THE STRIDE RITE CORPORATION June 27, 2006
NEWS RELEASE FOR IMMEDIATE RELEASE
CONTACT: Frank A. Caruso, Chief Financial Officer - (617) 824-6611
STRIDE RITE REPORTS INCREASED
SECOND QUARTER SALES AND PROFITS
- - RESULTS INCLUDE SAUCONY ACQUISITION RELATED CHARGES AND EXPENSES
CONNECTED TO THE ADOPTION OF SFAS NO. 123R FOR SHARE BASED COMPENSATION -
Lexington, MA, June 27, 2006 - The Stride Rite Corporation (NYSE:SRR) today
reported record second quarter fiscal 2006 sales of $194.0 million, an increase
of 22% compared to the same period in the prior year. Net income for the second
quarter totaled $16.9 million or $.45 per diluted share, compared to net income
of $11.8 million or $.32 per diluted share in the second quarter of 2005. The
second quarter financial results include the reversal of certain prior period
reserves for income tax exposures that are no longer required.
The second quarter tax rate decreased to 19.3% from 36.1% in the comparable
period of the prior year. The decrease was primarily attributable to the
favorable outcome of a tax audit which resulted in the reversal of certain prior
period reserves. The diluted per share impact of the lower tax rate was $.09
compared to last year. The annual 2006 tax rate is currently forecasted at
approximately 32.0%.
Beginning in 2006, the Company adopted SFAS No. 123R, "Share-Based
Payment", the impact of which increased pre-tax expenses by approximately $900
thousand for the second quarter of fiscal 2006. In addition, the current quarter
results include pre-tax acquisition related integration expenses of $1.0
million.
Excluding acquisition related integration costs, net income would have been
$17.5 million for the second quarter, while diluted earnings per share would
have been $.46. See the section entitled "Non-GAAP Pro Forma Financial Measures"
and the "Reconciliation of Non-GAAP Measures" provided in this release for
additional information regarding these Non-GAAP Measures.
For the first six months of fiscal 2006, net sales were $377.4 million, an
increase of 22% from the net sales of $310.2 million for the same period in
fiscal 2005. On a diluted basis, earnings per share was $.67 in the first half
of fiscal 2006 compared to $.54 in fiscal 2005. Net income for the first half of
fiscal 2006 totaled $25.2 million, an increase of 26% from the $19.9 million
reported in the comparable period in 2005.
The first half financial results include a pre-tax expense of $2.6 million
related to the flow through of the write-up of inventory purchased in the
Saucony acquisition as required by GAAP accounting rules. In addition, the first
half results include pre-tax
acquisition related integration expenses of $2.2 million. The SFAS No.
123R, "Share-Based Payment", increased pre-tax expenses by approximately $1.6
million for the first six months of fiscal 2006.
Excluding acquisition related integration costs and the flow through of the
inventory write-up, net income would have been $28.0 million for the first six
months, while diluted earnings per share would have been $.74. See the section
entitled "Non-GAAP Pro Forma Financial Measures" and the "Reconciliation of
Non-GAAP Measures" provided in this release for additional information regarding
these Non-GAAP Measures.
David Chamberlain, Chairman and CEO of Stride Rite, commented "While the
earnings for the quarter were solid, the sales results by the divisions were
mixed."
"We are pleased with Saucony which continues to enjoy solid growth in the
specialty run business. The technical product continues to perform well. An
updated originals line and a separate children's line have been developed for
spring 2007. The integration of Saucony into Stride Rite has now been
successfully completed."
"Stride Rite Children's Group performed as expected in the quarter with
total sales up 13%. Comparable sales at Stride Rite Children's Group
company-owned retail stores were up 8.7% for the second quarter and 3.4% for the
first six months of fiscal 2006. We expect Stride Rite Children's Group sales to
be up in the second half led by the retail area. Second half wholesale sales
should be flat to down slightly, which will be an improvement over the first
half."
"The Tommy Hilfiger Division declined significantly in the second quarter
reflecting lower sales across all retail channels. The second half will see a
continued sales decline, similar to the first half. Tommy Hilfiger sales in our
retail stores, children's product line and international business continue to be
reported as part of those operating units and are important businesses for us."
"Keds sales performed below expectations, declining 16%. Lower than
expected reorders, particularly in the Champion and Microstretch products,
affected second quarter results. Sales to certain mid tier and specialty
accounts were up for the first six months of the year. We are working with each
account to complete the brand repositioning. This month we will begin shipping
Keds into all Journey's stores. We expect the second half to be a continuation
of the performance seen in the first six months, particularly in the core
products."
"Sperry Top-Sider continued its strong performance in both men's and
women's products. We expect them to continue to show a solid second half."
