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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 May 28,2004
( ) 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 .10
---- ----
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 June 30, 2004, 37,726,486 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
May 28, May 30,
2004 November 28, 2003
(Unaudited) 2003 (Unaudited)
--------------- -------------- ------------
(In thousands)
Assets
Current Assets:
Cash and cash
equivalents $79,574 $103,272 $81,463
Accounts and notes
receivable, net 79,278 51,058 70,151
Inventories 80,749 81,925 76,654
Deferred income taxes 15,178 14,393 20,588
Other current assets 10,734 19,452 5,215
-------- -------- -------
Total current assets 265,513 270,100 254,071
Property and equipment, net 57,793 60,802 64,092
Other assets 13,193 14,315 15,350
-------- -------- --------
Total assets $336,499 $345,217 $333,513
======== ======== ========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
May 28, May 30,
2004 November 28, 2003
(Unaudited) 2003 (Unaudited)
--------------- -------------- -------------
(In thousands, except for share data)
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $20,529 $23,887 $12,006
Income taxes payable 17,111 16,815 20,196
Accrued expenses and other
liabilities 20,816 23,273 19,936
------- -------- -------
Total current liabilities 58,456 63,975 52,138
Deferred income taxes 844 381 531
Pension obligation 13,145 13,145 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 15,371 16,825 17,408
Retained earnings 431,519 415,988 414,471
Accumulated other
comprehensive loss (7,927) (7,798) (6,770)
Less cost of 19,223,032
shares of common stock
held in treasury
(17,607,304 on November
28, 2003 and 17,527,919
on May 30, 2003) (189,146) (171,536) (170,179)
--------- --------- ---------
Total stockholders' equity 264,054 267,716 269,167
--------- --------- ---------
Total liabilities and
stockholders' equity $336,499 $345,217 $333,513
======== ======== ========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the six months ended May 28, 2004 and May 30, 2003
Three Months Ended Six Months Ended
------------------ ----------------
(In thousands, except for per share data)
May 28, May 30, May 28, May 30,
2004 2003 2004 2003
------------ ------------ ------------ ----------
Net sales $165,009 $154,286 $301,143 $306,608
Cost of sales 101,507 93,308 184,628 187,589
-------- -------- -------- --------
Gross profit 63,502 60,978 116,515 119,019
Selling and
administrative
expenses 44,589 44,002 85,929 88,378
-------- -------- -------- ---------
Operating income 18,913 16,976 30,586 30,641
Investment income 473 923 1,044 l,606
Interest expense (82) (102) (156) (172)
Other expense, net (70) (1) (148) (164)
--------- --------- --------- ---------
321 820 740 1,270
--------- --------- --------- ---------
Income before income
taxes 19,234 17,796 31,326 31,911
Provision for income
taxes 7,334 6,577 11,942 11,871
--------- --------- --------- ---------
Net income $ 11,900 $ 11,219 $ 19,384 $ 20,040
========= ========= ========= =========
Net income per common share:
Diluted $ .30 $ .28 $ .49 $ .50
========= ========== ========= ==========
Basic $ .31 $ .29 $ .50 $ .51
========= ========== ========= ==========
Dividends per common
share $ .05 $ .05 $ .10 $ .10
========= ========== ========= ==========
Average common shares
used in per share
computations:
Diluted 39,450 39,895 39,887 39,866
========= ========== ========= ==========
Basic 38,637 39,362 39,029 39,394
========= ========== ========= ==========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended May 28, 2004 and May 30, 2003
2004 2003
-------------- -------------
Cash flows from operating activities: (In thousands)
Net income $19,384 $20,040
Adjustments to reconcile net income to net
cash used for operations:
Depreciation and amortization 6,495 7,622
Deferred income taxes (322) -
Gain related to long-term investments - (1,071)
Loss on disposals of property and equipment 226 69
Changes in:
Accounts and notes receivable (28,220) (22,076)
Inventories 1,176 21,559
Other current assets 9,718 8,398
Other current liabilities (5,531) (16,838)
Other long-term assets 1,122 (2,436)
Contribution to pension plan (1,000) -
------ -------
Net cash provided from operating activities 3,048 15,267
------ -------
Cash flows from investing activities:
Additions to property and equipment (3,712) (3,492)
Distributions from long-term investments - 1,071
------- -------
Net cash used in investing activities (3,712) (2,421)
-------- -------
Cash flows from financing activities:
Proceeds from sale of stock under stock plans 3,368 1,146
Cash dividends paid (3,947) (3,943)
Repurchase of common stock (22,455) (1,691)
-------- -------
Net cash used in financing activities (23,034) (4,488)
-------- -------
Net increase (decrease) in cash and cash
equivalents (23,698) 8,358
Cash and cash equivalents at beginning of the
period 103,272 73,105
------- -------
Cash and cash equivalents at end of the period $79,574 $81,463
======= =======
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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 May 28, 2004 and May 30, 2003
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. The results of operations for the periods ended May 28, 2004 and
May 30, 2003 are not necessarily indicative of the results of operations that
may be expected for the complete fiscal year. The year-end condensed balance
sheet data was derived from audited financial statements, but does not include
all disclosures required by generally accepted accounting principles. The
Company filed with the Securities and Exchange Commission audited consolidated
financial statements for the year ended November 28, 2003 on Form 10-K, which
included all information and footnotes necessary for such presentation.
