Saucony, Inc. reported that 2004 third quarter net income increased 59% to $3.4 million, compared to $2.2 million in the third quarter of 2003. Diluted earnings per share increased to $0.45 per Class A share and $0.49 per Class B share in the third quarter of 2004, compared to diluted earnings per share of $0.32 per Class A share and $0.35 per Class B share for the comparable period in 2003. Net sales for the third quarter increased 32%, to $42.3 million, compared to $32.0 million in the third quarter of 2003.
For the nine months ended October 1, 2004, net income increased 53% to $10.7 million, compared to $7.0 million in the comparable period of 2003. Diluted earnings per share increased to $1.43 per Class A share and $1.58 per Class B share, for the nine months ended October 1, 2004, compared to diluted earnings per share of $1.05 per Class A share and $1.15 per Class B share for the comparable period in 2003. Net sales increased 26%, to $133.2 million, in the nine months ended October 1, 2004, compared to $105.5 million in the comparable period of 2003.
Net income for the third quarter ended October 1, 2004, included $300,000 of legal fees related to our review of strategic alternatives and related matters.
Net income for the third quarter and for the nine months ended October 1, 2004, included approximately $415,000 and $775,000 of professional fees, respectively, associated with our assessment of internal controls as required under Section 404 of the Sarbanes-Oxley Act. Net income for the third quarter and for the nine months ended October 3, 2003, included a pre-tax benefit of $566,000 recorded in general and administrative expenses as a result of a litigation settlement agreement between the Company and the trustee appointed to oversee the liquidation of assets of a former customer.
John H. Fisher, President and Chief Executive Officer, commented, “It is extremely gratifying to once again generate strong sales and profit growth, as well as registering our 12th consecutive quarter of meeting or exceeding expectations. Our robust top line performance was primarily driven by strength in our domestic mid-priced cross-over, originals and technical running footwear categories. We were also pleased with the growth in our international net sales during the quarter. In addition, our ongoing focus on improving operating efficiencies allowed us to translate a 32% gain in sales into a 59% increase in net income in the third quarter. As we head into the holiday season we expect our positive momentum to continue and accordingly, have increased business outlook for the fourth quarter.”
Order Backlog
Our backlog of open orders at October 1, 2004 scheduled for delivery within the next five months (October 2, 2004 – February 25, 2005) increased 7% to $46.6 million, compared to $43.5 million at October 3, 2003.
At October 1, 2004, the open order backlog for delivery in the next 12 months increased 7% to $62.9 million, from $58.8 million at October 3, 2003.
Mr. Fisher continued, “Our increase in open orders scheduled for delivery over the next five months is due primarily to the growth in our technical running footwear category in both our international and domestic markets and to the impact of a weaker U.S. dollar. Despite strong sales of our mid-priced cross-over and originals footwear products in the quarter ended October 1, 2004, our open orders scheduled for delivery over the next five months for the mid-priced cross-over and originals categories did not meet our expectations at October 1, 2004. However, we expect that our focus in technical footwear and the expansion of our brand reach in cross-over and originals footwear are and will continue to be keys to our effort to meet our long-term growth objectives.”
Mr. Fisher remarked, “Our cash and cash equivalents and short-term investments decreased during the first nine months of fiscal 2004 from our fiscal 2003 year end balances, due in large measure to the payment of regular and special cash dividends, cash expended for the initial phase of the expansion and renovation of our corporate headquarters and the use of cash to finance our seasonal working capital needs. Our day's sales in accounts receivable, defined as the number of average daily net sales in our accounts receivable as of the period end date and calculated by dividing the end of period accounts receivable by the average daily net sales for the period, increased to 54 days at October 1, 2004, compared to 51 days at October 3, 2003. The number of days sales in inventory, defined as the number of average daily cost of sales in our inventory as of the period end date and calculated by dividing the end of period inventory by the average daily cost of sales for the period, increased to 81 days at October 1, 2004, compared to 76 days at October 3, 2003. We made significant progress as our day's sales in inventory at October 1, 2004 decreased by 12 days when compared to our day's sales in inventory at July 2, 2004. We remain committed to proactively managing our working capital to achieve greater efficiencies.”
