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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 June 3, 2005
( ) 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 reports), 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 Rule 12b-2 of the Exchange Act).
Yes(X) No ( )
As of July 12, 2005, 36,277,374 shares of the Registrant's common stock, $.25
par value, and the accompanying Preferred Stock Purchase Rights were
outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 3, May 28,
2005 December 3, 2004
(Unaudited) 2004 (Unaudited)
--------------- -------------- ------------
Assets
Current Assets:
Cash and cash
equivalents $30,376 $20,005 $17,324
Marketable securities 40,000 70,850 62,250
Accounts and notes
receivable, net 73,079 47,730 79,278
Inventories 98,476 87,790 80,749
Deferred income taxes 15,134 13,123 15,178
Other current assets 11,179 15,681 10,734
------- ------- -------
Total current assets 268,244 255,179 265,513
Property and equipment, net 51,758 54,246 57,793
Other assets 13,104 11,871 13,193
------- ------- -------
Total assets $333,106 $321,296 $336,499
======== ======== ========
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)
(In thousands, except for share data)
June 3, May 28,
2005 December 3, 2004
(Unaudited) 2004 (Unaudited)
------------- -------------- -------------
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $14,647 $21,046 $20,529
Income taxes payable 17,378 15,316 17,111
Accrued expenses and other
liabilities 20,884 21,377 20,816
--------- --------- -------
Total current liabilities 52,909 57,739 58,456
Deferred income taxes 487 487 844
Pension obligation and other
long-term liabilities 16,280 16,208 13,145
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
Shares outstanding -
36,233,727 on June 3,
2005, 35,907,478 on
December 3, 2004 and
37,723,512 on May 28,
2004
Capital in excess of par
value 14,634 15,969 15,371
Retained earnings 450,067 434,147 431,519
Accumulated other
comprehensive loss (9,223) (9,398) (7,927)
Less cost of 20,712,817
shares of common stock
held in treasury
(21,039,066 on December
3, 2004 and 19,223,032
on May 28, 2004) (206,285) (208,093) (189,146)
---------- ---------- ---------
Total stockholders' equity 263,430 246,862 264,054
---------- ---------- ---------
Total liabilities and
stockholders' equity $333,106 $321,296 $336,499
======== ======== ========
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 June 3, 2005 and May 28, 2004
(In thousands, except per share data)
Three Months Ended Six Months Ended
--------------------------- ---------------------------
June 3, May 28, June 3, May 28,
2005 2004 2005 2004
------------- ------------ ------------ -------------
Net sales $159,641 $165,009 $310,232 $301,143
Cost of sales 94,430 101,507 184,489 184,628
--------- --------- --------- ---------
Gross profit 65,211 63,502 125,743 116,515
Selling and
administrative
expenses 47,028 44,589 94,479 85,929
--------- --------- --------- ---------
Operating income 18,183 18,913 31,264 30,586
Investment income 380 473 680 1,044
Interest expense (91) (82) (172) (156)
Other expense, net (81) (70) (138) (148)
---------- ---------- ---------- ----------
208 321 370 740
Income before
income taxes 18,391 19,234 31,634 31,326
Provision for
income taxes 6,639 7,334 11,721 11,942
--------- --------- --------- ---------
Net income $11,752 $11,900 $19,913 $19,384
========= ========= ========= =========
Net income per
common share:
Diluted $ .32 $ .30 $ .54 $ .49
========= ========= ========= =========
Basic $ .32 $ .31 $ .55 $ .50
========= ========= ========= =========
Dividends per
common share $ .06 $ .05 $ .11 $ .10
========= ========= ========= =========
Average common
shares used in
per share
computations:
Diluted 37,185 39,450 37,075 39,887
========= ========= ========= =========
Basic 36,175 38,637 36,091 39,029
========= ========= ========= =========
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 June 3, 2005 and May 28, 2004
(Dollars in thousands)
2005 2004
------------ -----------
Cash flows from operating activities:
Net income $19,913 $19,384
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities:
Depreciation and amortization 6,320 6,495
Deferred income taxes (2,011) (322)
Compensation expense related to stock plans 360 -
Gain related to long-term investments (61) -
Loss on disposals of property and
equipment 30 226
Changes in:
Accounts and notes receivable (25,470) (28,307)
Inventories (10,720) 1,157
Other current assets 7,483 10,051
Other current liabilities (5,520) (5,708)
Other long-term assets (1,233) 1,122
Other long-term liabilities 72 -
Contribution to pension plan (3,000) (1,000)
-------- -------
Net cash(used in)provided by operating
activities (13,837) 3,098
-------- -------
Cash flows from investing activities:
Additions to property and equipment (3,863) (3,712)
Investments in marketable securities
available for sale (29,325) (34,050)
Proceeds from sale of marketable securities
available for sale 60,175 63,950
Distributions from long-term investments 61 -
------- -------
Net cash provided from investing activities 27,048 26,188
------- -------
Cash flows from financing activities:
Proceeds from sale of stock under stock plans 6,172 3,368
Cash dividends paid (3,598) (3,947)
Repurchase of common stock (5,758) (22,455)
-------- --------
Net cash used in financing activities (3,184) (23,034)
-------- --------
Effect of exchange rate changes on cash and
cash equivalents 344 (50)
------- -------
Net increase in cash and cash equivalents 10,371 6,202
Cash and cash equivalents at beginning of the
period 20,005 11,122
------- -------
Cash and cash equivalents at end of the period $30,376 $17,324
======= =======
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 June 3, 2005 and May 28, 2004
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 June 3, 2005 and
May 28, 2004 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 December 3, 2004 on Form 10-K, which
included all information and footnotes necessary for such presentation.
In the first quarter of fiscal 2005 the Company concluded that it was
appropriate to classify its auction rate securities as current marketable
securities. These securities are considered available for sale. Previously, such
securities had been classified as cash and cash equivalents. Accordingly, the
Company has revised the classification in all periods presented to report these
securities as short-term marketable securities in its condensed consolidated
balance sheets. The Company has also made corresponding adjustments to its
condensed consolidated statements of cash flows to reflect the gross purchases
and sales of these securities as investing activities rather than as a component
of cash and cash equivalents. This change in classification does not affect
previously reported cash flows from operating or from financing activities in
its condensed consolidated statements of cash flows or previously reported
condensed consolidated statements of income.