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,
sales returns allowances, markdowns (which reduce revenues), inventory and
income taxes; assumptions related to the defined benefit pension plan; and
estimates of future undiscounted cash flows on property and equipment that may
be impaired. Actual results could differ from those estimates.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Stock Purchase and Option Plans
At May 28, 2004, the Company had 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 28, 2003 as contained on 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. 148, to stock-based compensation.
Three Months Ended Six Months Ended
May 28, May 30, May 28, May 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
(In thousands, except for per share data)
Net income, as reported $11,900 $11,219 $19,384 $20,040
Add: Stock based employee
compensation expense
included in net income,
net of related tax effects
6 - 6 9
Deduct: Total stock based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects
(434) (616) (940) (931)
-------- --------- --------- ---------
Pro forma net income $11,472 $10,603 $18,450 $19,118
======= ======== ======== ========
Earnings per share:
Basic - as reported $ .31 $ .29 $ .50 $ .51
======= ======== ======== ========
Basic - pro forma $ .30 $ .27 $ .47 $ .49
======= ======== ======== ========
Diluted - as reported $ .30 $. 28 $ .49 $ .50
======= ======== ======== ========
Diluted - pro forma $ .29 $ .27 $ .46 $ .48
======= ======== ======== ========
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:
Three Months Six Months
Ended Ended
------------------- ------------------
May 28, May 30, May 28, May 30,
2004 2003 2004 2003
--------- -------- -------- --------
(In thousands, except for per share data)
Net income $11,900 $11,219 $19,384 $20,040
Calculation of shares:
Weighted average common shares
outstanding (basic) 38,637 39,362 39,029 39,394
Dilutive effect of stock options 813 533 858 472
------- ------- ------- -------
Weighted average common shares
outstanding (diluted) 39,450 39,895 39,887 39,866
======= ======= ======= =======
Net income per common share
(basic) $ .31 $ .29 $ .50 $ .51
===== ===== ===== =====
Net income per common share
(diluted) $ .30 $ .28 $ .49 $ .50
===== ===== ===== =====
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:
Second Quarter First Six Months
------------------- ------------------
2004 2003 2004 2003
-------- --------- -------- --------
(In thousands)
Options to purchase shares of common
stock 1,079 521 318 550
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 Ended Six Months
Ended
---------------------- --------------------
May 28, May 30, May 28, May 30,
2004 2003 2004 2003
----------- --------- ---------- ---------
(In thousands)
Net income $11,900 $11,219 $19,384 $20,040
Other comprehensive
income(loss):
Foreign currency translation
adjustments (127) 326 (129) 476
-------- -------- -------- --------
Total comprehensive income $11,773 $11,545 $19,255 $20,516
======== ======== ======== ========
Components of accumulated other comprehensive loss consist of the following:
May 28, November 28, May 30,
2004 2003 2003
--------------- ---------------- ------------
(In thousands)
Foreign currency translation
adjustments $ (346) $ (217) $ (49)
Minimum pension liability
adjustments, net of taxes (7,581) (7,581) (6,721)
-------- -------- ---------
Accumulated other
comprehensive loss $ (7,927) $ (7,798) $ (6,770)
========= ========= =========
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Intangible Assets and Goodwill
The following table summarizes the Company's intangible assets and goodwill
balances:
Intangible assets not subject to amortization
------------------------------------------------
Trademark
Goodwill Rights Total
- -------------------------------------------------------------------------------
May 28, 2004 (In thousands)
Gross carrying amount $3,067 $2,980 $6,047
Accumulated amortization $(2,159) $(1,290) $(3,449)
November 28, 2003
Gross carrying amount $3,068 $2,980 $6,048
Accumulated amortization $(2,160) $(1,290) $(3,450)
May 30, 2003
Gross carrying amount $3,073 $2,980 $6,053
Accumulated amortization $(2,165) $(1,290) $(3,455)
Note 5 - Benefit Plans
During the first quarter of fiscal 2004, the Company adopted the interim
disclosure provisions of SFAS No. 132 revised 2003, "Employers' Disclosure about
Pensions and Other Postretirement Benefits, an Amendment of FASB Statements No.
