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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 27, 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 .
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
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 ( )
-
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of October 5, 2004, 36,773,352 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
August 27, August 29,
2004 November 28, 2003
(Unaudited) 2003 (Unaudited)
--------------- -------------- --------------
(In thousands)
Assets
Current Assets:
Cash and cash
equivalents $84,906 $103,272 $96,195
Accounts and notes
receivable, net 69,998 51,058 69,590
Inventories 80,604 81,925 68,557
Deferred income taxes 15,167 14,393 20,222
Other current assets 10,140 19,452 5,330
-------- -------- --------
Total current assets 260,815 270,100 259,894
Property and equipment, net 56,874 60,802 62,552
Other assets 12,582 14,315 15,022
-------- -------- --------
Total assets $330,271 $345,217 $337,468
======== ======== ========
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)
August 27, August 29,
2004 November 28, 2003
(Unaudited) 2003 (Unaudited)
------------- -------------- -------------
(In thousands, except for share data)
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $17,450 $23,887 $10,132
Income taxes payable 17,288 16,815 20,458
Accrued expenses and other
liabilities 21,164 23,273 21,869
-------- -------- --------
Total current liabilities 55,902 63,975 52,459
Deferred income taxes 844 381 775
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 15,288 16,825 16,803
Retained earnings 435,890 415,988 418,914
Accumulated other
comprehensive loss (7,796) (7,798) (6,961)
Less cost of 19,999,131
shares of common stock
held in treasury
(17,607,304 on November
28, 2003 and 17,547,650
on August 29, 2003) (197,239) (171,536) (170,436)
--------- --------- ---------
Total stockholders' equity 260,380 267,716 272,557
--------- --------- ---------
Total liabilities and
stockholders' equity $330,271 $345,217 $337,468
======== ======== ========
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 periods ended August 27, 2004 and August 29, 2003
Three Months Ended Nine Months Ended
------------------ -----------------
(In thousands, except for per share data)
August 27, August 29, August 27, August 29,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $140,382 $139,747 $441,525 $446,355
Cost of sales 89,197 87,111 273,825 274,700
------------ ------------ ------------ ------------
Gross profit 51,185 52,636 167,700 171,655
Selling and
administrative
expenses 41,831 42,592 127,760 130,970
------------ ------------ ------------ ------------
Operating income 9,354 10,044 39,940 40,685
Investment income 298 201 1,342 1,807
Interest expense (79) (75) (235) (247)
Other expense, net (85) (43) (233) (207)
------------ ------------ ------------ ------------
134 83 874 1,353
------------ ------------ ------------ ------------
Income before income
taxes 9,488 10,127 40,814 42,038
Provision for income
taxes 3,269 3,714 15,211 15,585
------------ ------------ ------------ ------------
Net income $6,219 $6,413 $25,603 $26,453
============ ============ ============ ============
Net income per common share:
Diluted $ .16 $ .16 $ .65 $ .66
============ ============ ============ ============
Basic $ .17 $ .16 $ .66 $ .67
============ ============ ============ ============
Dividends per common
share $ .05 $ .05 $ .15 $ .15
============ ============ ============ ============
Average common shares
used in per share
computations:
Diluted 38,159 40,243 39,311 39,992
============ ============ ============ ============
Basic 37,467 39,456 38,508 39,415
============ ============ ============ ============
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 nine months ended August 27, 2004 and August 29, 2003
2004 2003
------------- -------------
Cash flows from operating activities: (In thousands)
Net income $25,603 $26,453
Adjustments to reconcile net income to net
cash provided from operations:
Depreciation and amortization 9,477 10,438
Deferred income taxes (311) 610
Loss on sale of trading security - 6
Gain related to long-term investments - (1,071)
Loss on disposals of property and equipment 219 555
Changes in:
Accounts and notes receivable (18,940) (21,515)
Inventories 1,321 29,656
Other current assets 10,312 9,030
Other current liabilities (7,920) (15,436)
Other long-term assets 1,733 (2,108)
Contribution to pension plan (1,000) (2,000)
---------- ---------
Net cash provided from operating activities 20,494 34,618
---------- ---------
Cash flows from investing activities:
Additions to property and equipment (5,768) (5,254)
Distributions from long-term investments - 1,071
---------- ---------
Net cash used in investing activities (5,768) (4,183)
---------- ---------
Cash flows from financing activities:
Proceeds from sale of stock under stock plans 3,981 2,342
