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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 29, 2003
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 1-4404
THE STRIDE RITE CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-1399290
----------------- --------------
(State or other jurisdiction) (I.R.S. Employer Identified No.)
191 Spring Street, Lexington, Massachusetts 02421
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617)824-6000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- -----------------------
Common stock, $.25 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( ) - Indicate by check mark whether the registrant is an
accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes(X) No ( )
As of October 3, 2003, 39,278,431 shares of the Registrant's common stock, $.25
par value, and the accompanying Preferred Stock Purchase Rights were
outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
August 29, August 30,
2003 November 29, 2002
(Unaudited) 2002 (Unaudited)
-------------- --------------- -------------
Assets
Current Assets:
Cash and cash
equivalents $ 96,195 $ 73,105 $ 73,979
Accounts and notes
receivable, net 69,590 48,075 70,436
Inventories 68,557 98,213 77,531
Deferred income taxes 20,222 20,588 23,759
Other current assets 5,330 13,613 4,169
-------- -------- --------
Total current assets 259,894 253,594 249,874
Property and equipment, net 62,552 68,291 70,539
Other assets 15,022 12,914 13,337
-------- -------- --------
Total assets $337,468 $334,799 $333,750
======== ======== ========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
2
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in Thousands)
August 29, August 30,
2003 November 29, 2002
(Unaudited) 2002 (Unaudited)
--------------- -------------- --------------
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 10,132 $ 31,513 $ 13,957
Income taxes payable 20,458 17,407 16,412
Accrued expenses and other
liabilities 21,869 20,630 25,892
--------- --------- ---------
Total current liabilities 52,459 69,550 56,261
Deferred income taxes 775 531 5,162
Pension obligation 11,677 11,677 -
Stockholders' Equity:
Preferred stock, $1 par value
Shares authorized - 1,000,000
Shares issued - None - - -
Common stock, $.25 par value
Share authorized - 135,000,000
Shares issued - 56,946,544 14,237 14,237 14,237
Capital in excess of par
value 16,803 18,043 17,674
Retained earnings 418,914 398,368 402,383
Accumulated other
comprehensive loss (6,961) (7,246) -
Less cost of 17,547,650
shares of common stock
held in treasury
(17,504,140 on November
29, 2002 and 16,390,253
on August 30, 2002) (170,436) (170,361) (161,967)
----------- -------- ---------
Total stockholders' equity 272,557 253,041 272,327
---------- -------- ---------
Total liabilities and
stockholders' equity $337,468 $334,799 $333,750
========== ======== =========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the periods ended August 29, 2003 and August 30, 2002
(In Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
------------------ -----------------
August 29, August 30, August 29, August 30,
2003 2002 2003 2002
------------ ------------ ------------- -----------
Net sales $139,747 $136,989 $446,355 $434,203
Cost of sales 87,111 86,203 274,700 273,212
Selling and
administrative expenses 42,592 41,667 130,970 122,757
--------- --------- --------- ---------
Operating income 10,044 9,119 40,685 38,234
Other income (expense):
Investment income 201 294 1,807 1,020
Interest expense (75) (71) (247) (607)
Other, net (43) (62) (207) (315)
---------- ---------- ---------- ----------
83 161 1,353 98
---------- ---------- ---------- ----------
Income before income
taxes 10,127 9,280 42,038 38,332
Provision for income
taxes 3,714 2,239 15,585 12,179
--------- --------- --------- ---------
Net income $ 6,413 $ 7,041 $ 26,453 $ 26,153
========= ========= ========= =========
Net income per common
share:
Diluted $ .16 $ .17 $ .66 $ .62
========= ========= ========= =========
Basic $ .16 $ .17 $ .67 $ .63
========= ========= ========= =========
Dividends per common
share $ .05 $ .05 $ .15 $ .15
========= ========= ========= =========
Average common shares
used in per share
computations:
Diluted 40,243 41,657 39,992 42,137
========= ========= ========= =========
Basic 39,456 41,308 39,415 41,746
========= ========= ========= =========
Theaccompanying notes are an integral part of the
condensed consolidated financial statements.