"International sales, which reflect the inclusion of Saucony were very
strong. That should continue in the second half. We have hired a senior
executive to oversee
operations and to build all of our brands in Europe. We expect this to
pay significant dividends in future years."
Mr. Chamberlain continued, "Although the Keds turnaround has been slower
than anticipated and the Tommy decline larger than expected, we are reconfirming
our full year earnings range forecast of $.82 - $.88. However, we are now
forecasting the range for sales growth this year to be 20% - 22%."
This earnings forecast excludes the impact of the lower tax rate described
previously. Included in the projected earnings is the annual impact related to
the expensing of stock options, which is projected at approximately $.05 per
diluted share. In addition, these projections include the previously reported
cost of sales impact related to the flow through of the write-up of inventory
purchased in the Saucony acquisition, which reduced earnings per diluted share
by $.04 in the first quarter. Acquisition related integration costs of $3.0
million or $.05 per diluted share for the year are also included in the earnings
projections.
NET SALES HIGHLIGHTS PER SEGMENT:
o Net sales for the quarters ended June 2, 2006 and June 3, 2005 are summarized
in the table as follows:
The Stride Rite Corporation
Net Sales (in thousands)
Second Quarter
Percent
2006 2005 Change
---- ---- ------
(Unaudited)
Stride Rite Children's Group -
Wholesale $18,292 $19,491 (6)%
Stride Rite Children's Group -
Retail 55,789 45,977 21%
------------ ----------- ----------
Stride Rite Children's Group -
Combined 74,081 65,468 13%
Keds 34,925 41,720 (16)%
Sperry Top-Sider 28,519 23,084 24%
International (includes Saucony) 19,172 7,877 143%
Saucony Domestic (includes Hind) 25,623 - n/a
------------ ----------- ----------
Other Wholesale - Combined 108,239 72,681 49%
Tommy Hilfiger Adult 14,583 24,559 (41)%
Intercompany Eliminations (2,896) (3,067) n/a
------------ ----------- ----------
Total $194,007 $159,641 22%
============ =========== ==========
o Net sales for the six months ended June 2, 2006 and June 3, 2005 are
summarized in the table as follows:
The Stride Rite Corporation
Net Sales (in thousands)
Six Months
Percent
2006 2005 Change
---- ---- ------
(Unaudited)
Stride Rite Children's Group -
Wholesale $39,448 $45,078 (12)%
Stride Rite Children's Group -
Retail 93,713 81,422 15%
------------ ----------- -----------
Stride Rite Children's Group -
Combined 133,161 126,500 5%
Keds 76,916 87,517 (12)%
Sperry Top-Sider 52,107 42,528 23%
International (includes Saucony) 41,990 16,688 152%
Saucony Domestic (includes Hind) 50,186 - n/a
------------ ----------- -----------
Other Wholesale - Combined 221,199 146,733 51%
Tommy Hilfiger Adult 29,516 42,680 (31)%
Intercompany Eliminations (6,453) (5,681) n/a
------------ ----------- -----------
Total $377,423 $310,232 22%
============ =========== ===========
o Total Stride Rite Children's Group net sales increased 13% in the second
quarter and 5% for the first half compared to last year.
- Stride Rite Children's Group-Wholesale net sales decreased 6% for the
quarter and 12% for the first six months as compared to the prior year.
This decrease was attributable to several factors including: the changed
product flow of certain department stores, a shift in value channel buying
patterns and a decline in smaller accounts.
- Net sales of the Stride Rite Children's Group-Retail division increased
21% in the second quarter and 15% for the first six months versus the
prior year. Sales at comparable Children's Group retail stores (open 52
weeks in each fiscal year) increased 8.7% for the second quarter and 3.4%
for the first six months of fiscal 2006. At quarter-end, the Stride Rite
Children's Group-Retail operated 288 Stride Rite children's shoe stores
and outlets as well as 16 Saucony outlet stores.
o Net sales in the Keds division decreased 16% for the second quarter and 12%
for the first six months compared to the comparable periods in the prior
year. The increased sales to specialty and independent retail accounts did
not offset the sales declines in the department store, mid tier, and value
channels.
o Sperry Top-Sider net sales increased 24% for the second quarter and 23% for
the first half on strong sales of men's and women's products, particularly in
the marine and family shoe retail channels.
o Saucony net sales were $25.6 million for the second quarter and $50.2 million
for the first half of 2006. Saucony technical running product continued to
perform well.
o International net sales increased 143% for the second quarter and 152% for
the first six months compared to fiscal 2005, primarily due to the addition
of Saucony international sales. Contributing to the first half increase in
international sales versus last year were higher sales of Tommy Hilfiger in
Canada and Latin America, Keds footwear in Canada, and Sperry Top-Sider in
Europe.
o Net sales of Tommy Hilfiger men's and women's products decreased 41% for the
second quarter and 31% for the first six months compared to last year, with
sales declines in all retail channels.
