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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 March 2, 2007
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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.)
of Incorporation or Organization)
191 Spring Street, Lexington, Massachusetts 02421
(Address of principal executive offices) (Zip Code)
(617)824-6000
------------------------------------------
(Registrant's telephone number, including area code)
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 a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and larger accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
One):
Large accelerated filer ( ) Accelerated filer (X) Non-accelerated filer ( )
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 March 30, 2007, 36,541,316 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
(In thousands)
March 2, March 3,
2007 December 1, 2006
(Unaudited) 2006 (Unaudited)
--------------- -------------- ------------
Assets
Current Assets:
Cash and cash
equivalents $19,982 $17,502 $23,219
Accounts and notes
receivable, net 128,733 75,263 121,098
Inventories 126,651 119,917 115,594
Deferred income taxes 14,275 14,293 14,262
Other current assets 17,048 16,676 18,074
-------- -------- ---------
Total current assets 306,689 243,651 292,247
Property and equipment, net 52,950 53,472 51,625
Goodwill 70,257 70,575 56,732
Trademarks and other
intangibles 71,890 71,890 58,590
Other assets, net 18,731 18,299 19,301
-------- -------- ---------
Total assets $520,517 $457,887 $478,495
======== ======== ========
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)
March 2, March 3,
2007 December 1, 2006
(Unaudited) 2006 (Unaudited)
--------------- -------------- -------------
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $32,327 $27,838 $28,120
Income taxes payable 10,508 8,204 7,936
Accrued expenses and other
liabilities 31,402 30,836 31,709
------ ------ ------
Total current liabilities 74,237 66,878 67,765
Long term debt 98,500 54,200 95,000
Deferred income taxes 24,780 25,194 23,781
Pension obligation and other
long-term liabilities 15,060 14,886 15,153
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 and
outstanding -
36,533,131 on
March 2,2007,
36,320,579 on
December 1, 2006 and
36,711,809 on March
3,2006 9,152 9,087 9,172
Capital in excess of par
value 30,425 26,962 22,634
Retained earnings 275,071 266,508 253,674
Accumulated other
comprehensive loss (6,708) (5,828) (8,684)
------- - ------- -- -------
Total stockholders' equity 307,940 296,729 276,796
------- - ------- ---------
Total liabilities and
stockholders' equity $520,517 $457,887 $478,495
======== ======== =========
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 three months ended March 2, 2007 and March 3, 2006
(In thousands, except for per share data)
2007 2006
-------------- ---------------
Net sales $194,671 $183,416
Cost of sales 115,181 110,184
---------- ---------
Gross profit 79,490 73,232
Selling and administrative expenses 60,799 58,910
---------- ---------
Operating income 18,691 14,322
Investment income 392 484
Interest expense (1,434) (1,163)
Other income (expense), net (8) (144)
---------- ----------
Income before income taxes 17,641 13,499
Provision for income taxes (6,546) (5,214)
---------- ---------
Net income $11,095 $ 8,285
========== =========
Net income per common share:
Diluted $ .30 $ .22
========== =========
Basic $ .30 $ .23
========== =========
Dividends per common share $ .07 $ .06
========== =========
Average common shares used in per share
computations:
Diluted 37,537 37,703
========== =========
Basic 36,556 36,588
========== =========
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 three months ended March 2, 2007 and March 3, 2006
(In thousands)
2007 2006
-------------- -----------
Cash flows from operating activities:
Net income $11,095 $8,285
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,257 3,898
Deferred income taxes (268) (245)
Compensation expense related to stock plans 731 721
Gain on disposals of property and
equipment (171) (307)
Other non-cash items (193) -
Changes in:
Accounts and notes receivable (54,110) (57,565)
Inventories (6,796) 675
Other current assets 129 6,352
Other current liabilities 6,775 (4,489)
Other long-term assets (552) 296
Other long-term liabilities 181 1,341
--------- ---------
Net cash used by operating activities (38,922) (41,038)
--------- ----------
Cash flows from investing activities:
Additions to property and equipment (3,266) (3,850)
---------- ----------
Net cash used by investing activities (3,266) (3,850)
---------- ----------
Cash flows from financing activities:
Borrowings under revolving credit facility 213,800 54,000
Payments under revolving credit facility (169,500) (19,000)
Proceeds from sale of stock under stock plans 1,732 2,489
Tax benefit in connection with exercise of
stock options 1,019 629
Cash dividends paid (2,213) (2,189)
Repurchase of common stock - (1,587)
-------- ---------
Net cash provided from financing activities 44,838 34,342
-------- ---------
Effect of exchange rate changes on cash and
cash equivalents (170) 671
-------- ---------
Net increase (decrease) in cash and cash
equivalents 2,480 (9,875)
Cash and cash equivalents at beginning of the
period 17,502 33,094
------ ---------
Cash and cash equivalents at end of the period $19,982 $23,219
======= =========
Cash paid for interest expense $ 1,342 $ 970
Cash paid for income taxes $ 1,883 $ 3,266
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 March 2, 2007 and March 3,
2006 is unaudited. Such information includes all adjustments (including only and
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 March 2, 2007 and
March 3, 2006 are not necessarily indicative of the result 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 accounting principles generally accepted in the
United States of America. The Company has previously filed with the Securities
and Exchange Commission audited consolidated financial statements for the year
ended December 1, 2006 on Form 10-K, which includes all information and
footnotes necessary for such presentation.
