Payless ShoeSource, Inc. reported a net loss of $5.6 million or 8 cents per diluted share for the fourth quarter ended January 28, 2006, including the cumulative effect of a change in accounting principle. The 2005 fourth quarter net loss before cumulative effect of change in accounting principle was $1.5 million, or 2 cents per diluted share. This compares to a net loss of $26.5 million or 39 cents per diluted share for the fourth quarter of 2004.
The company adopted FASB Financial Interpretation No. 47 (“FIN 47”) “Accounting for Conditional Asset Retirement Obligations” in the fourth quarter of 2005. FIN 47 requires the company to record an asset and a corresponding liability for the present value of the estimated asset retirement obligation associated with the fixed assets and leasehold improvements at all store locations. The company recognized an expense for the cumulative effect of this change in accounting principle in the fourth quarter of 2005 of $4.1 million, net of income taxes and minority interest, or ($0.06) per diluted share.
Fourth quarter 2005 results include pre-tax restructuring charges of approximately $1.9 million relating to continuing operations or 2 cents per diluted share. In addition, the effective income tax rate for the fourth quarter included a discrete event for the impact of repatriating foreign earnings pursuant to the American Jobs Creation Act of 2004. The impact of these repatriated foreign earnings was to increase income taxes by $1.4 million, or a decrease in diluted earnings per share of ($0.02). Fourth quarter 2004 results include pre-tax restructuring charges of $7.3 million, or ($0.07) per diluted share, relating to continuing operations. Also, the impact of repatriated foreign earnings during the fourth quarter 2004 was to increase income taxes by $2.3 million, or a decrease in diluted earnings per share of ($0.03).
Net earnings were $66.4 million, or 98 cents per diluted share for fiscal year 2005, compared to a net loss of $2.0 million, or 3 cents per diluted share for fiscal year 2004. Net earnings from continuing operations were $74.2 million, or $1.09 per diluted share for fiscal 2005 compared to net earnings from continuing operations of $35.1 million, or 52 cents per diluted share in fiscal 2004.
Chief Executive Officer's Comments
“We are pleased with our fiscal 2005 results,” said Matt Rubel, President and Chief Executive Officer of Payless ShoeSource, Inc. “We achieved our goals to deliver low single-digit, positive same-store sales for the year, improve our margins, and significantly increase earnings and operating profit. We are moving forward strongly positioned to develop and implement our strategy to inspire fun, fashion possibilities for the family. Our strategy will include additional improvements to our product; the development of a comprehensive brand portfolio; and an integrated marketing plan that delivers an inspiring, clear and consistent message at all customer touch points, supported by a compelling in-store experience.”
“Investing in our business will remain a top priority. These investments will take place on a variety of levels. We are increasing the rate of capital investments we are making for new store expansion, remodeling, technology and in our supply chain. We will continue to invest in all elements of our business that impact the customer experience, while ensuring that an efficient supporting infrastructure is in place.”
“Continuing to implement all of the components of our strategy will serve as a catalyst to reach new customers and increase our share of our current customers' footwear purchases, driving top line sales growth and continued gross margin growth, which will lead to long-term value creation for our shareholders.”
Results From Continuing Operations
Sales during the fourth quarter 2005 totaled $611.3 million, a 0.7% increase from $607.2 million during the fourth quarter 2004. Same-store sales increased 2.3% during the fourth quarter 2005. Average footwear unit retail for the quarter increased by 6.6% and footwear unit sales decreased by 3.9% relative to the same period last year.
Sales during fiscal 2005 totaled $2.67 billion, a 0.4% increase over sales of $2.66 billion in fiscal 2004. During fiscal 2005, same-store sales increased 2.4%.
Gross margin was 31.1% of sales in the fourth quarter 2005 versus 30.0% in the fourth quarter 2004. The improvement resulted primarily from favorable initial mark-on relative to last year. During fiscal year 2005, gross margin was 33.3% of sales versus 30.9% in fiscal 2004.
Selling, general and administrative expenses were 31.0% of sales in the fourth quarter 2005 versus 30.9% in the fourth quarter 2004. During fiscal 2005, selling, general and administrative expenses were 28.9% of sales versus 27.6% in fiscal 2004.
Operating loss from continuing operations was $0.9 million during the fourth quarter 2005 compared to a loss of $12.7 million during the fourth quarter 2004. The fourth quarters of 2005 and 2004 included pre-tax restructuring charges of $1.9 million and $7.3 million, respectively. Operating profit from continuing operations for fiscal 2005 was $113.8 million, compared with $61.5 million in fiscal 2004.
