- Net Earnings $25.5 Million -
- $0.39 Earnings per Diluted Share Including Purchase Accounting Impact of
$0.12 per Diluted Share -
TOPEKA, Kan., Dec. 4 /PRNewswire-FirstCall/ -- Collective Brands, Inc.
(NYSE: PSS) today reported financial results for the third quarter ended
November 3, 2007, the first financial reporting period since the
acquisition of Stride Rite on August 17, 2007. Third quarter 2007 net
earnings were $25.5 million, or $0.39 per diluted share, down 11.8% versus
third quarter 2006 net earnings of $28.9 million, or $0.43 per diluted
share. The results for the third quarter of 2007 included purchase
accounting expense resulting from the flow through of inventory recorded at
fair value and depreciation and amortization of certain other assets
purchased in the Stride Rite acquisition totaling $28.6 million pre-tax or
$0.12 per diluted share. Excluding the impact of purchase accounting (see
end note discussion of Non-GAAP Financial Measures), net income for the
third quarter of 2007* would have been $33.3 million, or $0.51 per diluted
share, an increase of 15.2% versus the third quarter 2006. Third quarter
2007 net earnings were favorably impacted by a lower annual effective
income tax rate. All 2006 financial information provided excludes Stride
Rite.
Collective Brands' third quarter 2007 total sales were $830.7 million,
up 18.1% compared to the third quarter of 2006, driven by the addition of
Stride Rite. Total sales for Payless and Stride Rite were $685.9 million
and $144.8 million, respectively, for the third quarter of 2007. Comparable
store sales (which include only Payless results) declined 3.5%. Comparable
store sales were affected by lower traffic and unit sales, primarily lower
sales of boots, as a result of unseasonably warm weather as well as
consumer behavior linked to the economic environment.
"Results in the third quarter show that our hybrid business model gives
us strength through diversification even in a challenging business
environment," said Matthew E. Rubel, Chief Executive Officer and President.
"The acquisition of Stride Rite during the quarter advances our strategy to
bring compelling lifestyle, performance, and fashion brands to footwear
consumers worldwide. The Stride Rite integration is progressing well, and
we continue to undertake initiatives which will drive long term earnings in
our business higher. Our actions in the third quarter to strengthen gross
margin and manage inventory and expenses mitigated the impact of negative
comparable store sales."
Gross margin rate for the third quarter of 2007 was 32.2%. Gross margin
rate excluding the impact of purchase accounting* was 35.6% in the third
quarter of 2007. This compares to a gross margin rate of 34.3% in the third
quarter of 2006, an increase of 130 basis points. Approximately 80 basis
points of this increase was driven by the mix impact of the higher gross
margin rate of Stride Rite. Approximately 50 basis points of this increase
was driven by higher average unit retail prices and more direct sourcing in
Payless, partially offset by higher product markdowns and higher occupancy
expenses.
Selling, general and administrative (SG&A) expenses were 28.8% of sales
in the third quarter of 2007 versus 28.0% in the prior year period, an
increase of 80 basis points. Approximately 40 basis points of the increase
was driven by $3.1 million of acquisition-related expenses. The remainder
of the rate increase was driven primarily by lower comparable store sales
and higher advertising expenses. This was offset in part by lower incentive
compensation. SG&A expenses were $239.6 million in the third quarter of
2007, up $42.8 million versus the prior year due primarily to the addition
of Stride Rite.
Third quarter 2007 operating profit from continuing operations as a
percent of sales (operating margin) was 3.3%. Operating margin excluding
the impact of purchase accounting* was 6.8%, or $56.3 million, compared to
third quarter 2006 operating margin of 6.3%, or $44.1 million. This
represents an increase of 50 basis points, or $12.2 million, over the prior
year period.
Net interest expense in the third quarter of 2007 was $15.2 million
compared to net interest income of $0.8 million in the same period last
year. The change was due to the use of cash and short term investments and
increase in borrowings to fund the acquisitions of Stride Rite and
Collective Licensing.