Cash dividends paid (5,824) (5,914)
Repurchase of common stock (31,249) (3,773)
---------- ---------
Net cash used in financing activities (33,092) (7,345)
---------- ---------
Net (decrease) increase in cash and cash
equivalents (18,366) 23,090
Cash and cash equivalents at beginning of the
period 103,272 73,105
--------- ---------
Cash and cash equivalents at end of the period $84,906 $96,195
========= =========
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 August 27, 2004 and August 29,
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 August 27, 2004
and August 29, 2003 are not necessarily indicative of the results of operations
that may be expected for the complete fiscal year. The year-end condensed
consolidated 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 the condensed consolidated 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
Note 1 - Summary of Significant Accounting Policies - (continued)
Stock Purchase and Option Plans
At August 27, 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, "Accounting for Stock Based Compensation
- - Transition and Disclosure", to stock-based compensation.
Three Months Ended Nine Months Ended
August 27, August 29, August 27, August 29,
2004 2003 2004 2003
------------ ------------ ------------ ------------
(In thousands, except for per share data)
Net income, as reported $6,219 $6,413 $25,603 $26,453
Add: Stock based employee
compensation expense
included in net income,
net of related tax effects
3 21 9 30
Deduct: Total stock based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects
(492) (361) (1,432) (1,292)
--------- --------- -------- --------
Pro forma net income $5,730 $6,073 $24,180 $25,191
========= ========= ======== ========
Earnings per share:
Basic - as reported $ .17 $ .16 $ .66 $ .67
========= ========= ======== ========
Basic - pro forma $ .15 $ .15 $ .63 $ .64
========= ========= ======== ========
Diluted - as reported $ .16 $ .16 $ .65 $ .66
========= ========= ======== ========
Diluted - pro forma $ .15 $ .15 $ .62 $ .63
========= ========= ======== ========
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 Ended Nine Months Ended
Aug. 27, Aug. 29, Aug. 27, Aug. 29,
2004 2003 2004 2003
--------- --------- --------- ----------
(In thousands, except for per share data)
Net income $6,219 $6,413 $25,603 $26,453
Calculation of shares:
Weighted average common shares
outstanding (basic) 37,467 39,456 38,508 39,415
Dilutive effect of stock options 692 787 803 577
------ ------ ------ ------
Weighted average common shares
outstanding (diluted) 38,159 40,243 39,311 39,992
====== ====== ====== ======
Net income per common share
(basic) $.17 $.16 $.66 $.67
====== ====== ====== ======
Net income per common share
(diluted) $.16 $.16 $.65 $.66
====== ====== ====== ======
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
------------------- ------------------
2004 2003 2004 2003
-------- --------- -------- --------
(In thousands)
Options to purchase shares of common
stock 1,130 507 1,043 540
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 Nine Months Ended
---------------------- ----------------------
Aug. 27, Aug. 29, Aug. 27, Aug, 29,
2004 2003 2004 2003
---------- ---------- ---------- ----------
(In thousands)
Net income $6,219 $6,413 $25,603 $26,453
Other comprehensive
income(loss):
Foreign currency translation
adjustments 131 (191) 2 285
---------- ---------- ---------- ----------
Total comprehensive income $6,350 $6,222 $25,605 $26,738
========== ========== ========== ==========
Components of accumulated other comprehensive loss consist of the following:
August 27, November 28, August 29,
2004 2003 2003
------------- -------------- -------------
(In thousands)
Foreign currency translation
adjustments $(215) $(217) $(240)
Minimum pension liability
adjustments, net of taxes (7,581) (7,581) (6,721)
--------- --------- ---------
Accumulated other
comprehensive loss $(7,796) $(7,798) $(6,961)
========= ========= =========
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
- -------------------------------------------------------------------------------
August 27, 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)
August 29, 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 Nine Months Ended
------------------------ -----------------------
Aug. 27, Aug. 29, Aug. 27, Aug. 29,
2004 2003 2004 2003
----------- ----------- ---------- -----------
(In thousands)
Service cost $431 $303 $1,282 $909
Interest cost 886 763 2,692 2,289
Expected return on assets (994) (704) (2,989) (2,112)
Net loss recognized 428 322 1,156 966
Amortization of prior service
cost 7 6 17 18
----------- ----------- ---------- -----------
Net periodic benefit cost $758 $690 $2,158 $2,070
=========== =========== ========== ===========
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. During the third quarter of fiscal 2003, $2.0 million was contributed to
the Company's defined benefit pension plan.
