Phoenix Footwear Group, Inc. saw net sales for the third quarter increase 6.4% to $36.5 million from $34.3 million last year. The net sales growth was attributable to strong performance by the Chambers Belt and Royal Robbins brands. The company reported organic growth of 8.8%, which excludes the Tommy Bahama Footwear brand acquired during the third quarter of fiscal 2005. Organic growth was lead by a 38.7% increase in Chambers and a 28.6% increase in Royal Robbins sales. On a trailing twelve month basis, net sales through the third quarter increased 49.7% to $144.8 million, compared to $96.7 million in the same period a year ago. This increase was primarily associated with the Chambers Belt and Tommy Bahama Footwear acquisitions which occurred during June 2005 and August 2005, respectively.
The company's net income for the third quarter was $343,000, or 4 cents per share, on 8.2 million fully diluted weighted-average shares outstanding, compared to net income of $981,000, or 12 cents per share, on 8.4 million fully diluted weighted-average shares outstanding for the comparable quarter during the previous fiscal year. On a trailing twelve month basis, net income increased 158.3% to $3.1 million, compared to $1.2 million a year ago.
Commenting on the quarter, Jim Riedman, Phoenix Footwear's Chairman and CEO, said, “During the third quarter, we took aggressive action to completely redesign and reposition the Tommy Bahama Footwear line. The resulting 2007 Spring line is now complete, has been approved by our licensor, and we expect to deliver the initial shipments during late December. Additionally, we aggressively liquidated slow moving and discontinued products in anticipation of our new offerings and incurred abnormally high operating expenses associated with our accelerated design and development timetable. As a result, the Tommy Bahama Footwear division generated a pre-tax loss of approximately $1.2 million, or $0.09 per diluted share. Weak sales results in the Company's Trask and Altama divisions also adversely impacted operational improvements from our other divisions. For the remainder of fiscal 2006, we expect to report a fourth quarter loss due to our continued repositioning efforts at Tommy Bahama Footwear and anticipated continued weak performance at Trask and Altama. However, we remain optimistic that our Tommy Bahama redesign investment, along with the Spring 2007 open order positions for the majority of our divisions, will put us in a strong position to achieve substantial operating improvement in fiscal 2007 and beyond.”
Gross margin in the third quarter of fiscal 2006 was 36.0%, compared to 36.7% in the third quarter of 2005. The decrease in gross margin was due to an increased level of close-out sales and inventory write-downs, during the quarter, primarily within the company's Tommy Bahama Footwear and Trask divisions along with an increased level of mass market sales which generate lower gross margins than the company's other distribution channels.
Operating costs increased to $11.1 million, compared to $9.8 million in the third quarter of fiscal 2005. The increase was attributable to a full quarter of operating costs associated with the Tommy Bahama Footwear brand, operating expenses associated with the company's newly formed Canadian subsidiary and increased selling expenses incurred to support higher sales levels. Operating expenses as a percentage of sales were 30.3% in the third quarter, as compared to 28.5% in the third quarter of fiscal 2005.
Operating income for the third quarter was $2.1 million, compared to operating income of $2.8 million in the third quarter of fiscal 2005. EBITDA for the third quarter was $3.0 million, compared to EBITDA of $3.7 million in the third quarter of fiscal 2005.
During the third quarter of 2006, interest expense totaled $1.5 million, compared to $1.2 million in the comparable prior fiscal 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 September 30, 2006, net sales increased 46.9% to $111.7 million compared to $76.0 million for the comparable prior-fiscal year period. The increase is a result of both overall organic growth of the company's legacy brands and the inclusion of the Chambers and Tommy Bahama Footwear brands for the full nine month period. Organic growth during the first nine months of fiscal 2006 was 8.1% as increases at Royal Robbins and Altama were offset by declines in the other legacy brands. Chambers and Tommy Bahama contributed 28.8% and 8.9% to the fiscal year-to-date net sales, respectively.
