Phoenix Footwear Group, Inc. reported net sales for the fourth quarter increased 60.2% to $33.2 million, compared to $20.7 million for the fourth quarter a year ago. The strong top-line performance during the quarter was driven by “robust” growth from the Royal Robbins brand and the recently acquired Chambers and Tommy Bahama brands. Including Altama, the company's organic growth, which excludes brands acquired in the last twelve months, was a negative 3.9% for the quarter. This reflects a 24.5% increase in Royal Robbins and a 4.1% increase in H.S. Trask, offset by sales declines in the other brands. Net income for the fourth quarter was $71,000, or $0.01 per diluted share, on 8.3 million weighted-average shares outstanding, compared to a net loss of $624,000, or $0.08 per diluted share, on 7.3 million weighted-average shares outstanding, for the comparable quarter a year ago.
Commenting on the fourth quarter, James Riedman, Phoenix Footwear's Chairman, said, “We are very pleased with the Company's top-line growth and our return to profitability from a loss a year ago. We significantly improved all of our operating and financial metrics during the quarter. We increased gross margins, lowered operating costs as a percentage of sales and reduced debt in our seasonally weakest quarter of the year. In addition, during 2005, we made two significant acquisitions and continued investing in our legacy brands. We view 2005 as a transitional year for the company and expect that our improvements in these businesses will generate better revenue growth and profitability in 2006 and beyond.”
Mr. Riedman continued, “As we begin 2006, our efforts are paying off. The trend for each of our brands is positive and we believe will continue to strengthen in 2006. In the first quarter of 2006, we expect to see organic growth across most of our brands, and anticipate that earnings will exceed those of 2005. Overall we are very optimistic about the opportunities that lie ahead.”
Gross margin in the fourth quarter of 2005 expanded 200 basis points to 37.4%, compared to 35.4% in the fourth quarter of 2004. The improvement in gross margin was primarily due to lower close-outs and mark downs.
Operating costs increased 35.8% to $10.8 million, compared to $7.9 million in the fourth quarter of 2004. Operating expenses as a percentage of sales were 32.4% in the fourth quarter, down 590 basis points as compared to the fourth quarter of 2004, and included $175,000 of pre-selling expenses associated with the company's new Canadian subsidiary and legal costs related to the Altama purchase price reduction. Operating income for the fourth quarter totaled $1.6 million, or 4.9% of sales, compared to an operating loss of $603,000 in the fourth quarter of 2004.
During the fourth quarter of 2005, interest expense totaled $1.4 million, compared to $385,000 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. The company continues to closely monitor its debt levels, and during the fourth quarter reduced debt by $3.2 million from the end of the third quarter.
For the twelve months ended December 31, 2005, net sales increased 42.9% to a record $109.2 million compared to $76.4 million for the comparable prior-year period. The growth was primarily attributable to a robust year-over-year increase from Royal Robbins and H.S. Trask and strong contribution from Chambers and Tommy Bahama in the second half of 2005. Organic growth in our legacy brands (which includes Trotters, SoftWalk, Royal Robbins and H.S. Trask) during 2005 declined 2.4% as the strength at Royal Robbins and H.S. Trask was offset by sales declines in the other legacy brands.
Net income for the twelve months ended December 31, 2005 was $1.2 million, or 15 cents per diluted share, compared to net income of $3.0 million, or 48 cents per diluted share, for the comparable period a year ago. Weighted-average shares outstanding for the two periods were 8.1 million and 6.3 million, respectively.
Gross margin for the twelve months ended December 31, 2005 was 37.9%, compared to 41.3% for the comparable prior-year period. The decrease in the gross margin was due to 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 2004.
Operating costs for the twelve months ended December 31, 2005 totaled $35.7 million, or 32.7% of net sales, versus $25.7 million, or 33.7% of net sales for the comparable prior year period. The improvement on a percentage basis is attributable to cost reductions in several legacy brands and continued operating leverage. The operating efficiencies offset incremental costs associated with the recently acquired Chambers, Tommy Bahama and Altama brands. Additionally, expenses for 2005 included $617,000 of severance and management restructuring charges, and $208,000 of pre-selling expenses related to the company's new Canadian subsidiary and legal costs associated with the Altama purchase price reduction. Operating income for the twelve months ended December 31, 2005 was $5.7 million, or 5.2% of net sales, down slightly from $5.9 million, or 7.7% of net sales, for the same period a year ago.