Also in the first quarter of fiscal 2005, the Company recorded a one-time
non-cash charge to conform its accounting policies with generally accepted
accounting principles related to the timing of rent expense for certain retail
store locations. The amount of this first quarter cumulative charge was $436,000
before tax and $269,000 after tax. The impact on earnings per share was less
than $.01 for both the first quarter and year to date periods. Previously, the
Company followed a practice prevalent across the retailing industry, in which it
began recording rent expense when the store opened and the lease term commenced.
Beginning with the 2005 fiscal year, the Company records rent expense when it
takes possession of a store, which occurs before the commencement of the lease
term and approximately 30 to 60 days prior to the opening of the store. This
results in an acceleration of the commencement of rent expense for each lease,
as we begin recording rent expense during the pre-opening period, but a
reduction in monthly rent expense, as the total rent due under the lease is
amortized over a greater number of months. Financial results for prior periods
have not been restated due to the immateriality of these amounts to the
consolidated statement of income and the consolidated balance sheet of each
prior year.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
This change will not affect historical or future cash flows or the timing
or amounts of payments under related leases, as this related solely to
accounting treatment. Furthermore, it is not expected to have any material
impact on future earnings.
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 valuation
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 materially from those estimates.
Stock Purchase and Option Plans
During the first quarter of fiscal 2003, the Company adopted the disclosure
provisions of Financial Accounting Standards Board (FASB)- Statement of
Financial Accounting Standard (SFAS) No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure" (SFAS No. 148). SFAS No. 148 amends
SFAS No. 123, "Accounting for Stock-Based Compensation" to provide two
additional alternative transition methods if a company voluntarily decides to
change its method of accounting for stock-based employee compensation to the
fair-value method. SFAS No. 148 also amends the disclosure requirements of SFAS
No. 123 by requiring that companies make quarterly disclosures regarding the
proforma effects of using the fair-value method of accounting for stock-based
compensation, effective for interim periods beginning after December 15, 2002.
At June 3, 2005, 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 December 3, 2004 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", (APB 25)and related interpretations.
In January 2005, the Company issued performance-based restricted stock to
certain employees. These shares have both service and performance criteria that
must be met. Depending on the performance achievement level, the amount of
restricted stock can be increased up to 150% or decreased to zero. These shares
also earn dividend equivalents until they vest. The Company accounted for these
shares in accordance with APB 25 and FASB Interpretation No. 28, "Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans" (FIN
28). The Company is recognizing compensation expense based on market values at
the end of each quarterly period.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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
June 3, May 28, June 3, May 28,
2005 2004 2005 2004
------------------------------------------------
(In thousands, except for per share data)
Net income, as reported $11,752 $11,900 $19,913 $19,384
Add: Stock-based employee
compensation expense included
in net income, net of related
tax effects
164 6 247 6
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects
(645) (434) (1,142) (940)
--------- -------- --------- ---------
Pro forma net income $11,271 $11,472 $19,018 $18,450
======== ======= ======== ========
Earnings per share:
Basic - as reported $ .32 $ .31 $ .55 $ .50
======== ======= ======== ========
Basic - pro forma $ .31 $ .30 $ .53 $ .47
======== ======= ======== ========
Diluted - as reported $ .32 $ .30 $ .54 $ .49
======== ======= ======== ========
Diluted - pro forma $ .30 $ .29 $ .51 $ .46
======== ======= ======== ========
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 Six Months Ended
------------------- ------------------
June 3, May 28, June 3, May 28,
2005 2004 2005 2004
--------- -------- -------- --------
(In thousands, except for per share data)
Net income $11,752 $11,900 $19,913 $19,384
Weighted average common shares
outstanding (basic) 36,175 38,637 36,091 39,029
Dilutive effect of stock options 1,010 813 984 858
------- ------- ------- -------
Weighted average common shares
outstanding (diluted) 37,185 39,450 37,075 39,887
====== ====== ====== ======
Earnings per common share
Basic $ .32 $ .31 $ .55 $ .50
===== ===== ===== =====
Diluted $ .32 $ .30 $ .54 $ .49
===== ===== ===== =====
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
------------------- ------------------
2005 2004 2005 2004
---------------------------------------
(In thousands)
Options to purchase shares of common
stock - 1,079 26 318
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
------------------- --------------------
June 3, May 28, June 3, May 28,
2005 2004 2005 2004
---------- --------- --------- --------
(In thousands)
Net income $11,752 $11,900 $19,913 $19,384
Other comprehensive
income(loss):
Foreign currency translation
adjustments ( 70) (127) 175 (129)
-------- -------- -------- --------
Total comprehensive income $11,682 $11,773 $20,088 $19,255
======= ======= ======= =======
Components of accumulated other comprehensive loss consist of the
following:
June 3, December 3, May 28,
2005 2004 2004
--------------- ---------------- --------------
(In thousands)
Foreign currency translation
adjustments $ 10 $ (165) $ (346)
Minimum pension liability
adjustments, net of taxes (9,233) (9,233) (7,581)
-------- -------- -------
Accumulated other
comprehensive loss $(9,223) $(9,398) $(7,927)
======== ======== ========
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
- -------------------------------------------------------------------------------
June 3, 2005 (In thousands)
Gross carrying amount $3,067 $2,980 $6,047
Accumulated amortization (2,159) (1,290) (3,449)
December 3, 2004
Gross carrying amount $3,067 $2,980 $6,047
Accumulated amortization (2,159) (1,290) (3,449)
May 28, 2004
Gross carrying amount $3,067 $2,980 $6,047
Accumulated amortization (2,159) (1,290) (3,449)
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Benefit Plans
The following table summarizes the components of net periodic benefit cost
for the Company:
Three Months Ended Six Months Ended
--------------------- ---------------------
June 3, May 28, June 3, May 28,
2005 2004 2005 2004
--------- --------- --------- ----------
(In thousands)
Service cost $ 530 $ 413 $1,060 $ 851
Interest cost 955 876 1,910 1,806
Expected return on assets (1,120) (997) (2,240) (1,995)
Net loss recognized 505 353 1,010 728
Amortization of prior services cost
5 5 10 10
------ ------ ------ ------
Net periodic benefit cost $ 875 $ 650 $1,750 $1,400
====== ====== ====== ======
During the first quarter of fiscal 2005, the Company contributed $3.0
million to the Company's defined benefit pension plan. At this time, the Company
does not plan to make any further contributions to its defined benefit pension
plan during the 2005 fiscal year. The Company made $1.0 million in contributions
during the first six months of fiscal 2004.