Net sales for the third quarter of 2004 increased 32% to $42.3 million, compared to $32.0 million in the third quarter of 2003. Domestic net sales increased 38% to $31.3 million in the third quarter of 2004, compared to $22.6 million in the third quarter of 2003. Our domestic sales increase in the third quarter of 2004 was due primarily to increased footwear unit volume and, to a lesser extent, increased Hind apparel unit volume and increased sales at our factory outlet stores. International net sales increased 17%, to $11.0 million in the third quarter of 2004, compared to $9.4 million in the third quarter of 2003. Our international sales increase in the third quarter of 2004 was due primarily to increased footwear unit volume and, to a lesser extent, favorable changes in foreign exchange rates as compared to the third quarter of 2003. Saucony brand footwear and apparel accounted for approximately 81% of total third quarter 2004 net sales, while a combination of Hind apparel and factory outlet stores net sales accounted for the balance.
Net sales for the nine months ended October 1, 2004 increased 26% to $133.2 million, compared to $105.5 million in the comparable period in 2003. Domestic net sales increased 29% to $102.7 million, compared to $79.3 million in the comparable period in 2003. Our domestic sales increase in the nine months ended October 1, 2004 was due primarily to increased footwear unit volume and, to a lesser extent, increased sales at our factory outlet stores. International net sales for the nine months ended October 1, 2004 increased 16% to $30.5 million, compared to $26.2 million in the comparable period in 2003. Our international sales increase in the nine months ended October 1, 2004 was due primarily to favorable changes in foreign exchange rates as compared to the comparable period in 2003 and, to a lesser extent, increased footwear unit volume. Saucony brand footwear and apparel account for approximately 85% of net sales during the first nine months of 2004, while a combination of Hind apparel and factory outlet stores net sales account for the balance.
The Company's gross margin in the third quarter of fiscal 2004 increased 70 basis points to 41.3%, compared to 40.6% in the third quarter of 2003, due primarily to favorable currency exchange due to the impact of a weaker U.S. dollar against European and Canadian currencies, higher levels of domestic at once shipments, which carry lower discounts, and improved margins at our factory outlet division. Partially offsetting these factors in the third quarter of 2004 were increased footwear unit volume of our mid-priced cross-over footwear sold into the athletic mall, sporting goods and value channel at lower gross margins that include rebates provided to certain Saucony domestic customers and increased inventory reserve provisions for certain slow-moving Saucony domestic footwear styles.
For the first nine months of 2004, gross margin increased 160 basis points to 41.0%, compared to 39.4% in the comparable period of 2003, due primarily to favorable currency exchange due to the impact of a weaker U.S. dollar against European and Canadian currencies, improved margins on Hind brand apparel, due to increased sales of first quality product at higher margin and lower sales of closeout apparel, higher levels of domestic at once shipments, which carry lower discounts, and improved margins at our factory outlet division. Partially offsetting these factors in 2004 were increased footwear unit volume of our mid-priced cross-over footwear sold into the athletic mall, sporting goods and value channel at lower gross margins that include rebates provided to certain Saucony domestic customers and increased inventory reserve provisions for certain slow-moving Saucony domestic footwear styles.
Selling, general and administrative expenses as a percentage of net sales decreased to 27.8% in the third quarter of 2004, compared to 29.9% in the third quarter of 2003. In absolute dollars, selling, general and administrative expenses increased 23%, due primarily to increased legal and other professional fees, administrative and selling payroll, operating expenses associated with the expansion of our factory outlet division, account specific advertising and promotion, variable selling expenses and promotions. Included in general and administrative expenses in the third quarter of 2004 were $415,000 of professional fees associated with our assessment of internal controls as required under Section 404 of the Sarbanes-Oxley Act and $300,000 of legal fees related to our review of strategic alternatives and related matters. Selling expenses as a percentage of net sales in the third quarter of 2004 were 12.4%, compared to 13.7% in the comparable 2003 period, while general and administrative expenses were 15.4% of net sales in the third quarter of 2004, compared to 16.2% in the third quarter of 2003.
