Phoenix Footwear Group, Inc. net sales for the first quarter increased 52.8% to $40.3 million, compared to $26.4 million for the first quarter of 2005. The strong top-line performance during the first quarter was attributable to robust growth from the Royal Robbins and H.S. Trask brands, as well as significant contributions from Altama, Tommy Bahama and Chambers. excludes the Tommy Bahama and Chambers brands as these were acquired in the last twelve months. This revenue reflects a 29.0% increase in Royal Robbins, a 16.2% increase in H.S. Trask, and a 5.4% increase in Altama, offset by declines in its Trotters and SoftWalk brands.
Net income for the first quarter was $3.0 million, or 37 cents per diluted share, on 8.2 million weighted-average shares outstanding, compared to net income of $1.2 million, or 15 cents per diluted share, on 7.9 million weighted-average shares outstanding, for the comparable quarter a year ago. Included in net income is a $1.5 million gain associated with a purchase price adjustment for Altama. Excluding this gain, earnings per diluted share were $0.19, an increase of 27%.
Previously the Company announced that it has accepted the resignation of President and Chief Executive Officer, Rick White. Mr. White is departing to pursue entrepreneurial interests, but has agreed to consult with Phoenix Footwear during a leadership transition period. Jim Riedman, Chairman, will assume the additional duties of CEO. The board intends to initiate a search for a new CEO in the months ahead.
Commenting on the first quarter, James Riedman, Phoenix Footwear's Chairman, said, “We are pleased to see the momentum we built in the last half of 2005 continuing into 2006 with strong sales and earnings. During the first quarter, we continued to improve Phoenix Footwear's market position by expanding distribution, further investing in our brands and improving sell-throughs across the majority of our brands. We focused on operating efficiencies and optimization of our manufacturing and sourcing capabilities, which resulted in improved margins and profitability. Additionally, to support our future growth, we made some important hires, including Prasad Reddy as Executive Vice President of Sourcing and Krista Treide as President of the Tommy Bahama Footwear division.”
Mr. Riedman continued, “The trends for our brands look encouraging and we expect to see further improvements throughout the fiscal year. We are particularly excited about today's announcement regarding our license agreement with the American Red Cross. We will be partnering with this well-respected organization to provide comfortable and stylish shoes to the healthcare and related industries.”
Mr. Riedman concluded, “We believe that Phoenix is successfully executing on its multi-brand strategy and are pleased to continue building shareholder value.”
Gross margin in the first quarter of 2006 was 38.9%. This represents an increase of 150 basis points compared to a gross margin of 37.4% in the fourth quarter of 2005 and a decrease of 110 basis points compared to a gross margin of 40.0% in the first quarter of 2005. The increase in gross margin on a sequential basis was primarily due to lower close-outs and mark downs. The decrease in gross margin year-over-year reflects the contribution from the recent acquisition of Chambers Belt Company which is in a lower gross margin business than the Company's other branded products.
Operating costs increased to $10.3 million, compared to $8.2 million in the first quarter of 2005. Operating expenses as a percentage of sales were 25.5% in the first quarter, down 540 basis points as compared to 30.9% in the first quarter of 2005. Included in operating expenses is the previously announced $1.5 million purchase price gain adjustment related to the Altama acquisition. On a sequential basis, operating costs as a percentage of sales, excluding the Altama purchase price adjustment, decreased 320 basis points to 29.1% from the fourth quarter 2005, reflecting improved operating efficiencies.
Operating income for the first quarter totaled $5.4 million, compared to operating income of $2.4 million in the first quarter of 2005. Operating margin increased 430 basis points to 13.4%, compared to 9.1% for the comparable period a year ago, and versus 4.9% in the fourth quarter 2005. Excluding the Altama price adjustment, Phoenix's operating margin was 9.7%.
During the first quarter of 2006, interest expense totaled $1.4 million, compared to $432,000 in the first quarter of 2005. This increase was primarily related to increased acquisition and working capital debt associated with the recent brand acquisitions as well as higher interest rates. The Company continues to closely manage its debt levels and expects to make steady improvement to reduce its debt throughout 2006. As of April 1, 2006, Phoenix Footwear's total debt, including the Company's outstanding line of credit, was $60.2 million, up from $55.5 million at December 31, 2005. The increase in total debt is consistent with the Company's seasonal working capital requirements.
First quarter 2006 net sales for Royal Robbins were particularly strong at $11.2 million, an increase of 29.0%, compared to $8.7 million a year ago, and represented 27.7% of total Company sales. The solid performance was driven by robust demand in both domestic and international markets. As previously disclosed, during the first quarter, Phoenix Footwear began selling Royal Robbins directly in Canada and the initial performance exceeded the Company's expectations. Domestically Royal Robbins opened 20 new accounts for the fall 2006 season. Additionally, as a testimony to Royal Robbins' strength, the brand was nominated as REI's Vendor Partner of the Year. During the quarter, the Company ceased selling to Dick's Sporting Goods. The loss of the Dick's sales volume will have an affect on the full year 2006 sales revenue, however, Royal Robbins' overall booking trends remain very positive and the Company expects the brand to continue to perform well throughout the year.