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.
Note 7 - Business Segments and Related Information
During the second quarter of fiscal 2005, the Company determined that it
has four reportable segments. Prior periods have been recast to conform to the
current presentation. The reportable segments are Stride Rite Children's Group -
Retail, Stride Rite Children's Group - Wholesale, Tommy Hilfiger Footwear and
Other Wholesale Footwear. The Stride Rite Children's Group - Retail segment is
comprised of the retail businesses of the Stride Rite Children's Group which
encompass the children's retail shoe stores, the outlet
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - BUSINESS SEGMENTS AND RELATED INFORMATION
shoe stores and the e-commerce site, striderite.com. The Stride Rite
Children's Group - Wholesale segment designs and markets children's footwear,
primarily for consumers between the ages of six months and ten years, including
dress and recreation shoes, boots, sandals and sneakers in traditional and
contemporary styles. These products are marketed under our Stride Rite(R),
Munchkin (R), Sperry Top-Sider (R), Tommy Hilfiger (R) and Born(R) trademarks in
medium to high price ranges and under our Baby Smart (R) trademark in medium to
lower price ranges. The Tommy Hilfiger Footwear segment designs and markets a
line of dress casual, sport casual and athletic footwear for men and women,
using the Tommy Hilfiger (R), and Tommy Girl (R) brand names under a license
agreement with Tommy Hilfiger Licensing, Inc. It also has the PRO-Keds (R)
trademark, which is now licensed to a third party. The Other Wholesale Footwear
segment is comprised of the three other operating segments of the Company, Keds,
Sperry Top-Sider and Stride Rite International, which have been aggregated into
one reportable segment. Keds designs and markets sneakers and casual footwear
for adults and children under the Keds(R) trademark and casual footwear for
women under the Grasshoppers (R) label. Sperry Top-Sider designs and markets
marine footwear and outdoor recreational, hand-sewn, dress and casual footwear
for adults under the Sperry Top-Sider (R), Sperry (R) and Mainsail (R)
trademarks. Stride Rite International distributes all of the Company's product
lines to customers outside of the United States.
The Company has various costs related to shared corporate services, such as
warehousing, customer service, credit and collections, finance, human resources,
information technology, product sourcing, executive and public company costs.
These costs are allocated to the operating segments based on usage or other
statistical measures. These allocated costs are not reflected in segment profit
contribution, but are reflected in segment operating income. Segment profit
contribution includes the gross profit from sales less direct costs, such as
payroll and related, advertising and warehouse distribution. Operating income
reflects all allocated corporate costs. The accounting policies of the segments
are the same as those described in the summary of significant accounting
policies. The Company's reportable segments are based on the way management
organizes the segments in order to make operating decisions and to assess
performance along types of products sold. The Company primarily evaluates
segment performance based on segment profit contribution and operating income.
Total assets are disaggregated to the extent that assets apply specifically to a
single segment. Unallocated Corporate assets primarily consist of cash and
marketable securities, assets of the Company's distribution centers, sourcing
assets, deferred income taxes and information technology equipment.
The Unallocated Corporate component of operating income consists primarily
of pension expense and certain other costs incurred in support of company-wide
activities. Investment income, interest expense and other income and expense are
not allocated among the reportable business segments.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended June 3, 2005 and May 28, 2004:
Stride Stride
Rite Rite
Children's Children's Tommy Other Unallocated
Second Quarter Group - Group - Hilfiger Wholesale Corporate Consol
2005 Retail Wholesale Footwear Footwear & Other idated
- -------------- --------- --------- --------- -------- ---------- ------
(In thousands)
Sales $45,977 $19,491 $24,690 $72,550 $162,708
Intercompany
sales 25 954 2,088 3,067
Net sales to
external
customers 45,977 19,466 23,736 70,462 159,641
Profit
contribution 6,752 4,157 2,247 16,186 29,342
Operating income 5,636 1,782 666 11,861 (1,762) 18,183
Interest and
other, net 208
-------
Income before
income taxes 18,391
=======
Total assets 38,061 60,942 23,924 91,459 118,720 333,106
Stride Stride
Rite Rite
Children's Children's Tommy Other Unallocated
Second Quarter Group - Group - Hilfiger Wholesale Corporate Consol
2004 Retail Wholesale Footwear Footwear & Other idated
- ---- --------- --------- --------- -------- ---------- ------
(In thousands)
Sales $43,156 $20,551 $28,656 $75,457 $167,820
Intercompany sales 23 765 2,023 2,811
Net sales to
external
customers 43,156 20,528 27,891 73,434 165,009
Profit
contribution 7,514 4,504 2,382 14,119 28,519
Operating income 6,449 2,170 729 9,759 (194) 18,913
Interest and
other, net 321
------
Income before
income taxes 19,234
======
Total assets 37,329 58,115 27,119 85,637 128,299 336,499
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 3, 2005 and May 28, 2004:
Stride Stride
Rite Rite
Children's Children's Tommy Other Unallocated
Group - Group - Hilfiger Wholesale Corporate Consol
Six Months 2005 Retail Wholesale Footwear Footwear & Other idated
- --------------- --------- --------- --------- -------- ---------- ------
(In thousands)
Sales $81,422 $45,078 $42,944 $146,469 $315,913
Intercompany sales 51 1,794 3,836 5,681
Net sales to
external
customers 81,422 45,027 41,150 142,633 310,232
Profit
contribution 7,334 10,569 2,612 34,156 54,671
Operating income 5,102 5,819 (549) 25,505 (4,613) 31,264
Interest and
other, net 370
------
Income before
income taxes 31,634
======
Total assets 38,061 60,942 23,924 91,459 118,720 333,106
Stride Stride
Rite Rite
Children's Children's Tommy Other Unallocated
Group - Group - Hilfiger Wholesale Corporate Consol
Six Months 2004 Retail Wholesale Footwear Footwear & Other idated
- --------------- --------- --------- --------- -------- ---------- ------
(In thousands)
Sales $72,240 $45,601 $48,887 $139,379 $306,107
Intercompany sales 47 1,279 3,638 4,964
Net sales to
external
customers 72,240 45,554 47,608 135,741 301,143
Profit
contribution 5,972 10,011 3,947 29,861 49,791
Operating income 3,842 5,343 641 21,141 (381) 30,586
Interest and
other, net 740
------
Income before
income taxes 31,326
======
Total assets 37,329 58,115 27,119 85,637 128,299 336,499
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Pending Acquisition
On June 2, 2005, the Company announced it has entered into a definitive
agreement to acquire Saucony, Inc. Under the terms of the agreement, Saucony
shareholders will receive $23.00 in cash for each Saucony share. The transaction
value is approximately $170 million based on the current number of shares of
Saucony's common stock outstanding and net option value. The transaction is
expected to close in the summer of 2005 and is subject to regulatory approval,
the approval by the holders of at least two-thirds of Saucony's Class A shares
and the holders of at least two-thirds of Saucony's Class A and B shares voting
together as a single class and other customary closing conditions. The Company
intends to finance the acquisition with cash on hand, Saucony's existing cash of
approximately $30 million and borrowings under a new revolving credit facility
that will be led by Bank of America, N.A. and which will include a number of
other banks.
