Operating profit from continuing operations 56.0 47.0
Interest expense, net 0.1 3.2
Earnings from continuing operations before
income taxes and minority interest 55.9 43.8
Provision for income taxes 19.5 12.5
Earnings from continuing operations before
minority interest 36.4 31.3
Minority interest, net of income taxes - 0.4
Net earnings from continuing operations 36.4 31.7
Loss from discontinued operations, net of
income taxes and minority interest 0.4 1.5
Net earnings $36.0 $30.2
Basic earnings per share:
Earnings from continuing operations $0.55 $0.47
Loss from discontinued operations (0.01) (0.02)
Basic earnings per share $0.54 $0.45
Diluted earnings per share:
Earnings from continuing operations $0.54 $0.47
Loss from discontinued operations (0.01) (0.02)
Diluted earnings per share $0.53 $0.45
Basic weighted average shares outstanding 66.6 67.1
Diluted weighted average shares outstanding 67.6 67.2