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 the condensed consolidated 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 third
quarter and first nine months of fiscal 2004 as compared to the results for the
same periods in fiscal 2003:
Increase (Decrease) Percent vs. 2003 Results:
- ---------------------------------------------
Third Quarter Nine Months
------------- -----------
Net sales 0.5% (1.1)%
Gross profit (2.8)% (2.3)%
Selling and administrative expenses (1.8)% (2.5)%
Operating income (6.9)% (1.8)%
Income before income taxes (6.3)% (2.9)%
Net income (3.0)% (3.2)%
Operating Ratios as a Percent of Net Sales:
Third Quarter Nine Months
----------------- -------------------
2004 2003 2004 2003
-------- ------- --------- ---------
Gross profit 36.5% 37.7% 38.0% 38.5%
Selling and administrative expenses 29.8% 30.5% 28.9% 29.3%
Operating income 6.7% 7.2% 9.0% 9.1%
Income before income taxes 6.8% 7.2% 9.2% 9.4%
Net income 4.4% 4.6% 5.8% 5.9%
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Third Quarter 2004 Compared to Third Quarter 2003
- -------------------------------------------------
Net Sales
- ---------
The third 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 $30.9 $29.4 5.1%
Stride Rite Children's Group - Retail 40.3 38.5 4.5%
--------- --------- ----------
Stride Rite Children's Group 71.2 67.9 4.8%
Keds 27.6 30.6 (10.0)%
Tommy Hilfiger Footwear 25.0 26.5 (5.5)%
Sperry Top-Sider 11.8 11.4 3.8%
Stride Rite International 7.7 6.5 17.8%
Elimination of intercompany sales (2.9) (3.2) N/A
--------- --------- ----------
Total net sales $140.4 $139.7 0.5%
====== ====== ======
During the third quarter of fiscal 2004, consolidated net sales increased
$0.7 million to $140.4 million, or 0.5% above the sales level achieved in the
third quarter of fiscal 2003. Wholesale net revenues decreased 1.3% for the
third quarter of 2004, while overall retail sales increased $1.9 million or 4.9%
when compared to the same period in the prior year. Unit shipments of current
line merchandise for the wholesale brands during the third quarter decreased
5.0% when compared with the same period in 2003. The Company's average first
quality wholesale selling price increased 1.9% from the third quarter of 2003.
In addition, closeout sales decreased 11.4% during the third quarter of fiscal
2004 as compared to the prior year. Royalty revenues at $1.7 million were 24.6%
higher in the third quarter of fiscal 2004 versus the same quarter last year.
