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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 September 2, 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 ( )
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes( ) No (X)
As of October 11, 2005, 36,249,629 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)
September 2, August 27,
2005 December 3, 2004
(Unaudited) 2004 (Unaudited)
--------------- -------------- -------------
Assets
Current Assets:
Cash and cash
equivalents $92,281 $20,005 $19,056
Marketable securities - 70,850 65,850
Accounts and notes
receivable, net 70,440 47,730 69,998
Inventories 86,171 87,790 80,604
Deferred income taxes 16,363 13,123 15,167
Other current assets 10,384 15,681 10,140
-------- -------- --------
Total current assets 275,639 255,179 260,815
Property and equipment, net 50,964 54,246 56,874
Other assets 14,039 11,871 12,582
-------- -------- --------
Total assets $340,642 $321,296 $330,271
======== ======== ========
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)
September 2, August 27,
2005 December 3, 2004
(Unaudited) 2004 (Unaudited)
--------------- -------------- --------------
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $12,843 $21,046 $17,450
Income taxes payable 19,135 15,316 17,288
Accrued expenses and other
liabilities 23,553 21,377 21,164
--------- --------- ------------
Total current liabilities 55,531 57,739 55,902
Deferred income taxes 303 487 844
Pension obligation and other
long-term liabilities 16,184 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
Shares outstanding -
36,247,259 on
September 2,2005,
35,907,478 on
December 3, 2004 and
36,947,413 on August
27,2004 14,237 14,237 14,237
Capital in excess of par
value 14,474 15,969 15,288
Retained earnings 455,598 434,147 435,890
Accumulated other
comprehensive loss (9,022) (9,398) (7,796)
Less cost of 20,699,285
shares of common stock
held in treasury
(21,039,066 on December
3, 2004 and 19,999,131
on August 27, 2004) (206,663) (208,093) (197,239)
--------- --------- --------
Total stockholders' equity 268,624 246,862 260,380
--------- --------- --------
Total liabilities and
stockholders' equity $340,642 $321,296 $330,271
========= ========= ========
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 September 2, 2005 and August 27, 2004
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 2, August 27, September 2, August 27,
2005 2004 2005 2004
--------------- ------------ -------------- ------------
Net sales $146,237 $140,382 $456,469 $441,525
Cost of sales 88,047 89,197 272,536 273,825
-------- -------- -------- --------
Gross profit 58,190 51,185 183,933 167,700
Selling and
administrative
expenses 47,136 41,831 141,615 127,760
-------- -------- -------- --------
Operating income 11,054 9,354 42,318 39,940
Investment income 441 298 1,120 1,342
Interest expense (84) (79) (255) (235)
Other income
(expense), net 338 (85) 200 (233)
-------- --------- -------- --------
695 134 1,065 874
Income before
income taxes 11,749 9,488 43,383 40,814
Provision for
income taxes 4,034 3,269 15,755 15,211
-------- -------- -------- --------
Net income $7,715 $6,219 $27,628 $25,603
======== ======== ======== ========
Net income per
common share:
Diluted $ .21 $ .16 $ .74 $ .65
======== ======== ======== ========
Basic $ .21 $ .17 $ .76 $ .66
======== ======== ======== ========
Dividends per
common share $ .06 $ .05 $ .17 $ .15
======== ======== ======== ========
Average common
shares used in
per share
computations:
Diluted 37,396 38,159 37,188 39,311
======== ======== ======== ========
Basic 36,292 37,467 36,158 38,508
======== ======== ======== ========
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 September 2, 2005 and August 27, 2004
(Dollars in thousands)
2005 2004
-------------- -----------
Cash flows from operating activities:
Net income $27,628 $25,603
Adjustments to reconcile net income to net
cash provided by operating
activities:
Depreciation and amortization 9,481 9,478
Deferred income taxes (3,425) (311)
Compensation expense related to stock plans 568 -
Gain related to long-term investments (61) -
Loss on disposals of property and equipment 152 218
Changes in:
Accounts and notes receivable (22,649) (18,899)
Inventories 1,633 1,332
Other current assets 8,307 10,655
Other current liabilities (3,102) (8,281)
Other long-term assets (2,167) 1,733
Other long-term liabilities (25) -
Contribution to pension plan (3,000) (1,000)
--------- ---------
Net cash provided by operating
activities 13,340 20,528
--------- ---------
Cash flows from investing activities:
Additions to property and equipment (6,351) (5,767)
Investments in marketable securities
available for sale (29,325) (51,550)
Proceeds from sale of marketable securities
available for sale 100,175 77,850
Distributions from long-term investments 61 -
--------- ---------
Net cash provided from investing activities 64,560 20,533
--------- ---------
Cash flows from financing activities:
Proceeds from sale of stock under stock plans 7,628 3,981
Cash dividends paid (5,772) (5,824)
Repurchase of common stock (7,771) (31,249)
--------- ---------
Net cash used in financing activities (5,915) (33,092)
--------- ---------
Effect of exchange rate changes on cash and
cash equivalents 291 (35)
--------- ----------
Net increase in cash and cash equivalents 72,276 7,934
Cash and cash equivalents at beginning of the
period 20,005 11,122
--------- ---------
Cash and cash equivalents at end of the period $92,281 $19,056
========= =========
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 September 2, 2005 and August
27, 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
September 2, 2005 and August 27, 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 the Company begins 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), an amendment of SFAS
No. 123, "Accounting for Stock-Based Compensation". SFAS No. 148 requires that
companies make quarterly disclosures regarding the pro forma effects of using
the fair-value method of accounting for stock-based compensation, effective for
interim periods beginning after December 15, 2002.