For the nine months ended October 1, 2004, selling, general and administrative expenses as a percentage of net sales decreased to 27.6%, compared to 28.8% in the comparable period of 2003. In absolute dollars, selling, general and administrative expenses increased 21%, due primarily to increased administrative and selling payroll, increased legal and professional fees, operating expenses associated with our factory outlet division expansion, print media advertising, professional fees, variable selling expenses and account specific advertising and promotion. Included in general and administrative expenses in the nine months ended October 1, 2004 were $775,000 of professional fees associated with our assessment of internal controls as required under Section 404 of the Sarbanes-Oxley Act and $300,000 of legal fees related to our review of strategic alternatives and related matters. General and administrative expenses in the nine months ended October 3, 2003 included a favorable litigation settlement which reduced bad debt expense by $566,000. Selling expenses as a percentage of net sales in the nine months ended October 1, 2004 were 13.2%, compared to 13.5% in the comparable 2003 period, while general and administrative expenses were 14.4% of net sales in the nine months ended October 1, 2004, compared to 15.3% in the comparable period of 2003.
Non-operating income increased in the third quarter of 2004 to $91,000, compared to income of $46,000 in the third quarter of 2003. The increase was due to foreign currency gains of $26,000 in the third quarter of 2004, compared to foreign currency losses of $41,000 in the third quarter of 2003, due primarily to losses on forward foreign currency contracts in the third quarter of 2003 and an increase in interest income in the third quarter of 2004 to $66,000, compared to interest income of $49,000 in the third quarter of 2003, due to higher interest rates earned on our invested cash balances.
For the nine months ended October 1, 2004, non-operating income (expense) decreased to an expense of $132,000, compared to income of $243,000 in the comparable period of 2003. The decrease was due to foreign currency exchange losses of $335,000 in the nine months ended October 1, 2004, compared to foreign currency gains of $17,000 in the comparable period of 2003, due primarily to losses on forward foreign currency contracts in the nine months ended October 1, 2004 and recognizing $146,000 of accumulated other comprehensive losses from the closing and relocation of our Saucony International administrative office.
Net income for the third quarter of 2004 was $3.4 million, or $0.45 per Class A share and $0.49 per Class B share on a diluted basis, compared to $2.2 million, or $0.32 per Class A share and $0.35 per Class B share on a diluted basis, in the third quarter of 2003. Weighted average common shares and common stock equivalents used to calculate diluted earnings per share for the third quarter of 2004 and 2003 consisted of, 2,521,000 Class A and 4,709,000 Class B shares and 2,521,000 Class A and 3,899,000 Class B shares, respectively.
For the nine months ended October 1, 2004, net income was $10.7 million, or $1.43 per Class A share and $1.58 per Class B share on a diluted basis, compared to $7.0 million, or $1.05 per Class A share and $1.15 per Class B share on a diluted basis, for the first nine months of 2003. Weighted average common shares and common stock equivalents used to calculate diluted earnings per share for the first nine months of 2004 and 2003 consisted of, 2,521,000 Class A and 4,524,000 Class B shares and 2,522,000 Class A and 3,808,000 Class B shares, respectively.
Net income available to the Company's common stockholders is allocated among our two classes of common stock, Class A Common Stock and Class B Common Stock. The allocation among each class is based upon the two-class method. Under the two-class method, earnings per share for each class of common stock are presented. The two-class presentation method is required as a result of the Company having two classes of common stock with different participation rights in undistributed earnings.
The increase in the weighted average common shares and equivalents in the third quarter of 2004 and for the nine months ended October 1, 2004, as compared to the third quarter of 2003 and the nine months ended October 3, 2003, was due to the issuance of approximately 356,000 Class B common shares pursuant to the exercise of stock options and stock purchase warrants and customary dilutive adjustments in the number of outstanding options to purchase our Class B common stock and the exercise price of such options in connection with the special cash dividend on our common stock announced on February 17, 2004.