4
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended August 29, 2003 and August 30, 2002
(Dollars in Thousands)
2003 2002
------------ ------------
Cash provided from (used for):
Operations:
Net income $ 26,453 $ 26,153
Adjustments to reconcile to net cash
provided from operations:
Depreciation and amortization 10,438 11,849
Deferred income taxes 610 790
Sales of trading securities 6 250
Gain related to long-term investments (1,071) -
Loss on disposals of property and equipment 555 631
Increase in other long-term assets (2,108) (1,114)
Changes in:
Accounts and notes receivable (21,515) (25,697)
Inventories 29,656 34,950
Other current assets 9,030 10,111
Other current liabilities (15,436) (12,221)
Contribution to defined benefit pension plan (2,000) -
---------- ---------
Net cash provided from operations 34,618 45,702
--------- ---------
Investments:
Additions to property and equipment (5,254) (10,576)
Proceeds from long-term investments 1,071 -
--------- ---------
Net cash used for investments (4,183) (10,576)
---------- ----------
Financing:
Short-term borrowings - (26,000)
Proceeds from sale of stock under stock plans 2,342 1,974
Cash dividends paid (5,914) (6,296)
Repurchase of common stock (3,773) (11,984)
---------- ----------
Net cash used for financing (7,345) (42,306)
---------- ----------
Net increase (decrease) in cash and cash
equivalents 23,090 (7,180)
Cash and cash equivalents at beginning of the
period 73,105 81,159
--------- ---------
Cash and cash equivalents at end of the period $96,195 $73,979
========= =========
Theaccompanying notes are an integral part of the
condensed consolidated financial statements.
5
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
The financial information included in this Form 10-Q of The Stride Rite
Corporation (the "Company") for the periods ended August 29, 2003 and August 30,
2002 is unaudited; however, such information includes all adjustments (including
all normal recurring adjustments) which, in the opinion of management, are
considered necessary for a fair presentation of the consolidated results for
those periods. Certain reclassifications have been made to the prior period
financial statements to conform to the fiscal 2003 presentation. The results of
operations for the periods ended August 29, 2003 and August 30, 2002 are not
necessarily indicative of the results of operations that may be expected for the
complete fiscal year. It is suggested that these unaudited condensed
consolidated financial statements be read in conjunction with the audited
consolidated financial statements for the year ended November 29, 2002, which
are contained in the Annual Report on 10-K of the Company as previously filed
with the SEC.
The Company's preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
respective periods. The most significant estimates included in these financial
statements include valuation allowances and reserves for accounts receivable,
inventory and income taxes. Actual results could differ from those estimates.
Stock Purchase and Option Plans
During the first quarter of fiscal 2003, the Company adopted the disclosure
provisions of Financial Accounting Standards Board (FASB)- Statement of
Financial Accounting Standard (SFAS) No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure" (SFAS No. 148). SFAS No. 148 amends
SFAS No. 123, "Accounting for Stock-Based Compensation" to provide two
additional alternative transition methods if a company voluntarily decides to
change its method of accounting for stock-based employee compensation to the
fair-value method. SFAS No. 148 also amends the disclosure requirements of SFAS
No. 123 by requiring that companies make quarterly disclosures regarding the pro
forma effects of using the fair-value method of accounting for stock-based
compensation, effective for interim periods beginning after December 15, 2002.
At August 29, 2003, the Company has three stock-based compensation plans,
which are described more fully in Note 10 to the Company's consolidated
financial statements for the fiscal year ended November 29, 2002 as contained in
Form 10-K. The Company accounts for these plans under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. The following table provides the effect
on net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, to stock-based compensation. 6
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
------------------------- -------------------------
August 29, August 30, August 29, August 30,
2003 2002 2003 2002
------------ ----------- ------------ ------------
Net income, as reported $ 6,413 $ 7,041 $26,453 $26,153
Add: Stock based employee
compensation expense
included in net income,
net of related tax effects
21 29 30 79
Deduct: Total stock based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects
(361) (398) (1,292) (1,144)
---------- ---------- --------- ---------
Pro forma net income $ 6,073 $ 6,672 $25,191 $25,088
========= ========= ======== ========
Earnings per share:
Basic - as reported $ .16 $ .17 $ .67 $ .63
========= ========= ======== ========
Basic - pro forma $ .15 $ .16 $ .64 $ .60
========= ========= ======== ========
Diluted - as reported $ .16 $ .17 $ .66 $ .62
========= ========= ======== ========
Diluted - pro forma $ .15 $ .16 $ .63 $ .60
========= ========= ======== ========
7
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Earnings Per Share
Basic earnings per common share excludes dilution and is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted earnings per common
share reflects the potential dilution that could occur if options to issue
common stock were exercised.