At September 2, 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 Accounting Principles Board 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 Nine Months Ended
Sept. 2, Aug. 27, Sept. 2, Aug. 27,
2005 2004 2005 2004
--------------------------------------------------
(In thousands, except for per share data)
Net income, as reported $7,715 $6,219 $27,628 $25,603
Add: Stock-based employee
compensation expense included
in net income, net of related
tax effects 146 3 393 9
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects
(671) (492) (1,813) (1,432)
-------- --------- --------- ---------
Pro forma net income $7,190 $5,730 $26,208 $24,180
======= ======== ======== ========
Earnings per share:
Basic - as reported $ .21 $ .17 $ .76 $ .66
======= ======== ======== ========
Basic - pro forma $ .20 $ .15 $ .72 $ .63
======= ======== ======== ========
Diluted - as reported $ .21 $ .16 $ .74 $ .65
======= ======== ======== ========
Diluted - pro forma $ .19 $ .15 $ .70 $ .62
======= ======== ======== ========
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
Sept. 2, Aug. 27, Sept. 2, Aug. 27,
2005 2004 2005 2004
----------- ---------- --------- ----------
In thousands, per share data
Net income $7,715 $6,219 $27,628 $25,603
Weighted average common shares
outstanding (basic) 36,292 37,467 36,158 38,508
Dilutive effect of stock options 1,104 692 1,030 803
------ ------ ------ ------
Weighted average common shares
outstanding (diluted) 37,396 38,159 37,188 39,311
====== ====== ====== ======
Earnings per common share
Basic $.21 $.17 $.76 $.66
====== ====== ====== ======
Diluted $.21 $.16 $.74 $.65
====== ====== ====== ======
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:
Third Quarter First Nine Months
------------------- ------------------
2005 2004 2005 2004
-------- --------- -------- --------
(In thousands)
Options to purchase shares of common
stock - 1,130 4 1,043
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
------------------ -----------------
Sept. 2, Aug. 27, Sept. 2, Aug. 27,
2005 2004 2005 2004
---------- ----------- ---------- ---------
(In thousands)
Net income $7,715 $6,219 $27,628 $25,603
Other comprehensive income:
Foreign currency translation
adjustments 201 131 376 2
------- ------- ------- -------
Total comprehensive income $7,916 $6,350 $28,004 $25,605
======= ======= ======= =======
Components of accumulated other comprehensive loss consist of the
following:
September 2, December 3, August 27,
2005 2004 2004
--------------- ---------------- ------------
(In thousands)
Foreign currency translation
adjustments $211 $(165) $(215)
Minimum pension liability
adjustments, net of taxes (9,233) (9,233) (7,581)
--------- --------- ---------
Accumulated other
comprehensive loss $(9,022) $(9,398) $(7,796)
========= ========= ========
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
- -------------------------------------------------------------------------------
September 2, 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)
August 27, 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 Nine Months Ended
------------------------ ---------------------
Sept. 2, Aug. 27, Sept. 2, Aug. 27,
2005 2004 2005 2004
------------ ---------- ---------- ----------
(In thousands)
Service cost $506 $431 $1,566 $1,282
Interest cost 943 886 2,853 2,692
Expected return on assets (1,117) (994) (3,357) (2,989)
Net loss recognized 476 428 1,486 1,156
Amortization of prior
service cost 4 7 14 17
------ ------ ------ ------
Net periodic benefit cost $812 $758 $2,562 $2,158
====== ====== ====== ======
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 nine 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. In early January 2004, the Company
finalized the terms of the license agreement, which will expire in March 2007.
The Company expects to meet our obligations under the Tommy Hilfiger license
agreement and accordingly, the Company believes that no provision is currently
required for costs related to the potential loss of this license. If the Company
loses 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
had 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 - (Continued)
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. The financial results of the
PRO-Keds(R) trademark, which is now licensed to a third party are also reported
in the Tommy Hilfiger segment. 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 and are reflected in segment operating income. 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 with the types of products sold.