Net income for the nine months ended September 30, 2006 was $3.0 million, or $0.37 per fully diluted share, compared to net income of $1.1 million, or $0.14 per diluted share, for the comparable period a year ago. Weighted- average shares outstanding for the two periods were 8.2 million and 8.1 million, respectively. Included in the 2006 nine-month net income results is a $1.5 million purchase price gain adjustment related to the Altama acquisition which was recorded in the first quarter.
Gross margins for the nine months ended September 30, 2006 were 37.6% of net sales, compared to 38.1% for the comparable prior fiscal year period. The decrease in the gross margin percentage was due to the two most 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 comparable prior fiscal year period.
Operating costs for the first nine months of fiscal 2006 totaled $33.6 million, or 30.1% of net sales, versus $25.0 million, or 32.9% of net sales for the comparable prior fiscal year period. Operating income for the first nine months of fiscal 2006 was $8.4 million, or 7.5% of net sales, up significantly from $4.0 million, or 5.3% of net sales, for the same fiscal period a year ago.
For the nine months ended September 30, 2006, interest expense totaled $4.4 million, compared to $2.1 million 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
Third quarter fiscal 2006 net sales for Royal Robbins were $9.5 million, an increase of 28.6%, compared to $7.4 million a year ago. The move to direct sales in Canada earlier in the year continues to benefit the brand's sales and margins. Royal Robbins continues to see healthy sell-through in all of its retail accounts, particularly at REI, and the long-term outlook for the brand is very positive. However, growth is expected to moderate somewhat through the first half of 2007 due to the closing of the
Dick's Sports and Academy Sports accounts, which took place earlier in the year and the anniversary in January of the move to direct sales in Canada.
Tommy Bahama
Net sales from the Tommy Bahama Footwear brand totaled $1.3 million, or 3.5% of total net sales. During the quarter, the company made considerable investments in development of a new women's and men's shoe and accessories product line for Spring 2007. The line has been approved, and is currently in production with an expected ship date of December 2006. During the third quarter however, management focused on the reorganization of the brand which required a high level of discontinued product sales. The brand was successful in eliminating a substantial portion of its old inventory, which resulted in a pre-tax loss for the division of approximately $1.2 million, or approximately 9 cents per diluted share. Looking forward, the company is very encouraged by the new product design and quality, and has received initial orders from Tommy Bahama Retail, Nordstrom, Macy's and other retailers. With the new management team in place, strong brand recognition, and the new look and feel of the product, the company is very encouraged by the 2007 outlook for Tommy Bahama Footwear.
Chambers
Chambers' net sales for the third quarter of fiscal 2006 increased 38.7% to $13.5 million, compared to $9.7 million for the third quarter of fiscal 2005. During the quarter, the Company continued its expansion into the mass market retail channels, including Wal-Mart and Kmart, and shipped significant orders to Tractor Supply Company. The Chambers' Route 66 private label products have shipped to 1,400 Kmart stores. The strong growth in each of the current accounts was slightly offset by weaker sales in the junior product category primarily at independent retailers. Overall the business is trending positively and the company remains optimistic about Chambers' future performance.
Altama
Altama's net sales for the third quarter of fiscal 2006 decreased 39.0% to $3.8 million, compared to net sales of $6.2 million for the third quarter of fiscal 2005. The decrease in net sales during the third quarter resulted primarily from a reduction in the Department of Defense (DoD) product deliveries. The company's DoD contract expired on September 30, 2006 and the company submitted a bid for a new five-year contract in August. The company expects to receive notification from the DoD by the end of the first quarter of fiscal 2007 of contract awardees. As of October 31, 2006, the company has a strong backlog of approximately 200,000 pairs, or $10 million, of firm military boot delivery orders from the DoD and others to be delivered during the fourth quarter of fiscal 2006 and the first quarter of fiscal 2007. There is no certainty that Altama will be awarded any future DoD boot solicitations, and if Altama does not receive an award from its current solicitation, or future awards, the company could be adversely affected.