87, 88 and 106 and a Revision of FASB Statement No. 132." This statement revises
employers' disclosures about pension plans and other post-retirement benefit
plans.
The following table summarizes the components of net periodic benefit cost
for the Company:
Three Months Ended Six Months Ended
--------------------- --------------------
May 28, May 30, May 28, May 30,
2004 2003 2004 2003
---------- --------- --------- -------
(In thousands)
Service Cost $ 413 $ 303 $ 851 $ 606
Interest Cost 876 763 1,806 1,526
Expected return on assets (997) (704) (1,995) (1,408)
Net loss recognized 353 322 728 644
Amortization of prior services cost
5 6 10 12
---------- --------- --------- -------
Net periodic benefit cost $ 650 $ 690 $1,400 $1,380
========== ========= ========= =======
During the first quarter of fiscal 2004, the Company contributed $1.0
million to its defined benefit pension plan. The Company does not intend to make
any further contributions to its defined benefit pension plan during fiscal year
2004. No contributions were made to the Company's defined benefit plans during
the first two quarters of fiscal 2003.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Contingencies
The sale of Tommy Hilfiger branded footwear is a significant portion of our
business. The Tommy Hilfiger footwear sales are contingent on our licensing
agreement with Tommy Hilfiger Licensing, Inc. During fiscal 2003, we negotiated
the renewal of the agreement for an additional term. In early January 2004, we
finalized the terms of the license agreement, which will expire in March 2007.
We expect to meet our obligations under the Tommy Hilfiger license agreement and
accordingly, we believe that no provision is currently required for costs
related to the potential loss of this license. If we lose the Tommy Hilfiger
license, our business would be materially and adversely affected.
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. We caution 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", "plan", "estimate",
"project", "should", "will be" 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. We expressly disclaim 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
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 chain and
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; 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; labor disputes; 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.
Investors should also be aware that while the Company does communicate with
securities analysts from time to time, it is against our policy to disclose to
them any material non-public information or other confidential information.
Accordingly, investors should not assume that we agree with any statement or
report issued by any analyst irrespective of the content of the statement or
report. Furthermore, the Company has a policy against issuing or confirming
financial forecasts or projections issued by others. Therefore, to the extent
that reports issued by securities analysts contain any projections, forecasts or
opinions, such reports are not the responsibility of the Company.
The Company discussed a number of significant trends and specific factors
affecting the footwear industry in general and our business in particular in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", Item 7 of our Annual Report on Form 10-K for the fiscal year 2003.
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 28, 2003 for additional information.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Contingencies
- -------------
The sale of Tommy Hilfiger branded footwear is a significant portion of our
business. The Tommy Hilfiger footwear sales are contingent on our licensing
agreement with Tommy Hilfiger Licensing, Inc. During fiscal 2003, we negotiated
the renewal of the agreement for an additional term. In early January 2004, we
finalized the terms of the license agreement, which will expire in March 2007.
We expect to meet our obligations under the Tommy Hilfiger license agreement and
accordingly, we believe that no provision is currently required for costs
related to the potential loss of this license. If we lose the Tommy Hilfiger
license, our business would be materially and adversely affected.
Results of Operations
- ---------------------
The following table summarizes the Company's performance for the second
quarter and first six months of fiscal 2004 as compared to the results for the
same periods in fiscal 2003:
Increase (Decrease) Percent vs. 2003 Results:
- ---------------------------------------------
Second Quarter Six Months
-------------- ----------
Net sales 6.9% (1.8)%
Gross profit 4.1% (2.1)%
Selling and administrative expenses 1.3% (2.8)%
Operating income 11.4% (0.2)%
Income before income taxes 8.1% (1.8)%
Net income 6.1% (3.3)%
Operating Ratios as a Percent of Net Sales:
- -------------------------------------------
Second Quarter Six Months
-------------- -------------------
2004 2003 2004 2003
------ ------ -------- --------
Gross profit 38.5% 39.5% 38.7% 38.8%
Selling and administrative expenses 27.0% 28.5% 28.5% 28.8%
Operating income 11.5% 11.0% 10.2% 10.0%
Income before income taxes 11.7% 11.5% 10.4% 10.4%
Net income 7.2% 7.3% 6.4% 6.5%
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter 2004 Compared to Second Quarter 2003
- ---------------------------------------------------
Net Sales
- ---------
The second quarter breakdown of net sales is as follows:
Percent
Change
2004 vs.