The Company primarily evaluates segment performance based on segment 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 September 2, 2005 and August 27, 2004:
Stride Stride
Rite Rite
Children's Children's Tommy Other Un-allocated
Third Group - Group - Hilfiger Wholesale Corporate Consol-
Quarter 2005 Retail Wholesale Footwear Footwear & Other idated
- ------------ ---------- ---------- --------- ---------- ---------- -------
(In thousands)
Sales $48,193 $29,169 $18,311 $53,386 $149,059
Intercompany
sales 26 1,207 1,589 2,822
Net sales to
external
customers 48,193 29,143 17,104 51,797 146,237
Operating
income 4,883 5,560 (434) 3,829 (2,784 11,054
Interest and
other, net 695
---
Income before
income taxes 11,749
======
Total assets 41,802 59,359 19,790 79,810 139,881 340,642
Stride Stride
Rite Rite
Children's Children's Tommy Other Un-allocated
Third Group - Group - Hilfiger Wholesale Corporate Consol-
Quarter 2004 Retail Wholesale Footwear Footwear & Other idated
- ------------ ---------- ---------- --------- --------- ---------- -------
(In thousands)
Sales $40,253 $30,871 $25,018 $47,045 $143,187
Intercompany
sales 23 850 1,932 2,805
Net sales to
external
customers 40,253 30,848 24,168 45,113 140,382
Operating
income 1,961 5,978 295 2,837 (1,717) 9,354
Interest and
other, net 134
---
Income before
income taxes 9,488
=====
Total assets 40,278 64,232 29,447 65,855 130,459 330,271
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 2, 2005 and August 27, 2004:
Stride Stride
Rite Rite
Children's Children's Tommy Other Un-allocated
Nine Months Group - Group - Hilfiger Wholesale Corporate Consol-
2005 Retail Wholesale Footwear Footwear & Other idated
- ---- ---------- ---------- --------- --------- ---------- --------
(In thousands)
Sales $129,615 $74,247 $61,255 $199,855 $464,972
Intercompany
sales 77 3,001 5,425 8,503
Net sales to
external
customers 129,615 74,170 58,254 194,430 456,469
Operating
income 9,985 11,379 (983) 29,334 (7,397) 42,318
Interest and
other, net 1,065
-----
Income before
income taxes 43,383
======
Total assets 41,802 59,359 19,790 79,810 139,881 340,642
Stride Stride
Rite Rite
Children's Children's Tommy Other Un-allocated
Nine Months Group - Group - Hilfiger Wholesale Corporate Consol-
2004 Retail Wholesale Footwear Footwear & Other idated
- ---- ---------- ----------- -------- ---------- ---------- -------
(In thousands)
Sales $112,493 $76,472 $73,905 $186,424 $449,294
Intercompany
sales 70 2,129 5,570 7,769
Net sales to
external
customers 112,493 76,402 71,776 180,854 441,525
Operating
income 5,803 11,321 936 23,978 (2,098) 39,940
Interest and
other, net 874
---
Income before 40,814
income taxes ======
Total assets 40,278 64,232 29,447 65,855 130,459 330,271
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Acquisition
On September 16, 2005, the Company completed the acquisition of all of the
outstanding Class A and Class B common shares of Saucony, Inc. ("Saucony") for
$23.00 per share in cash for a total purchase price of approximately $159.5
million not including Saucony's cash of approximately $37.0 million. The Company
also paid approximately $12.1 million in settlement of all outstanding Saucony
employee stock options. The results of Saucony's operations will be included in
the consolidated financial statements after that date. Headquartered in Peabody,
Massachusetts, Saucony is a designer, developer, marketer and retailer of
performance oriented athletic footwear, athletic apparel and casual footwear.
The acquisition will be accounted for using the purchase method in accordance
with Statement of Financial Accounting Standards No 141 "Business Combinations".
Note 9 - Credit Agreement
On September 16, 2005, the Company entered into a new credit facility for
an aggregate amount up to $275.0 million, with $200.0 million currently
committed with a group of nine banks, led by Bank of America, N.A. as
Administrative Agent. The credit agreement expires September 16, 2010. The
facility consists of a $200.0 million revolving credit facility (which replaced
an existing $75.0 million revolving credit facility). The revolving credit
facility, which was used in part to fund the Saucony, Inc. acquisition, is
available for working capital and general corporate purposes, and also provides
for the issuance of commercial and standby letters of credit. The Company
borrowed $85.0 million from the credit facility on September 16, 2005 to fund
the closing of the Saucony acquisition.
Under the revolving credit facility, interest rates and facility fees are
determined according to a pricing grid providing a margin rate over LIBOR or an
alternate base rate (the higher of the Federal Funds Rate plus 1/2% or the Bank
of America prime rate). The applicable fees and margins are determined by the
Company's leverage ratio which is defined as consolidated total funded
indebtedness to consolidated earnings before interest, taxes, depreciation and
amortization ("EBITDA").
Deferred financing costs incurred of $1.8 million related to the $200
million credit facility were capitalized and are being amortized over the
expected life of the agreement. These costs are included in other non-current
assets on the balance sheet.