The third quarter 2007 income tax benefit was $15.1 million compared to
income tax expense of $13.3 million in the third quarter of 2006. The
estimated annual effective tax rate for full year 2007 is 16.7%. As of the
end of the second quarter of 2007, the company recorded income tax expense
at an estimated annual effective tax rate of 32.8%. The lower annual
effective tax rate as projected at the end of the third quarter of 2007
compared to that at the second quarter of 2007 was driven principally by
the reduction in anticipated annual pre-tax earnings in high-tax
jurisdictions offset by higher pre-tax earnings estimates in relatively
low-tax jurisdictions.
Excluding the impact of purchase accounting, the full year 2007
effective income tax rate* is expected to be 27.6%. The decrease in the
annual effective tax rate from 32.8% at the second quarter 2007 to 27.6% at
the third quarter 2007 resulted in a decrease in income tax expense of
approximately $8 million, or $0.12 per diluted share, which was recognized
during the third quarter of 2007. Of this decrease in tax expense,
approximately $5 million, or $0.08 per diluted share, relates to the first
and second quarter catch-up impact of the effective income tax rate and
approximately $3 million, or $0.04 per diluted share, is due to the change
in the income tax rate applied to third quarter pre-tax earnings.
Collective Brands ended the third quarter of 2007 with $301.3 million
in cash and short-term investments compared to $472.4 million at the end of
the third quarter of 2006. Total debt increased to $926.1 million in the
third quarter of 2007 from $202.6 million in the prior year period. Both
the reduction in cash and short-term investments and the increase in debt
were due primarily to the acquisitions of Stride Rite and Collective
Licensing. Net debt at the end of the third quarter of 2007 was $624.8
million.
Total inventory was $476.1 million at the end of the third quarter of
2007, up $126.9 million compared to the same period last year due primarily
to the added inventory associated with the acquisition of Stride Rite. At
the end of the third quarter of 2007, aged inventory at Payless was
approximately flat on a unit basis compared to last year.
Capital expenditures for the first nine months of 2007 totaled $128.0
million versus $89.6 million in the prior-year period. The increase was due
primarily to greater investments in the Company's supply chain and store
base. During third quarter 2007, Collective Brands added 27 new stores (18
Payless and 9 Stride Rite), closed 26 stores (24 Payless and 2 Stride
Rite), and relocated 15 Payless stores. Collective Brands ended the period
with 4,891 stores (4,554 Payless and 337 Stride Rite).
Retail Store Counts 3rd Quarter 2007 2nd Quarter 2007 3rd Quarter 2006
Payless ShoeSource 4,554 4,560 4,574
Stride Rite 337 330 318
Total Stores 4,891 4,890 4,892
Note: Sales from Stride Rite stores in 2nd quarter 2007 and 3rd quarter
2006 are not included in Collective Brands results.
Outlook for Collective Brands
-- Collective Brands announces the following guidance for its fourth
quarter of 2007:
o Comparable store sales are expected to decrease in the
mid-single digits. Approximately two percentage points of this
decline is related to the shift of one week due to the 53rd week
last year.
o Total sales for Payless will include one less week for the
quarter than in 2006. The sales from the 53rd week last year
were approximately $36 million.
o Gross margin is anticipated to be approximately 500 to 600 basis
points lower than last year, approximately one-third of which is
due primarily to lower comparable store sales and having one
less week of sales in the fourth quarter. The balance of the
lower gross margin rate is due to purchase accounting expense
related to the flow through of inventory
recorded at fair value.
o The impact of purchase accounting is anticipated to be dilutive
to pre-tax earnings by approximately $28 million, or
approximately $0.41 per diluted share.
-- During 2008, the pre-tax purchase accounting expense is anticipated
to be approximately $20 million. The company anticipates
approximately $8 million in the first quarter 2008, approximately
half of which is due to the flow through of inventory recorded at
fair value. By the end of the first quarter, the flow through of
inventory recorded at fair value is expected to be fully recognized
in the income statement. Second, third and fourth quarter purchase
accounting is expected to be approximately $4 million pre-tax in
each period due to the depreciation and amortization of certain
other assets.