Net sales of the Stride Rite Children's Group increased 4.8% for the third
quarter of fiscal 2004, compared to the same period of fiscal 2003. Sales of the
Children's Group to independent retailers increased 5.1% during the third
quarter of 2004 as compared to the same quarter last year. This increase was
primarily attributable to increased sales of promotional and closeout products
as well as fewer returns and allowances. Increased sales of the Children's
Group's company-owned retail stores, which were up 4.5% from the same quarter
last year contributed to the overall Stride Rite Children's Group sales
improvement. Sales at comparable Children's Group retail stores (stores open for
52 weeks in each fiscal year) increased 1.3% during the third fiscal quarter of
2004. The third quarter company-owned retail store sales were somewhat
negatively impacted by the later Labor Day holiday this year. At the end of the
third quarter of fiscal 2004, the Stride Rite Children's Group operated 243
stores. This is an increase of 13 stores, or 6% from the end of
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
the same period in the prior year. Current plans call for the opening of
approximately 17 retail stores and the closing of 4 underperforming locations
during the 2004 fiscal year. During the third quarter of 2004 the Company opened
3 new stores and had no store closings.
Keds sales decreased in the third quarter of fiscal 2004 due primarily to
decreased sales of closeouts and promotional products, which is consistent with
our strategy to upgrade the brand's positioning. In addition, Grasshopper sales
declined. Partially offsetting these declines were increases in sales of the
core women's and children's product lines. In particular both the
Microstretch(TM) and Microstretch Sport(TM) basic programs continued to be
strong performers.
The decrease in sales of the Tommy Hilfiger Footwear brand in the third
quarter of fiscal 2004 was primarily attributable to a decline in the men's
first quality business. Offsetting this decline was the introduction of both the
"H" Hilfiger and the Tommy Girl lines, as well as an increase in closeout sales.
The increase in the sales of Sperry Top-Sider products during the third
quarter of the 2004 fiscal year was primarily attributable to the strong sales
of men's performance boat shoes. Sales declines in basic boat shoes and canvas
casual product categories along with a decrease in closeout sales in the third
quarter offset a portion of the gain.
The Stride Rite International division had a 17.8% increase in net sales
during the third quarter of fiscal 2004 in comparison to the same period in the
prior year. This sales growth was largely the result of the addition of new
distributors in Asia and the Middle East as well as continued strong sales of
Tommy Hilfiger footwear 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 third quarter of fiscal 2004, the Company's gross profit of
$51.2 million decreased $1.5 million or 2.8% below the amount recorded in the
third quarter of 2003. The lower level of wholesale sales and increased
inventory obsolescence costs contributed to the reduction in gross profit. The
gross profit rate in the third quarter of fiscal 2004 decreased 1.2 percentage
points to 36.5% as compared to the 37.7% rate achieved in the prior year's third
quarter. The reduction in gross profit percentage was primarily attributable to
increased discounted product sales, certain higher product costs and greater
inventory obsolescence costs. These reductions were partially offset by the
higher relative percentage of retail sales, fewer closeout sales and decreased
returns and allowances.
Operating Costs
- ---------------
During the third quarter of fiscal 2004, selling and administrative
expenses were $41.8 million, a decrease of $0.8 million or 1.8% as compared to
the third quarter of fiscal 2003. As a percent of sales, operating costs were
29.8% in the third quarter of fiscal 2004 compared to 30.5% in the third quarter
of fiscal 2003. This decrease in operating costs as a percentage of net sales
resulted from leveraging cost containment with the slight increase in net sales
for the 2004 third quarter. Advertising costs were up during the third quarter
of fiscal 2004 at 4.5% of net sales versus 4.2% in fiscal 2003. The primary
reasons for the third quarter's decrease in operating costs were reductions in
bad debt reserves, outbound freight costs, salary related expenses and various
other administrative items.
Other Income and Taxes
- ----------------------
Other income (expense) increased pre-tax income by $0.1 million in both the
third quarter of fiscal 2004 and fiscal 2003. Investment income related to the
Company's cash equivalents increased $0.1 million in the third fiscal quarter of
2004. Higher average interest rates were sufficient to offset lower average
investment balances. Interest expense was flat in the third quarter of fiscal
2004 as compared to the third quarter of fiscal 2003. No short-term borrowings
were made during the third quarters of either fiscal year 2004 or 2003.