Sales from the Tommy Bahama Footwear brand, which was acquired in August of 2005, totaled $4.3 million, or 10.7% of total sales. During the first quarter, the Company made progress toward the integration of its Tommy Bahama operations, including a software conversion to Phoenix Footwear's systems. The brand continues to make a significant contribution to the Company's top line performance and management is very optimistic about the future potential of this division. The Company hired Krista Treide, a fifteen-year industry veteran, as President of the division and added two new design consultants to develop product which will be introduced beginning with the Spring 2007 line. The Company has also begun moving the Tommy Bahama product to more competitive third party sourcing partners and expects to see tangible results of this realignment in 2007.
The acquisition of the Chambers Belt Company was completed in June of 2005. In the first quarter net sales contribution was $7.7 million, representing 19.0% of total sales. Sales trends for the division continue to be very strong. During the quarter, Chambers added Wal-Mart Canada as an account and product shipments are expected to begin in the third quarter. The Company anticipates that this account could generate more than $1 million in incremental annual sales. Additionally, Phoenix Footwear expanded its relationship with Tractor Supply Company, Chambers' third largest customer, which should positively impact sales in the future.
Altama's net sales for the first quarter of 2006 increased 5.4% to $7.2 million, compared to net sales of $6.8 million for the first quarter of 2005, and represented 17.8% of sales. This marked the brand's first year-over-year increase in several quarters. The brand enjoyed solid demand for its EXO-Speed(TM) tactical boots, particularly the desert style, which completely sold out during the quarter. To further grow the brand, Altama has hired three new sales representatives who will focus on the EXO-Speed(TM) product line. In May 2006, the Company signed a five-year license agreement with the American Red Cross for a line of footwear targeting the healthcare and related industries. Under the agreement, Phoenix Footwear will design and market an extensive line of footwear utilizing the patented SoftWalk footbed technology. Glen Becker, President of Phoenix Footwear's Institutional Group, will oversee the operations. The Company has developed several prototypes, which have generated a very positive initial response, and expects to have the product in the market by early 2007.
SoftWalk posted net sales of $3.3 million for the first quarter, down 21.2% from $4.2 million for the first quarter of 2005. The decline in sales is primarily attributable to the previously discussed loss of the Dillard's account in 2005. The core product line continues to perform well at retail and the Company expects this trend to continue. Based on its current bookings the Company believes that SoftWalk will return to growth in the second half of the year.
First quarter Trotters' sales decreased 8.2% to $4.3 million, compared to $4.6 million for the same quarter a year ago primarily related to lower close-out sales. This represents a significantly smaller year-over-year decline versus the fourth quarter of 2005. Trotters' sales continue to be adversely impacted by design issues and poor consumer acceptance of the 2005 Trotters' product line. The Company believes it has corrected the design problem and experienced improved gross margins in the first quarter. Based on current future bookings for the Trotters' division, the Company believes that the brand will return to positive growth in the second half of 2006.
Net sales for H.S. Trask increased 16.2% in the first quarter to $2.4 million, compared to $2.0 million a year ago. The growth was due, in part, to increased sales in its direct-to-consumer division, along with higher close-out sales of the brand's women's product line. The Company expects to introduce an expanded product line later in the year which has received positive early retailer feedback.
The Company expects to violate several of its bank debt covenants during its second quarter ending July 1, 2006, primarily as a result of approximately $800,000 in severance charges associated with Mr. White's resignation that it will recognize during that quarter. Under the terms of the severance agreement Mr. White will receive among other things, his current salary and certain employee benefits payable monthly through November 30, 2007. The Company is working with its bank to secure an amendment modifying these debt covenants so that it will be in compliance as of the close of the second quarter. Under applicable accounting rules, the Company is required to classify its entire bank debt as a current liability in its April 1, 2005 consolidated condensed unaudited balance sheet included with this press release. The Company anticipates obtaining an appropriate amendment during the next 30 days so that it will be in compliance with its debt covenants and it can reclassify the approximately $50 million long-term portion of its bank debt to long-term liabilities. There can be no assurance, however, when and if this loan modification will occur.
The Company expects to report lower revenues and earnings in the second quarter versus the first quarter, consistent with its historical seasonality. Additionally, during the second quarter, the Company will incur additional expenses related to its ongoing integration of Tommy Bahama. While Altama is expected to significantly contribute to the second quarter, the Company believes its sales and contributions will be lower than the first quarter. In spite of the seasonally weaker second quarter, the Company is optimistic about its outlook for the balance of 2006 and beyond.
Phoenix Footwear Group, Inc. Consolidated Condensed Statement of Operations For the Quarter Ended (Unaudited) April 1, April 2, 2006 2005 Net sales $40,342,000 100.0% $26,400,000 100.0% Cost of goods sold 24,639,000 61.1% 15,842,000 60.0% Gross profit 15,703,000 38.9% 10,558,000 40.0% Operating expenses: Selling and administrative expenses $11,199,000 27.8% $ 7,154,000 27.1% 401k stock grant compensation 161,000 0.4% 233,000 0.9% Amortization 327,000 0.8% 158,000 0.6% Other expense, net (1,394,000) -3.5% 613,000 2.3% Total operating expenses 10,293,000 25.5% 8,158,000 30.9% Income from operations 5,410,000 13.4% 2,400,000 9.1% Interest expense $1,369,000 $432,000 Income before income taxes 4,041,000 10.0% 1,968,000 7.5% Income tax provision $1,011,000 $787,000 Net income $3,030,000 7.5% $1,181,000 4.5% Earnings per common share: Basic $0.38 $0.16 Diluted $0.37 $0.15 Weighted-average shares outstanding: Basic 7,874,235 7,428,151 Diluted 8,206,983 7,853,406