The Company's preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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, income taxes, assumptions related to the
defined benefit pension plan; assumptions used in the calculation of share-based
compensation costs, assumptions and estimates used in valuing the assets and
liabilities acquired through business acquisitions, 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 2002, the Company's stockholders approved The Stride Rite
Corporation Amended and Restated Employee Stock Purchase Plan. Amending the
Employee Stock Purchase Plan, among other things, increased the number of common
shares available for issuance thereunder by 500,000 shares to a total of
6,140,000 shares. Under the Plan, participating associates can authorize the
Company to withhold up to 10% of their earnings during consecutive three month
payment periods for the purchase of shares. At the conclusion of the period,
associates can purchase shares at 95% of the market value of the Company's
common stock on the last day of the payment period. For the payment period which
ended in December 2006, a total of 10,509 shares were issued under the Plan for
an aggregate amount of $151 thousand. At March 2, 2007, a total of 5,959,889
shares had been purchased under the Plan since inception and 180,111 shares were
available for purchase by participating associates.
During 1998, the Company's stockholders approved The Stride Rite
Corporation 1998 Non-Employee Director Stock Ownership Plan. Under the 1998
Director's Plan, awards of common stock and options to purchase common stock are
granted to any director who is not an employee of the Company in accordance with
the provisions of the Plan. During April 2003, the Company's stockholders
approved an amendment to the 1998 Director's Plan increasing the number of
shares of common stock authorized for issuance from 300,000 to 600,000. Options
to purchase common stock are granted at a price equal to the closing price of
the Company's common stock on the date the option is granted. Directors receive
an annual grant of options to purchase 5,000 shares of common stock under the
Plan. Options have a term of ten years and are non-transferable. Under the Plan,
options become exercisable over a three-year period and must be paid for in full
at the time of exercise. In April 1999, the stockholders approved an amendment
to the Plan which allowed directors to receive their annual retainer either
entirely in shares of common stock or one-half in shares of common stock and
one-half in cash at the election of each director. In addition, directors may
defer receipt of the stock (deferred stock unit) and/or cash portion of their
annual retainer by electing to participate in the Company's Deferred
Compensation Plan for Directors. At March 2, 2007, the issuance of 136,886
shares has been deferred by participating directors. At March 2, 2007, 113,121
options were available to grant under the 1998 Director's Plan.
During 2004, the Company's stockholders approved an amendment to the 2001
Stock Option and Incentive Plan. This amendment, among other things, increased
the number of common shares of stock reserved and available for issuance under
the 2001 plan to 6,000,000 shares, of which 3,000,000 shares represent an
increase over the previous number of shares reserved. The 2001 Stock Option and
Incentive Plan, which expires in April 2011, replaced a similar long-term
incentive plan which had been approved by the stockholders in 1998. Under the
Plan, as amended, options to purchase common stock and stock awards of up to an
aggregate of 6,000,000 shares of the Company's common stock may be granted to
officers and other key associates. At March 2, 2007, 957,490 options were
available to grant under the 2001 plan. The option price of the shares may not
be less than the fair market value of the Company's common stock at the date of
grant. Options issued under the Plan prior to fiscal 2005 generally vest over a
three-year period and the rights to purchase common shares expire ten years
following the date of grant. Options issued since the beginning of the 2005
fiscal year generally vest over a four-year period and expire seven years
following the date of grant. During the first quarter of fiscal 2007 certain key
executives and employees were granted awards of restricted stock representing
135,050 shares of common stock under the 2001 plan. Certain of these restricted
shares are subject to pre-established performance criteria, which may affect the
number of restricted shares received. If issued, these performance-based
restricted shares will vest over four years in equal annual installments. The
restricted shares which were issued without performance criteria will vest three
years after the grant date.