The present and future domestic subsidiaries of the Company and the
material foreign subsidiaries have agreed to guarantee the obligations under the
credit agreement. All domestic subsidiaries of the Company have entered into a
guaranty agreement, dated September 16, 2005, with Bank of America, N.A., as
administrative agent.
In addition, the credit agreement requires the Company to maintain a
consolidated tangible net worth in excess of a specified amount that is
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
adjusted in accordance with the Company's consolidated net income and
restricted payments. The credit agreement also requires the Company to meet
specified ratio requirements with respect to leverage (debt to EBITDA) and fixed
charge coverage, and restricts the making of capital expenditures. The credit
agreement also contains negative covenants limiting, among other things,
indebtedness, liens, investments (including acquisitions), fundamental changes
and restricted payments (including repurchasing the Company's common stock or
declaring cash dividends in respect thereof).
Refer to the Form 8-K filed by the Company with the Securities and Exchange
Commission on September 22, 2005 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
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 inability to fully
realize the anticipated benefits from the acquisition of Saucony, the challenges
of achieving the expected synergies with Saucony, the possibility of incurring
costs or difficulties related to the integration of the businesses of Stride
Rite and Saucony; 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
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 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 generally accepted accounting principles 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. 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 third
quarter and first nine months of fiscal 2005 as compared to the results for the
same periods in fiscal 2004:
Increase Percent vs. 2004 Results:
- ----------------------------------
Third Quarter Nine Months
------------- -----------
Net sales 4.2% 3.4%
Gross profit 13.7% 9.7%
Selling and administrative expenses 12.7% 10.8%
Operating income 18.2% 6.0%
Income before income taxes 24.0% 6.3%
Net income 24.1% 7.9%
Operating Ratios as a Percent of Net Sales:
- -------------------------------------------
Third Quarter Nine Months
--------------------------------------
2005 2004 2005 2004
--------- -------- -------- --------
Gross profit 39.8% 36.5% 40.3% 38.0%
Selling and administrative expenses 32.2% 29.8% 31.0% 28.9%
Operating income 7.6% 6.7% 9.3% 9.0%
Income before income taxes 8.0% 6.8% 9.5% 9.2%
Net income 5.3% 4.4% 6.1% 5.8%
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 third 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 $29.2 $30.9 (5.5)%
Stride Rite Children's Group - Retail 48.2 40.3 19.7%
--------- --------- ----------
Stride Rite Children's Group 77.4 71.2 8.8%
Keds 25.1 27.6 (8.9%)
Tommy Hilfiger Footwear 18.3 25.0 (26.8)%
Sperry Top-Sider 18.0 11.8 52.8%
Stride Rite International 10.2 7.7 33.2%
Elimination of intercompany sales (2.8) (2.9) n/a
--------- --------- ----------
Total net sales $146.2 $140.4 4.2%
========= ========= ==========
During the third quarter of fiscal 2005, consolidated net sales increased
$5.9 million to $146.2 million, or 4.2% above the sales level achieved in the
third quarter of fiscal 2004. Wholesale net sales decreased 2.0% for the third
quarter of 2005, and overall retail sales, including Keds retail and the
e-commerce sites, increased $7.8 million or 19.0% when compared to the same
period in the prior year. Unit shipments of first quality merchandise for the
wholesale brands during the third quarter were 5.6% lower than the comparable
period in 2004. The Company's average first quality wholesale selling price
increased 0.3% from the third quarter of 2004.
First quality wholesale net sales decreased by $3.7 million, or 4.7% below
the wholesale net sales level achieved in the third quarter of fiscal 2004. This
includes the positive impact of a $0.8 million decrease in combined discounts,
returns and allowances. Closeout sales increased $1.3 million from the
comparable period in the 2004 fiscal year while sales from promotional products
were increased $0.1 million. Although the increase in closeout sales negatively
impacted the product mix, the higher gross profit rate on the third quarter
closeout sales neutralized the comparative gross profit impact. Offsetting these
wholesale sales declines was a $0.4 million increase in royalties and a $7.8
million increase in retail store sales from the same period in 2004, which
resulted in an overall increase of $5.9 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 third quarter of fiscal 2005, the Company's gross profit of
$58.2 million increased $7.0 million or 13.7% above the amount recorded during
fiscal 2004's third quarter. The higher sales and increased gross profit rate on
retail sales, as well as a decrease in discounts and allowances on wholesale
sale versus the comparable period in fiscal 2004, led to the increase in gross
profit dollars for the period. The gross profit percentage rate for the fiscal
2005 third quarter improved 3.3 percentage points to 39.8%, versus the 36.5%
rate achieved in the prior year's third quarter. The higher gross profit
percentage was largely attributable to the increased retail sales, as well as an
increased gross profit rate on the third quarter retail sales. In addition,
fewer markdown allowances, predominantly in Keds, contributed positively to the
improved gross profit rate.
