Phoenix Footwear Group, Inc. recorded a 4.3% increase in net sales for the first quarter to $42.1 million compared to $40.3 million for the same period last year. The net sales growth was primarily attributable to strong performance of the Altama and Chambers Belt brands, which increased 54.0% and 28.3%, respectively, as well as a positive contribution from Trotters. Additionally, during the first quarter, the company started shipping footwear under the American Red Cross brand. The net sales growth was offset significantly by a 46.5% decrease in Tommy Bahama and a 48.6% decrease in H.S. Trask.
For the first quarter of fiscal 2007, the company reported net income of $414,000, or 5 cents per share, on 8.7 million fully diluted weighted-average shares outstanding. The first quarter of 2007 includes increased corporate expenditures associated with Sarbanes-Oxley compliance, FIN 48 implementation and CEO recruitment fees of approximately $1.0 million, or 7 cents per diluted share. In the first quarter of 2006, the company reported net income of $3.0 million, or 37 cents per diluted share, which included a net one-time gain associated with the Altama purchase price adjustment of $1.5 million, or 19 cents per diluted share.
Commenting on the results, Jim Riedman, Phoenix Footwear's chairman, said, “We returned to profitability in the first quarter and continued the implementation of many key initiatives necessary to successfully execute our growth strategy. We have entered 2007 with a significantly improved outlook across most of our brands. The completely redesigned and repositioned Tommy Bahama Footwear brand enjoyed strong sell-throughs and we have recently introduced a new Tommy Bahama Fall 2007 line. Additionally, we started shipping our first footwear product under the American Red Cross brand, which made a modest initial contribution to our top-line during the quarter. Finally, we have embarked upon restructuring the H.S. Trask brand and expect it to start contributing to our growth in the future.”
Mr. Riedman continued, “During the quarter we also made significant enhancements to our management team. We are thrilled to welcome Cathy Taylor as the Company's new Chief Executive Officer. Cathy brings to Phoenix Footwear over 25 years of executive and consulting experience in developing and managing top-tier consumer lifestyle brands. As an industry veteran who spent two decades with Cole Haan and Nike, we believe Cathy is the right person to bring Phoenix Footwear to the next level of its success in 2007 and beyond. We are also pleased with the addition of Michael Crosno as Vice President of Sales for our Trotters and SoftWalk divisions as we continue to foresee a strong future for both of these brands.”
Cathy Taylor, Phoenix Footwear's CEO, said, “I'm honored to join Phoenix Footwear's talented executive team. I believe the Company has a strong portfolio of brands and each has significant growth potential. We plan to stay focused on leveraging the brands' strengths, expanding their market presence and building value for our shareholders. I am excited by the opportunities ahead for the Company and its brands.”
Gross margin in the first quarter of fiscal 2007 was 35.5%, compared to 38.9% in the first quarter of 2006. The decrease in gross margin was due to a decrease in sales of Royal Robbins and SoftWalk, which represent high margin brands, as well as an increase in sales of military boot and accessories which both generate relatively lower margins.
Operating costs increased 22.9% to $12.7 million, compared to $10.3 million in the first quarter of fiscal 2006. The increase in operating expenses in the first quarter of fiscal 2007 is primarily attributable to the $1.5 million net gain related to the Altama purchase price reduction settlement recognized during the first quarter of fiscal 2006 which reduced operating expenses, in addition to increased spending on legal, tax and auditing fees and initiatives addressing Sarbanes-Oxley compliance and FIN 48 implementation. Operating expenses as a percentage of sales were 30.1% in the first quarter of fiscal 2007, as compared to 25.5% in the first quarter of fiscal 2006.
Operating income for the first quarter of 2007 was $2.3 million, compared to operating income of $5.4 million in the first quarter of fiscal 2006.
During the first quarter of 2007, interest expense totaled $1.6 million, compared to $1.4 million in the comparable prior fiscal year period. This increase is primarily related to higher interest rates.
As of March 31, 2007 the company had defaulted on its financial covenants with its bank. On May 14, 2007, the bank waived the covenant violations. The company, however, does not believe it will meet its current financial covenants during the remainder of 2007. The company is having ongoing discussions with its bank about amending its future financial covenants to better align with management's expected financial performance for the remainder of fiscal 2007. There is no assurance, when or if, future covenant waivers or amendments will be provided by the bank.
Unit Results
Royal Robbins
First quarter fiscal 2007 net sales for Royal Robbins decreased 9.6% to $10.1 million, compared to $11.2 million a year ago. The decrease was primarily attributable to lower sales volumes related to the loss of two large customers during Fall 2006: Dick's Sporting Goods and Academy Sports. The long-term outlook for Royal Robbins remains very positive as the brand continues to see growth and healthy sell-through in the rest of its retail accounts. The company believes Royal Robbins will return to positive levels of growth in the second half of 2007.
Tommy Bahama
First quarter net sales from the Tommy Bahama Footwear brand decreased 46.5% to $2.3 million, compared to $4.3 million in the first quarter a year ago. The brand was completely redesigned and repositioned in 2006. The new styles of Tommy Bahama footwear and belts began shipping only in January 2007, which adversely impacted the brand's sales during the first quarter. The new product is experiencing robust sell-throughs at Tommy Bahama Retail and the company has begun shipping additional orders to other retailers, including Nordstrom and Macy's. The company expects shipments will continue to increase throughout 2007 as more styles become available. Based on the successful initial sell-throughs of new styles of Tommy Bahama Footwear, the company believes the brand is positioned for future growth and will begin making contributions to the bottom-line in the future.