The provision for income taxes decreased $0.4 million in the third quarter
of fiscal 2004 as compared to the similar period in fiscal 2003. This decrease
was primarily due to the lower pre-tax income amount, combined with a lower
effective income tax rate. Our effective tax rate was 34.4% in the third quarter
of fiscal 2004 as compared to 36.7% in the third quarter of fiscal 2003. The
lower tax rate in the third quarter of fiscal 2004 reflects a decrease in
certain state tax accruals that were no longer necessary.
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 third quarter of fiscal 2004 was $6.2 million, a
decrease of $0.2 million, or 3.0% as compared to the same period in the prior
year. The drop in gross profit dollars was partially offset by the decrease in
operating costs and the lower effective income tax rate and resulted in the
decline in the third quarter's net income versus last year. The Company's return
on net sales of 4.4% in the third fiscal quarter of 2004 declined versus the
4.6% return on sales recorded for the third 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 Nine Months of 2004 Compared to the First Nine Months of 2003
- -------------------------------------------------------------------
Net Sales
- ---------
The first nine 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 $76.5 $77.3 (1.1)%
Stride Rite Children's Group - Retail 112.5 103.4 8.8%
------- ------- -------
Stride Rite Children's Group 189.0 180.7 4.6%
Keds 118.7 136.4 (13.0)%
Tommy Hilfiger Footwear 73.9 75.4 (1.9)%
Sperry Top-Sider 46.3 44.3 4.5%
Stride Rite International 21.4 18.3 17.0%
Elimination of intercompany sales (7.8) (8.7) N/A
------- ------- ------
Total net sales $441.5 $446.4 (1.1)%
====== ====== =====
During the first nine months of fiscal 2004, consolidated net sales
decreased $4.9 million to $441.5 million, or 1.1% below the sales level recorded
in the first nine months of fiscal 2003. Wholesale net revenues decreased 4.2%
for the first nine months of 2004, while overall retail sales increased $9.5
million or 9.0% when compared to the same period last year. Unit shipments of
current line merchandise for the wholesale brands during the first nine months
of 2004 decreased 1.8% when compared to last year's first nine months. The
Company's average first quality wholesale selling price declined 1.7% from the
first nine months of 2003. In addition, closeout sales decreased 11.8% in the
first nine months of fiscal 2004 as compared to the prior year. Royalty revenues
at $5.3 million were 12.7% higher in the first nine months of 2004 than in the
same period in the prior year.
Net sales of the Stride Rite Children's Group increased 4.6% for the first
nine months of fiscal 2004, compared to the same period of fiscal 2003. Sales to
independent retailers decreased 1.1% during the first nine months of 2004 versus
the same period last year. The decrease in sales to independent retailers was
principally the result of difficulties during the Spring selling season related
to the Footstar bankruptcy and weaknesses with the Munchkin and Tommy Hilfiger
Kids product lines caused by the loss of business at certain mid-tier accounts.
Partially offsetting these declines were increases in closeout sales and
promotional products, as well as a reduction in returns and allowances. As
compared to the first nine months 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 8.8% during the first nine 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)
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
increased 6.4% for the first nine months of fiscal 2004. A major reason for
the increase in the comparable store sales results was the addition of a number
of newer stores, which have generally recorded better sales performance than
many of the more mature stores.
Keds sales decreased in the first nine months of fiscal 2004 due in part to
continued retailer caution in ordering Keds products, based on poor performance
at retail in the comparable period of 2003. In addition, lower sales to the
promotional channels and less closeouts further reduced the Keds sales volume.
