Phoenix Footwear Group, Inc. announced net sales for the second quarter ended July 2, 2005 increased 10.6% to $15.4 million compared to $13.9 million for the second quarter of 2004. The second quarter saw a net loss of $1.0 million or 14 cents per diluted share compared to net income of $643,000 or 12 cents per diluted share for the same quarter last year. Gross margin for the quarter was 38% of sales, compared to 45% last year.
James R. Riedman, chairman, commented, “Our second quarter results were in line with our revised expectations, reflecting softness at our Altama and Trotters units and, to a lesser extent, the impact of a poor Spring sandal selling season at retail which affected our SoftWalk brand. Nonetheless, we anticipate posting revenue growth at the majority of our brands in the second half of 2005. We also expect to return to profitability in the current quarter and full year. Several factors support our improved outlook, principally the recent resumption of government orders for military boots at Altama, healthy demand for our Fall product lines at Royal Robbins and SoftWalk and an ongoing turnaround at H.S. Trask. We will also benefit from the addition of our recent acquisition of the Chambers Belt Company, which we expect to add approximately $40 million in annualized revenues to our results. As we integrate the Chambers operations and focus on improving our performance across all of our brands, we anticipate generating increased value for our shareholders.”
Richard White, chief executive officer, commented, “Despite our mixed performance in the first half of the year, we are seeing improving sales indicators across most of our brands. Each of our brands has increased retail doors this Spring. The government is now accepting contracted shipments and Altama is posting sales in line with the levels we experienced in late 2004 and early 2005. We are also moving ahead with our efforts to expand Altama's public safety market penetration. A significant increase in the number of H.S. Trask retail accounts and futures orders leads us to expect solid sales growth at this brand in the second half of 2005. We are very optimistic about Fall sales for SoftWalk, including the launch of our new SoftWalk Lights products and early reorders on key styles moving into the season. Early shipment requests and an expanded cool weather line indicate another strong Fall season for Royal Robbins and interest in the brand continues to expand. Lastly, we expect Trotters to post sales that are negative for the full year. Our Fall interim line has been well received, but we will need to continue to work through our re-positioning efforts over the balance of the year. Positive retailer feedback in our Spring pre-line presentations underscores our expectation that the brand will return to growth in 2006. We are optimistic the investments we are making in our businesses, combined with our recent acquisitions, will lead to improved revenues and profits as the year unfolds.”
Results for the Second Quarter Ended July 2, 2005
Net sales for the second quarter ended July 2, 2005 increased 10.6% to $15.4 million compared to $13.9 million for the second quarter of 2004. This increase includes $3.5 million of new revenue associated with the Altama brand acquisition, completed during the third quarter of 2004, partially offset by a decline in other footwear brand sales.
Gross margin in the second quarter of 2005 was 38% of net sales, compared to 45% in the second quarter of 2004. The decrease in the gross margin percentage was due to the addition of the Altama brand gross margins, which generate lower gross margins than the company's other branded products and a higher level of footwear close-out sales as compared to the prior year quarter. Operating expenses for the second quarter of 2005 were $7.1 million or 46% of net sales, versus $5.0 million, or 36% of net sales for the second quarter of 2004. This increase is related to increased legal, acquisition, marketing and employee compensation costs along with operating costs associated with the recently acquired Altama brand.
During the second quarter of 2005, interest expense totaled $533,000, compared to $134,000 in the comparable prior year period. This increase is primarily related to increased acquisition and working capital debt associated with prior years brand acquisitions and higher interest rates.
Results for the Six Months Ended July 2, 2005
Net sales for the six months ended July 2, 2005 increased 28.4% to $41.8 million compared to $32.5 million for the comparable prior year period. This increase includes $10.3 million of new revenue associated with the Altama brand acquisition, completed during the third quarter of 2004, partially offset by a decline in other footwear brand sales.
Gross margin for the six months ended July 2, 2005 was 39% of net sales, compared to 44% for the comparable prior year period. The decrease in the gross margin percentage was due to the addition of the Altama brand gross margins, which generate lower gross margins than the company's other branded products and a higher level of footwear close-out sales as compared to the prior year period. Operating expenses for the first six months of 2005 were $15.2 million, or 36% of net sales, versus $10.9 million, or 33% of net sales for the comparable prior year period. This increase is related to increased legal, acquisition, marketing and employee compensation costs along with operating costs associated with the recently acquired Altama brand. Additionally, other expense, net for the current year period includes severance and management restructuring charges totaling $615,000.
During the six months ended July 2, 2005, interest expense totaled $965,000, compared to $304,000 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.
UNIT RESULTS
Royal Robbins:
Second quarter 2005 net sales for Royal Robbins were $5.2 million, flat compared to second quarter 2004 levels. For the entirety of the Spring season (January 1 through June 30) Royal Robbins' sales grew by 17%. The first and third quarters are typically Royal Robbins' strongest periods, and early third quarter results are encouraging, as key retailers have again requested early delivery of Fall goods. Royal Robbins' travel related business also continues to grow. Additionally, the brand continues to open new accounts, such as Academy Sports. We continue to expect Royal Robbins to post strong growth for the full year 2005.