-- Excluding the impact of purchase accounting, the Stride Rite
acquisition is expected to be accretive to earnings per share in
2008 as Stride Rite's operating earnings contribution including
synergies is expected to exceed the incremental interest expense.
Due to the impact of purchase accounting, the Stride Rite
acquisition is not expected to be earnings per share accretive in
2008 on a GAAP basis.
-- Excluding the impact of purchase accounting, the 2006 - 2009
compound annual growth rate in operating profit is expected to be in
the mid-to-upper teens, assuming a revenue growth rate in the
low-to-mid single-digits in 2008 and 2009. Similarly, including the
impact of purchase accounting, the 2006 - 2009 compound annual
growth rate in operating profit is expected to be in the low-teens
on a GAAP basis.
-- Capital expenditures are expected to total approximately $175
million and $150 million for 2007 and 2008, respectively.
About Collective Brands and Forward Looking Statements
Collective Brands, Inc. is a consumer-centric global footwear,
accessories and lifestyle brand company, reaching customers through
multiple price points and selling channels. Collective Brands, Inc. is the
holding company of Payless ShoeSource, Stride Rite, and Collective
Licensing International. Payless ShoeSource is the largest specialty family
footwear retailer in the Western Hemisphere. It is dedicated to
democratizing fashion and design in footwear and accessories and inspiring
fun, fashion possibilities for the family at a great value. Stride Rite
markets the leading brand of high-quality children's shoes in the United
States. Stride Rite also markets products for children and adults under
well-known brand names, including Keds, Robeez, Saucony, and Sperry
Top-Sider. Collective Licensing International is a leading youth lifestyle
marketing and global licensing business. Information about, and links for
shopping at, each of Collective Brands' units can be found at
http://www.collectivebrands.com.
This release contains one or more forward-looking statements. Forward-
looking statements are identified by words such as "will," "expected," and
other similar words. A variety of known and unknown risks and uncertainties
could cause actual results to differ materially from the anticipated
results which include, but are not limited to: the risk that the Stride
Rite business will not be integrated successfully or will take longer than
anticipated; the risk that the expected cost savings will not be achieved
or unexpected costs will be incurred; the risk that customers will not be
retained or that disruptions from the transaction will harm relationships
with customers, employees and suppliers; costs and other expenditures in
excess of those projected for environmental investigation and remediation
or other legal proceedings; changes in accounting treatment of any
financings; changes in consumer spending patterns; changes in intellectual
property, customs and/or tax laws; litigation, including intellectual
property and employment litigation; and the ability to hire and retain
associates. In addition, other risks and uncertainties not presently known
to us or that we consider immaterial could affect the accuracy of our
forward-looking statements. Please refer to the Collective Brands 2006
Annual Report on Form 10-K for the fiscal year 2006 and the Form 10-Q for
the second quarter for more information on these and other risk factors
that could cause actual results to differ. In addition, refer to the
Payless ShoeSource Annual Report on Form 10-K for a definition of
same-store (a.k.a. comparable store) sales. Comparable store sales exclude
sales from Latin America. Collective Brands does not undertake any
obligation to release publicly any revisions to such forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events. The unaudited condensed
consolidated statements of earnings, balance sheets and statements of cash
flows have been prepared in accordance with the company's accounting
policies as described in the company's 2006 Form 10-K, on file with the
Securities and Exchange Commission, are subject to reclassification and
should be read in conjunction with the 2006 Annual Report to Shareowners.
In the opinion of management, this information is fairly presented and all
adjustments (consisting only of normal recurring adjustments) necessary for
a fair statement of the results for the interim periods have been included.