2004 2003 2003
--------- --------- -----------
(In millions, except
percentages)
Stride Rite Children's Group - Wholesale $20.5 $19.2 6.8%
Stride Rite Children's Group - Retail 43.2 39.3 9.8%
--------- --------- -----------
Stride Rite Children's Group 63.7 58.5 8.8%
Keds 48.7 50.2 (2.9)%
Tommy Hilfiger Footwear 28.7 24.1 18.8%
Sperry Top-Sider 19.7 18.5 6.4%
Stride Rite International 7.0 5.6 25.8%
Elimination of intercompany sales (2.8) (2.6) n/a
--------- --------- -----------
Total net sales $165.0 $154.3 6.9%
========= ========= ===========
During the second quarter of fiscal 2004, consolidated net sales increased
$10.7 million to $165.0 million, or 6.9% above the sales level achieved in the
second quarter of fiscal 2003. Wholesale net revenues decreased 5.6% for the
second quarter of 2004, while overall retail sales increased $3.9 million or
9.8% when compared to the same period in the prior year. Unit shipments of
current line merchandise for the wholesale brands during the second quarter were
6.1% greater than the comparable period in 2003. The Company's average first
quality wholesale selling price declined 3.2% from the second quarter of 2003.
In addition, closeout sales increased 3.9% during the second quarter of fiscal
2004 as compared to the prior year. Royalty revenues at $1.8 million were 13.4%
higher in the 2004 second quarter versus the same quarter last year.
Net sales of the Stride Rite Children's Group increased 8.8% for the second
quarter of fiscal 2004, compared to the same period of fiscal 2003. Sales of the
Children's Group to independent retailers increased 6.8% during the second
quarter of 2004 as compared to the same quarter last year. This increase was
primarily attributable to higher sales of Tommy Hilfiger Children's products, a
strong performance by sandals and increased closeout sales. These increases were
partially offset by continued weakness in the Munchkin brand as well as a
greater number of returns. Adding to the increases from the wholesale side of
the division were increased sales of the Children's Group's company-owned retail
stores, which were up 9.8% from the same quarter last year. Sales at comparable
Children's Group retail stores (stores open for 52 weeks in each fiscal year)
increased 7.8% for the second fiscal quarter of 2004. Driving this increase in
the comparable stores
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
category was the addition of newer stores which have generally had greater
sales increases than our more mature stores. At the end of the second quarter of
fiscal 2004, the Stride Rite Children's Group operated 240 stores. This is an
increase of 10 stores, or 4% from the end of the same period in the prior year.
Current plans call for the opening of approximately 18 retail stores and the
closing of 4 underperforming locations during the 2004 fiscal year. During the
second quarter of 2004 the Company opened 7 new stores and had no store
closings.
Keds sales decreased in the second quarter of fiscal 2004 due in part to
initial retailer caution in ordering Keds products, based on poor performance at
retail in Spring 2003. In addition, the Keds seasonal product lines did not
generate the anticipated level of reorders in the quarter. Partially offsetting
the disappointing performance of Keds seasonal styles, the Microstetch product
line's sales results were strong during the second quarter, continuing a trend
that began in the first quarter.
The Tommy Hilfiger footwear division recorded stronger sales during the
second quarter of fiscal 2004 after the weak sales in fiscal 2004's first
quarter. The improvement was primarily the result of a strong beach program in
the women's category, along with the introduction of both the "H" Hilfiger line
and the Tommy Girl line. These increases were partially offset by weakness in
the men's athletic category. Additionally, closeout sales increased in the
quarter and good performance on key programs resulted in a decrease in sales
allowances.
The 6.4% increase in the sales of Sperry Top-Sider products during the
first quarter of the 2004 fiscal year was primarily attributable to strong sales
of men's casual footwear and performance boat shoes. Sales declines in the
women's product category in the second quarter, primarily caused by weaknesses
in canvas styles, offset a portion of the gains in men's products.