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: the pending acquisition
of Saucony, Inc. may not be consummated; the ability of the Company to fully
integrate Saucony's operations and employees; the possible failure to retain the
Tommy Hilfiger footwear license; 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; unseasonable weather; 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 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
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
retailers, the 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; 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 2004.
Those trends and factors continue to be relevant to the Company's performance
and financial condition.
Critical Accounting Policies and 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 policies
and estimates in the Company's Annual Report on Form 10--K for the fiscal year
ended December 3, 2004 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.
Whether our license with Tommy Hilfiger will remain in effect depends on our
achieving certain minimum sales levels for the licensed products. We expect to
continue to meet the minimum sales levels required by the Tommy Hilfiger license
agreement. 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 2005 as compared to the results for the
same periods in fiscal 2004:
Increase (Decrease) Percent vs. 2004 Results:
- ---------------------------------------------
Second Quarter Six Months
-------------- ----------
Net sales (3.3)% 3.0%
Gross profit 2.7% 7.9%
Selling and administrative expenses 5.5% 10.0%
Operating income (3.9)% 2.2%
Income before income taxes (4.4)% 1.0%
Net income (1.2)% 2.7%
Operating Ratios as a Percent of Net Sales:
- -------------------------------------------
Second Quarter Six Months
------------------ -------------------
2005 2004 2005 2004
-------- -------- ------- ---------
Gross profit 40.8% 38.5% 40.5% 38.7%
Selling and administrative expenses 29.5% 27.0% 30.5% 28.5%
Operating income 11.4% 11.5% 10.1% 10.2%
Income before income taxes 11.5% 11.7% 10.2% 10.4%
Net income 7.4% 7.2% 6.4% 6.4%
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net Sales
- ---------
The second quarter breakdown of net sales is as follows:
Percent
Change
2005 vs.
2005 2004 2004
--------- --------- ----------
(In millions, except percentages)
Stride Rite Children's Group - Wholesale $19.5 $20.5 (5.2)%
Stride Rite Children's Group - Retail 46.0 43.2 6.5%
--------- --------- ----------
Stride Rite Children's Group 65.5 63.7 2.8%
Keds 41.6 48.7 (14.6)%
Tommy Hilfiger Footwear 24.7 28.7 (13.8)%
Sperry Top-Sider 23.1 19.7 17.2%
Stride Rite International 7.9 7.0 11.7%
Elimination of intercompany sales (3.2) (2.8) n/a
--------- --------- ----------
Total net sales $159.6 $165.0 (3.3)%
========= ========= ==========
During the second quarter of fiscal 2005, consolidated net sales decreased
$5.4 million to $159.6 million, or 3.3% below the sales level achieved in the
second quarter of fiscal 2004. Wholesale net revenues decreased 6.7% for the
second quarter of 2005, and overall retail sales, including Keds retail and the
e-commerce sites, increased $2.8 million or 6.3% when compared to the same
period in the prior year. Unit shipments of first quality merchandise for the
wholesale brands during the second quarter were 5.3% lower than the comparable
period in 2004. The Company's average first quality wholesale selling price
increased 2.5% from the second quarter of 2004.
First quality wholesale gross sales decreased by $2.0 million, or 2.0%
below the wholesale gross sales level achieved in the second quarter of fiscal
2004. In addition, sales from promotional products decreased $1.3 million and
closeout sales decreased $7.5 million from the comparable period in the 2004
fiscal year. The lower level of closeout sales contributed to an improvement in
the product mix in net sales, which resulted in an overall improvement in gross
profit. Partially offsetting these wholesale sales declines was a $2.7 million
decrease in returns and allowances and a $2.8 million increase in retail store
sales from the same period in 2004, which resulted in an overall decrease of
$5.4 million in consolidated net sales.
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 2005, the Company's gross profit of
$65.2 million increased $1.7 million or 2.7% above the amount recorded during
fiscal 2004's second quarter. The higher level of retail sales along with the
decrease in returns and allowances contributed to the overall increase in gross
profit dollars. The gross profit rate for the fiscal 2005 second quarter
improved 2.3 percentage points to 40.8% as compared to the 38.5% rate achieved
in the prior year's second quarter. The higher gross profit percentage was
largely attributable to the decreased sales of closeout products, primarily in
the Keds and Tommy Hilfiger divisions. In addition, fewer markdown allowances
and increased company-owned retail store sales also contributed positively to
the improved gross profit rate.