Sales of Grasshoppers, which are included in the Keds results, were also down as
compared to the same period last year, due principally to the loss of certain
key retailers. Partially offsetting the disappointing performance of their
seasonal styles, Keds has experienced strong sales with its core styles,
specifically the newly introduced Microstretch(TM) products.
The Tommy Hilfiger footwear sales decreased 1.9% during the first nine
months of fiscal 2004 due to continued weakness in the men's product category as
well as an increase in women's product returns. Offsetting these decreases were
higher sales of the women's product and the sales related to the introduction of
both the "H" Hilfiger and the Tommy Girl lines.
Sales of Sperry Top-Sider products increased 4.5% for the first nine months
of fiscal 2004. This increase was primarily the result of strong sales in the
men's product lines, particularly in the performance category, as well as
increased sales of promotional products. This strong showing was partially
offset by weaknesses in the women's line, principally in the canvas category and
a reduction in closeout sales. Sales were also adversely affected by the
acquisition of Boat U.S. retail operations by West Marine, two key retail
accounts for the brand.
The Stride Rite International division had a 17.0% increase in net sales
for the first nine months of 2004, versus the same period in the prior year. The
addition of new distributors of the Company's brands in Asia and the Middle East
and increased sales of Tommy Hilfiger and Sperry Top-Sider products in Latin
America and Asia were the primary reasons for the increase.
Gross Profit
- ------------
During the first nine months of fiscal 2004, the Company's gross profit of
$167.7 million decreased $4.0 million or 2.3% below the amount recorded during
the same period last year. The gross profit rate for the first nine months of
fiscal 2004 decreased slightly as compared to the same period last year, 38.0%
to 38.5%. The decline in the gross profit percentage versus last year was
primarily due to certain product costs, increased inbound freight and inventory
obsolescence costs. This was offset somewhat by the gross profit percentage
impact of the greater percentage of retail sales. The decrease in the first nine
months gross profit was primarily the result of the lower level of wholesale
sales during the period and increased inventory and obsolescence costs. 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 these other factors.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operating Costs
- ---------------
Operating expenses for the first nine months of fiscal 2004 were $127.8
million, a decrease of $3.2 million or 2.5% as compared to the same period in
fiscal 2003. As a percent to sales, operating costs were 28.9% in the first nine
months of fiscal 2004 versus 29.3% in the first nine months of last year. During
the first nine months of fiscal 2004, advertising expenses as a percent of net
sales were 4.9% versus 5.0% in the same period last year. Advertising spending
decreased as well as salary related and other administrative expenses in the
first nine months of fiscal 2004. Somewhat offsetting these decreases were
higher retail store expenses due to the increased number of company-owned
stores.
Other Income and Taxes
- ----------------------
Other income (expense) increased pre-tax income by $0.9 million in the
first nine months of fiscal 2004 and by $1.4 million in the first nine months of
fiscal 2003. Investment income in the first nine months of fiscal 2004 was $0.5
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 nine months of
fiscal 2004 was slightly below the level recorded in the prior year. There were
no short-term borrowings during the first nine months of both fiscal 2004 and
2003.
The provision for income taxes decreased $0.4 million in the first nine
months of fiscal 2004 as compared to the same period in fiscal 2003. This
decrease was primarily due to the lower pre-tax income amount offset slightly by
the higher effective income tax rate. During the first nine months of fiscal
2004, the effective tax rate was 37.3% as compared to the 37.1% rate during last
year's first nine months. The higher tax rate during the first nine 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 nine months of fiscal 2004 was $25.6 million, a
decrease of $0.9 million, or 3.2% 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. However, lower other income (expense)
combined with our slightly higher effective income tax rate led to the reduction
in net income during the first nine months of fiscal 2004 versus the same period
last year. The Company's return on net sales of 5.8% in the first nine months of
2004 declined slightly as compared to the 5.9% return on net sales realized in
the first nine months 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 third fiscal quarter of 2004, our balance sheet reflected
a current ratio of 4.7 to 1 with no debt. Our cash and cash equivalents totaled
$84.9 million at August 27, 2004, a decrease of $11.3 million from the total
cash and cash equivalents of $96.2 million at the end of the third 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 August 27, 2004 or August 29, 2003.