The company's effective income tax rate on continuing operations was 28.9% during fiscal year 2005, including the discrete benefit of released tax reserves relating to favorable settlements of income tax audits, and the additional income tax expense required for the repatriation of foreign earnings. The company's effective income tax rate on continuing operations for fiscal 2005 was 33.1%, excluding discrete events.
Balance Sheet
The company ended the fourth quarter 2005 with cash, cash equivalents and short-term investments of $438 million, an increase of $33 million during the fourth quarter. Total inventories at the end of the fourth quarter 2005 were $333 million compared to $345 million at the end of fourth quarter 2004, a decrease of 2.8% on a per-store basis.
Capital Expenditures
Cash used for capital expenditures totaled $14.8 million during the fourth quarter 2005, and $64.4 million for the full year 2005. During fiscal 2006, Payless expects capital expenditures of approximately $120 million.
Store Count
In the fourth quarter 2005, the company opened 3 new stores and closed 24, for a net decrease of 21 stores. In addition, 8 stores were relocated. For the full year 2005, the company opened 46 new stores and closed 81 for a net reduction of 35 stores. In addition, 75 stores were relocated. During fiscal year 2006, the company intends to open approximately 80 new stores and close approximately 60, for a net increase of approximately 20 new stores. The company also plans to relocate approximately 130 stores.
Share Repurchase
During the fourth quarter of 2005, the company repurchased $54.2 million (approximately 2.3 million shares) of common stock under its stock repurchase program. During fiscal 2005, the company repurchased $70.4 million (approximately 3.2 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 $32 million of common stock. This limit will continue to adjust quarterly based on the company's net earnings.
February 2006 Sales
Company sales for the month of February 2006 are estimated to be approximately $179 million, compared with sales of $182.5 million from continuing operations during February 2005. Same-store sales decreased 1.7% during February 2006, consistent with the company's internal plans which incorporated less promotional activity compared to a 13.5% same-store sales increase achieved in February 2005.
Going forward, the company will no longer release monthly sales results and will shift to a quarterly release schedule. We believe this provides a more accurate indication of company performance.
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 (LOSS)
(UNAUDITED)
(Millions, except per share data)
13 Weeks Ended 52 Weeks Ended
January 28, January 29, January 28 January 29,
2006 2005 2006 2005
Net sales $611.3 $607.2 $2,667.3 $2,656.5
Cost of sales 420.9 425.0 1,778.9 1,836.9
Gross margin 190.4 182.2 888.4 819.6
Selling, general and
administrative expenses 189.4 187.6 770.8 733.2
Restructuring 1.9 7.3 3.8 24.9
Operating (loss) profit
from continuing operations (0.9) (12.7) 113.8 61.5
Interest expense, net 0.3 3.6 7.4 16.8
(Loss) earnings from
continuing operations before
income taxes and minority
interest (1.2) (16.3) 106.4 44.7
(Benefit) provision for
income taxes (1.1) (1.9) 30.8 13.2
(Loss) earnings from
continuing operations before
minority interest (0.1) (14.4) 75.6 31.5
Minority interest, net of
income taxes (1.1) (0.7) (1.4) 3.6
Net (loss) earnings from
continuing operations (1.2) (15.1) 74.2 35.1
Loss from discontinued
operations, net of income
taxes and minority interest (0.3) (11.4) (3.7) (37.1)
Net (loss) earnings before
cumulative effect of change
in accounting principle (1.5) (26.5) 70.5 (2.0)
Cumulative effect of change
in accounting principle, net
of income taxes and minority
interest (4.1) - (4.1) -
Net (loss) earnings $(5.6) $(26.5) $66.4 $(2.0)
Basic (loss) earnings per share:
(Loss) earnings from
continuing operations $(0.02) $(0.22) $1.09 $0.52
Loss from discontinued
operations (0.00) (0.17) (0.05) (0.55)
Basic (loss) earnings per
share before cumulative
effect of change in
accounting principle $(0.02) $(0.39) $1.04 $(0.03)
Cumulative effect of
change in accounting
principle (0.06) - (0.06) -
Basic (loss) earnings
per share $(0.08) $(0.39) $0.98 $(0.03)
Diluted (loss) earnings per share:
(Loss) earnings from
continuing operations $(0.02) $(0.22) $1.09 $0.52
Loss from discontinued
operations (0.00) (0.17) (0.05) (0.55)
Diluted (loss) earnings
per share before cumulative
effect of change in
accounting principle $(0.02) $(0.39) $1.04 $(0.03)
Cumulative effect of
change in accounting
principle (0.06) - (0.06) -
Diluted (loss) earnings
per share $(0.08) $(0.39) $0.98 $(0.03)
Basic weighted average
shares outstanding 67.8 67.9 67.5 67.9
Diluted weighted average
shares outstanding 67.8 67.9 67.8 68.0