Operating Costs
- ---------------
During the second quarter of fiscal 2005, selling and administrative
expenses were $47.0 million, an increase of $2.4 million or 5.5% as compared to
the second quarter of fiscal 2004. As a percent of sales, operating costs were
29.5% in the second quarter of fiscal 2005 compared to 27.0% in the second
quarter of fiscal 2004. This increase was principally the result of advertising
costs which were 6.1% of net sales during the second quarter of fiscal 2005
versus 5.3% in fiscal 2004, with Keds and Sperry Top-Sider driving most of the
increase. Also contributing to the higher expense levels in the fiscal 2005
second quarter were the costs associated with the increased number of Stride
Rite Children's Group retail stores.
Other Income and Taxes
- ----------------------
Other income (expense) increased pre-tax income by $0.2 million in the
second quarter of fiscal 2005 versus $0.3 million in the second quarter of
fiscal 2004. Investment income related to the Company's cash equivalents and
marketable securities was $0.3 million in the second quarter of fiscal 2005,
which was a slight increase to the similar category of investment income in the
same quarter last year. The higher average interest rates in the second quarter
of fiscal 2005 were sufficient to offset the lower average amount of
investments. Interest expense remained flat in the second quarter of fiscal 2005
as compared to the second quarter of fiscal 2004 as no short-term borrowings
were made during the second quarters of both years.
The provision for income taxes decreased $0.7 million in the second quarter
of fiscal 2005 as compared to the similar period in fiscal 2004. This decrease
was due to the lower pre-tax income amount and the lower effective income tax
rate. Our effective tax rate was 36.1% in the second quarter of fiscal 2005 as
compared to 38.1% in the second quarter of fiscal 2004. The lower tax rate in
the second quarter of fiscal 2005 versus the second quarter in fiscal 2004
related primarily to certain tax reserves established in prior years that were
no longer required.
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 second quarter of fiscal 2005 was $11.8 million, a
decrease of $0.1 million, or 1.2% as compared to the same period in the prior
year. The lower net sales were offset by a higher gross profit percentage and a
lower effective tax rate. This was, however, offset by higher operating costs
resulting in a slight decrease in net income. The Company's return on net sales
of 7.4% in the second fiscal quarter of 2005 was an improvement versus the 7.2%
return on sales recorded for the second fiscal quarter of 2004.
Segments Review
- ---------------
Stride Rite Children's Group - Retail
- -------------------------------------
The year over year increase in net sales of the Stride Rite Children's
Group - Retail was primarily attributable to the 6.5% increase in net sales from
the Children's Group company-owned retail stores. Sales at comparable Children's
Group retail stores (stores open for 52 weeks in each fiscal year) increased
1.9% for the second fiscal quarter of 2005. Driving this increase in the
comparable stores category was the new "Baby Stages" product launch in specialty
stores, as well as improved inventory selection in outlet stores. The shift in
the Easter holiday from the second quarter last year to the first quarter this
year hurt overall comparable sales in the second quarter of fiscal 2005 as a
portion of the sales connected to Easter were pulled into the first fiscal
quarter in 2005. At the end of the second quarter of fiscal 2005, the Stride
Rite Children's Group - Retail operated 259 stores. This is an increase of 19
stores, or 8% from the end of the same period in the prior year. Current plans
call for the opening of approximately 22 retail stores and the closing of 2
underperforming locations during the 2005 fiscal year. During the second quarter
of 2005 the Company opened 5 new stores. In addition, the Children's Group -
Retail Division converted 2 former Shoe Buzz stores to outlet stores.
The Stride Rite Children's Group - Retail profit contribution declined due
to a lower gross profit percentage versus the prior year. In addition there were
higher store operating costs in the second quarter of fiscal 2005, primarily
related to the additional stores and increased indirect store costs. The lower
operating income compared to last year reflects the contribution decline less
the allocated corporate overhead costs.
Stride Rite Children's Group - Wholesale
- ----------------------------------------
Sales decreased 5.2% during the second quarter of 2005 as compared to the
same quarter last year. This decrease was primarily attributable to decreased
sales of first quality products, mainly in the Tommy Hilfiger and Munchkin
product lines, as well as a decrease in closeout sales.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Stride Rite Children's Group - Wholesale profit contribution and
operating income declines versus the prior year was primarily related to the
impact of the lower sales in fiscal 2005 compared to 2004. A lower gross profit
rate in the second quarter of fiscal 2005 also negatively impacted results
versus the same period last year.
Tommy Hilfiger Footwear, Inc.
- -----------------------------
The decrease in sales of Tommy Hilfiger men's and women's footwear products
during the second quarter of fiscal 2005 was primarily attributable to continued
decreased shipments to the department store and independent channels in the
Tommy Hilfiger men's product line. The PRO-Keds brand licensing in fiscal 2005
resulted in $1.4 million of the decrease in the comparison to the prior year's
Tommy Hilfiger net sales. Starting in fiscal 2005 Tommy Hilfiger Footwear began
licensing the PRO-Keds trademark to an independent third party instead of
marketing and selling PRO-Keds products directly. This change negatively impacts
sales comparisons to the prior year.
The Tommy Hilfiger profit contribution and operating income declines versus
prior year was primarily related to the effect of the lower sales in fiscal 2005
compared to 2004. Weaker gross profit performance of first quality products in
the second quarter of fiscal 2005 also negatively effected profit comparisons to
the same period in fiscal 2004.
Other Wholesale Footwear
- ------------------------
The decrease in sales of the Other Wholesale Footwear segment was primarily
attributable to a decline in sales of the Keds product line. The Keds decline
was largely attributable to a strategic decision to reduce sales to the moderate
and value channels, combined with fewer closeout sales. This decrease was
partially offset by a decrease in returns and allowances. Partially offsetting
the Keds decrease in sales was the increase in sales of Sperry Top-Sider
products during the second quarter of the 2005 fiscal year, which was primarily
attributable to strong sales of men's boat shoes and their overall women's
product line. The significant growth in men's product sales seen in 2005
resulted from increases in the premium department store, family shoe store and
outdoor channels. The women's business had improved distribution in the better
department store, independent and outdoor channels, which resulted in increased
sales of boat shoes, nautical casuals and canvas. The Stride Rite International
division's net sales growth in the second quarter of fiscal 2005 was also able
to offset a portion of the Keds decrease in sales and was the result of strong
sales of Stride Rite and Keds footwear in Canada, as well as Sperry and Keds
footwear in Europe.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The increased profit contribution and operating income versus prior year in
this segment was primarily the result of Keds improved gross profit percentage
performance due to significantly fewer closeout sales, discounts and allowances.