The Stride Rite International division had a 25.8% increase in net sales
during the second quarter of fiscal 2004 in comparison to the same period in the
prior year. While this sales performance was solid in most product categories,
it was largely the result of the continued strong sales of the Tommy Hilfiger
footwear product line, particularly in Asia and Latin America.
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 second quarter of fiscal 2004, the Company's gross profit of
$63.5 million increased $2.5 million or 4.1% above the amount recorded during
2003's second quarter. Increased revenues at the company-owned retail stores was
a significant contributor to the improvement in gross profit. The gross profit
rate for fiscal 2004's second quarter decreased one percentage point to 38.5% as
compared to the 39.5% rate achieved in the prior year's second quarter. The
reduction in gross profit percentage was primarily attributable to lower in-line
product gross profit margins, related to higher freight costs, and greater
closeout and inventory obsolescence costs. These reductions were partially
offset by the higher relative percentage of retail sales and decreased returns
and allowances.
Operating Costs
- ---------------
During the second quarter of fiscal 2004, selling and administrative
expenses were $44.6 million, an increase of $0.6 million or 1.3% as compared to
the second quarter of fiscal 2003. As a percent of sales, operating costs were
27.0% in the second quarter of fiscal 2004 compared to 28.5% in the second
quarter of fiscal 2003. This decrease in operating costs as a percentage of net
sales resulted from the Company's expense containment being leveraged by the
increase in net sales for the 2004 second quarter. During the second quarter of
fiscal 2004, advertising costs were 5.3% of net sales versus 5.6% in fiscal
2003. The increase in operating costs was primarily attributable to higher
expenses in Children's Group retail stores, chiefly associated with the increase
in the number of company-owned retail stores and an increase in costs related to
distribution.
Other Income and Taxes
- ----------------------
Other income (expense) increased pre-tax income by $0.3 million in the
second quarter of fiscal 2004 and by $0.8 million in the second quarter of 2003.
Investment income decreased $0.4 million in the second fiscal quarter of 2004 as
compared to the same quarter last year. Investment income related to the
Company's cash equivalents increased $0.3 million in the first fiscal quarter of
2004, due to greater average investment balances. Offsetting this increase was
the $0.7 million that was received in the second quarter of 2003 related to
Stride Rite's sale of its interest in a joint venture footwear manufacturing
facility. Interest expense was slightly lower in the second quarter of fiscal
2004 as compared to the second quarter of fiscal 2003. No short-term borrowings
were made during the second quarters of either fiscal year 2004 or 2003.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The provision for income taxes increased $0.8 million in the second quarter
of fiscal 2004 as compared to the similar period in fiscal 2003. This increase
was primarily due to the higher pre-tax income amount, combining with a higher
effective income tax rate. Our effective tax rate was 38.1% in the second
quarter of fiscal 2004 as compared to 37.0% in the second quarter of fiscal
2003. The higher tax rate in the second quarter of fiscal 2004 reflects fewer
tax saving items in 2004 than in the prior year.
Net Income
- ----------
Net income for the second quarter of fiscal 2004 was $11.9 million, an
increase of $0.7 million, or 6.1% as compared to the same period in the prior
year. Higher net sales and the resulting increase in gross profit dollars were
somewhat offset by the increases in operating costs and the higher effective
income tax rate. The Company's return on net sales of 7.2% in the second fiscal
quarter of 2004 declined versus the 7.3% return on sales recorded for the second
fiscal quarter of 2003.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
First Six Months of 2004 Compared to the First Six Months of 2003
- -----------------------------------------------------------------
Net Sales
- ---------
The first six months breakdown of net sales is as follows:
Percent
Change
2004 vs.
2004 2003 2003
---- ---- ----------
(In millions, except percentages)
Stride Rite Children's Group - Wholesale $45.6 $47.9 (4.8)%
Stride Rite Children' Group - Retail 72.2 64.9 11.3%
------- ------- -------
Stride Rite Children's Group 117.8 112.8 4.5%
Keds 91.1 105.8 (13.8)%
Tommy Hilfiger Footwear 48.9 48.9 -
Sperry Top-Sider 34.4 32.9 4.8%
Stride Rite International 13.8 11.8 16.6%
Elimination of intercompany sales (4.9) (5.6) n/a
------ ------ ------
Total net sales $301.1 $306.6 (1.8)%
====== ====== =======
During the first six months of fiscal 2004, consolidated net sales
decreased $5.5 million to $301.1 million, or 1.8% below the sales level recorded
in the first six months of fiscal 2003. Wholesale net revenues decreased 5.4%
for the first half of 2004, while overall retail sales increased $7.6 million or
11.4% when compared to the same period last year. Unit shipments of current line
merchandise for the wholesale brands during the first half of 2004 were 1.0%
lower than last year's first half. The Company's average first quality wholesale
selling price declined 4.1% from the first six months of 2003. In addition,
closeout sales decreased 1.9% in the first six months of fiscal 2004 as compared
to the prior year. Royalty revenues at $3.6 million were 7.8% higher in the
first half of 2004 than in the same period in the prior year.
