Payless ShoeSource, Inc. reported that the disappointing sales trends seen in May have persisted through the first two weeks of June. The unseasonably cold weather in many parts of the country has depressed consumer demand for sandals, a traditionally important product category for the company in its second quarter. As a result of the weaker than anticipated sales, there is currently a large surplus of seasonal inventory throughout the footwear market.
The company expects the market to be increasingly promotional as retailers act aggressively to clear their seasonal product. Payless intends to defend its market share and clear spring and summer merchandise through a series of promotions and more aggressive markdowns.
Therefore, for the second quarter, the company now expects low double- digit negative same-store sales, with considerable pressure on margins, and net earnings of a nominal loss to a slight profit. The pressure on sales, margins and earnings is likely to persist in the second half of the year.
In a separate matter, the company said that its $600 million credit facility, entered into in 2000, consisting of a $400 million term loan and a line of credit of $200 million, requires the company to comply with various financial and other covenants. As of May 3, 2003, the company is in compliance with all of the covenants under the Credit Facility. However, based on current expectations, at the end of the second quarter ending August 2, 2003, the company would not meet the most restrictive of those covenants, which is the maintenance of a fixed charge coverage ratio, as defined in the credit agreement. The company intends to amend its fixed charge coverage ratio requirement. In addition, the company is evaluating its capital structure.
While there can be no assurances that the company will be successful in these efforts, the company believes it will be able to amend the Credit Facility based on its positive cash flow from operations, the company’s history of paying down borrowings faster than required and its ample coverage levels under the other covenants.
The company’s outstanding indebtedness on its term loan declined to $200.0 million as of May 3, 2003, from $293.3 million as of May 4, 2002. As of May 3, 2003, no amounts were drawn against the company’s $200.0 million line of credit. The availability under the line of credit has been reduced, however, by $13.4 million in outstanding letters of credit.