Operating Costs
- ---------------
During the third quarter of fiscal 2005, selling and administrative
expenses were $47.1 million, an increase of $5.3 million or 12.7% as compared to
the third quarter of fiscal 2004. As a percent of sales, operating costs were
32.2% in the third quarter of fiscal 2005 compared to 29.8% in the third quarter
of fiscal 2004. This increase was principally the result of higher advertising
costs, which were 6.2% of net sales during the third quarter of fiscal 2005
versus 4.5% 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
third quarter were the $1.4 million in added costs associated with the increased
number of Stride Rite Children's Group retail stores and approximately $450,000
of costs related to the estimated losses due to Hurricane Katrina.
Other Income and Taxes
- ----------------------
Other income (expense) increased pre-tax income by $0.7 million in the
third quarter of fiscal 2005 versus $0.1 million in the third quarter of fiscal
2004. Investment income related to the Company's cash equivalents and marketable
securities was $0.4 million in the third quarter of fiscal 2005, which was
increased $0.1 million versus the similar period in fiscal 2004. The higher
average interest rates in the third quarter of fiscal 2005 combined with a
higher average amount of investments led to the increase in investment income.
Interest expense remained flat in the third quarter of fiscal 2005 as compared
to the third quarter of fiscal 2004 as no short-term borrowings were made during
the third quarters of either year.
The provision for income taxes increased $0.8 million in the third quarter
of fiscal 2005 as compared to the similar period in fiscal 2004. This increase
was due to the higher pre-tax income amount. Our effective tax rate was 34.3% in
the third quarter of fiscal 2005 as compared to 34.4% in the third quarter of
fiscal 2004. In both the third quarters of fiscal 2005 and 2004 the tax rate was
reduced due to the adjusting of 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 third quarter of fiscal 2005 was $7.7 million, an
increase of $1.5 million, or 24.1% as compared to the same period in the prior
year. The higher net sales and increased gross profit percentage led to the
favorable comparison to the third quarter of fiscal 2004. This was, however,
offset by higher operating costs. The Company's return on net sales of 5.3% in
the third quarter of fiscal 2005 was an improvement versus the 4.4% return on
sales recorded for the third quarter of fiscal 2004.
Segments Review
- ---------------
Stride Rite Children's Group - Retail
- -------------------------------------
The net sales of the Stride Rite Children's Group - Retail increased 19.7%
in the third quarter as compared to the same quarter in the prior year. Sales at
comparable Children's Group retail stores (stores open for 52 weeks in each
fiscal year) increased 7.4% for the third 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 and a change in the timing of a promotional event versus last year. At
the end of the third quarter of fiscal 2005, the Stride Rite Children's Group -
Retail operated 264 stores. This is a net increase of 21 stores, or 9% from the
end of the same period in the prior year. Current plans call for the opening of
approximately 24 retail stores and the closing of 3 underperforming locations
during the 2005 fiscal year. During the third quarter of 2005 the Company opened
7 new stores and closed 2 underperforming locations.
The Stride Rite Children's Group - Retail operating income increased due to
higher sales and an improved gross profit percentage versus the prior year.
Offsetting the increased profit were higher store operating costs in the third
quarter of fiscal 2005, primarily related to the additional stores and certain
increased indirect store costs.
Stride Rite Children's Group - Wholesale
- ----------------------------------------
Sales decreased 5.5% during the third 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 products 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 operating income decline
versus the prior year was primarily related to the impact of the lower sales in
fiscal 2005 compared to 2004. A higher gross profit rate in the third quarter of
fiscal 2005 was offset by slightly higher operating expenses versus the same
period last year.
Tommy Hilfiger Footwear, Inc.
- -----------------------------
The decrease in sales of Tommy Hilfiger footwear products during the third
quarter of fiscal 2005 was primarily attributable to a significant reduction in
the men's business across all channels of distribution and a downward trend in
women's and department stores. The licensing of the PRO-Keds brand to a third
party in fiscal 2005 resulted in $0.8 million of the decrease in the comparison
to the prior year's Tommy Hilfiger net sales. Starting in fiscal 2005 the
Company began licensing the PRO-Keds trademark to an independent third party and
Tommy Hilfiger Footwear receives a royalty instead of marketing and selling
PRO-Keds products directly. This change negatively impacts sales comparisons to
the prior year. In addition, the Tommy "H" product line was discontinued and
this represented $1.4 million of the sales decline comparing the 2005 third
quarter versus last year.
The Tommy Hilfiger operating income decline versus prior year was primarily
related to the effect of the lower sales in fiscal 2005 compared to 2004.
Operating expenses, although reduced in the third quarter of 2005 versus the
prior year, could not fully offset the gross profit impact of the lower sales.