Net sales of the Stride Rite Children's Group increased 4.5% for the first
half of fiscal 2004, compared to the same period of fiscal 2003. Sales to
independent retailers decreased 4.8% during the first six months of 2004 versus
the same period last year. The decrease in sales to independent retailers was
principally the result of the Footstar bankruptcy, continued weakness with the
Munchkin product line, and cautious buying activity in the department store
channel. Partially offsetting these declines were increases in closeout sales
and promotional products for certain accounts. As compared to the first half of
last year the Children's Group has seen a shift in sales of the Tommy Hilfiger
Kids products from the department store channel to the mid-tier channel.
Offsetting the decrease in the wholesale side of the division, were the
increased sales of the Children's Group's company-owned retail stores, which
were up 11.3% during the first six months of fiscal 2004 versus the same period
last year. Sales at comparable Children's Group retail stores (stores open for
52 weeks in each fiscal year) increased 9.4% for the first half of fiscal 2004.
A major reason for the increase in the comparable
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
store sales results was the addition of a number of newer stores, which have
generally recorded better sales performance than many of our more mature stores.
Keds sales decreased in the first half of fiscal 2004 due in part to
continued retailer caution in ordering Keds products, based on poor performance
at retail in Spring 2003. In addition, the Keds seasonal product lines did not
generate the anticipated level of reorders. Sales of Grasshoppers, which are
included in the Keds results, were also down as compared to the same period last
year, due principally to their loss of shelf space at certain major department
store customers. Partially offsetting the disappointing performance of their
seasonal styles, Keds experienced strong sales with its newly introduced
Microstretch(TM) products.
The Tommy Hilfiger footwear unit's sales performance during the first six
months of fiscal 2004 was flat with the same period in the prior year. Compared
with last year's first half, there was an overall decrease in the men's
business. Offsetting this decrease were increased sales of ProKeds products in
addition to strong performance by the women's beach programs. During the first
half of fiscal 2004 both the "H" Hilfiger and the Tommy Girl lines were
introduced.
Sales of Sperry Top-Sider products increased for the first six months of
fiscal 2004. This increase was primarily the result of strong performance in the
men's product lines, particularly in the performance category. This strong
showing was partially offset by weaknesses in the women's line, principally in
the canvas category. Sales were also adversely affected by the acquisition by
West Marine of Boat U.S. retail operations, two important accounts for the
division.
The Stride Rite International division had a 16.6% increase in net sales
for the first half of 2004, versus the same period in the prior year. The
addition of new distributors of the Company's brands in Asia and increased sales
of Tommy Hilfiger and Sperry Top-Sider products in Latin America were the
primary reasons for the increase.
Gross Profit
- ------------
During the first half of fiscal 2004, the Company's gross profit of $116.5
million decreased $2.5 million or 2.1% below the amount recorded during the same
period last year. The gross profit rate for the first six months of fiscal 2004
decreased slightly as compared to the same period last year, 38.7% to 38.8%. The
decrease in first half gross profit was primarily the result of the lower level
of wholesale sales during the period. The additional gross profit that was
generated by the higher levels of retail sales was insufficient to offset the
impact from the decline in gross profit resulting from the lower wholesale
sales. The decline in gross profit percentage versus last year was due primarily
to increased freight costs and a higher level of returns which was offset
somewhat by the gross profit percentage impact of the greater percentage of
retail sales.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operating Results
- -----------------
Operating expenses for the first six months of fiscal 2004 were $85.9
million, a decrease of $2.5 million or 2.8% as compared to the same period in
fiscal 2003. As a percent to sales, operating costs were 28.5% in the first half
of fiscal 2004 versus 28.8% in the first half of last year. During the first six
months of fiscal 2004, advertising expenses as a percent of net sales were 5.0%
versus 5.4% on the same period last year. Advertising spending decreased at most
of the Company's brands and reflects a change in the timing of our advertising
programs from last year. In addition to the lower advertising costs,
administrative expenses also decreased. Somewhat offsetting these decreases were
higher retail store payroll expenses, due to the increased number of stores and
also higher distribution costs.