* Non-GAAP Financial Measures
This release contains certain non-GAAP financial measures. In
particular, Collective Brands provides historic and anticipated net
income, diluted earnings per share, gross margin, operating income
and annual effective income tax rates excluding the impact of
purchase accounting, which are non-GAAP financial measures. These
measures are included as a complement to results provided in
accordance with GAAP because management believes these non-GAAP
financial measures help understand underlying performance trends in
Collective Brands business and provide useful information to both
management and investors by excluding certain items that are not
indicative of Collective Brands core operating results. These
measures should be considered in addition to results prepared in
accordance with GAAP, but should not be considered a substitute for
or superior to GAAP results. Please see reconciliations of non-GAAP
financial measures for the quarter and year-to-date.
COLLECTIVE BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(Dollars and shares in
millions, except
per share data) 13 Weeks Ended 39 Weeks Ended
November 3, October 28, November 3, October 28,
2007 2006 2007 2006
Net sales $830.7 $703.4 $2,258.6 $2,104.0
Cost of sales 563.5 462.1 1,481.9 1,362.9
Gross margin 267.2 241.3 776.7 741.1
Selling, general and
administrative expenses 239.6 196.8 650.5 589.4
Restructuring charges (0.1) 0.4 0.2 0.7
Operating profit from
continuing operations 27.7 44.1 126.0 151.0
Interest expense 18.1 4.8 27.7 14.2
Interest income (2.9) (5.6) (11.6) (15.6)
Earnings from continuing
operations before income
taxes and minority
interest 12.5 44.9 109.9 152.4
(Benefit)/provision for
income taxes (15.1) 13.3 16.4 50.1
Earnings from continuing
operations before
minority interest 27.6 31.6 93.5 102.3
Minority interest, net
of income taxes (2.0) (1.0) (4.2) (1.9)
Net earnings from
continuing operations 25.6 30.6 89.3 100.4
Loss from discontinued
operations, net of
income taxes and
minority interest (0.1) (1.7) - (3.0)
Net earnings $25.5 $28.9 $89.3 $97.4
Basic earnings per share:
Earnings from
continuing operations $0.40 $0.47 $1.38 $1.52
Loss from discontinued
operations - (0.03) - (0.05)
Basic earnings per share: $0.40 $0.44 $1.38 $1.47
Diluted earnings per share
Earnings from
continuing operations $0.39 $0.46 $1.36 $1.49
Loss from discontinued
operations - (0.03) - (0.04)
Diluted earnings per
share $0.39 $0.43 $1.36 $1.45
Basic weighted average
shares outstanding 64.6 65.4 64.6 66.2
Diluted weighted average
shares outstanding 65.3 66.4 65.7 67.2
COLLECTIVE BRANDS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
NOVEMBER 3, OCTOBER 28, FEBRUARY 3,
(dollars in millions) 2007 2006 2007
ASSETS:
Current assets:
Cash and cash equivalents $301.3 $389.0 $371.4
Short-term investments - 83.4 90.0
Restricted cash - 2.0 2.0
Receivables, net 93.6 15.8 14.8
Inventories 476.1 349.2 361.9
Current deferred income taxes 15.1 18.0 15.6
Prepaid expenses 94.9 41.3 46.5
Other current assets 14.9 3.2 3.3
Current assets of discontinued
operations 0.8 1.4 1.1
Total current assets 996.7 903.3 906.6
Property and Equipment:
Land 10.8 7.4 6.6
Property, buildings and
equipment 1,422.6 1,241.1 1,245.1
Accumulated depreciation and
amortization (892.4) (843.7) (830.5)