Chambers
Chambers' net sales for the first quarter of fiscal 2007 increased 28.3% to $9.9 million, compared to $7.7 million for the first quarter of fiscal 2006. The business unit further expanded its presence in Wal-Mart. During the quarter Chambers also opened a new relationship with Shopko a Midwest store chain with 143 locations. The company believes Chambers is well positioned to maintain its growth momentum as the brand continues to expand into additional markets.
Altama
Altama's net sales for the first quarter of fiscal 2007 increased 54.0% to $11.1 million, compared to net sales of $7.2 million for the first quarter of fiscal 2006. Altama's latest DoD contract expired September 30, 2006. The company submitted a bid proposal for a new contract with the DoD on August 2, 2006 and expects to be notified by the DoD of any contract award in the first half of fiscal 2007, although there can be no assurance as to when it will be notified or whether it will be successful in receiving an award.
As of March 31, 2007 the company had approximately 31,000 pairs of firm military boot delivery orders from the DoD and another U.S. government agency which are expected to be delivered during the second quarter of fiscal 2007. Additionally, during the first quarter, the demand for EXO-Speed and EXO- LIGHT Speed tactical boots remained very strong.
During the first quarter of fiscal 2007 the company made its first shipments of footwear under a previously signed license agreement with American Red Cross. These shipments resulted in net sales of $136,000 during the quarter. This initiative allows the company to combine its proprietary foot bed technology and expertise in institutional footwear with the brand equity of American Red Cross to target the footwear market for healthcare professionals. Based on the initial success of the product, the company expects it to begin contributing positively to its growth and earnings in the later half of fiscal 2007.
SoftWalk
SoftWalk's net sales for the first quarter decreased 9.3% to $3.0 million, compared to $3.3 million for the first quarter of fiscal 2006. The brand presently enjoys a strong future position and as a result the company expects SoftWalk to generate positive growth during 2007.
Trotters
First quarter Trotters sales increased 2.2% to $4.4 million, compared to $4.3 million for the same quarter a year ago. Trotters benefited from lower close-out sales which contributed to the brand's improved performance during the quarter. The company believes the brand will enjoy higher growth rates in the second half of 2007.
During the quarter, the company welcomed Michael Crosno as vice president of sales of the Trotter and SoftWalk divisions. His extensive industry experience, including three decades of sales and marketing with Munro & Company and Nine West Group, Inc., is expected to help the company further develop the Trotters and SoftWalk brands and expand their market share.
H.S. Trask
Net sales for H.S. Trask decreased 48.6% to $1.2 million in the first quarter, compared to $2.4 million a year ago. The company is in the process of updating and redesigning the brand and developing new products. Although these restructuring initiatives negatively impacted H.S. Trask's sales during the first quarter, the company expects to see an increase in the brand's sales later in 2007 as the new styles become available for shipment to customers.
Balance Sheet
As of March 31, 2007, Phoenix Footwear's cash and cash equivalents totaled $2.3 million. Additionally, the company had $56.0 million in bank debt, including its outstanding line of credit. Because the company does not expect to meet its required financial covenants as of June 30, 2007, the company has reclassified all of its long-term bank debt as a current liability as of March 31, 2007. This reclassification resulted in a working capital deficit of $8.2 million as of March 31, 2007. Excluding the effects of this long-term debt reclassification, the company would have had positive working capital at March 31, 2007 of $34.4 million.
The company has implemented, and continues to implement initiatives to reduce the working capital required for its business. The company is also exploring a possible sale of one or more of its assets to reduce bank debt. There can be no assurance that any transaction will occur or if one is undertaken, its terms or timing. The company does not intend to make announcements regarding a potential sale until a definitive agreement providing for the transaction is approved by the Board of Directors and signed by the company.
Phoenix Footwear Group, Inc.
Consolidated Condensed Statement of Operations
(In thousands)
For the Quarter Ended
(Unaudited)
March 31 April 1
2007 2006
Net sales $42,074 100.0% $40,342 100.0%
Cost of goods sold 27,117 64.5% 24,639 61.1%
Gross profit 14,957 35.5% 15,703 38.9%
Operating expenses:
Selling and administrative expenses $12,208 29.0% $11,199 27.8%
Non cash 401k stock grant compensation 133 0.3% 161 0.4%
Amortization 305 0.7% 327 0.8%
Other expense, net 6 --% (1,394) --%
Total operating expenses 12,652 30.1% 10,293 25.5%
Income from operations 2,305 5.5% 5,410 13.4%
Interest expense $1,577 $1,369
Income before income taxes 728 1.7% 4,041 10.0%
Income tax provision $314 $1,011
Net income $414 1.0% $3,030 7.5%
Phoenix Footwear Group, Inc
Condensed Net Sales Information
(Unaudited)
(In thousands)
Net Sales by Brand
Quarter Ended
March 31, April 1, Growth / Decline
2007 2006 Dollars Percent
Trotters $4,356 $4,264 $92 2.2%
SoftWalk 3,028 3,338 (310) -9.3%
H.S. Trask 1,215 2,366 (1,151) -48.6%
Royal Robbins 10,101 11,176 (1,075) -9.6%
Altama 11,066 7,186 3,880 54.0%
Chambers 9,856 7,684 2,172 28.3%
Tommy Bahama 2,316 4,328 (2,012) -46.5%
Other 136 -- 136 100.0%
$42,074 $40,342 $1,732 4.3%