The following is a reconciliation of the number of shares used in the basic
and diluted earnings per share computations (amounts in thousands, except per
share data):
Three Months Nine Months
Ended Ended
----------------------- ----------------------
Aug. 29, Aug. 30, Aug. 29, Aug. 30,
2003 2002 2003 2002
----------- ---------- ---------- ----------
Net income $ 6,413 $ 7,041 $26,453 $26,153
Calculation of shares:
Weighted average common
shares outstanding (basic) 39,456 41,308 39,415 41,746
Dilutive effect of stock
options 787 349 577 391
------- ------- ------- -------
Weighted average common
shares outstanding (diluted) 40,243 41,657 39,992 42,137
======= ======= ======= =======
Net income per common share
(basic) $ .16 $ .17 $ .67 $ .63
===== ===== ===== =====
Net income per common share
(diluted) $ .16 $ .17 $ .66 $ .62
===== ===== ===== =====
The following options were not included in the computation of diluted
earnings per share because the options' exercise prices were greater than the
average market price of the common shares:
First Nine
Third Quarter Months
------------------- ------------------
2003 2002 2003 2002
-------- --------- -------- --------
Options to purchase shares of common
stock (in thousands) 507 1,390 540 1,435
8
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Comprehensive Income
Comprehensive income is as follows:
Three Months Nine Months
Ended Ended
----------------------- ----------------------
Aug. 29, Aug. 30, Aug. 29, Aug. 30,
2003 2002 2003 2002
----------- ---------- ---------- ----------
(In thousands)
Net income $6,413 $7,041 $26,453 $26,153
Other comprehensive income
(loss):
Foreign currency translation
adjustments (191) - 285 -
----------- ---------- ---------- ---------
Total comprehensive income $6,222 $7,041 $26,738 $26,153
=========== ========== ========== =========
Accumulated other comprehensive loss is as follows:
August 29, November 29, August 30,
2003 2002 2002
-------------- ---------------- ------------
(In thousands)
Foreign currency translation
adjustments $ (240) $ (525) -
Minimum pension liability
adjustments, net of taxes (6,721) (6,721) -
-------- ------- -----
Accumulated other
comprehensive loss $(6,961) $(7,246) -
======== ======== =====
9
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Intangible Assets and Goodwill
The Company adopted Statement of Financial Accounting Standard No 142,
"Goodwill and Other Intangible Assets", (SFAS 142) effective November 30, 2002.
In accordance with SFAS 142, goodwill and intangible assets with indefinite
useful lives will no longer be amortized, but instead will be measured for
impairment at least annually, or when events indicate that impairment exists.
Intangible assets that are determined to have finite useful lives will continue
to be amortized over their useful lives.
As required by SFAS 142, the Company performed impairment tests on goodwill
and other indefinitely lived intangible assets, which consisted only of certain
trademarks, as of November 30, 2002. As a result of this testing, the Company
does not believe that the carrying value of goodwill or any indefinitely lived
intangible assets have been impaired.
The following table summarizes the Company's intangible assets and goodwill
balances:
Intangible Assets Not Subject to Amortization
------------------------------------------------
Trademark
Goodwill Rights Total
- -------------------------------------------------------------------------------
August 29, 2003 (In Thousands)
Gross carrying amount $3,073 $2,980 $6,053
Accumulated amortization $(2,165) $(1,290) $(3,455)
November 29, 2002
Gross carrying amount $3,048 $2,980 $6,028
Accumulated amortization $(2,165) $(1,290) $(3,455)
August 30, 2002
Gross carrying amount $2,748 $2,980 $5,728
Accumulated amortization $(2,131) $(1,255) $(3,386)
Amortization expense, which is included in selling and administrative
expenses, was $0 and $64,000 for the three-month periods and $0 and $199,000 for
the nine-month periods ended August 29, 2003 and August 30, 2002, respectively.
The estimated amortization expense for intangible assets for future periods is
zero, because the Company does not have any intangible assets with finite useful
lives.
The results for the three-month and nine-month periods ended August 30,
2002 do not reflect the provisions of SFAS 142. Net income for the three-month
and nine-month periods was $7,041 and $26,153, respectively. Had the Company
adopted SFAS 142 on December 1, 2001, for the three-month and nine-month periods
ended August 30, 2002, the Company would have recorded net income of $7,090 and
$26,289 as a result of not recording amortization. Basic and diluted earnings
per share would not have changed.
10
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Guarantees
The Company adopted Financial Accounting Standards Board Interpretation No.
45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34 (FIN
45) during the first quarter of fiscal 2003. This interpretation clarifies the
requirements of FASB Statement No. 5, "Accounting for Contingencies" relating to
the guarantor's accounting for, and disclosure of, the issuance of certain types
of guarantees. The provisions for initial recognition and measurement are
effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002.
Prior to December 31, 2002, the Company entered into a guarantee of the
lease payment of a storefront located in New York, New York for a third party.
The storefront is used to support the marketing of one of the Company's product
lines. The guarantee, which runs for five years, could require the Company to
make annual payments in the amount of $50,000. The Company has not recorded any
liability related to this guarantee because the Company does not believe that it
is probable that any payments will be required.
