The Stride Rite Corporation first quarter fiscal 2006 sales were $183.4 million, an increase of 22% compared to the same period in the prior year. Net income for the first quarter totaled $8.3 million or 22 cents per diluted share, compared to the net income of $8.2 million or 22 cents per diluted share in the first quarter of 2005.
The first quarter financial results includes a pre-tax expense of $2.6 million related to the flow through of the write-up of inventory purchased in the Saucony acquisition as required by GAAP accounting rules. In addition, the current quarter includes pre-tax acquisition related integration expenses of $1.2 million. Also, during the first quarter, the Company adopted SFAS No. 123R, “Share-Based Payment”, the impact of which increased pre-tax expenses by approximately $700 thousand.
Excluding acquisition related integration costs and the flow through of the inventory write-up, net income would have been $10.6 million for the first quarter, while diluted earnings per share would have been $.28. See the section entitled “Non-GAAP Pro Forma Financial Measures” and the “Reconciliation of Non-GAAP Measures” provided in this release for additional description of these Non-GAAP Measures.
David Chamberlain, Chairman and CEO of Stride Rite, commented that the first quarter of 2006 was a solid start to the year. “The positive impact of Saucony sales and profits was evident in the quarter. We are on schedule with our integration of the Saucony business. On March 20th we moved the Saucony associates into our Lexington, Massachusetts headquarters and Saucony began shipping from our existing warehouse facility in Louisville, Kentucky.”
“The Children's Group net sales were impacted by the later Easter holiday this year and shifting of the preseason retail store event into the second quarter. Our company-owned retail stores same store growth percentages were down year-over-year as planned. March is off to a good start, and we expect strong second quarter retail store comparative sales to result in positive single digit comparative retail store sales for the half. Our 2006 retail strategy includes the addition of 33 new Stride Rite Children's stores for a total of 302 stores. In addition to the shift in the Easter holiday, our Stride Rite Children's wholesale sales have been impacted by several factors including: the changed strategy and buying patterns of certain department stores, the consolidation of May Company by Federated Department Stores, a shift in value channel strategy and a decline in the number of smaller accounts.
“Although the later Easter this year should result in improvement in the second quarter, we expect to continue to be impacted by those same factors and anticipate Stride Rite Children's wholesale sales to be down for the first half. Overall, we remain on strategy to continue growth in our Stride Rite children's business through new stores and positive same store comparative sales. We are projecting to end the half with a combined Stride Rite Children's Group sales increase.”
“Keds had a challenging first quarter. The moderate retail channel stabilized while the premium department store channel fell below last year, due to strong prior year sell-in. The value channel sales were also below last year. We are encouraged that a number of retailers are starting to enjoy solid Keds product movement and good profitability. Our operating profit margins continued to improve nicely in the brand.”
“Sperry Top-Sider enjoyed another strong quarter of sales and profits. Our products are strong, and we expect growth across all retail channels with particular success in the women's area. This brand has a great deal of positive momentum that should continue throughout the year.”
“Saucony domestic sales were in line with expectations as we continue to see strength in technical running and international. We feel positive about Saucony growth opportunities in 2007, including originals and children's product expansion.”
“International had strong sales and profits, helped in part by sales of Tommy Hilfiger products in Latin America and strong Saucony sales in Europe and Canada.”
“Our Tommy Hilfiger footwear sales were impacted by the soft business trends in the broader Tommy Hilfiger brand. We are focused on maximizing that business as we look for opportunities to improve profitability.”
“We had a solid start to 2006, building off the acquisition of Saucony. The addition of Saucony sales to our other brands has provided increased operating leverage. With sound strategies in place and strong management teams, we anticipate a year of meaningful progress and growth.”
Mr. Chamberlain continued, “Assuming reasonable retail and economic conditions in 2006, we are reaffirming our projected sales growth of 23% to 27% and earnings per share of $.82 – $.88, including a full year of Saucony financial results. Included in the projected earnings is the annual impact related to the expensing of stock options, which is projected at approximately $.05 per diluted share. In addition, these projections include the cost of sales impact related to the flow through of the write-up of inventory purchased in the Saucony acquisition, which reduced earnings per diluted share by $.04 in the first quarter. Acquisition related integration costs are estimated at approximately $2.5 million or $.04 per diluted share for the year and are also included in the earnings projections.”