A summary of the activity in stock options with respect to all plans for
the three months ended March 2, 2007 is as follows:
Number of Weighted Average
Options Exercise Price
- --------------------------------------------------------------------------------
Outstanding at December 1, 2006 3,812,420 $ 9.98
Granted 693,525 16.82
Exercised (162,500) 9.73
Canceled (72,981) 9.29
-------------- ---------
Outstanding at March 2, 2007 4,270,464 $ 11.08
============= =======
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A summary of the activity in restricted stock awards with respect to the
2001 plan for the three months ended March 2, 2007 is as follows:
Number of
Restricted Weighted Average
Stock Awards Exercise Price
- --------------------------------------------------------------------------------
Outstanding at December 1, 2006 240,033 -
Granted 135,050 -
Exercised (69,319) -
Canceled - -
------------ -------
Outstanding at March 2, 2007 305,764 -
============ =======
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding
at March 2, 2007:
Weighted
Average Weighted
Range of Remaining Average Aggregate
Exercise Number Contractual Exercise Intrinsic
Prices Outstanding Life Price Value
- -------------- ----------- ----------- --------- -----------
$5.00-$6.88 930,530 3.6 years $6.61 $8,495,739
$7.38-$10.63 809,465 5.5 years 8.24 6,070,988
$10.64-$12.25 1,098,195 5.9 years 11.55 4,601,437
$12.95-$16.82 1,432,274 6.5 years 15.24 716,137
--------- --------- ----- -----------
4,270,464 5.9 years $11.08 $19,884,301
========= ========= ====== ===========
The following table summarizes information about stock options exercisable
at March 2, 2007:
Weighted
Average Weighted
Range of Remaining Average Aggregate
Exercise Number Contractual Exercise Intrinsic
Prices Exercisable Life Price Value
$5.00-$6.88 930,530 3.6 years $6.61 $8,495,739
$7.38-$10.63 803,632 5.5 years 8.23 6,035,276
$10.64-$12.25 776,047 6.1 years 11.41 3,360,284
$12.95-$16.82 162,251 5.9 years 13.72 327,745
-- ------- --------- ----- ---- -------
2,672,460 5.6 years $9.56 $18,219,044
========= ========= ===== ===========
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123(R), "Share-Based Payment" ("SFAS
123R"), which requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial statements based on
their fair values. SFAS 123R revises SFAS No. 123 and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees". Effective December 3, 2005, the
Company adopted the provisions of SFAS 123R using the modified prospective
application transition method. Under this transition method, the compensation
cost related to all equity instruments granted prior to, but not yet vested as
of adoption of the standard is recognized based on the grant-date fair value as
estimated in accordance with the original provisions of SFAS 123. The grant-date
fair value of the awards generally vest over the service period. Under the
provisions of SFAS 123R, the Company is required to include an estimate of the
number of the awards that will be forfeited. Previously, the Company had
recognized the impact of forfeitures as they occurred.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Share-based compensation cost was $731 thousand and $721 thousand for the
three months ended March 2, 2007 and March 3, 2006, respectively. The portion of
share-based compensation cost included in selling and administrative expenses
for the three months ended March 2, 2007 and March 3, 2006 was $651 thousand and
$616 thousand, respectively. The portion of share-based compensation cost
included in cost of sales for the three months ended March 2, 2007 and March 3,
2006 was $80 thousand and $105 thousand, respectively. The Company did not
capitalize any share-based compensation cost as the costs that qualified for
capitalization were not material. The related tax benefit from the exercise of
shares recognized in the three months ended March 2, 2007 and March 3, 2006 was
$1.0 million and $295 thousand, respectively.
The weighted average grant date fair value used in the calculation of
share-based compensation cost in the accompanying condensed consolidated
statements of income for the three months ended March 2, 2007 has been
calculated using the Black-Scholes option pricing model with the following
weighted average assumptions:
Employee Stock Options 2007 2006
- -----------------------------------------------------------------------
Risk-free interest rate 4.76% 4.32%
Dividend yield 1.8% 1.8%
Volatility factor 29.5% 26.6%
Weighted average
expected life of options (years) 4.75 4.75
The weighted average expected life of options was calculated using the
simplified method as provided by the Securities and Exchange Commission's Staff
Accounting Bulletin No. 107. This decision was based on the lack of relevant
historical data due to decreasing the option's contractual term from 10 years to
7 years and increasing the vesting period from 3 years to 4 years for options
that were granted starting in fiscal year 2005. The risk-free interest rate
assumption was based on the United States Treasury's constant maturity's rate
for a 4.75 year term on the date the option was granted. The volatility
assumption was based on weekly historical volatility during the time period that
corresponds to the expected weighted average life of the option. The assumed
dividend yield was based on the Company's expectation of future dividend
payouts. The post-vesting forfeiture rate is based on the four year historical
average turnover rate for two groups of option eligible employees. These
assumptions are evaluated, and revised as necessary, based on changes in market
conditions and historical experience.