Other Wholesale Footwear
- ------------------------
The increase in sales of the Other Wholesale Footwear segment was primarily
attributable to the increase in sales of the Sperry Top-Sider product line. The
Sperry Top-Sider increase was largely attributable to strong sales of men's boat
shoes and the overall women's product line. The significant growth in the Sperry
Top-Sider men's product sales in 2005 resulted from increases in the premium
department store, family shoe store and outdoor channels. The women's business
had expanded retail distribution in the better department store, independent and
outdoor channels, which resulted in increased sales of boat shoes, nautical
casuals and canvas. The Keds sales decline versus last year was in the moderate
and value retail sales channels. The Stride Rite International division's net
sales growth in the third quarter of fiscal 2005 was also a contributing factor
to the increase in sales of the Other Wholesale Footwear segment. This was the
result of strong sales of Tommy Hilfiger in Latin America, Keds footwear in
Europe and Asia, and Sperry Top-Sider in Europe and South Africa. Overall, the
Keds product line sales decline offset a portion of the Sperry Top-Sider and
Stride Rite International sales increases.
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 operating income versus prior year in this segment was
primarily the result of Sperry Top-Sider's increased sales and Keds improved
gross profit percentage performance due to significantly fewer closeout sales,
discounts and allowances. Increased Keds and Sperry Top-Sider advertising
spending in the third quarter was the most significant factor contributing to
the higher operating expenses.
First Nine Months of 2005 Compared to the First Nine Months of 2004
- -------------------------------------------------------------------
Net Sales
- ---------
The first nine 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 $74.3 $76.5 (2.9)%
Stride Rite Children's Group - Retail 129.6 112.5 15.2%
------ ------- ----
Stride Rite Children's Group 203.9 189.0 7.9%
Keds 112.4 118.7 (5.3)%
Tommy Hilfiger Footwear 60.6 73.9 (17.1)%
Sperry Top-Sider 61.2 46.3 31.0%
Stride Rite International 26.9 21.4 25.4%
Elimination of intercompany sales (8.5) (7.8) n/a
-------- ------- ---
Total net sales $456.5 $441.5 3.4%
====== ====== ===
During the first nine months of fiscal 2005, consolidated net sales
increased $14.9 million to $456.5 million, or 3.4% above the sales level
recorded in the first nine months of fiscal 2004. Wholesale net sales were down
0.6% for the first nine months of 2005, while overall retail sales increased
$17.0 million or 14.8% when compared to the same period last year. Unit
shipments of first quality merchandise for the wholesale brands during the first
nine months of 2005 were down slightly from last year. The Company's average
first quality wholesale selling price increased 1.6% from the first nine months
of 2004.
First quality wholesale net sales increased by $4.3 million, or 1.6% above
the wholesale net sales level achieved in the first nine months of fiscal 2004.
This includes the positive impact of a $6.7 million decrease in combined
discounts, returns and allowances. In addition, closeout sales decreased $7.4
million or 19.5% below the same period in 2004. An increase in royalty revenue
of $1.1 million and a $17.0 million increase in retail store sales resulted in
an overall increase of $14.9 million in consolidated sales, as compared to the
first nine months 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 nine months of fiscal 2005, the Company's gross profit of
$183.9 million increased $16.2 million or 9.7% above the amount recorded during
the same period last year. The gross profit percentage rate for the first nine
months of fiscal 2005 improved 2.3 percentage points to 40.3% as compared to the
38.0% rate achieved in the same period last year. The increase in the first nine
months gross profit was primarily the result of the higher level of retail sales
during the period along with a reduction in markdown allowances and returns. The
improvement in the 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 nine months of fiscal 2005 were $141.6
million, an increase of $13.9 million or 10.8% as compared to the same period in
fiscal 2004. As a percent of sales, operating costs were 31.0% in the first nine
months of fiscal 2005 versus 28.9% in the first nine months of last year. During
the first nine months of fiscal 2005, advertising expenses as a percent of net
sales were 5.9% versus 4.9% in the same period last year, an increase of $5.5
million. Advertising spending increased primarily in the Keds and Sperry
Top-Sider brands. In addition to the higher level of advertising costs, there
were $3.7 million of increased costs related to retail store expansion, as well
as certain other headcount related costs.
Other Income and Taxes
- ----------------------
Other income (expense) increased pre-tax income by $1.1 million in the
first nine months of fiscal 2005 and by $0.9 million in the first nine months of
fiscal 2004. Investment income in the first nine months of fiscal 2005 was $0.2
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 nine months of fiscal 2005 was flat with the level recorded last year.
There were no short-term borrowings during the first nine months of either
fiscal 2005 or 2004.