This improvement in gross profit was somewhat offset by increased Keds and
Sperry Top-Sider advertising spending.
First Six Months of 2005 Compared to the First Six Months of 2004
- -----------------------------------------------------------------
Net Sales
- ---------
The first six months breakdown of net sales is as follows:
Percent
Change
2005 vs.
2005 2004 2004
---- ---- ----------
(In millions, except percentages)
Stride Rite Children's Group - Wholesale $45.1 $45.6 (1.1)%
Stride Rite Children's Group - Retail 81.4 72.2 12.7%
------- ------- -------
Stride Rite Children's Group 126.5 117.8 7.3%
Keds 87.3 91.1 (4.3)%
Tommy Hilfiger Footwear 43.0 48.9 (12.2)%
Sperry Top-Sider 42.5 34.4 23.5%
Stride Rite International 16.7 13.8 21.0%
Elimination of intercompany sales (5.8) (4.9) n/a
------- ------- ------
Total net sales $310.2 $301.1 3.0%
====== ====== =======
During the first six months of fiscal 2005, consolidated net sales
increased $9.1 million to $310.2 million, or 3.0% above the sales level recorded
in the first six months of fiscal 2004. Wholesale net revenues remained flat for
the first half of 2005, while overall retail sales increased $9.2 million or
12.4% when compared to the same period last year. Unit shipments of first
quality merchandise for the wholesale brands during the first half of 2005 were
flat with last year's first half. The Company's average first quality wholesale
selling price increased 1.5% from the first six months of 2004.
First quality wholesale gross sales increased by $2.1 million, or 1.0%
above the wholesale gross sales level achieved in the first half of fiscal 2004.
In addition, returns and allowances decreased $6.1 million and sales of
promotional products increased $0.7 million. Offsetting these changes was an
$8.8 million decrease in closeout sales. This slight net decrease in overall
wholesale net sales was offset by the $9.2 million increase in retail store
sales, which resulted in an overall increase of $9.1 million in consolidated
sales, as compared to the first half of fiscal 2004.
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 first half of fiscal 2005, the Company's gross profit of $125.7
million increased $9.2 million or 7.9% above the amount recorded during the same
period last year. The gross profit rate for the first six months of fiscal 2005
improved 1.8 percentage points to 40.5% as compared to the 38.7% rate achieved
in the same period last year. The increase in first half gross profit was
primarily the result of the higher level of retail sales during the period along
with a reduction in wholesale returns and allowances. The improvement in gross
profit percentage versus last year was due primarily to the reduction in
closeout sales and fewer returns and allowances, as well as the overall increase
in retail sales.
Operating Costs
- ---------------
Operating expenses for the first six months of fiscal 2005 were $94.5
million, an increase of $8.6 million or 10.0% as compared to the same period in
fiscal 2004. As a percent to sales, operating costs were 30.5% in the first half
of fiscal 2005 versus 28.5% in the first half of last year. During the first six
months of fiscal 2005, advertising expenses as a percent of net sales were 5.8%
versus 5.0% in the same period last year. Advertising spending increased
primarily in the Keds and Sperry Top-Sider brands. In addition to the higher
level of advertising costs, there were increased costs related to retail store
expansion, as well as other headcount related costs. Also, the Company recorded
a one-time non-cash charge of $0.5 million in the first quarter of fiscal 2005
to conform our accounting policies with generally accepted accounting principles
related to the timing of rent expense for certain locations.
Other Income and Taxes
- ----------------------
Other income (expense) increased pre-tax income by $0.4 million in the
first six months of fiscal 2005 and by $0.7 million in the first six months of
fiscal 2004. Investment income in the first half of fiscal 2005 was $0.4 million
below the same period of fiscal 2004. Higher average interest rates were not
sufficient to offset lower average investments. Interest expense in the first
half of fiscal 2005 was flat with the level recorded last year. There were no
short-term borrowings during the first half of either fiscal 2005 and 2004.
The provision for income taxes decreased $0.2 million in the first half of
fiscal 2005 as compared to the similar period in fiscal 2004. This slight
decrease was primarily due to the lower effective income tax rate offsetting the
slightly higher pre-tax income amount. During the first half of fiscal 2005, the
effective tax rate was 37.1% as compared to the 38.1% rate during last year's
first half. The lower tax rate during the first six months of fiscal 2005 versus
fiscal 2004 related primarily to tax reserves established in prior years that
were no longer required.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net Income
- ----------
Net income for the first six months of fiscal 2005 was $19.9 million, an
increase of $0.5 million, or 2.7% above that of the same period in the prior
year. Increased net sales and the resulting improvement in gross profit dollars
were offset by higher operating expenses. Lower other expense, net combined with
our lower effective income tax rate led to the increase in net income during the
first half of fiscal 2005 versus the same period last year. The Company's return
on net sales of 6.4% in the first fiscal half of 2005 was flat when compared to
the same period last year.
Segments Review
- ---------------
Stride Rite Children's Group - Retail
- -------------------------------------
Sales of the Children's Group - Retail company-owned stores, increased
12.7% during the first six months of fiscal 2005 versus the same period last
year. Sales at comparable Children's Group retail stores (stores open for 52
weeks in each fiscal year) increased 4.4% for the first half of fiscal 2005. A
major reason for the increase in the comparable store sales results was the new
"Baby Stages" product launch in specialty stores as well as improved inventory
selection in outlet stores. The Stride Rite Children's Group - Retail profit
contribution and operating income increases versus the prior year were primarily
related to the impact of the 2005 sales increase compared to the prior year.