The weighted average grant date fair values of stock options granted during
the three months ended March 2, 2007 and March 3, 2006 were estimated at $4.70
and $3.46, respectively.
Total unrecognized share-based compensation costs related to non-vested
stock options was approximately $8.9 million as of March 2, 2007 which related
to approximately 1.9 million shares with a per share weighted value of $4.66.
This unrecognized cost is expected to be recognized over a weighted average
period of approximately 3 years. The intrinsic value of options exercised during
the three months ended March 2, 2007 was approximately $2.5 million.
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 (which includes deferred stock units, see
Note 1) for the period. Diluted earnings per common share reflects the potential
dilution that could occur if stock options and other types of stock-based
compensation that issue common stock are exercised.
The following is a reconciliation of the number of shares used in the basic
and diluted earnings per share computations:
Three Months Ended
---------------------------------------
March 2, March 3,
2007 2006
--------------------- -------------
(In thousands, except for per share data)
Net income $11,095 $ 8,285
======= =======
Weighted average common shares
outstanding (basic) 36,556 36,588
Dilutive effect of share-based
compensation 981 1,115
------- -------
Weighted average common shares
outstanding (diluted) 37,537 37,703
======= ======
Earnings per common share:
Basic $ .30 $ .23
======= =======
Diluted $ .30 $ .22
======= =======
The following weighted shares have been excluded in the computation of
diluted earnings per share because the weighted shares are anti-dilutive:
First Quarter
----------------------------
2007 2006
------------ ------------
(In thousands)
Anti-dilutive weighted shares 1,149 944
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
-----------------------------------
March 2, March 3,
2007 2006
------------------ --------------
(In thousands)
Net income $11,095 $8,285
Other comprehensive income:
Foreign currency translation adjustments (880) 783
--------- ------
Total comprehensive income $ 10,215 $9,068
======== ======
Components of accumulated other comprehensive loss consist of the
following:
March 2, December 1, March 3,
2007 2006 2006
--------------- ---------------- --------------
(In thousands)
Foreign currency translation
adjustments $1,505 $2,385 $730
Minimum pension liability
adjustments, net of taxes (8,213) (8,213) (9,414)
------- --------- - -------
Accumulated other
comprehensive loss $(6,708) $ (5,828) $(8,684)
======== ========= ========
Note 4 - Robeez Acquisition
On September 5, 2006, the Company purchased all of the outstanding shares
of three holding companies that, together with their direct and indirect
subsidiaries, constitute the Robeez Group ("Robeez") for a purchase price of
approximately $28.7 million, net of cash acquired. As a result, Robeez became a
wholly-owned subsidiary of the company. Robeez was purchased using cash provided
from operations in addition to approximately $17 million borrowed under our
existing revolving credit facility.
As part of the acquisition and in the fourth quarter of 2006, the Company
terminated certain executives at a cost of approximately $1.3 million.
Additionally, approximately $313 thousand of other acquisition liabilities were
incurred relating to lease termination costs on equipment and other
miscellaneous expenses.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Details of the Robeez acquisition related reserves at March 2, 2007 as are
follows:
Acquisition Acquisition
Related Related
Severance Exit Costs
- ------------------------------------------------------------------------
Balance at December 1,2006 $1,191 $304
Deductions from reserve (434) -
Foreign currency translation impact (31) (8)
----------- -----------
$726 $296
=========== ===========
Note 5 - Debt
In connection with the acquisition of Saucony, the Company entered into a
five-year revolving credit facility pursuant to a Credit Agreement dated
September 16, 2005 (the "Credit Agreement'). The Credit Agreement provides for
collateralized revolving loans in an aggregate amount up to $275 million (the
"revolver"), including a $75 million sublimit for the issuance of letters of
credit and a $15 million sublimit for swingline loans, with $200 million
currently committed. Borrowings under the Credit Agreement are scheduled to
mature on September 16, 2010 and are collateralized by substantially all of the
assets of the Company.
During the first quarter of fiscal 2007, borrowings under this Credit
Agreement averaged $71.9 million, with a maximum amount outstanding of $98.5
million. For the same period in the prior fiscal year, borrowings averaged $78.1
million with a maximum borrowing of $101.0 million. The weighted average
interest rate on these borrowings during the first quarter of fiscal year 2007
was 7.97% versus 5.80% in the prior year's quarter. On March 2, 2007 and March
3, 2006, $98.5 million and $95.0 million, respectively, were outstanding under
the revolver. Cash interest payments were $1.4 million and $1.1 million in the
first quarter of fiscal year 2007 and 2006, respectively.