OTHER FINANCIAL HIGHLIGHTS:
o The second quarter gross profit percentage of 42.4% increased 1.6 percentage
points compared to the same period in the prior year. For the first six
months and excluding the flow through of the inventory write-up related to
the Saucony purchase, the gross profit percentage increased 1.4 percentage
points to 41.9%.Keds, Sperry Top-Sider and International all had strong gross
profit percentage improvements in the first half compared to the prior year.
o Operating expenses increased 28% for the second quarter and 26% for the first
six months compared to the comparable periods in the prior year. As planned,
the major operating cost increases were related to Saucony expenses, higher
advertising costs and the Stride Rite Children's Group-Retail store
expansion. Also contributing to the increase in operating expenses were
integration costs and the impact of adopting SFAS No. 123R, "Share-Based
Payment".
o For the second quarter, operating income increased 21% and was up 26%
excluding the acquisition related integration costs ($1.0 million). For the
first six months, operating income increased 16% and was up 31% for the first
six months excluding the acquisition related integration costs ($2.2 million)
and the flow through of the inventory write up ($2.6 million).
o Accounts receivable increased 32% versus the comparable period last year due
to the addition of Saucony and higher sales in the last month of the quarter.
DSO of 42 days was flat compared to the same period last year.
o Inventories of $123 million were up 25% versus the comparable period of 2005.
The increase was due primarily to the addition of Saucony.
o The Company repurchased approximately 340 thousand shares of company stock
during the second quarter at a cost of $4.8 million. For the first six
months, approximately 448 thousand shares have been repurchased at a cost of
$6.3 million.
COMPANY OVERVIEW & CONFERENCE CALL INFORMATION:
The Stride Rite Corporation markets the leading brand of high quality
children's shoes in the United States. Other footwear products for children and
adults are marketed by the Company under well-known brand names, including Keds,
Sperry Top-Sider, Tommy Hilfiger, Saucony, Grasshoppers, Munchkin, Spot-bilt and
Hind. Apparel products are marketed by the Company under the Saucony and Hind
brand names. Information about the Company is available on our website -
www.strideritecorp.com. The Company will provide a live webcast of its second
quarter conference call. The live broadcast of Stride Rite's quarterly
conference call will be available on the Company's website and at
www.streetevents.com, beginning at 10:00AM ET on June 27, 2006. An on-line
replay will follow shortly after the call and will continue through July 4,
2006. Information about the Company's brands and product lines is available at
www.striderite.com, www.keds.com, www.sperrytopsider.com, www.grasshoppers.com,
www.saucony.com and www.hind.com.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995:
This press release includes forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. These forward-looking statements, including,
but not limited to, statements regarding upcoming product lines, division sales
expectations, growth expectations, and sales growth for the Company, reflect our
current views with respect to the future events or financial performance
discussed in the release, based on management's beliefs and assumptions and
information currently available. When used, the words "believe", "anticipate",
"estimate", "project", "should", "expect", "appear" and similar expressions,
which do not relate solely to historical matters identify forward-looking
statements. Investors are cautioned that forward-looking statements are subject
to risks, uncertainties and assumptions and are not guarantees of future events
or performance, which may be affected by known and unknown risks, trends and
uncertainties, and should not place undue reliance on these statements. Should
one or more of these risks or uncertainties materialize, or should our
assumptions prove incorrect, actual results may vary materially from those
anticipated, projected or implied. Factors that may cause or contribute to such
differences include, among others: international, national and local general
economic, political and market conditions; our reliance on independent
manufacturers in China and potential disruptions in such manufacturing caused by
difficulties associated with political instability in China, the occurrence of a
natural disaster or outbreak of a pandemic disease in China, labor shortages or
work stoppages, and changes in duty structures; the impact of changes in the
value of foreign currencies, including the Chinese Yuen; the possible failure to
retain the Tommy Hilfiger footwear license or other current license agreements;
increased leverage from the financing of our recent acquisition; intense
competition among sellers of footwear; delay in opening new stores; a decline in
the volume of anticipated sales; revenues from new product lines may fall below
expectations; a delay in the launch of new product lines; an inability to
achieve expected results for new retail concepts; general retail sales trends
may be below expectations; consumer fashion trends may shift to footwear styles
not currently included in our product lines; our retail customers, including
large department stores, may continue to consolidate or restructure operations
resulting in unexpected store closings; and additional factors discussed from
time to time in our filings with the Securities and Exchange Commission (the
"SEC"), all of which are available at the SEC's website at www.sec.gov. We
expressly disclaim any responsibility to update forward-looking statements.