For the twelve months ended December 31, 2005, interest expense totaled $3.5 million, compared to $888,000 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 December 31, 2005, Phoenix Footwear's cash and cash equivalents totaled $566,000. Total debt, including the Company's outstanding line of credit, was $55.5 million, down from $58.7 million at September 30, 2005.
Unit Results
Royal Robbins
Fourth quarter 2005 net sales for Royal Robbins continued to be strong at $3.7 million, an increase of 24.5%, compared to $3.0 million a year ago. For the year, sales were $24.9 million, a 17.4% increase compared to 2004. Domestic sales continue to be strong, driving the increased sales in the fourth quarter. Additionally, during 2005, the Company finalized an agreement with its Canadian distributor, and as of January 2006, Royal Robbins began selling directly in Canada. Initial performance has been very positive and in line with the company's expectations. Over time, the company expects to see higher sales and better margins in this region. Finally, the brand's futures bookings continue to be very strong. While it is early in the fall bookings schedule, the initial results suggest Royal Robbins should experience continued growth through the fall of 2006.
Tommy Bahama Footwear
Sales from the Tommy Bahama Footwear brand, which was acquired in August of 2005, totaled $3.0 million in the fourth quarter. During the fourth quarter integration of Tommy Bahama continued, including a software conversion to Phoenix Footwear's systems. The company is optimistic about the potential for the Tommy Bahama Footwear brand, particularly under its new leader, Krista Treide, who started as President of the division in March. Ms. Treide joins Phoenix with over 15 years experience in footwear and brand management. Most recently, she was Vice President, Design, Operations and Brand Strategy at Global Brand Marketing, Inc. (GBMI). Her responsibilities included product creation, licensing and seasonal strategies for eight footwear, apparel and accessories brands, including Diesel. Prior to GBMI, she held various positions in brand management, merchandising and sales with major footwear companies, Nike and Reebok International. Additionally, Phoenix continues to migrate manufacturing of the Tommy Bahama men's and women's belts and accessories business in-house utilizing Chambers' capacity and expects to see the benefits of direct sourcing in the second half of 2006.
Chambers
The acquisition of the Chambers Belt Company was completed in June of 2005. In the fourth quarter, the second full quarter as part of the Phoenix Footwear organization, net sales contribution was $10.3 million, representing 31.0% of total sales. The division is performing in line with the company's expectations. During the fourth quarter, Chambers continued to expand its distribution within both Wal-Mart and Kmart. Trials in Kmart have performed well and are expected to result in $1.0 million of incremental annual revenue beginning in the second half of this year. Additionally, Chambers' Western division did particularly well in the fourth quarter.
Altama
Altama's net sales for the fourth quarter of 2005 decreased 4.5% to $6.6 million, compared to net sales of $6.9 million for the fourth quarter of 2004. For the full year, sales were $23.0 million. The sales decline in the division continued to moderate. Sales from the Department of Defense are currently growing and Altama has bids for several large contracts outstanding and expects a decision to be made on each shortly. Additionally, during the fourth quarter, Altama opened over 60 retail accounts for the EXO-Speed tactical line of public safety boots and the company is encouraged by their initial acceptance. The company believes Altama will continue to see improvement during the first half of 2006, however, there is less visibility into the second half of the year, as the company waits for the outcome of the pending contract bids and the potential renewal of the current DSCP combat boot contract.
SoftWalk
SoftWalk posted net sales of $2.7 million for the fourth quarter, down 5.9% from $2.9 million for the fourth quarter of 2004. For the full year, sales were $12.0 million, a 7.4% decline versus 2004. As previously mentioned, the decline in sales is primarily attributable to lost revenue associated with the loss of the Dillard's account. Excluding sales from Dillard's, SoftWalk experienced positive year-over-year sales growth. Additionally, gross margins for the brand improved during the fourth quarter and the positive trend continues into the first quarter of 2006. The improvement is a reflection of the acceptance at retail of the current product line. The positive trend is expected to continue as SoftWalk expands its customer base. During the fourth quarter, door counts at Belks were increased. Finally, the new SoftWalk Lights product line, which began shipping late in the third quarter, performed well at retail in the fourth quarter and the company expects this trend to continue.