During the first six months of 2005 the Company opened 9 new stores and closed 1
underperforming location for a net increase of 8 stores. In addition, the
Children's Group - Retail division converted 2 former Shoe Buzz stores to outlet
stores. Store operating costs and indirect store costs increased at a greater
rate than sales when compared to last year. This increase in costs related to
the greater number of stores, higher management support costs and upgraded
information technology costs.
Stride Rite Children's Group - Wholesale
- ----------------------------------------
Sales decreased 1.1% during the first six months of 2005 versus the same
period last year. The decrease in sales in the first half of fiscal 2005 versus
the same period in the prior year was principally the result of lower sales in
the Tommy Kids and Munchkin product lines, as well as a decrease in sales of
closeouts. Partially offsetting these declines were increases in first quality
sales of the Stride Rite product line as well as a decrease in returns.
The Stride Rite Children's Group - Wholesale's profit contribution and
operating income increased compared to prior year largely due to reduced direct
operating costs. These cost decreases related primarily to bad debt reserve
reductions and lower freight expenses. In addition, the gross profit percentage
for the first six months of fiscal 2005 was slightly higher than for the same
period in the prior year.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Tommy Hilfiger Footwear
- -----------------------
The decrease in the Tommy Hilfiger Footwear unit's sales performance during
the first six months of fiscal 2005 was primarily attributable to declines in
the core men's product line. The Tommy Hilfiger men's and women's sales during
the first six months of fiscal 2005 were below the sales level when compared to
the same period in the prior year. The PRO-Keds licensing in fiscal 2005
contributed to $2.1 million of the decrease in Tommy Hilfiger net sales for the
first half of fiscal 2005. Beginning in fiscal 2005, Tommy Hilfiger Footwear
started licensing the PRO-Keds trademark to an independent third party instead
of marketing and selling the products directly. This change has negatively
impacted sales comparisons to the prior year.
The Tommy Hilfiger profit contribution and operating income declines versus
the prior year were primarily related to the lower sales in fiscal 2005 compared
to 2004 and the impact of weaker gross profit performance of both first quality
and closeout products.
Other Wholesale Footwear
- ------------------------
Sales of the Other Wholesale Footwear segment for the first six months of
fiscal 2005 were above the levels achieved in the prior year primarily due to
the strong performance of Sperry Top-Sider and Stride Rite International. Sales
of Sperry Top-Sider products increased for the first six months of fiscal 2005.
This increase was primarily the result of a strong performance in the men's
product line, particularly in the premium department store and outdoor channels
in the boat shoe category. Adding to this was continued strong sales of the
women's product line primarily with the boat shoe, nautical casual and canvas
product lines. The Stride Rite International division had a 21.0% increase in
net sales for the first half of 2005, versus the same period in the prior year.
Increased sales of Tommy Hilfiger in Central and South America, as well as Keds
and Sperry Top-Sider products in Canada and Europe, were the primary reasons for
the increase.
These sales gains were partially offset by the performance of the Keds
division. Keds sales decreased in the first half of fiscal 2005 due primarily to
the strategic repositioning of the Keds brand as a higher-priced product line
with improved styling. This resulted in solid sales to the premium retail
channel, but reduced sales to moderate and value channel retailers. Sales of
both Grasshoppers and Keds children's products, which are included in the Keds
results, were also down as compared to the same period last year. Solid
performances of the Champion(R) and Microstretch(TM) products as well as a
decrease in returns and allowances were offset by fewer closeout and sandal
product sales compared to last year.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The increased profit contribution and operating income within the Other
Wholesale Footwear segment was primarily the result of the effect of both the
higher sales and increased gross profit percentage rate in fiscal 2005 versus
2004. The improved gross profit percentage was principally due to Keds overall
higher average selling prices, improved returns and allowances performance and
increased royalty income. This was somewhat offset by increased advertising
spending in both Keds and Sperry Top-Sider.
Liquidity and Capital Resources
- -------------------------------
At the end of the second fiscal quarter of 2005, our balance sheet
reflected a current ratio of 5.1 to 1 with no debt. Our cash, cash equivalents
and marketable securities totaled $70.4 million at June 3, 2005, a decrease of
$9.2 million from the total cash, cash equivalents and marketable securities of
$79.6 million at the end of the second quarter of fiscal 2004. 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
June 3, 2005 or May 28, 2004.
During the first six months of fiscal 2005, the Company used $13.8 million
of cash to fund operating needs. This use of cash to fund operations was
unfavorable when compared to the generation of $3.1 million of cash during the
first half of fiscal 2004. Inventory levels at the end of the second quarter of
fiscal 2005 increased $17.7 million, or 22.0% from the levels recorded at the
end of the prior year's second quarter. The increase in inventory related
primarily to the timing of product receipts, increased levels of in-line
products and the higher number of retail stores. Accounts receivable at June 3,
2005 were $6.2 million or 7.8% lower than the amount at the end of last year's
second quarter. Days sales outstanding ("DSO"), which measures the length of the
collection period for accounts receivable, was 42 days at the end of the second
fiscal quarter of 2005 and was similar to the DSO of 41 days at the end of the
same period last year. Accounts payable, at the end of the second quarter of
fiscal 2005, decreased $5.9 million from the level recorded at the end of the
prior year's second quarter. This decrease was primarily the result of the
timing of payments and the reduction of a large vendor payment. During the first
fiscal quarter of 2005, the Company also contributed $3.0 million to its defined
benefit pension plan. The Company does not plan to make any further
contributions to its defined benefit pension plan during the 2005 fiscal year.
Additions to property and equipment totaled $3.9 million in the first half
of 2005, which was similar to the $3.7 million in the first half of 2004.
Funding of our capital expenditures was provided from internal sources. We
expect that all capital purchases during fiscal 2005 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 2005 we returned $9.4 million to
shareholders through share repurchases and cash dividends. We spent $5.8 million
to repurchase 437,300 common shares under our share repurchase program. As of
June 3, 2005, we have approximately 4.1 million shares remaining on our share
repurchase authorization. We expect to continue to purchase shares
opportunistically through the remainder of the fiscal year.