Note 6 - Benefit Plans
The following table summarizes the components of net periodic benefit cost
for the Company:
Three Months Ended
----------------------------------
2007 2006
---------------- ---------------
(In thousands)
Service cost $ - $570
Interest cost 1,108 1,029
Expected return on assets (1,173) (1,143)
Net loss recognized 190 510
Amortization of prior service cost - 3
------ ------
Net periodic benefit cost $ 125 $969
====== ======
During the first quarter of fiscal 2007, no contributions were made to the
Company's defined benefit pension plan. At this time, the Company does not plan
to make any contributions to its defined benefit pension plan during the 2007
fiscal year.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On June 29, 2006, the Company announced changes to its defined benefit
pension plan effective December 31, 2006 that included stopping the accrual of
future benefits in the Company's defined benefit pension plan and fully
preserving all retirement benefits that employees will have earned as of
December 31, 2006. At the same time the company also announced changes that
included significant increases to the matching contributions to its defined
contribution plan beginning January 1, 2007. The impact of the change to the
defined benefit plan was a curtailment of the projected benefit obligation of
$2.7 million and no change to the accumulated benefit obligation. The defined
contribution plans were redesigned to increase the Company match from 3% of pay
up to 6% of pay and to allow all participants to make full use of the maximum
statutory deferral limits.
Note 7 - Contingencies
The revenue of Tommy Hilfiger branded footwear is a significant portion of
the Company's business. The Tommy Hilfiger footwear sales are contingent on the
Company's licensing agreement with Tommy Hilfiger Licensing, Inc. In July 2006,
the Company amended the terms of the current license agreement, which extended
the term of the agreement to expire in March 2008. During the first quarter of
fiscal 2007, the Company entered into an additional extension of the term of the
agreement through December 2008. Whether the Company's license with Tommy
Hilfiger will remain in effect depends in part on the Company achieving certain
minimum sales levels for the licensed products. The Company continues to expect
to meet the minimum sales levels required by the Tommy Hilfiger License
agreement. The Company believes that no provision is currently required for
costs related to the potential loss of this license. If the Tommy Hilfiger
license is lost, the Company's business would be materially and adversely
affected. Revenues derived from our Tommy Hilfiger licenses were approximately
$21 million in the first quarter of fiscal 2007. This revenue is included in the
Tommy Hilfiger Footwear segment, the Other Wholesale Footwear segment
(specifically the Stride Rite International division), Stride Rite Children's
Group - Retail division, and the Stride Rite Children's Group - Wholesale
Division.
In December 2004, Saucony, Inc. recorded a charge to address environmental
conditions at a Saucony owned distribution facility. The facility and the
related liability were acquired by the Company as part of the Saucony
acquisition in September 2005. The liability as of March 2, 2007 is $1,829,000
and is included as an accrued expense in the accompanying condensed consolidated
balance sheet. The original estimated costs ranged from $1,242,000 to
$4,621,000. The Company's management determined that the liability was fairly
stated upon acquisition. The assessment of the liability and the associated
costs are an estimate based upon available information after consultation with
environmental engineers, consultants and attorneys assisting the Company in
addressing these environmental issues. Actual costs to address the environmental
conditions may change based upon further investigations, the conclusions of
regulatory authorities about information gathered in those investigations, and
due to the inherent uncertainties involved in estimating conditions in the
environment and the costs of addressing such conditions. During the first
quarter of the fiscal 2007, there were $36 thousand of costs deducted from the
reserve.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Operating Segments and Related Information
In September 2005 the Company acquired Saucony, Inc. During the 2006 fiscal
year, Saucony's operations were integrated into the existing operations of the
Company. As a result, during the first quarter of fiscal 2006, the Company
re-assessed its operating and reportable segments under SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
changes to the Company's segments were as follows: the Stride Rite Children's
Group - Retail Division includes the Saucony factory outlet stores (15 stores as
of March 2, 2007); Saucony's international operations are included in the Stride
Rite International division, which is aggregated in the Other Wholesale Footwear
reportable segment and the Saucony domestic footwear division, which includes
the Hind unit, is also aggregated into the Other Wholesale Footwear reportable
segment.