Net sales for the quarters ended March 3, 2006 and March 4, 2005 are summarized in the table as follows:
The Stride Rite Corporation Net Sales (in thousands) First Quarter ------------- Percent 2006 2005 Change ---------- --------- -------- (Unaudited) Stride Rite Children's Group - Wholesale $21,156 $25,586 (17)% Stride Rite Children's Group - Retail 37,924 35,445 7% ---------- --------- -------- Stride Rite Children's Group - Combined 59,080 61,031 (3)% Keds 41,991 45,799 (8)% Sperry Top-Sider 23,588 19,444 21% International (includes Saucony) 22,818 8,810 159% Saucony Domestic (includes Hind) 24,563 - n/a ---------- --------- -------- Other Wholesale - Combined 112,960 74,053 53% Tommy Hilfiger Adult 14,933 18,121 (18)% Intercompany Eliminations (3,557) (2,614) n/a ---------- --------- -------- Total $183,416 $150,591 22% ========== ========= ========
Stride Rite Children's Group-Wholesale net sales decreased 17% for the quarter as compared to the prior year. This decrease was primarily attributable to the shift in the Easter holiday to second quarter, particularly in department stores and smaller independent retailers. In addition, fewer promotional product sales impacted the sales results.
Net sales of the Stride Rite Children's Group-Retail division increased 7% in the first quarter versus the prior year. Sales at comparable Children's Group retail stores (open 52 weeks in each fiscal year) decreased 3.4% for the first quarter of 2006. In the prior year, benefiting from the earlier Easter holiday and spring promotion, same store comparative sales increased 7.8% versus 2004. At quarter-end, the Stride Rite Children's Group-Retail operated 280 Stride Rite outlets and children's shoe stores. This is a net increase of 26 stores, or 10% from the comparable period last year. In addition, Stride Rite Children's Group-Retail also operated 16 Saucony outlet stores.
Net sales in the Keds division decreased 8%. The strong prior year product sell-in to the premium channels and fewer sales this quarter in the value channel resulted in lower sales comparisons. Sperry Top-Sider net sales increased 21% for the first quarter on strong sales of men's and women's products, particularly in the marine and family shoe retail channels. Saucony net sales were $24.6 million for the first quarter of 2006. Saucony technical running product sales were strong in the quarter.
International net sales increased 159%, mostly due to the addition of Saucony international sales. Also contributing to the increase in international sales were higher sales of Tommy Hilfiger in Canada and Latin America, Keds footwear in Canada, and Sperry Top-Sider in Europe and South Africa.
Net sales of Tommy Hilfiger men's and women's products for the first quarter decreased 18%, primarily due to a reductions in department store product sales, promotional product sales and an overall decline in the men's business. Last year's first quarter also had the sales of the Tommy H product line, which has since been discontinued.
Excluding the flow through of the inventory write-up related to the Saucony purchase, the gross profit percentage increased 1.2 percentage points to 41.4% for the quarter. Keds, Tommy Hilfiger, Sperry Top-Sider and International all had strong gross profit percentage improvements versus last year.
Operating expenses increased 24% for the first quarter. As planned, the major operating cost increases were related to Saucony expenses, higher advertising costs and the Stride Rite Children's Group-Retail store expansion. Also contributing to the increase in operating expenses were integration costs and the impact of adopting SFAS No. 123R, “Share-Based Payment”.
Operating income increased 9% on a GAAP basis and was up 38% excluding the acquisition related integration costs ($1.2 million) and the flow through of the inventory write up ($2.6 million).
Accounts receivable increased 34% compared to last year due to the addition of Saucony and higher sales in the last month of the quarter. DSO was 56 days, an increase of 4 days versus the same period last year. The DSO increase was due to the addition of Saucony which generally has offered somewhat longer credit terms to retailers.
Inventories of $116 million were up 22% versus to the comparable period of 2005. The increase was due primarily to the addition of Saucony.
Cash and cash equivalents were $23 million at the end of the fiscal quarter with $95 million in outstanding debt. The outstanding debt increase versus year end is related to building inventory for spring sales. The Company initially borrowed $85 million in mid-September 2005 to fund the acquisition of Saucony.
The Stride Rite Corporation Summarized Financial Information for the periods ended March 3, 2006 and March 4, 2005 Statements of Income (in thousands) First Quarter ---------------------------- 2006 2005 ------------- ------------ (Unaudited) Net sales $183,416 $150,591 Cost of sales 110,184 90,059 ------------- ------------ Gross profit 73,232 60,532 Selling and administrative expenses 58,910 47,451 ------------- ------------ Operating income 14,322 13,081 Other income (expense), net (823) 162 ------------- ------------ Income before income taxes 13,499 13,243 Provision for income taxes 5,214 5,082 ------------- ------------ Net income $8,285 $8,161 ============= ============ Earnings per share: Diluted $0.22 $0.22 Basic $0.23 $0.23 Weighted average shares outstanding: Diluted 37,703 36,963 Basic 36,588 36,007