Mr. Fisher concluded, “We believe that we are on track to post another strong year in fiscal 2004 and to further grow Saucony's position in the marketplace. Our success to date underscores our ongoing commitment to innovation and the highest level of execution and reflects the hard work and dedication of all our employees around the globe. We move forward with a powerful brand, strong balance sheet and a management team focused on capitalizing on the opportunities that lie ahead.”
Business Outlook
The Company is providing certain forward-looking information in this press release. These statements are based on the Company's current information and expectations, and actual results may differ materially. The Company undertakes no obligation to update this information. Please see the further disclaimer in the last paragraph of this release. The following information replaces our previous guidance.
Fourth Quarter and Fiscal Year 2004
The Company expects fully diluted earnings per share to range from $0.12 to $0.13 for Class A shares and $0.13 to $0.14 for Class B shares for the fourth quarter of 2004 and to range from $1.53 to $1.54 for Class A shares and $1.68 to $1.69 for Class B shares for the year.
The Company expects fourth quarter net sales to range from $33 million to $34 million. The Company expects net sales for the year to range from $166 million to $167 million.
The Company expects gross margins of approximately 39% for the fourth quarter and approximately 40.5% for the year.
The Company expects selling, general and administration expenses, as a percentage of net sales, to range from 34% to 35% for the fourth quarter and to be approximately 29% for the year. The Company expects selling, general and administration expenses to include costs related to our review of strategic alternatives of approximately $400,000 for the fourth quarter and approximately $700,000 for the year.
The Company expects weighted average fully diluted common shares and equivalents to be approximately 2.5 million Class A and 4.7 million Class B shares and 2.5 million Class A and 4.6 million Class B shares, respectively, for the fourth quarter and for the year.
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
For the Quarters and Nine Months ended October 1, 2004 and
October 3, 2003
(Unaudited)
(in thousands, except per share amounts)
Nine Nine
Quarter Quarter Months Months
Ended Ended Ended Ended
October October October October
1, 3, 1, 3,
2004 2003 2004 2003
---- ---- ---- ----
Net sales $ 42,266 $ 31,978 $133,214 $105,518
Other revenue 95 94 377 257
-------- -------- -------- --------
Total revenue 42,361 32,072 133,591 105,775
-------- -------- -------- --------
Costs and expenses
Cost of sales 24,797 18,983 78,617 63,899
Selling expenses 5,223 4,396 17,592 14,266
General and
administrative
expenses 6,527 5,172 19,117 16,127
-------- -------- -------- --------
Total costs
and expenses 36,547 28,551 115,326 94,292
-------- -------- -------- --------
Operating income 5,814 3,521 18,265 11,483
Non-operating
income (expense)
Interest income 66 49 192 176
Interest expense -- -- (5) (5)
Foreign
currency 26 (41) (335) 17
Other (1) 38 16 55
-------- -------- -------- --------
Income before
income taxes and
minority interest 5,905 3,567 18,133 11,726
Provision for
income taxes 2,401 1,359 7,289 4,577
Minority interest
in income of
consolidated
subsidiaries 46 29 110 135
-------- -------- -------- --------
Net income $ 3,458 $ 2,179 $ 10,734 $ 7,014
======== ======== ======== ========
Per share amounts:
Earnings per share:
Basic:
Class A
common
stock $ 0.50 $ 0.34 $ 1.57 $ 1.09
======== ======== ======== ========
Class B
common
stock $ 0.55 $ 0.37 $ 1.72 $ 1.20
======== ======== ======== ========
Diluted:
Class A
common
stock $ 0.45 $ 0.32 $ 1.43 $ 1.05
======== ======== ======== ========
Class B
common
stock $ 0.49 $ 0.35 $ 1.58 $ 1.15
