Phoenix Footwear Group net sales for the third quarter ended October 1, 2005 increased 47.9% to $34.3 million compared to $23.2 million for the third quarter of 2004. The strong top-line growth was primarily attributable to $11.7 million, or 34.1% of total sales, generated by the Company's two recently acquired brands, Chambers and Tommy Bahama. The Company reported flat organic growth, as the increase in the Royal Robbins' brand was offset by declines in the other legacy brands. Net income for the third quarter was $981,000, or $0.12 per diluted share, on 8.4 million of weighted-average shares outstanding, compared to net income of $1.7 million, or $0.24 per diluted share, on 7.3 million weighted-average shares outstanding, for the comparable quarter a year ago.
Commenting on the quarter, Jim Riedman, Phoenix Footwear's Chairman, said, “We are pleased with the Company's top-line growth. During the quarter, we made progress integrating the acquisitions of the Chambers Belt Company and Paradise Shoe Company, which both had a positive impact on our top and bottom line performance. The transactions noticeably augmented our product offering and retail presence and made a significant contribution to our revenues. We also continued investing in our legacy brands to position them for success in the future. We have now made several acquisitions and believe we have a strong multi-brand strategy in place. We now plan to concentrate on integrating the recent acquisitions, reducing our debt, sustaining profitability and creating shareholders' value.”
Richard White, Phoenix Footwear's Chief Executive Officer, added, “While our top-line performance in the quarter was impressive, our organic growth was below our expectations. Our third quarter results for Phoenix Footwear's three casual footwear brands, SoftWalk, Trotters and H.S. Trask, were all negatively impacted by the previously disclosed loss of the Dillard's department stores account. The impact resulted in lower revenues in each of the divisions, as well as increased close-out sales which resulted in weaker margins. The loss of this account, which occurred in early 2005, is expected to continue to adversely impact the three casual footwear brands for the balance of this year.” Mr. White continued, “We view 2005 as a transitional year for the Company. We are confident that we are implementing the right strategic initiatives to rejuvenate the brands in order to generate better performance in 2006 and beyond. We believe our recent acquisitions of Chambers and Tommy Bahama will continue to make positive contributions. Furthermore, we believe Altama sales have stabilized, and we feel our multi-brand strategy will prove successful over the long term.”
Gross margin in the third quarter of 2005 was 36.7% of net sales, compared to 42.4% in the third quarter of 2004. The decrease in the gross margin percentage was due to our recent acquisitions which generate lower gross margins than the Company's other branded products and a higher level of footwear close-out and mark down sales in our Trotters, Softwalk and H.S. Trask brands as compared to the prior year period.
Operating costs increased 41.2% to $9.8 million, compared to $6.9 million in the third quarter of 2004. This increase is due to $3.3 million in operating costs associated with the recently acquired Chambers and Tommy Bahama brands, and $270,000 in increased intangible asset amortization costs related to our recent acquisitions, offset by net operating expense reductions totaling $700,000 related to reduced marketing, advertising and other selling expenses. Operating expenses as a percentage of sales were 28.5% in the third quarter of 2005, down from 29.8% of net sales in the comparable quarter a year ago.
Operating income for the third quarter was $2.8 million, down slightly from $2.9 million in the third quarter of 2004. Additionally, the operating margin of 8.2% decreased compared to an operating margin of 12.6% for the comparable quarter a year ago.
During the third quarter of 2005, interest expense totaled $1.2 million, compared to $199,000 in the comparable prior year period. This increase is primarily related to increased acquisition and working capital debt associated with brand acquisitions and higher interest rates.
For the nine months ended October 1, 2005, net sales increased 36.5% to $76.0 million compared to $55.7 million for the comparable prior-year period. Approximately $11.7 million, or 15.4% of total sales, were generated by the two recently acquired brands, Chambers Belt and Tommy Bahama Footwear. Organic growth during the first nine months of 2005 was down 2.1% as increases at H.S. Trask and Royal Robbins were offset by declines in other brands.
Net income for the nine months ended October 1, 2005 was $1.1 million, or $0.14 per diluted share, compared to net income of $3.6 million, or $0.61 per diluted share, for the comparable period a year ago. Weighted-average shares outstanding for the two periods were 8.1 million and 5.9 million, respectively.
Gross margin for the nine months ended October 1, 2005 was 38.1% of net sales, compared to 43.6% for the comparable prior-year period. The decrease in the gross margin percentage was due to the recent acquisitions, which generate lower gross margins than the Company's other branded products and a higher level of footwear close-out and mark down sales as compared to the prior year period.
Operating costs for the first nine months of 2005 totaled $25.0 million, or 32.9% of net sales, versus $17.8 million, or 32.0% of net sales for the comparable prior year period. This increase is related to $4.4 million in operating costs associated with the recently acquired Chambers, Tommy Bahama and Altama brands, $550,000 in increased intangible asset amortization costs related to our recent acquisitions, and $1.65 million in increased legal, accounting, bad debt, employee compensation and other operating costs associated with the Company's other operating units. Additionally, other expense, net for the current nine-month period includes severance and management restructuring charges totaling $614,000.
Operating income for the first nine months of 2005 was $4.0 million, or 5.3% of net sales, down from $6.5 million, or 11.6% of net sales, for the same period a year ago.
For the nine months ended October 1, 2005, interest expense totaled $2.1 million, compared to $503,000 in the comparable prior-year period. This increase is related to increased acquisition and working capital debt associated with brand acquisitions and higher interest rates.
As of October 1, 2005, Phoenix Footwear's cash and cash equivalents totaled $3.0 million. Total debt, including the Company's outstanding line of credit, was $58.6 million.