11
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
- --------
The following discusses The Stride Rite Corporation's results of operations
and liquidity and capital resources. The discussion, including known trends and
uncertainties identified by management, should be read in conjunction with the
condensed consolidated financial statements and related notes.
This Form 10-Q contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934. The Company cautions investors that any
forward-looking statements presented in this report and presented elsewhere by
management from time to time are based on management's beliefs and assumptions
made by, and information currently available to, management. When used, the
words "anticipate", "believe", "expect", "intend", "may", "might", "plan",
"estimate", "project", "should", "will be", "will result" and similar
expressions which do not relate solely to historical matters are intended to
identify forward-looking statements. Such statements are subject to risks,
uncertainties and assumptions and are not guarantees of future performance,
which may be affected by known and unknown risks, trends, uncertainties and
factors that are beyond our control. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
projected. The Company expressly disclaims any responsibility to update
forward-looking statements. Accordingly, past results and trends should not be
used by investors to anticipate future results or trends.
Risks and uncertainties that may affect future performance are detailed
from time to time in reports filed by the Company with the SEC, including Forms
10-Q and 10-K, and include, among others, the following: international, national
and local general economic and market conditions; the size and growth of the
overall footwear and general retail market; intense competition among designers,
marketers, distributors and sellers of footwear; demographic changes; changes in
consumer fashion trends that may shift to footwear styling not currently
included in our product lines; popularity of particular designs and categories
of products; seasonal and geographic demand for the Company's products;
difficulties in anticipating or forecasting changes in consumer preferences;
delays in the opening of new stores; difficulties in implementing, operating and
maintaining the Company's complex information systems and controls, including,
without limitation, the systems related to the Company's retail stores, systems
related to demand and supply planning, and inventory control; interruptions in
data and communications systems; fluctuations and difficulty in forecasting
operating results; the ability of the Company to sustain, manage or forecast its
growth and inventories; the size, timing and mix of purchases of the Company's
products; the underperformance or delay of new products; the possible failure to
retain the Tommy Hilfiger footwear license; the ability to secure and protect
trademarks, patents and other intellectual property; performance and reliability
of products; customer service; adverse publicity; the loss of significant
suppliers or customers, such as department stores and specialty retailers, the
12
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
consolidation or restructuring of such customers, including large department
stores, which may result in unexpected store closings; dependence on China
manufacturing; the ability to secure raw materials; delays and increased costs
of freight and transportation to meet delivery deadlines; the impact on product
development or manufacturing as a result of health risks such as SARS (Severe
Acute Respiratory Syndrome); changes in business strategy or development plans;
general risks associated with doing business outside the United States,
including, without limitation, import duties, tariffs, quotas and political and
economic instability; acts of war or terrorism; changes in government
regulations; liability and other claims asserted against the Company; the
ability to attract and retain qualified personnel; and other factors referenced
or incorporated by reference in this report and other reports.
The risks included here are not exhaustive. Other sections of this report
may include additional factors which could adversely affect the Company's
business and financial performance. Moreover, the Company operates in a very
competitive and rapidly changing environment. New risk factors emerge from time
to time and it is not possible for management to predict all such risk factors,
nor can it assess the impact of all such risk factors on the Company's business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors should not place
undue reliance on forward-looking statements as a prediction of actual results.
The Company discussed a number of significant trends and specific factors
affecting the footwear industry in general and the business in particular in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", Item 7 of the Company's Annual Report on Form 10-K for the fiscal
year 2002. Those trends and factors continue to be relevant to the Company's
performance and financial condition.
Critical Accounting Estimates
- -----------------------------
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make judgments, assumptions and estimates that affect the
amounts reported. Please refer to the discussion of critical accounting
estimates in the Company's Annual Report on Form 10--K for the fiscal year ended
November 29, 2002 for additional information.
Contingencies
- -------------
The sale of Tommy Hilfiger branded footwear is a significant portion of the
Company's business. The Tommy Hilfiger footwear sales are contingent on the
Company's licensing agreement with Tommy Hilfiger Licensing, Inc. During June
2003 the Company and Tommy Hilfiger Licensing, Inc. agreed to an extension of
the footwear licensing agreement for the United States through March 2007. The
licensing agreement was due to expire in March 2004.