SoftWalk:
SoftWalk posted net sales for the second quarter of 2005 of $2.1 million, compared to net sales of $2.8 million for the second quarter of 2004, representing a decline of 23.8%. SoftWalk witnessed less-than-expected reorders due to unseasonable Spring temperatures and weak sandal sales resulting in a 6% decline in total sales for the first half of 2005 compared to the first half of 2004. We are witnessing encouraging third quarter bookings, due to significant account growth and response to our innovative SoftWalk Lights products and several other new key styles. We expect SoftWalk to post growth for the full-year 2005.
Trotters:
Second quarter 2005 net sales for Trotters were $2.9 million, compared to $5.2 million for the second quarter of 2004, representing a decline of 44.0%. For the total Spring season (January 1 through June 30) sales decreased by 34%. It will take the full year to work through the product issues previously discussed. While we expect the brand to experience weakness during 2005, we have witnessed some positive signs for the future. Our modest interim Fall line was well received; in fact, it ranks as one of Trotter's best product introductions ever. Early Spring 2006 line reviews from key retailers indicates their enthusiasm for our repositioned line direction. Overall we expect Trotters sales for the full-year 2005 to decline compared to full-year 2004.
H.S. Trask:
Net sales for H.S. Trask in the second quarter were $1.6 million, a 133% increase over the comparable prior year period. We continue to witness strength following our rebuilding of the H.S. Trask product line in 2004, as well as the brand's increased sales force. Significant growth in new, strategic retail accounts, coupled with growing Fall bookings reinforces our expectation of continued growth from H.S. Trask for the full year 2005. However, we expect growth rates to moderate as year over year comparisons become normalized.
Altama:
Altama's net sales for the second quarter of 2005 decreased 71.5% to $3.5 million, compared to net sales of $12.2 million for the second quarter 2004, prior to our acquisition of the brand. As previously announced, the sales decline for the quarter was attributable to a temporary cessation in Department of Defense (DOD) deliveries at our Altama unit. The DOD has begun to receive shipments in the third quarter and we expect third quarter sales in-line with what we experienced in late 2004 and early 2005. We believe the unit will add sustainable new sales volume as it begins to implement our strategy of diversifying revenues, with new opportunities resulting from safety toe boots, United States Marine Corps certification and its introduction of the EXO-Speed line of public safety footwear during the second half of 2005.
Chambers:
We completed our acquisition of the Chambers Belt Company on June 29, 2005. The business had no impact on our income statement during the second quarter; however its effect is included in the assets and liabilities of our July 2, 2005 balance sheet. This division is anticipating opportunities stemming from tests of several new initiatives in the mass sector beginning with Wal-Mart in August. Additional new growth is anticipated through its new Union Bay license in the moderate retail sector, along with new distribution of branded products in better department stores.
2005 BUSINESS OUTLOOK
The following statements are based on current information and expectations, and actual results may differ materially. The company can give no assurances that such expectations will prove correct. These statements do not include the potential impact of any mergers, acquisitions or other business combinations that may be completed after August 4, 2005. The company makes these statements as of today and undertakes no obligation to update this information based on actual results during the period or changes in assumptions or estimates or other changes in the period. While it is currently expected that these business outlook statements will not be updated prior to the release of the company's third quarter 2005 earnings announcement, the company reserves the right to update the outlook for any reason during the quarter, including the occurrence of material events.
The company continues to expect to report full-year revenues of $100 million to $110 million and diluted EPS of 42 cents to 47 cents. This guidance includes the addition of Chambers Belt Company. Also included in projected EPS is 14 cents per share in amortization charges of acquisition-related intangibles and expenses related to employee stock grants in the company's 401(k) savings plan.
Phoenix Footwear Group, Inc.
Consolidated Condensed Statement of Operations
For the Quarter Ended
(Unaudited)
July 2, June 26,
2005 2004
Net sales $15,353,000 100% $13,876,000 100%
Cost of goods sold 9,481,000 62% 7,587,000 55%
Gross profit 5,872,000 38% 6,289,000 45%
Operating expenses:
Selling and administrative
expenses $7,063,000 46% $5,021,000 36%
Other expense, net 2,000 0% 26,000 0%
Total operating expenses 7,065,000 46% 5,047,000 36%
(Loss) income from operations (1,193,000) -8% 1,242,000 9%
Interest expense $533,000 $134,000
(Loss) income before income
taxes (1,726,000) -11% 1,108,000 8%
Income tax provision $(685,000) $465,000
Net (loss) income $(1,041,000) -7% $643,000 5%
(Loss) earnings per common share:
Basic ($0.14) $0.14
Diluted ($0.14) $0.12