In September 2006, the Company completed its acquisition of three holding
companies that, together with their direct and indirect subsidiaries, constitute
the Robeez Group ("Robeez") pursuant to a Share Purchase Agreement. At that
time, Robeez became our wholly-owned subsidiary. Robeez results of operations
have been included in our results since the date of acquisition. Robeez has been
reported as a separate segment since the date of acquisition, based on
management's evaluation of the business for the purposes of assessing
performance and allocating resources.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Segment information for the three months ended March 2, 2007 and March 3, 2006
is as follows:
Stride Stride
Rite Rite
First Children'sChildren's Other Tommy Unallocated
Quarter Group - Group - Whlsle Hilfiger Corporate Consol-
2007 Retail Whlsle Footwear Footwear Robeez & Other idated
- --------------------------------------------------------------------------------
Sales $43,129 $20,980 $112,235 $15,472 $7,084 - $198,900
Inter-
company
sales - (48) (3,273) (771) (137) - (4,229)
------- -------- --------- -------- ------- ------ ---------
Net sales
to
external
customers $43,129 $20,932 $108,962 $14,701 $6,947 - $194,671
======= ======= ======== ======= ====== ====== =========
Operating
(loss)
Income $(2,502) $ 2,515 $ 18,661 $ 828 $ 398 $(1,209) $ 18,691
Interest
and
other,
net - - - - - (1,050) (1,050)
-------- -------- --------- ------- ------- ------- ---------
Income
(loss)
before
income
taxes $(2,502) $ 2,515 $ 18,661 $ 828 $ 398 $(2,259) $ 17,641
======== ======= ======== ======= ======= ======== ========
Total assets $49,498 $47,085 $322,254 $16,326 $38,898 $46,456 $520,517
======= ======= ======== ======= ======= ======= ========
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Stride Stride
Rite Rite
First Children'sChildren's Other Tommy Unallocated
Quarter Group - Group - Wholesale Hilfiger Corporate Consol-
2006 Retail Wholesale Footwear Footwear Robeez & Other idated
- -----------------------------------------------------------------------------------
Sales $37,924 $21,156 $112,960 $14,933 - - $186,973
Inter-
company
sales - (27) (2,665) (865) - - (3,557)
------- -------- --------- -------- ------ ------ ---------
Net sales
to
external
customers $37,924 $21,129 $110,295 $14,068 - - $183,416
======= ======= ======== ======== ======= ====== ========
Operating
(loss)
income $(2,088) $ 2,802 $ 16,908 $ (338) - $(2,962) $ 14,322
Interest
and
other,
net - - - - - (823) (823)
------- ------- -------- ------ ------- ------- -------
Income
(loss)
before
income
taxes $(2,088) $ 2,802 $ 16,908 $ (338) - $(3,785) $ 13,499
======= ======= ======== ======== ====== ======= ========
Total assets $44,457 $48,610 $304,958 $14,615 - $65,855 $478,495
======= ======= ======== ======== ====== ======= ========
Note 9 - Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 158 ("SFAS 158"), Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106 and 132 (R). This Statement requires an employer that is a
business entity and sponsors one or more single-employer defined benefit pension
plans to recognize the funded status of a benefit plan - measured as the
difference between plan assets at fair value (with limited exceptions) and the
benefit obligation - in its statement of financial position. It also requires
companies to recognize as a component of other comprehensive income, net of tax,
the gains and losses and prior service costs or credits that arise during the
period but are not recognized as components or net periodic benefit cost
pursuant to FASB Statement No. 87; to measure defined benefit plan assets and
obligations as of the date of the employer's fiscal year-end statement of
financial position; and to disclose in the notes to the financial statements
certain other information. The provisions of this statement are effective as of
the end of fiscal years ending after December 15, 2006. The Company does not
expect the provisions of SFAS 158 to have a material impact on its financial
position, results of operations and cash flows.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In June 2006, the FASB issued FASB interpretation No. 48 ("FIN48")
"Accounting for Uncertainty in Income Taxes", an interpretation of SFAS No. 109,
"Accounting for Income Taxes" ("SFAS 109"). This interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS No. 109. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. This interpretation is effective for fiscal years beginning after
December 15, 2006; the Company's first quarter of fiscal 2008. The Company is
currently evaluating the provisions of FIN 48 to determine the impact on our
financial position, results of operations and cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value and requires enhanced disclosures about fair value
measurements. SFAS No. 157 requires companies to disclose the fair value of
their financial instruments according to a fair value hierarchy as defined in
the standard. Additionally, it requires companies to provide enhanced disclosure
regarding financial instruments in Level 3 of the fair value hierarchy. SFAS No.
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. We
believe the adoption of SFAS No. 157 will not have a material impact on our
financial position, results of operations and cash flows.