13
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The following table summarizes the Company's performance for the third
quarter and first nine months of fiscal 2003 as compared to the results for the
same periods in fiscal 2002:
Increase (Decrease) Percent vs. 2002 results:
- ---------------------------------------------
Third Quarter Nine Months
------------- -----------
Net sales 2.0% 2.8%
Gross profit 3.6% 6.6%
Selling and administrative expenses 2.2% 6.7%
Operating income 10.1% 6.4%
Income before income taxes 9.1% 9.7%
Net income (8.9%) 1.1%
Operating Ratios as a Percent to Net Sales:
- -------------------------------------------
Third Quarter Nine Months
---------------- ------------------
2003 2002 2003 2002
------- ------- ------- -------
Gross profit 37.7% 37.1% 38.5% 37.1%
Selling and administrative expenses 30.5% 30.4% 29.3% 28.3%
Operating income 7.2% 6.7% 9.1% 8.8%
Income before income taxes 7.2% 6.8% 9.4% 8.8%
Net income 4.6% 5.1% 5.9% 6.0%
Third Quarter 2003 Compared to the Third Quarter 2002
- -----------------------------------------------------
Net Sales
- ---------
During the third quarter of fiscal 2003, consolidated net sales increased
$2.8 million to $139.7 million, or 2.0% above the sales level realized in the
third quarter of fiscal 2002. Wholesale net revenues decreased 3.3% for the
third quarter of 2003, while overall retail sales were up 16.6% when compared to
the same period in the prior year. Unit shipments of current line merchandise
for the wholesale brands during the third quarter were 0.5% lower than the
comparable period in fiscal 2002. The Company's average first quality selling
price was lower for the third quarter of 2003, decreasing 1.8% from the same
period last year.
First quality wholesale gross sales for the third quarter decreased by $2.2
million, or 2.1% lower than the wholesale gross sales level achieved in the same
quarter in the prior year. This decrease was primarily the result of lower sales
to our licensed partners and independent accounts, along with declines to
certain department stores. As compared to last year's third quarter, the Company
decreased its sale of obsolete or excess product. Retail store sales were up
significantly, $5.6 million versus the sales levels recorded in the third
quarter of fiscal 2002.
14
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Sales of the Stride Rite Children's Group during the third quarter of
fiscal 2003 were $67.9 million, 1.1% higher than the same period in the prior
fiscal year. Sales to independent retailers decreased 13.9% during the third
quarter as compared to the same quarter last year. This decrease reflects a
trend of consistent sales declines in the Children's Group's wholesale sales.
These decreases are principally attributable to retailer and general economic
weakness, with the greatest declines in licensed dealers and trade accounts.
Sales levels for the Children's Group's retail stores were up significantly,
increasing 16.6%, when comparing the third quarters of fiscal years 2003 and
2002. Sales at comparable Children's Group retail stores (stores open for 52
weeks in each fiscal year) increased 7.9% for the third quarter of fiscal 2003.
Driving the increase in the comparable stores category was a greater proportion
of newer stores that are now included in the computation. Newer stores generally
grow their sales at a faster rate than more mature retail locations. At the end
of the third quarter of fiscal 2003, the Stride Rite Children's Group operated
230 stores. This is an increase of 4 stores, or 1.8% from the end of the same
period in the prior year. Current plans call for the opening of approximately
eleven stores during the 2003 fiscal year. Five children's shoe stores and one
outlet store have been opened during the first nine months of fiscal 2003. The
Company has also closed five stores for a net new store increase of one. The
rate of new store openings has been slowed this year to concentrate our efforts
on optimizing business performance in our new and existing stores.
Sales of the Keds division were $30.6 million during the third quarter of
fiscal 2003, a decrease of 4.1% as compared to the results of the same period in
the prior year. This quarterly decrease in 2003 was primarily the result of a
sales shortfall in the women's basic product line compared to the prior year.
Sales of Tommy Hilfiger men's and women's footwear products during the
third quarter of the fiscal year were $26.5 million, an increase of 6.3% from
the third quarter of 2002. This increase was primarily due to the expansion of
sales to independent and shoe chain accounts. Sales increases were recorded in
both the men's and women's product categories. The PRO-Keds product line sales,
reported as part of Tommy Hilfiger Footwear's results, were below last year,
although their sales are currently not a significant part of the Company's
overall sales.
Sales of Sperry Top-Sider products during the third quarter of fiscal 2003
were $11.4 million, an increase of 10.2% from the same quarter in the prior
year. The major contributors to the sales growth were strong shipments of men's
performance shoes, as well as increased sales of basic boat shoes. Sales of
women's products were also improved, with growth coming from the marine channel.
Sales of the Stride Rite International division during the third quarter of
fiscal 2003 were $6.5 million, relatively flat versus last year's third quarter
as improved sales in Canada offset continued sales declines in South America.