Other Income and Taxes
- ----------------------
Other income (expense) increased pre-tax income by $0.7 million in the
first six months of fiscal 2004 and by $1.3 million in the first six months of
fiscal 2003. Investment income in the first half of fiscal 2004 was $0.6 million
below the same period of fiscal 2003. Comparisons of investment income to last
year are negatively impacted by the receipt in fiscal year 2003 of $0.7 million
related to Stride Rite's sale of its interest in a joint venture footwear
manufacturing facility. Interest expense in the first half of fiscal 2004 was
slightly below the level recorded last year. There were no short-term borrowings
during the first half of either fiscal 2004 and 2003.
The provision for income taxes increased $0.1 million in the first half of
fiscal 2004 as compared to the similar period in fiscal 2003. This slight
increase was primarily due to the higher effective income tax rate offsetting
the lower pre-tax income amount. During the first half of fiscal 2004, the
effective tax rate was 38.1% as compared to the 37.2% rate during last year's
first half. The higher tax rate during the first six months of fiscal 2004 is
the result of fewer tax saving items this year as compared to fiscal 2003.
Net Income
- ----------
Net income for the first six months of fiscal 2004 was $19.4 million, a
decrease of $0.7 million, or 3.3% below that of the same period in the prior
year. Decreased net sales and the resulting reduction in gross profit dollars
were offset by lower operating expenses. Lower other income (expense) combined
with our higher effective income tax rate lead to the reduction in net income
during the first half of fiscal 2004 versus the same period last year. The
Company's return on net sales of 6.4% in the first fiscal half of 2004 declined
slightly as compared to the 6.5% return on sales realized in the first half of
fiscal 2003.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
At the end of the second fiscal quarter of 2004, our balance sheet
reflected a current ratio of 4.5 to 1 with no debt. Our cash and cash
equivalents totaled $79.6 million at May 28, 2004, a decrease of $1.9 million
from the total cash and cash equivalents of $81.5 million at the end of the
second quarter of fiscal 2003. The Company maintains a $75 million revolving
credit facility to fund any seasonal working capital needs. No borrowings under
this line of credit were outstanding as of May 28, 2004 or May 30, 2003.
The Company's seasonal cash flow patterns typically provide cash from
operations during the second quarter of the fiscal year. During the first six
months of fiscal 2004, the Company generated $3.0 million of cash from
operations. This positive cash flow was below the $15.3 million cash flow
generated during the first six months of fiscal 2003. The primary reasons for
the lower level of cash flow were greater increases in accounts receivable
balances and a lower reduction of inventory levels versus the first half of
fiscal 2003. Inventory levels at the end of the second quarter of fiscal 2004
increased $4.1 million, or 5.3% from the levels recorded at the end of the prior
year's second quarter. Accounts receivable at May 28, 2004 were $9.1 million or
13.0% higher than the amount at the end of last year's second quarter. This
increase is primarily attributable to a greater level of sales that occurred in
the last month of the second quarter as compared to fiscal 2003. Days sales
outstanding, which is a measure of the length of the collection period of
accounts receivable, was 41 days and 40 days at the end of the second fiscal
quarters of both 2004 and 2003, respectively. Accounts payable at the end of the
second quarter of fiscal 2004 increased $8.5 million from the level recorded at
the end of the prior year's second quarter. This difference was primarily the
result of an increase in inventory in-transit at the end of the second quarter
of fiscal 2004. During the first fiscal quarter of 2004, the Company contributed
$1.0 million to its defined benefit pension plan. The Company does not intend to
make any additional contributions to its defined benefit pension plan this year.
Other current assets at May 28, 2004 were $10.7 million or $5.5 million higher
than the amount at the end of last year's second quarter. This difference was
primarily caused by an increase in prepaid pension expense, largely due to the
$8 million of pension contributions that have occurred since the end of last
year's second quarter.
Additions to property and equipment totaled $3.7 million in the first half
of 2004, which was greater than the $3.5 million in the first half of 2003.
During the first half of fiscal 2004, as compared to the same period last year,
the Company increased its spending on information technology and e-commerce and
had lower spending on new retail stores, store renovations, and at its
distribution centers. Funding of our capital expenditures was provided from
internal sources. We expect that all capital purchases during fiscal 2004 will
be provided for internally, however if business conditions change and do not
allow for internal funding, we will re-evaluate our plans.