NON-GAAP PRO FORMA FINANCIAL MEASURES:
This release contains certain non-GAAP financial measures, specifically
non-GAAP historic and anticipated net income and diluted earnings per share,
each of which excludes certain cash and non-cash charges. These non-GAAP
financial measures are used by management to evaluate the Company's historical
and prospective financial performance and to indicate underlying trends in the
Company's business. Although the non-GAAP measures provided by the Company may
be different from the non-GAAP measures provided by other companies, management
believes that these non-GAAP financial measures provide useful information to
investors because, by excluding non-cash items related to the write-up to fair
value of inventory and one-time cash items related to integration costs of the
Company's recent acquisition, it provides investors with a better understanding
of the performance of the Company and allows investors to evaluate the
effectiveness of the methodology and information used by management in its
financial and operational decision-making. These non-GAAP financial measures
should be considered in addition to results prepared in accordance with GAAP,
but should not be considered a substitute for or superior to GAAP results. The
GAAP measures most directly comparable to the non-GAAP measures are net income
and diluted earnings per share.
9
The Stride Rite Corporation
Summarized Financial Information
for the periods ended June 2, 2006 and June 3, 2005
Statements of Income
(in thousands) Second Quarter Six Months
2006 2005 2006 2005
---- ---- ---- ----
(Unaudited) (Unaudited)
Net sales $194,007 $159,641 $377,423 $310,232
Cost of sales 111,728 94,430 221,912 184,489
--------- -------- --------- --------
Gross profit 82,279 65,211 155,511 125,743
Selling and administrative 60,291 47,028 119,201 94,479
expenses
--------- -------- --------- --------
Operating income 21,988 18,183 36,310 31,264
Other income (expense), net (1,064) 208 (1,887) 370
--------- -------- --------- --------
Income before income taxes 20,924 18,391 34,423 31,634
Provision for income taxes 4,031 6,639 9,245 11,721
--------- -------- --------- --------
Net income $16,893 $11,752 $25,178 $19,913
========= ======== ========= ========
Earnings per share:
Diluted $0.45 $0.32 $0.67 $0.54
Basic $0.46 $0.32 $0.69 $0.55
Weighted average shares outstanding:
Diluted
37,623 37,185 37,619 37,075
Basic 36,650 36,175 36,625 36,091
Balance Sheets
Second Quarter
2006 2005
Assets: (Unaudited)
Cash and cash equivalents $23,349 $30,376
Marketable securities - 40,000
Accounts receivable 96,102 73,079
Inventories 123,108 98,476
Deferred income taxes 13,620 15,134
Other current assets 15,741 7,050
--------- --------
Total current assets 271,920 264,115
Property and equipment, net 52,373 51,758
Goodwill 56,794 908
Trademarks 58,590 1,690
Other assets 18,736 10,506
--------- --------
Total assets $458,413 $328,977
========= ========
Liabilities and Stockholders'
Equity:
Current liabilities 61,236 52,909
Long-term debt 68,000 -
Deferred income taxes and 39,674 12,638
other liabilities
Stockholders' equity 289,503 263,430
--------- --------
Total liabilities and
stockholders' equity $458,413 $328,977
========= ========
The Stride Rite Corporation
Reconciliation of Non-GAAP Measures
(in thousands, except share data)
For the Quarter Ended June 2, 2006
Reported Adjusted Results
Second Quarter Second Quarter
2006 Adjustments 2006
---- ----------- ----
Net sales $194,007 $194,007
Operating income 21,988 $990 (b) 22,978
Provision for income 4,031 404 (c) 4,435
taxes
Net income $16,893 $586 (b),(c) $17,479
Earnings per share:
Diluted $0.45 $0.46
Basic $0.46 $0.48
Weighted average shares outstanding:
Diluted
37,623 37,623
Basic 36,650 36,650
For the Six Months Ended June 2, 2006
Reported Adjusted Results
Six Months Six Months
2006 Adjustments 2006
---- ----------- ----
Net sales $377,423 $377,423
Operating income 36,310 4,775 (a),(b) 41,085
Provision for income 9,245 1,950 (c) 11,195
taxes
Net income $25,178 $2,825 (a),(b),(c) $28,003
Earnings per share:
Diluted $0.67 $0.74
Basic $0.69 $0.76
Weighted average shares outstanding:
Diluted
37,619 37,619
Basic 36,625 36,625
Pro forma adjustments:
(a) Flow through of the inventory write up to fair value (pre-tax)
(b) Saucony integration costs (pre-tax)
(c) Income tax effect at the incremental rate