15
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Gross Profit
- ------------
During the third quarter of fiscal 2003, the Company's gross profit of
$52.6 million increased $1.8 million or 3.6% above the amount recorded during
fiscal year 2002's third quarter. A lower level of first quality wholesale sales
reduced gross profit by $1.6 million. The effect of LIFO and inventory
capitalization reduced gross profit by an additional $0.6 million. These
declines were offset by $3.1 million of additional gross profit associated with
the higher level of retail sales as well as a $1.0 million improvement due to
less excess and obsolete inventory which resulted in lower closeout sales and
obsolescence costs. The gross profit rate for fiscal 2003's third quarter
improved 60 basis points to 37.7% as compared to the 37.1% rate achieved in the
prior year's third quarter. Lower inventory obsolescence costs, in addition to
the relative growth in company-owned retail store sales, which have a higher
gross profit margin, were the principal reasons for the higher gross profit rate
in the third quarter of 2003 as compared to the same period last year.
Operating Costs
- ---------------
During the third quarter of fiscal 2003, selling and administrative
expenses were $42.6 million, an increase of $0.9 million or 2.2% as compared to
the third quarter of fiscal 2002. As a percent of sales, operating costs were
30.5% in the third quarter of fiscal 2003 versus 30.4% in the third quarter of
fiscal 2002. A major factor causing the increase in operating costs was the $0.6
million increase in year-to-year retail store expenses, primarily related to the
large number of stores opened during the first nine months of the 2002 fiscal
year and the carryover of these added costs into fiscal 2003. This is a
continuation of the trend seen in the first and second quarters of fiscal 2003.
Pension expense in the third quarter increased $0.7 million versus the prior
year's third quarter.
Other Income (Expense)
- ----------------------
Other income (expense) increased pre-tax income by $0.1 million in the
third quarter of fiscal 2003. This compares to the increase in other income
(expense) of $0.2 million in the third quarter of fiscal 2002. Investment income
of $0.2 million decreased $0.1 million in the third quarter of fiscal 2003 as
compared to the same quarter last year. Higher average investments were not
sufficient to offset lower average interest rates. Interest expense remained
relatively flat in the third quarter of fiscal 2003 as compared to the same
period last year.
16
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Income Taxes
- ------------
The provision for income taxes increased $1.5 million in the third quarter
of fiscal 2003 as compared to last year's third quarter. The increase was mainly
due to the effect of a higher effective income tax rate of 36.7%, as compared to
24.1% in 2002. The fiscal 2002 effective income tax rate reflected a reduction
in previously established tax accruals, which were no longer needed. The
effective income tax rate for the remainder of the year is expected to
approximate 37%.
Net Income
- ----------
Net income for the third quarter of fiscal 2003 was $6.4 million, a
decrease of $0.6 million, or 8.9% as compared to the same period in the prior
fiscal year. The increase in both gross profit and operating income was not
sufficient to offset a higher provision for income taxes. The Company's return
on net sales of 4.6% in the third quarter of fiscal 2003 was below the 5.1%
return on net sales for the prior year's third quarter.
First Nine Months 2003 Compared to the First Nine Months 2002:
- -------------------------------------------------------------
Net Sales
- ---------
Net sales for the first nine months of fiscal 2003 increased $12.2 million
or 2.8% above the net sales level for the same period of fiscal 2002. Revenues
related to the Company's wholesale brands decreased $1.0 million or less than
1.0%. Overall retail sales increased 11.3% when compared to the same period in
the prior year. Unit shipments of current line merchandise for the wholesale
brands during the first nine months were 0.9% higher than during last year's
first nine months. The Company's average first quality selling price for the
first nine months of fiscal 2003, decreased by 3.8% compared to the same period
last year.
First quality wholesale gross sales for the first nine months decreased by
$7.7 million, or 2.4% below the wholesale gross sales level for the prior year's
first nine months. Closeout sales increased as compared to last year. The
increase in closeout sales, combined with fewer returns, were not sufficient to
offset the decrease in first quality sales, which resulted in the overall
decrease in wholesale net sales. Strong retail sales comparisons to last year,
increasing $10.7 million or 11.3% for the first nine months, contributed to the
overall $3.0 million increase in consolidated net sales.
17
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Sales of the Stride Rite Children's Group during the first nine months of
fiscal 2003 were $180.7 million, 2.3% higher than the same period in the prior
fiscal year. Sales to independent retailers decreased 9.9% in the first nine
months of fiscal 2003 compared to last year. Increased sales of both Munchkin
products and Tommy Hilfiger children's shoes were not sufficient to offset the
decrease in Stride Rite brand footwear. Sales levels of the Children's Group's
retail stores were up 11.3% for the first nine months of fiscal 2003 as compared
to the prior fiscal year. Sales at comparable Children's Group retail stores
(stores open for 52 weeks in each fiscal year) increased 4.4% for the first
three quarters of fiscal 2003. Strong comparable performances at many of the new
comparative stores were a major reason for this improvement.