Property and equipment, net 541.0 404.8 421.2
Intangible assets, net 564.8 40.1 39.6
Goodwill 314.6 5.9 5.9
Deferred income taxes 1.4 31.1 37.7
Other assets 43.3 19.7 16.4
TOTAL ASSETS $2,461.8 $1,404.9 $1,427.4
LIABILITIES AND EQUITY:
Current liabilities:
Current maturities of
long-term debt $7.5 $0.9 $0.4
Notes payable - 2.0 2.0
Accounts payable 159.3 166.2 185.6
Accrued expenses 214.4 204.1 190.2
Current liabilities of
discontinued operations 1.5 2.1 2.1
Total current liabilities 382.7 375.3 380.3
Long-term debt 918.6 201.7 201.7
Other liabilities 221.3 118.2 132.6
Minority interest 13.5 10.5 12.7
Commitments and contingencies
Deferred income taxes 132.0 - -
Total shareowners' equity 793.7 699.2 700.1
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY $2,461.8 $1,404.9 $1,427.4
COLLECTIVE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
39 Weeks Ended Year ended
November 3, October 28, February 3,
(dollars in millions) 2007 2006 2007
OPERATING ACTIVITIES:
Net earnings $89.3 $97.4 $122.0
Loss from discontinued
operations, net of income
taxes and minority interest - 3.0 3.4
Net earnings from continuing
operations 89.3 100.4 125.4
Adjustments for non-cash items
included in net earnings:
Loss on impairment and
disposal of assets 6.1 7.2 10.3
Depreciation and amortization 81.4 67.5 89.6
Provision for losses on
accounts receivable 0.7 - -
Share-based compensation
expense 10.7 8.3 12.2
Deferred income taxes (9.3) 4.5 9.1
Minority interest, net of
income taxes 4.2 1.9 4.6
Income tax benefit from
share-based compensation 2.6 4.7 8.6
Excess tax benefits from
share-based compensation (2.4) (4.2) (8.0)
Accretion of investments (0.6) (2.2) (3.6)
Changes in working capital:
Receivables, net 22.5 1.8 2.5
Inventories 76.0 (16.2) (29.8)
Prepaid expenses and other
current assets (33.1) (5.9) (11.5)
Accounts payable (76.7) (4.9) 15.6
Accrued expenses (16.5) 38.6 5.7
Other assets and liabilities, net 26.6 (1.5) 3.0
Net cash used in discontinued
operations (0.3) (3.9) (4.0)
Cash flow provided by operating
activities 181.2 196.1 229.7
INVESTING ACTIVITIES:
Capital expenditures (128.0) (89.6) (118.6)
Restricted Cash 2.0 - -
Proceeds from the sale of property
and equipment 2.9 3.2 4.6
Intangible asset additions - (15.1) (15.5)
Purchases of investments (6.1) (160.7) (215.6)
Sales and maturities of
investments 96.7 138.5 188.2
Acquisition of business, net of
cash acquired (876.9) - -
Cash flow used in investing
activities (909.4) (123.7) (156.9)
FINANCING ACTIVITIES:
Repayment of notes payable (2.0) - -
Issuance of debt 725.0 - -
Repayment of debt (51.5) (2.2) (2.8)
Payment of deferred financing
costs (8.1) (0.2) (0.2)
Issuances of common stock 8.3 27.7 47.1
Purchases of common stock (21.2) (91.6) (129.3)
Excess tax benefits from share-
based compensation 2.4 4.2 8.0
Contributions by minority owners - 1.2 -
Distribution to minority owners (2.4) (1.0) (1.5)
Net cash provided by discontinued
operations - - 1.2
Cash flow provided by (used in)
financing activities 650.5 (61.9) (77.5)
Effect of exchange rate changes
on cash 7.6 0.3 (2.1)
(Decrease) increase in cash and
cash equivalents (70.1) 10.8 (6.8)
Cash and cash equivalents,
beginning of year 371.4 378.2 378.2
Cash and cash equivalents,
end of period $301.3 $389.0 $371.4
COLLECTIVE BRANDS, INC.