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 acquisitions of Robeez Footwear, the
challenges of achieving the expected synergies with Robeez Footwear, and the
possibility of incurring costs or difficulties related to the integration of the
business of Stride Rite and Robeez Footwear and Saucony; increased leverage from
the financing of our recent acquisitions; 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; 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
PART I -FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
to secure and protect trademarks, patents and other intellectual property;
performance and reliability of our 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 department stores, which may result in unexpected
store closings; our reliance on independent manufacturers in China and potential
disruptions in such manufacturing caused by political instability, the
occurrence of a natural disaster or other disruptions in China's social or
economic structure; the impact of changes in the value of foreign currencies,
including the Chinese Yuan and the currencies of countries where Stride Rite
markets its various brands; 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; acts
of terrorism; 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; changes in government regulations; liability and other claims
asserted against the Company; the ability to attract and retain qualified key
personnel; and other factors referenced or incorporated by reference in this
report and other reports.
The risks included here are not exhaustive. Other sections, including
without limitation the section entitled "Risk Factors", of our annual report on
Form 10-K 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 non-public or 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.
Critical Accounting Policies and Estimates
- ------------------------------------------
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America 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 1, 2006 for additional information. There
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
have been no changes to the Company's critical accounting policies in the
quarter ended March 2,2007.
Contingencies
- -------------
The sale of Tommy Hilfiger branded footwear is a significant portion of our
business. The Tommy Hilfiger footwear sales are contingent on our licensing
agreement with Tommy Hilfiger Licensing, Inc. During fiscal 2006, we renewed the
agreement for an additional one-year term, to March 2008. During the first
quarter of fiscal 2007, we subsequently entered into an additional extension of
the term of the agreement to December 2008. Whether our license with Tommy
Hilfiger will remain in effect depends, in part, 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.
During 2006, the parent company of Tommy Hilfiger Licensing, Inc., Tommy
Hilfiger Corp., was sold to Apax Partners. If we lose the Tommy Hilfiger
license, our business would be materially and adversely affected. Revenues
derived from our Tommy Hilfiger licenses are included in the Tommy Hilfiger
Footwear segment, the Other Wholesale footwear segment (specifically the Stride
Rite International division), Stride Rite Children's Group - Retail Division,
and the Stride Rite Children's Group - Wholesale Division.
Results of Operations
- ---------------------
The following table summarizes the Company's performance for the first
quarter of fiscal 2007 as compared to the results for the same period in fiscal
2006:
Increase Percentage vs. 2006 Results:
- ------------------------------------
First Quarter
-------------
Net sales 6.1%
Gross profit 8.5%
Selling and administrative expenses 3.2%
Operating income 30.5%
Income before income taxes 30.7%
Net income 33.9%
Operating Ratios as a Percentage of Net Sales:
First Quarter
--------------------------------
2007 2006
-------------- --------------
Gross profit 40.8% 39.9%
Selling and administrative expenses 31.2% 32.1%
Operating income 9.6% 7.8%
Income before income taxes 9.1% 7.4%
Net income 5.7% 4.5%
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 first quarter breakdown of net sales is as follows:
Percentage
Change
2007 vs.
2007 2006 2006
-------- -------- ------------
(In millions, except percentages)
Stride Rite Children's Group - Wholesale $21.0 $21.2 (0.8)%
Stride Rite Children's Group - Retail 43.1 37.9 13.7%
-------- -------- ------------
Stride Rite Children's Group 64.1 59.1 8.5%
Keds 38.1 42.0 (9.3)%
Sperry Top-Sider 26.0 23.6 10.3%
Stride Rite International 23.3 22.8 2.1%
Saucony 22.4 21.1 6.3%
Hind 2.4 3.5 (30.8)%
-------- -------- ------------
Other Wholesale Footwear 112.2 113.0 (0.6)%
Tommy Hilfiger Footwear 15.5 14.9 3.6%
Robeez 7.1 - n/a
Elimination of intercompany sales (4.2) (3.6) n/a
-------- -------- ------------
Total net sales $194.7 $183.4 6.1%
======== ======== ============
During the first quarter of fiscal 2007, consolidated net sales increased
$11.3 million to $194.7 million, or 6.1% above the sales level achieved in the
first quarter of fiscal 2006. The increase in sales is primarily related to the
inclusion of a full quarter of Robeez sales as well as the increase in Stride
Rite Children's Group - Retail's sales. Wholesale net sales increased $5.2
million or 3.6% for the first quarter of 2007, and overall retail sales,
including the e-commerce sites, increased $6.1 million or 15.7% when compared to
the same period in the prior year. Unit shipments of first quality merchandise
for the wholesale brands during the first quarter were 1.4% higher than the
comparable period in 2006.