During the quarter, the company continued to ship its EXO-Speed(TM) tactical boots. Due to the steady demand for the product and the growing number of new accounts, the company continues to commit additional resources to the product line. Additionally, the company commercialized its new license agreement with The American Red Cross during the quarter and received orders for 10,000 pairs which are in production and expected to ship in the first quarter of fiscal 2007. Currently Altama has 13 American Red Cross product designs. In spite of a weak quarter, the company believes that its strong order backlog and opportunities with American Red Cross institutional products should positively impact Altama's future performance.
SoftWalk
SoftWalk net sales increased 3.0% to $3.1 million, compared to $3.0 million for the third quarter of fiscal 2005. The brand's sales and margins improved due to stronger demand and a lower level of close-out sales. SoftWalk opened 13 new accounts during the quarter including Amazon.com. SoftWalk's strong future order position supports continued sales acceleration and the company believes the brand should perform well in fiscal 2007.
Trotters
Third quarter Trotters sales increased 1.2% to $4.3 million, compared to $4.2 million for the same quarter a year ago. Twenty-six new accounts were opened during the quarter including adding seven incremental doors at Nordstrom. A lower level of close-out sales, improved margins and robust future orders should enable Trotters to maintain its current growth trend into fiscal 2007.
H.S. Trask
Net sales for H.S. Trask decreased 41.6% to $1.1 million in the third quarter, compared to $1.8 million a year ago. The brand experienced higher close-out sales as a result of inventory reduction initiatives including moving out of older product lines. During September, the company hired David Pompel as President of the division. Mr. Pompel joins the company with 22 years of experience in the retail and wholesale sporting goods and traditional men's and women's clothing industries. His experience includes store management, buying, and product and marketing management. Most recently, Mr. Pompel was Director of Product and Brand at ECCO USA, Inc. Previously he held various senior positions at The Timberland Company, Adidas AG and Reebok International Limited. Additionally, the brand's new Fall 2006 line, the first in several seasons, began shipping in October 2006. The company considers the Trask division as a work in progress and anticipates positive contributions from this division in 2007.
Balance Sheet
As of September 30, 2006, Phoenix Footwear's cash and cash equivalents totaled $1.2 million. Additionally, the company had $58.2 million in debt, including its outstanding line of credit.
On November 13, 2006 the company refinanced with its current lender its existing revolving credit facility, term loan and bridge loan. The new facility includes a five-year $28 million revolving credit facility, a $24 million five-year term loan, and a $10 million 15-month term loan. The revolving credit facility and $24 million term loan initially carry an interest rate of LIBOR plus 3.5% and 4.0%, respectively, or the base rate plus 3/4%. The $10 million term loan initially accrues interest at LIBOR plus 7.0%. The interest rates on all of the loans adjust quarterly based on the company's average borrowings compared to adjusted EBITDA. The $24 million term loan is amortized on a quarterly basis while the $10 million loan is interest-only until it matures and is payable in full in February 2008.
Phoenix Footwear Group, Inc.
Consolidated Condensed Statement of Operations
For the Quarter Ended
September 30, October 1,
2006 2005
Net sales $36,453,000 100.0% $34,275,000 100.0%
Cost of goods sold 23,319,000 64.0% 21,703,000 63.3%
Gross profit 13,134,000 36.0% 12,572,000 36.7%
Operating expenses:
Selling and administrative
expenses $10,573,000 29.0% $9,090,000 26.5%
Non cash 401k stock grant
compensation 161,000 0.4% 233,000 0.7%
Amortization 310,000 0.9% 433,000 1.3%
Other expense, net 14,000 --% 2,000 --%
Total operating expenses 11,058,000 30.3% 9,758,000 28.5%
Income from operations 2,076,000 5.7% 2,814,000 8.2%
Interest expense $1,528,000 $1,156,000
Income before income taxes 548,000 1.5% 1,658,000 4.8%
Income tax provision $205,000 $677,000
Net income $343,000 0.9% $981,000 2.9%
Earnings per common share:
Basic $0.04 $0.12
Diluted $0.04 $0.12
Weighted-average shares
outstanding:
Basic 7,927,306 8,001,439
Diluted 8,203,837 8,371,290