RECONCILIATION OF GAAP TO NON-GAAP CONDENSED CONSOLIDATED STATEMENT OF
EARNINGS (UNAUDITED)
FOR THE THIRTEEN WEEKS ENDED NOVEMBER 3, 2007
(Dollars and shares in millions,
except per share data)
As Reported
(GAAP Basis) Adjustments Non-GAAP Basis
Net sales $830.7 $- $830.7
Cost of sales 563.5 (28.6) (a) 534.9
Gross margin 267.2 28.6 295.8
Selling, general and
administrative expenses 239.6 - 239.6
Restructuring charges (0.1) - (0.1)
Operating profit from continuing
operations 27.7 28.6 56.3
Interest expense 18.1 - 18.1
Interest income (2.9) - (2.9)
Earnings from continuing operations
before income taxes and minority
interest 12.5 28.6 41.1
(Benefit) provision for income
taxes (15.1) 20.8 (b) 5.7
Earnings from continuing
operations before minority
interest 27.6 7.8 35.4
Minority interest, net of income
taxes (2.0) - (2.0)
Net earnings from continuing
operations 25.6 7.8 33.4
Loss from discontinued operations,
net of income taxes and minority
interest (0.1) - (0.1)
Net earnings $25.5 $7.8 $33.3
Basic earnings per share:
Earnings from continuing
operations $0.40 $0.12 $0.52
Loss from discontinued
operations - - -
Basic earnings per share: $0.40 $0.12 $0.52
Diluted earnings per share
Earnings from continuing
operations $0.39 $0.12 $0.51
Loss from discontinued
operations - - -
Diluted earnings per share $0.39 $0.12 $0.51
Basic weighted average shares
outstanding 64.6 64.6 64.6
Diluted weighted average shares
outstanding 65.3 65.3 65.3
Notes to adjustments:
(a) Represents the flow through of inventory recorded at fair value ($25.0
pre-tax), plus incremental depreciation and amortization related to
certain other assets ($3.6 pre-tax).
(b) Impact on GAAP income tax provision caused by inclusion of forecasted
2007 purchase accounting expenses in the calculation of the effective
income tax rate, as well as the inclusion of third quarter purchase
accounting in the calculation of the year-to-date income tax
provision.
COLLECTIVE BRANDS, INC.
RECONCILIATION OF GAAP TO NON-GAAP CONDENSED CONSOLIDATED STATEMENT OF
EARNINGS (UNAUDITED)
FOR THE THIRTY-NINE WEEKS ENDED NOVEMBER 3, 2007
(Dollars and shares in millions,
except per share data)
As Reported
(GAAP Basis) Adjustments Non-GAAP Basis
Net sales $2,258.6 $- $2,258.6
Cost of sales 1,481.9 (28.6) (a) 1,453.3
Gross margin 776.7 28.6 805.3
Selling, general and
administrative expenses 650.5 - 650.5
Restructuring charges 0.2 - 0.2
Operating profit from continuing
operations 126.0 28.6 154.6
Interest expense 27.7 - 27.7
Interest income (11.6) - (11.6)
Earnings from continuing
operations before income taxes
and minority interest 109.9 28.6 138.5
Provision for income taxes 16.4 20.8 (b) 37.2
Earnings from continuing
operations before minority
interest 93.5 7.8 101.3
Minority interest, net of income
taxes (4.2) - (4.2)
Net earnings from continuing
operations 89.3 7.8 97.1
Loss from discontinued operations,
net of income taxes and minority
interest - - -
Net earnings $89.3 $7.8 $97.1
Basic earnings per share:
Earnings from continuing
operations $1.38 $0.12 $1.51
Loss from discontinued
operations - - -
Basic earnings per share: $1.38 $0.12 $1.51
Diluted earnings per share
Earnings from continuing
operations $1.36 $0.12 $1.48
Loss from discontinued
operations - - -
Diluted earnings per share $1.36 $0.12 $1.48
Basic weighted average shares
outstanding 64.6 64.6 64.6
Diluted weighted average shares
outstanding 65.7 65.7 65.7
Notes to adjustments:
(a) Represents the flow through of inventory recorded at fair value ($25.0
pre-tax), plus incremental depreciation and amortization related to
certain other assets ($3.6 pre-tax).
(b) Impact on GAAP income tax provision caused by inclusion of forecasted
2007 purchase accounting expenses in the calculation of the effective
income tax rate, as well as the inclusion of third quarter purchase
accounting in the calculation of the year-to-date income tax
provision.
SOURCE Collective Brands, Inc.
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Related links:
http://www.paylessinfo.com/
CONTACT:
James Grant, +1-785-559-5321, for Collective
Brands, Inc.
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