Sales of the Keds division were $136.4 million for the first nine months of
fiscal 2003, a decrease of 2.3% versus the same period last year. This decline
was primarily the result of the disappointing performance of certain women's
products, particularly in the first half of fiscal 2003, which was adversely
affected by the cold spring, poor economy and a weak canvas market. This trend
continued into the third quarter of fiscal 2003. Somewhat offsetting these
decreases were closeout product sales, which were up versus last year's first
nine months.
Sales of Tommy Hilfiger men's and women's footwear products were $75.4
million for the first nine months of fiscal 2003, an increase of 9.7% versus
last year's first nine months. This increase was driven by strong sales in the
first and third quarters, which was positively impacted by the continued
expansion of retail channels.
Sales of Sperry Top-Sider products during the first nine months of fiscal
2003 were $44.3 million, an increase of 10.6% as compared to the first nine
months of fiscal 2002. Strong sales of performance oriented products, along with
the new collection of boat shoes and the continued increase in sales of women's
products, were the primary reasons for the sales gains for the first nine months
versus last year.
Sales of the Stride Rite International division during the first nine
months of fiscal 2003 were $18.3 million, a decrease of 10.4% versus the first
nine months of fiscal 2002. Continued weakness in the global economy,
particularly in South America, negatively impacted the nine-month results.
Gross Profit
- ------------
During the first nine months of fiscal 2003, the Company's gross profit of
$171.7 million increased by $10.7 million or 6.6% as compared to the amount
recorded during the first nine months of fiscal 2002. The gross profit rate for
the first nine months of fiscal 2003 improved 140 basis points to 38.5% as
compared to the 37.1% rate achieved in the prior year's first nine months.
18
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The principle reasons for the increase in year-to-year gross profit comparisons
were a reduction of excess inventory and obsolescence costs of $4.5 million due
to better inventory management combined with $6.5 million of additional gross
profit from retail store sales. The growing importance of the retail store
business continues to positively impact gross profit comparisons.
Operating Costs
- ---------------
During the first nine months of fiscal 2003, selling and administrative
expenses were $131.0 million, an increase of $8.2 million or 6.7% as compared to
the same period in the prior year. As a percent of sales, operating costs were
29.3% for the first nine months of 2003 and 28.3% for the first nine months of
fiscal 2002. Increased advertising costs of $2.3 million, higher retail store
expenses of $3.1 million and a $2.1 million increase in pension expense were the
primary reasons for the increase from the prior year.
Other Income (Expense)
- ----------------------
Other income (expense) increased pre-tax income by $1.4 million for the
first nine months of fiscal 2003. This compares favorably to the increase in
other income (expense) of $0.1 million for the same period of fiscal 2002.
Investment income of $1.8 million increased $0.8 million in the first nine
months of fiscal 2003 as compared to the same period of last year. The $750,000
gain on the sale of the Company's interest in the Thailand factory joint
venture, as well as a gain on a prior year investment, were the major reasons
for the increase versus last year. Higher average investments were unable to
offset lower average interest rates. Interest expense decreased $0.4 million in
the first nine months of fiscal 2003 as compared to the last year's first nine
months, principally due to the fact that there were no short-term borrowings
during the first nine months of fiscal 2003.
Income Taxes
- ------------
The provision for income taxes increased $3.4 million in the first nine
months of fiscal 2003 as compared to the same period last year. The increase in
the provision for income taxes was due to the combination of a higher effective
income tax rate being applied to an increase in income before income taxes. The
effective income tax rate for the first nine months of fiscal 2003 was 37.1%, as
compared to the 31.8% rate for the first nine months of fiscal 2002. The 2002
effective income tax rate reflected a reduction in previously established tax
accruals, which were no longer needed. The effective income tax rate for the
remainder of the year is expected to approximate 37%.
19
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net Income
- ----------
Net income for the first nine months of fiscal 2003 was $26.5 million, an
increase of $0.3 million, or 1.1% as compared to the same period in the prior
fiscal year. For the first nine months of the 2003 fiscal year, the increase in
gross profit resulting from the greater sales and higher gross profit percentage
was somewhat offset by both higher selling and administrative expenses and an
increased provision for income taxes. The Company's return on net sales of 5.9%
for the first nine months of fiscal 2003 was slightly lower than the 6.0% return
on net sales for the prior year's first nine months.