Trotters
Fourth quarter Trotters sales decreased 21.9% to $4.1 million, compared to $5.3 million for the same quarter a year ago. For the year, sales were $15.9 million, a 25.9% decline, due to previously reported design issues and poor consumer acceptance of the 2005 Trotters' product line. The company believes the resulting increase in mark downs and close-out sales is behind them. Gross margin for the Trotters division improved significantly in the second half of 2005 and continues into the first quarter of 2006. Trotters is expanding its customer relationships and recently reopened an account with the Brown Shoe Fit Corporation. The Company expects its Trotters brand to generate positive organic year-over-year growth and improved profitability for the full year 2006.
H.S. Trask
Net sales for H.S. Trask grew 4.1% in the fourth quarter to $2.8 million, compared to $2.7 million a year ago. For the year, sales increased 18.3% to $8.3 million, and excluding the impact from the loss of the Dillards account, sales growth would have been much more significant. Trask has experienced a recent pick-up in sales in its direct-to-consumer division, which led to enhanced margins in the fourth quarter. Additionally, the company recently moved the responsibility for the Trask line to Bob Orlando, who also runs the Royal Robbins division. Under his direction, the line is being significantly refreshed and the company remains enthusiastic about the long term direction of the brand.
Business Outlook
Due to the timing of the fourth quarter 2005 earnings release, the company has elected to provide preliminary guidance for the first quarter 2006. Sales are currently expected to reach $37 to $39 million with earnings per diluted share of 18 cents to 20 cents.
Additionally, as previously reported, the company received a purchase price adjustment from the seller of its Altama brand in early January 2006. The net effect of this transaction is expected to result in a one-time after tax gain of approximately $1.6 million or 19 cents per diluted share, which will be reported in the first quarter of 2006. This amount is in addition to the earnings forecast referenced above.
Phoenix Footwear Group, Inc.
Consolidated Condensed Statement of Operations
For the Quarter Ended
(Unaudited)
December 31, January 1,
2005 2005
Net sales $33,161,000 100.0% $20,696,000 100.0%
Cost of goods sold 20,764,000 62.6% 13,378,000 64.6%
Gross profit 12,397,000 37.4% 7,318,000 35.4%
Operating expenses:
Selling and
administrative
expenses $10,115,000 30.5% $7,516,000 36.3%
401k stock grant
compensation 233,000 0.7% 163,000 0.8%
Amortization 408,000 1.2% 191,000 0.9%
Other expense, net --% 51,000 0.2%
Total operating
expenses 10,756,000 32.4% 7,921,000 38.3%
Income from
operations 1,641,000 4.9% (603,000) -2.9%
Interest expense $1,374,000 $385,000
Income before
income taxes 267,000 0.8% (988,000) -4.8%
Income tax provision $196,000 $(364,000)
Net income $71,000 0.2% $(624,000) -3.0%
Earnings per
common share:
Basic $0.01 ($0.08)
Diluted $0.01 ($0.08)
Weighted-average
shares outstanding:
Basic 7,988,058 7,347,610
Diluted 8,330,167 7,347,610
For the Fiscal Year Ended
December 31, January 1,
2005 2005
Net sales 109,189,000 100.0% $76,386,000 100.0%
Cost of goods sold 67,822,000 62.1% 44,802,000 58.7%
Gross profit 41,367,000 37.9% 31,584,000 41.3%
Operating expenses:
Selling and
administrative
expenses $32,933,000 30.2% $24,500,000 32.1%
401k stock grant
compensation 934,000 0.9% 653,000 0.9%
Amortization 1,222,000 1.1% 457,000 0.6%
Other expense, net 617,000 0.6% 114,000 0.1%
Total operating
expenses 35,706,000 32.7% 25,724,000 33.7%
Income from
operations 5,661,000 5.2% 5,860,000 7.7%
Interest expense $3,495,000 $888,000
Income before
income taxes 2,166,000 2.0% 4,972,000 6.5%
Income tax provision $975,000 $1,990,000
Net income $1,191,000 1.1% $2,982,000 3.9%
Earnings per
common share:
Basic $0.15 $0.51
Diluted $0.15 $0.48
Weighted-average
shares outstanding:
Basic 7,760,173 5,793,920
Diluted 8,129,107 6,277,222