The provision for income taxes increased $0.5 million in the first nine
months of fiscal 2005 as compared to the similar period in fiscal 2004. This
increase was due to the higher pre-tax income amount. Our effective tax rate was
36.3% for the first nine months of fiscal 2005 as compared to 37.3% in the first
nine months of fiscal 2004. The lower tax rate in the first nine months of
fiscal 2005 versus the first nine months 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 first nine months of fiscal 2005 was $27.6 million, an
increase of $2.0 million, or 7.9% 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. The increased operating income
combined with our lower effective income tax rate and led to the increase in net
income during the first nine months of fiscal 2005 versus the same period last
year. The Company's return on net sales of 6.1% in the first fiscal nine months
of 2005 was up from 5.8% 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
15.2% during the first nine 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 5.5% for the first nine months 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
operating income increase versus the prior year was primarily related to the
impact of the higher 2005 sales. During the first nine months of 2005 the
Company opened 16 new stores and closed 3 underperforming locations for a net
increase of 13 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,
certain management support costs and the depreciation expense related to our
upgrade of information technology. There was also a one-time non-cash charge of
$0.4 million to conform the Company's accounting policies with generally
accepted accounting principles related to the timing of rent expense for certain
retail store locations.
Stride Rite Children's Group - Wholesale
- ----------------------------------------
Sales decreased 2.9% during the first nine months of 2005 versus the same
period last year. The decrease in sales in the first nine months 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
department store sales as well as a decrease in returns.
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's operating income was flat
compared to prior year as reduced direct operating costs offset the gross profit
impact of lower sales in fiscal 2005 versus 2004. In addition, the gross profit
percentage for the first nine months of fiscal 2005 was slightly higher than for
the same period in the prior year.
Tommy Hilfiger Footwear
- -----------------------
The decrease in the Tommy Hilfiger Footwear unit's sales performance during
the first nine months of fiscal 2005 was primarily attributable to a decline in
the men's product line. The Tommy Hilfiger men's and women's sales during the
first nine months of fiscal 2005 were below the sales level when compared to the
same period in the prior year. The PRO-Keds brand licensing in fiscal 2005
contributed to $2.9 million of the decrease in Tommy Hilfiger net sales for the
first nine months of fiscal 2005. Beginning in fiscal 2005, the Company 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 discontinued Tommy "H" product line
represented $0.6 million of the 2005 nine months sales decline versus 2004.
The Tommy Hilfiger operating income decline versus the prior year was
primarily related to the lower sales in fiscal 2005 compared to 2004 and the
impact of a weaker gross profit percentage in 2005 versus 2004. Lower operating
expenses in the period could not fully offset the profit impact of decreased
sales.
Other Wholesale Footwear
- ------------------------
Sales of the Other Wholesale Footwear segment for the first nine 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 $14.3 million or 31.0% for the first nine
months of fiscal 2005. This increase was primarily the result of a strong
performance by the women's product line. Adding to this were continued strong
sales of the men's product line primarily with the boat shoe and performance
boat shoe product categories. The Stride Rite International division had a 25.4%
increase in net sales for the first nine months 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 major reasons for the increase.
These sales gains were partially offset by the performance of the Keds
product line. Keds sales decreased in the first nine months 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
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
The increased operating income within the Other Wholesale Footwear segment
was primarily the positive result of both the higher sales of Sperry Top-Sider
and Stride Rite International and the 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 third fiscal quarter of 2005, our balance sheet reflected
a current ratio of 5.0 to 1 with no debt. Our cash, cash equivalents and
marketable securities totaled $92.3 million at September 2, 2005, an increase of
$7.4 million from the total cash, cash equivalents and marketable securities of
$84.9 million at the end of the third quarter of fiscal 2004. The Company
maintained a $75 million revolving credit facility to fund any seasonal working
capital needs. This revolving credit facility was replaced on September 16, 2005
by a new five year $200 million revolving credit facility. No borrowings under
this line of credit were outstanding as of September 2, 2005 or August 27, 2004.
On September 16,2005, the Company borrowed $85.0 million under the new credit
facility.
During the first nine months of fiscal 2005, the Company generated $13.3
million of cash from operating activities, a decrease from the $20.5 million of
cash from operations during the first nine months of fiscal 2004. Inventory
levels at the end of the third quarter of fiscal 2005 increased $5.6 million, or
6.9% from the levels recorded at the end of the prior year's third quarter. The
increase in inventory related primarily to the increased levels of in-line
products and the higher number of retail stores. Accounts receivable at
September 2, 2005 were $0.4 million or 0.6% higher than the amount at the end of
last year's third quarter. Days sales outstanding ("DSO"), which measures the
length of the collection period for accounts receivable, was 40 days at the end
of the third fiscal quarter of 2005 and was improved compared to the DSO of 43
days at the end of the same period last year. Accounts payable, at the end of
the third quarter of fiscal 2005, decreased $4.6 million from the level recorded
at the end of the prior year's third quarter. This decrease was primarily the
result of the timing of vendor and duty related payments. During the first nine
months 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 $6.4 million in the first nine
months of 2005, an increase compared to the $5.8 million in the first nine
months of 2004. The increase in capital purchases compared to the same period in
fiscal 2004 related primarily to the continued retail expansion efforts during
the first nine months of fiscal 2005. Funding of our capital
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
expenditures was provided from internal sources by the Company's $200
million revolving credit facility. We expect that all capital purchases during
the fourth quarter of fiscal 2005 will be provided for.