The Company's seasonal cash flow patterns typically provide cash from
operations during the third quarter of the fiscal year. During the first nine
months of fiscal 2004, the Company generated $20.5 million of cash from
operations. This positive cash flow was below the $34.6 million cash flow
generated during the first nine months of fiscal 2003. The primary reasons for
the lower level of cash flow were lower reductions of current liability balances
and inventory levels this year versus the first nine months of fiscal 2003.
Inventory levels at the end of the third quarter of fiscal 2004 increased $12.0
million, or 17.6% from the levels recorded at the end of the prior year's third
quarter. This increase was primarily attributable to the timing of product
receipts and the increase in the number of retail stores from the third quarter
of 2003. Accounts receivable at August 27, 2004 were $0.4 million or 0.6% higher
than the amount at the end of last year's third quarter. Days sales outstanding,
which is a measure of the length of the collection period of accounts
receivable, was 43 days and 42 days at the end of the third fiscal quarters of
both 2004 and 2003, respectively. Accounts payable at the end of the third
quarter of fiscal 2004 increased $7.3 million from the level recorded at the end
of the prior year's third quarter. This difference was primarily the result of
an increase in inventory in-transit at the end of the third 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 August 27, 2004 were $10.1 million or $4.8 million
higher than the amount at the end of last year's third quarter. This difference
was primarily caused by an increase in prepaid pension expense, largely due to
the $6.0 million of pension contributions that have occurred since the end of
last year's third quarter.
Additions to property and equipment totaled $5.8 million in the first nine
months of 2004, which was greater than the $5.3 million in the first nine months
of 2003. During the first nine months of fiscal 2004, as compared to the same
period last year, the Company increased its spending on information technology,
e-commerce and new retail stores with lower spending on 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 nine months of fiscal 2004 we returned $37.1 million to
shareholders through share repurchases and cash dividends. We spent $8.8 million
in the third quarter to repurchase 847,300 common shares under our share
repurchase program. As of August 27, 2004, 5.5 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. Under the terms of our credit agreement, as amended
on July 13, 2004, we are not allowed to make distributions to stockholders in
excess of $50 million during fiscal year 2004. The previous limit on
distribution to stockholders during the 2004 fiscal year was $40 million. We
expect to continue to purchase shares opportunistically through the remainder of
the fiscal year.
At the end of the third quarter of fiscal 2004, there were no borrowings
outstanding under the Company's $75.0 million revolving credit facility. This is
consistent with the third quarter of fiscal 2003. We did not utilize any
available credit under the revolving credit line during the first nine 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 August 27 2004, letters of credit totaling $25.1
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 third 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
- ---------------------------------------------------------------------------------
May 29, 2004 - June 25, 2004 - - - 6,394,700
June 26, 2004 - July 30, 2004 490,200 $10.55 490,200 5,904,500
July 31, 2004 - August 27, 2004 357,100 $10.14 357,100 5,547,400
--------- ------ --------- ---------
Total 847,300 $10.38 847,300 5,547,400
========= ====== ========= =========
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. In June 2004, the Board of Directors increased the authorization
under the existing stock repurchase program by 5 million shares. 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
THE STRIDE RITE CORPORATION
ITEM 6. EXHIBITS
(a) Exhibits. The following exhibits are contained in this report:
---------
Exhibit Number Description
-------------- -----------
10.1 Second Amendment to Revolving Credit
Agreement between the Registrant and Fleet
National Bank, Bank of America National
Association, The Bank of New York and
SunTrust Bank dated as of July 13, 2004.
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.
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 7, 2004 By: /s/ Frank A. Caruso
---------------------------
Frank A. Caruso
Chief Financial Officer