Liquidity and Capital Resources
- -------------------------------
At the end of the first nine months of fiscal 2003, the Company's balance
sheet had a current ratio (total current assets divided by total current
liabilities) of 5.0 to 1 with no debt. The cash and cash equivalents totaled
$96.2 million at August 29, 2003, an increase of $22.2 million from the total
cash and cash equivalents of $74.0 million at the end of the first nine months
of fiscal 2002. The Company has a $75 million revolving credit facility to fund
seasonal working capital needs, if required. No borrowings under this line of
credit were outstanding as of August 29, 2003 or August 30, 2002.
During the first nine months of fiscal 2003, $34.6 million of cash was
provided from operations. This positive cash flow amount was below the $45.7
million of cash provided from operations in the prior year's first nine months.
At August 29, 2003, accounts receivable and inventory levels totaled $138.1
million, a decrease of $9.8 million or 6.6% below the $148.0 million level at
August 30, 2002. Accounts receivable were slightly lower at the end of the first
nine months of fiscal 2003, down $0.8 million or 1.2% from the comparable 2002
level. Day's sales outstanding, which is a measure of the length of the
collection period, were 42 days at the end of the first nine months, a reduction
of 3 days from the same point in the prior year. Inventories at the end of the
third quarter of 2003, decreased $9.0 million or 11.6% compared to the prior
year.
Additions to property and equipment totaled $5.3 million in the first nine
months of fiscal 2003. This was $5.3 million below the level of capital
expenditures in the same period in the prior year. The decrease in capital
purchases is primarily related to the lower level of spending caused by the
reduction in new store openings during the 2003 fiscal year. The Company expects
that all capital purchases during fiscal 2003 will be provided for with internal
funds. During the third quarter of fiscal 2003, $2.0 million was contributed to
the Company's defined benefit pension plan. The Company plans to contribute an
additional $5.0 million during the fourth quarter of fiscal 2003.
20
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
During the first nine months of fiscal 2003 the Company returned $9.7
million to shareholders through share repurchases and cash dividends. The
Company paid $3.8 million to repurchase 424,100 common shares under our share
repurchase program. As of August 29, 2003, there remains 3.8 million shares of
the original 5.0 million share repurchase authorization. The Company expects to
continue to repurchase shares opportunistically through the remainder of the
fiscal year.
At the end of the first nine months of the 2003 fiscal year there were no
borrowings outstanding under the Company's $75 million revolving credit
facility. This is consistent with the level of borrowings at the end of the
first nine months of fiscal 2002. During the first nine months of fiscal 2003,
the Company did not utilize any of the available credit under the revolving
credit line. Borrowings were not required during the first nine months primarily
because the Company entered the year with no outstanding debt and has been
successful in managing both inventory levels and accounts receivable balances.
As of August 29, 2003, letters of credit totaling $25.3 million were outstanding
for the purchase of inventories. All letters of credit generally expire within
one year.
21
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Within the 90 days prior to the date of this report, the Company carried
out an evaluation under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to the Exchange Act Rule
13a-15. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic filings with the Securities and Exchange
Commission.
(b) Changes in internal controls.
During the third quarter of fiscal 2003, the Company completed the
conversion to a new software platform for its general ledger accounting system
with no interruption of functionality.
22
PART II - OTHER INFORMATION
THE STRIDE RITE CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are contained in this report:
None
(b) Reports on Form 8-K
On June 26, 2003, the Company filed a current report on Form 8-K
(Item 9) with respect to the extension of the Tommy Hilfiger
footwear licensing agreement.
On June 26, 2003, the Company filed a current report on Form 8-K
(Item 9) with respect to its press release announcing the
Company's financial results for the three and six months ended
May 31, 2003.
On July 9, 2003, the Company filed a current report on Form 8-K
(Item 9) with respect to its press release announcing the
promotion of Richard T. Thornton to President and Chief
Operating Officer, the appointment of a new director, James F.
Orr III, and the appointment of Richie Woodworth as President of
Tommy Hilfiger Footwear, Inc.
On September 23, 2003, the Company filed a current report on
Form 8-K (Item 12) with respect to its press release announcing
the Company's financial results for the three and nine months
ended August 29, 2003.
23
THE STRIDE RITE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
THE STRIDE RITE CORPORATION
(Registrant)
Date: October 10, 2003 By: /s/ Frank A. Caruso
---------------- --------------------------
Frank A. Caruso
Chief Financial Officer
24
I, David M. Chamberlain, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ending
August 29, 2003 of The Stride Rite Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: October 10, 2003 /s/ David M. Chamberlain
---------------- ---------------------------------------
David M. Chamberlain, Chairman & CEO
25
I, Frank A. Caruso, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ending
August 29, 2003 of The Stride Rite Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: October 10, 2003 /s/ Frank A. Caruso
---------------- ---------------------------------------
Frank A. Caruso,
Chief Financial Officer
26