During the first nine months of fiscal 2005 we returned $13.5 million to
shareholders through share repurchases and cash dividends. We spent $7.8 million
to repurchase 587,800 common shares under our share repurchase program. As of
September 2, 2005, we have approximately 3.9 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 third quarter of fiscal 2005, there were no borrowings
outstanding under the Company's then $75 million revolving credit facility. This
is consistent with the third quarter of fiscal 2004. We did not utilize any
available credit under the revolving credit line during the first nine months of
fiscal 2005. Borrowings were not required during this time primarily because we
entered the year with no outstanding debt and significant cash, cash equivalents
and marketable securities balances. As of September 2, 2005, letters of credit
totaling $24.5 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 September 16, 2005, the Company completed the acquisition of all of the
outstanding Class A and Class B common shares of Saucony, Inc. ("Saucony") for
$23.00 per share in cash for a total purchase price of approximately $159.5
million not including Saucony's cash of approximately $37.0 million. The Company
also paid approximately $12.1 million in settlement of all outstanding Saucony
employee stock options. The results of Saucony's operations will be included in
the consolidated financial statements after that date. Headquartered in Peabody,
Massachusetts, Saucony is a designer, developer, marketer and retailer of
performance oriented athletic footwear, athletic apparel and casual footwear.
The acquisition will be accounted for using the purchase method in accordance
with Statement of Financial Accounting Standards No 141 "Business Combinations".
Also on September 16, 2005, the Company entered into a new credit facility
for an aggregate amount up to $275.0 million, with $200.0 million currently
committed with a group of nine banks, led by Bank of America, N.A. as
Administrative Agent. The credit agreement expires September 16, 2010. The
facility consists of a $200.0 million revolving credit facility (which replaced
an existing $75.0 million revolving credit facility). The revolving credit
facility, which was used in part to fund the Saucony, Inc. acquisition, is
available for working capital and general corporate purposes, and also provides
for the issuance of commercial and standby letters of credit. The Company
borrowed $85.0 million from the credit facility on September 16, 2005 to fund
the closing of the Saucony acquisition.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Under the revolving credit facility, interest rates and facility fees are
determined according to a pricing grid providing a margin rate over LIBOR or an
alternate base rate (the higher of the Federal Funds Rate plus 1/2% or the Bank
of America prime rate). The applicable fees and margins are determined by the
Company's leverage ratio which is defined as consolidated total funded
indebtedness to consolidated earnings before interest, taxes, depreciation and
amortization ("EBITDA").
The present and future domestic subsidiaries of the Company and the
material foreign subsidiaries have agreed to guarantee the obligations under the
credit agreement. All domestic subsidiaries of the Company have entered into a
guaranty agreement, dated September 16, 2005, with Bank of America, N.A. as
administrative agent.
In addition, the credit agreement requires the Company to maintain a
consolidated tangible net worth in excess of a specified amount that is adjusted
in accordance with the Company's consolidated net income and restricted
payments. The credit agreement also requires the Company to meet specified ratio
requirements with respect to leverage (debt to EBITDA) and fixed charge
coverage, and restricts the making of capital expenditures. The credit agreement
also contains negative covenants limiting, among other things, indebtedness,
liens, investments (including acquisitions), fundamental changes and restricted
payments (including repurchasing the Company's common stock or declaring cash
dividends in respect thereof). Refer to the Form 8-K filed by the Company with
the Securities and Exchange Commission on September 22, 2005 for additional
information. 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 third 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 third 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
- --------------------------------------------------------------------------------
June 4, 2005 - July 1, 2005 - - - 4,057,494
July 2, 2005 - August 5, 2005 47,700 $13.43 47,700 4,009,794
August 6, 2005 - September 2, 2005 102,800 $13.34 102,800 3,906,994
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.
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 Credit Agreement, dated September 16, 2005,
among The Stride Rite Corporation, Stride
Rite Children's Group,, Inc., Bank of
America, N.A., as Administrative Agent and
Swing Line Lender, the other lenders from
time to time party thereto, The Bank of New
York and Sun Trust Bank, as Co-Syndications
Agents, and Citizens Bank of Massachusetts,
as Documentation Agent and Banc of America
Securities, LLC, as Sole Lead Arranger and
Sole Book Manager. This document was filed
as Exhibit 10.1 to the registrant's Form
8-K filed on September 22, 2005 and is
incorporated herein by reference.
10.2 Guaranty Agreement dated September 16, 2005
by and among The Stride Rite Corporation,
Stride Rite Children's Group, Inc. the
other borrowers listed therein, the lenders
from time to time party thereto, and Bank
of America, N.A., as Administrative Agent.
This document was filed as Exhibit 10.2 to
the registrant's Form 8-K filed on
September 22, 2005 and is 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: October 12, 2005 By: /s/ Frank A. Caruso
--------------------------
Frank A. Caruso
Chief Financial Officer