At the end of the second quarter of fiscal 2005, there were no borrowings
outstanding under the Company's $75 million revolving credit facility. This is
consistent with the second quarter of fiscal 2004. We did not utilize any
available credit under the revolving credit line during the first quarter of
fiscal 2005. Borrowings were not required during the quarter primarily because
we entered the year with no outstanding debt and significant cash, cash
equivalents and marketable securities balances. As of June 3, 2005 letters of
credit totaling $44.5 million were outstanding for the purchase of inventories.
The issuance of letters of credit for inventory purchases does not impact the
Company's borrowing capacity under the revolving line of credit because these
letters of credit are supported by other uncommitted lines of credit. All
letters of credit generally expire within one year.
On June 2, 2005, the Company announced it has entered into a definitive
agreement to acquire Saucony, Inc. Under the terms of the agreement, Saucony
shareholders will receive $23.00 in cash for each Saucony share. The transaction
value is approximately $170 million based on the current number of shares of
Saucony's common stock outstanding and net option value. The transaction is
expected to close in the summer of 2005 and is subject to regulatory approval,
the approval by the holders of at least two-thirds of Saucony's Class A shares
and the holders of at least two-thirds of Saucony's Class A and B shares voting
together as a single class and other customary closing conditions. The Company
intends to finance the acquisition with cash on hand, Saucony's existing cash of
approximately $30 million and borrowings under a new revolving credit facility
that will be led by Bank of America, N.A. and which will include a number of
other banks.
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.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information previously
reported under Item 7A of the Company's Annual Report on Form 10-K for the
fiscal year ended December 3, 2004.
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 of and with the participation of the
Company's management, including the participation of its 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 Rule 13a-15 of the
Securities Exchange Act of 1934, as amended. Based upon that evaluation, as of
the end of the period covered by this report, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended) are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. We continue to review and document our
disclosure controls and procedures and may from time to time make changes aimed
at enhancing their effectiveness and ensuring that our systems evolve with our
business.
(b) Changes in internal controls over financial reporting.
There was no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities
Exchange Act of 1934, as amended) during our second quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Our repurchases of equity securities for the second quarter of fiscal 2005
were as follows:
Total
Number of Maximum
Shares Number
Purchased of Shares
Total Average As Part that May
Number Price of Yet Be
of Paid Publicly Purchased
Shares Per Announced Under the
Period Purchased Share Plan Plan
- --------------------------------------------------------------------------------
March 5, 2005 - April 1, 2005 - - - 4,062,594
April 2, 2005 - May 6, 2005 5,100 $13.03 5,100 4,057,494
May 7, 2005 - June 3, 2005 - - - 4,057,494
In June 2004, the Board of Directors increased the authorization under an
existing stock repurchase program by five 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's shareholders was held on April 14,
2005. The three directors nominated by the Company's Board of Directors were
elected by the vote set forth below:
Votes
------------------------------
Name of Director For Withheld
-------------------------- ------------------------------
F. Lance Isham 32,951,518 687,740
Frank R. Mori 32,907,033 732,225
Bruce Van Saun 32,943,793 695,465
The Company's other directors, whose term of office continues after the
2005 stockholders' meeting, are as follows:
David M. Chamberlain
Christine M. Cournoyer
Shira D. Goodman
James F. Orr III
Myles J. Slosberg
The Company's shareholders also ratified the Company's selection of
PricewaterhouseCoopers LLP as auditors of the Company for the 2005 fiscal year
by the vote set forth below:
Votes
-----------------------------------------------
For Against Abstentions
--- ------- -----------
33,109,331 504,885 25,042
PART II - OTHER INFORMATION (continued)
THE STRIDE RITE CORPORATION
ITEM 6. EXHIBITS
(a) Exhibits. The following exhibits are contained in this report:
---------
Exhibit Number Description
-------------- -----------
3(i) Restated Articles of Organization of the
Registrant with amendments thereto through
November 28, 1986, incorporated by
reference from Exhibit 4(i) to the
Registrant's Form S-8 filed on October 25,
1996.
3(ii) Articles of Amendment dated April 7, 1987
to Restated Articles of Organization,
incorporated by reference form Exhibit 4(i)
to the Registrant's Form S-8 filed on
October 25, 1996.
3(iii) Articles of Amendment dated December 16,
1987 to Restated Articles of Organization
of the Registrant, incorporated by
reference from Exhibit 4(i) to the
Registrant's Form S-8 filed on October 25,
1996.
3(iv) Articles of Amendment dated December 3,
1991 to the Restated Articles of
Organization of the Registrant,
incorporated by reference from Exhibit 4(i)
to the Registrant's Form S-8 filed on
October 25, 1996.
3(v) Certificate of Vote of Directors
establishing a series of a Class of Stock
dated as of June 18, 1997.
3(vi) By-laws of the Registrant, as amended. This
document was filed as Exhibit 3 of the
Registrant's Form 10-Q for the fiscal
period ended June 1, 1990 and is
incorporated herein by reference.
4(i) Reference is made to Exhibits 3(i), (ii),
(iii) and (iv) referred to above, which are
expressly incorporated herein by reference.
PART II - OTHER INFORMATION (continued)
THE STRIDE RITE CORPORATION
ITEM 6. EXHIBITS
10.1 Agreement and Plan of Merger, dated
June 1, 2005 among The Stride Rite
Corporation, Saucony, Inc. and OC,
Inc. (excluding schedules, which the
registrant agrees to furnish
supplementally to the Commission upon
request). This document was filed as
Exhibit 2.1 to the registrant's form
8-K filed on June 3, 2005
incorporated herein by reference.
31.1* Certification of Principal Executive
Officer pursuant to Exchange Act Rules
13a-14 and 15d-14, 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-14 and 15d-14, 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.
* Filed with this form 10-Q.
** Furnished with this form 10-Q. This certification shall not be
deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, or otherwise subject to the liability of
that section, nor shall it be incorporated by reference into any
filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934.
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 13, 2005 By: /s/ Frank A. Caruso
--------------------------
Frank A. Caruso
Chief Financial Officer