Unit Results
Third quarter 2005 net sales for Royal Robbins were seasonally strong at $7.4 million, an increase of 15.6%, compared to $6.4 million a year ago. During the quarter the Royal Robbins brand made several important achievements. First, Robert Orlando was appointed as President of the division. As a thirty-year industry veteran, most recently as President of Teva, a division of Deckers Outdoor, Inc., the Company believes he is well suited to take the brand to the next stage of its growth. Secondly, Phoenix has finalized an agreement with its Canadian distributor whereby it will take back the distribution rights. Beginning in 2006, the Company will begin selling directly in Canada which should result in higher sales and better margins. Finally, the brand continues to open up new accounts including 18 Academy Sports doors, with additional growth planned for spring 2006. The brand has booked double-digit growth in spring futures with each of its key national accounts.
Sales from the newly acquired Tommy Bahama brand were $2.0 million for the two-month period from August 4, 2005, when the acquisition closed, through the end of the quarter. The Company is in the process of integrating operations, and is conducting a search for a President of the division. Phoenix believes there is significant growth opportunity for this well-known brand, and plans to add to the existing distribution. During the quarter, the brand opened a new account with The Walking Company which has over 80 stores nationwide. Additionally, Phoenix is in the process of bringing the manufacturing of the Tommy Bahama men's and women's belts and accessories business in-house utilizing the Chambers capacity which is expected to have a positive impact on gross margins going forward.
The acquisition of the Chambers Belt Company was completed in June of this year. In the third quarter, the first full quarter as part of the Phoenix Footwear organization, net sales contribution was $9.7 million, representing 28.3% of total sales. The integration of Chambers is on track, and sales for the quarter were as expected. The Company continues to open new accounts and broaden distribution for the Chambers brands. One of its women's brands, Riders(R), licensed from VF Corporation, is rolling out 500 Kmart doors on a test basis. If successful, the brand would expand into 1,200 Kmart doors in 2006. On the men's side, Chambers is scheduled to test a private label product with Kmart, which if successful could make significant revenue contribution going forward.
Altama's net sales for the third quarter of 2005 dropped 8.7% to $6.2 million, compared to net sales of $6.7 million for the period the Company owned the brand during the third quarter of 2004. Altama has continued to experience slower sales attributable to the previously announced temporary cessation in Department of Defense deliveries. However, it is important to note that the declines moderated significantly from previous quarters. The Company believes the period of weaker orders experienced earlier in the summer is behind them, and the brand is returning to the level of sales experienced earlier this year. The Altama unit has implemented a strategy to diversify its revenues which began showing results during the third quarter as Altama opened up two of the top four targeted retail accounts for its new EXO-Speed (TM) tactical line of public safety boots. These are boots specifically designed for the police department. Additionally, Altama shipped its first safety toe boots during the quarter.
SoftWalk posted net sales of approximately $3.0 million for the third quarter, down 10.6% from $3.3 million for the third quarter of 2004. As mentioned above, the decline in sales is primarily attributable to lost revenue associated with the loss of the Dillard's account and increased close-out sales. The new SoftWalk Lights(TM) product line began shipping on a limited basis late in the quarter.
Third quarter Trotters sales decreased 9.7% to $4.2 million, compared to $4.7 million for the same quarter a year ago. As previously reported, design issues in the 2005 Trotters' product line resulted in less than anticipated sales and an ensuing increase in mark downs and close-out sales. Additionally the Trotters brand was negatively impacted by the discontinuance of the Dillard's account. However, the Company believes the product line has stabilized, evidenced by the smaller rate of decline in the third quarter sales versus the previous two. Trotters introduced a re-designed interim line with initial shipments during the third quarter resulting in promising sales. Beginning with the spring 2006 designs, the Company has refocused on its core, conservative customer and expects sales to normalize.
Net sales for H.S. Trask have grown 27.1% year-to-date, but declined 8.9% in the third quarter to $1.8 million, compared to $2.0 million a year ago. Negative sales growth was primarily a result of the loss of the Dillard's business. Year-over-year, the brand has added more than 50 new accounts which partially offset the Dillard's account impact.
While Phoenix Footwear has given guidance historically, for the present time, the Company will no longer do so. The Company feels that given the transitional state it is in, and the nature of its current business, it is not prudent to give specific revenue or earnings guidance at this time. Rather, the Company has discussed some of the initiatives it is undertaking on a brand-by-brand basis to create long-term value and to improve its operating performance.
Phoenix Footwear Group, Inc.
Consolidated Condensed Statement of Operations
(Unaudited)
For the Quarter Ended
October 1, September 25,
2005 2004
Net sales $34,275,000 100.0% $23,176,000 100.0%
Cost of goods sold 21,703,000 63.3% 13,345,000 57.6%
Gross profit 12,572,000 36.7% 9,831,000 42.4%
Operating expenses:
Selling and
administrative expenses $9,090,000 26.5% $6,530,000 28.2%
Non cash 401k stock
grant compensation 233,000 0.7% 213,000 0.9%
Amortization 433,000 1.3% 164,000 0.7%
Other expense, net 2,000 -- 3,000 --
Total operating expenses 9,758,000 28.5% 6,910,000 29.8%
Income from operations 2,814,000 8.2% 2,921,000 12.6%
Interest expense $1,156,000 $199,000
Income before income taxes 1,658,000 4.8% 2,722,000 11.7%
Income tax provision $677,000 $994,000
Net income $981,000 2.9% $1,728,000 7.5%
Earnings per common share:
Basic $0.12 $0.26
Diluted $0.12 $0.24
Weighted-average
shares outstanding:
Basic 8,001,439 6,665,616
Diluted 8,371,290 7,331,021