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 half of fiscal 2004 we returned $26.4 million to
shareholders through share repurchases and cash dividends. We spent $21.3
million in the second quarter to repurchase 2,008,900 common shares under our
share repurchase program. As of May 28, 2004, 1.4 million shares were remaining
on our share repurchase authorization. On June 24, 2004 the Company's Board of
Directors increased the authorization under our on-going share repurchase
program by 5 million shares. This action had the effect of increasing the shares
remaining on our share repurchase authorization to 6.4 million shares. We expect
to continue to purchase shares opportunistically through the remainder of the
fiscal year.
At the end of the second quarter of fiscal 2004, there were no borrowings
outstanding under the Company's $75 million revolving credit facility. This is
consistent with the second quarter of fiscal 2003. We did not utilize any
available credit under the revolving credit line during the first six months of
fiscal 2004. Borrowings were not required during this time primarily because we
entered the year with no outstanding debt and a significant cash and cash
equivalents balance. As of May 28, 2004, letters of credit totaling $56.7
million were outstanding for the purchase of inventories. All letters of credit
generally expire within one year.
We do not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of
facilitating off-balance-sheet arrangements or other contractually narrow or
limited purposes. As such, we are not exposed to any financing, liquidity,
market or credit risk that could arise if we had engaged in such relationships.
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.
None.
PART II - OTHER INFORMATION
THE STRIDE RITE CORPORATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our repurchases of equity securities for the second quarter of fiscal 2004
were as follows:
Total
Number Of Maximum
Shares Number
Purchased Of Shares
As Part That May
Total Average Of Yet Be
Number Price Publicly Purchased
Of Paid Announced Under The
Shares Per Plans Or Plans Or
Period Purchased Share Programs Programs
- --------------------------------------------------------------------------------
February 28,2004 - March 26, 2004 - - - 3,403,600
March 27, 2004 - April 30, 2004 1,386,000 $10.62 1,386,000 2,017,600
May 1, 2004 - May 28, 2004 622,900 $10.60 622,900 1,394,700
--------- ------ --------- ---------
Total 2,008,900 $10.62 2,008,900 1,394,700
========= ====== ========= =========
In September 2002, the Board of Directors authorized a stock repurchase
program allowing the repurchase of up to five million shares of our outstanding
common stock. Under the authorization, the Company can repurchase shares in the
open market or through privately negotiated transactions. The repurchase program
does not have an expiration date. All shares repurchased during the period
covered by this report were purchased under a publicly announced plan.
PART II - OTHER INFORMATION (continued)
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's shareholders was held on April 15,
2004. The two directors nominated by management were elected by the vote set
forth below:
Votes
------------------------------
Name of Director For Withheld
-------------------------- ------------------------------
Christine M. Cournoyer 33,503,367 3,246,621
James F. Orr III 33,587,123 3,162,865
The Company's other directors, whose term of office continues after the
2004 stockholders' meeting, are as follows:
David M. Chamberlain
Shira D. Goodman
Frank R. Mori
Myles J. Slosberg
Bruce Van Saun
The Company's shareholders also ratified the Company's selection of
PricewaterhouseCoopers LLP as auditors of the Company for the 2004 fiscal year
by the vote set forth below:
Votes
-----------------------------------------------
For Against Abstentions
--- ------- ----------
36,255,575 463,367 31,046
The shareholders voted in favor of a proposal requesting that the directors
consider and act upon to approve an amendment to The Stride Rite Corporation
2001 Stock Option and Incentive Plan to increase the number of shares of common
stock authorized for issuance from 3,000,000 to 6,000,000 by the vote set forth
below:
Votes
--------------------------------------------------------------
Broker
For Against Abstentions Non-Vote
--- ------- ---------- --------
21,107,951 7,961,950 2,019,247 5,660,840
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:
--------
Exhibit Number Description
-------------- -----------
31.1 Certification of Principal Executive
Officer pursuant to Exchange Act Rules
13a-15(e) and 15d-15(e), as adopted
pursuant to Section 302 of Sarbanes-Oxley
Act of 2002.
31.2 Certification of Principal Financial
Officer pursuant to Exchange Act Rules
13a-15(e) and 15d-15(e), as adopted
pursuant to Section 302 of Sarbanes-Oxley
Act of 2002.
32.1 Certification of Principal Executive
Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial
Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
-------------------
On March 25, 2004, 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 months ended February
27, 2004.
On June 22, 2004, 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 six months ended
May 28, 2004.
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: July 8, 2004 By: /s/ Frank A. Caruso
--------------------------
Frank A. Caruso
Chief Financial Officer