First quality wholesale net sales increased by $2.9 million, or 2.0% above
the wholesale net sales level achieved in the first quarter of fiscal 2006. This
includes the positive impact of a $1.0 million decrease in combined discounts,
returns and allowances. Sales of closeout products increased $1.3 million from
the comparable period in the 2006 fiscal year. Additionally, royalty income
increased $0.6 million versus the comparable period in the 2006 fiscal year.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Gross Profit
- ------------
During the first quarter of fiscal 2007, the Company's gross profit of
$79.5 million increased $6.3 million or 8.5% above the amount recorded during
fiscal 2006's first quarter. The gross profit percentage rate for the fiscal
2007 first quarter increased 0.9 percentage points to 40.8%, versus the 39.9%
rate reported in the prior year's first quarter. Contributing to the improved
gross profit dollars were the full quarter impact of Robeez gross sales in 2007
and increased sales of higher priced Sperry Top-Sider products in premier
department store and independent retail channels. Offsetting a portion of these
increases were the lower gross profit dollars caused by the declines in Keds
sales, an increase in promotional event sales in the Stride Rite Children's
Group retail stores, and a shift in product mix. The gross profit comparison was
also impacted by the $2.6 million pre-tax expense recorded in the first quarter
of the prior year which related to the flow through of the remaining purchase
accounting inventory write-up to fair value recorded as part of the Saucony
acquisition.
Operating Costs
- ---------------
During the first quarter of fiscal 2007, selling and administrative
expenses were $60.8 million, an increase of $1.9 million or 3.2% as compared to
the first quarter of fiscal 2006. This increase was principally the result of
the inclusion of Robeez which added $3.3 million in operating expenses. Also
contributing to the higher expense levels in the first quarter of fiscal 2007
were $2.1 million in incremental costs associated with the increased number of
Stride Rite Children's Group retail stores, which includes Saucony's factory
outlet stores in addition to increased investment in European operations which
added $0.8 million in expenses during the quarter. Offsetting a portion of these
expense increases were $0.8 million in reduced pension expense due to the
previously announced changes in our defined benefit plan that included stopping
the accrual of future retirement benefits and preserving earned benefits as of
December 31, 2006. In addition, first quarter acquisition related integration
costs of $0.3 million for Robeez in fiscal 2007 were $0.9 million lower than the
integration expenses in the prior year's comparable period related to the
acquisition of Saucony. As a percentage of sales, operating costs were 31.2% in
the first quarter of fiscal 2007 compared to 32.1% in the first quarter of
fiscal 2006.
Other Income and Taxes
- ----------------------
Investment income related to the Company's cash equivalents and marketable
securities was $0.4 million in the first quarter of fiscal 2007, which remained
flat versus the similar period in fiscal 2006. Interest expense, which relates
to borrowings under the revolving credit agreement, increased by $0.3 million in
the first quarter of fiscal 2007 as compared to the first quarter of fiscal
2006.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The provision for income taxes increased $1.3 million in the first quarter
of fiscal 2007 as compared to the similar period in fiscal 2006. This increase
was due to the higher pre-tax income amount, offset in part by a lower tax rate.
Our effective tax rate was 37.1% in the first quarter of fiscal 2007 as compared
to 38.6% in the first quarter of fiscal 2006.
Net Income
- ----------
Net income for the first quarter of fiscal 2007 was $11.1 million, an
increase of $2.8 million, or 33.9% as compared to the same period in the prior
year. The higher net sales and resulting gross profit, due in part to the
addition of Robeez, were able to offset corresponding increases in operating
expenses and interest expense.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Segments Review
- ---------------
In September 2006, the Company completed its acquisition of three holding
companies that, together with their direct and indirect subsidiaries, constitute
the Robeez Group ("Robeez") pursuant to a Share Purchase Agreement. At that
time, Robeez became our wholly-owned subsidiary. Robeez' results of operations
have been included in our results since the date of acquisition. Robeez has been
reported as a separate segment based on management's evaluation of the business
for the purposes of assessing performance and allocating resources.
Stride Rite Children's Group - Retail
- -------------------------------------
The net sales of the Stride Rite Children's Group - Retail increased $5.2
million or 13.7% in the first 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 6.3% for the first fiscal quarter of
2007. The increase in the comparable stores category was partially attributable
to the shift of the annual pre-Easter holiday promotional event into the first
quarter of fiscal 2007, as compared to the second quarter of fiscal 2006. At the
end of the first quarter of fiscal 2007, the Stride Rite Children's Group -
Retail operated 307 Stride Rite children's shoe stores and outlets. This is a
net increase of 27 stores, or 10% from the end of the same period in the prior
year. In addition Stride Rite Children's Group-Retail operated 15 Saucony outlet
stores. Current plans for fiscal 2007 include the opening of 27 Children's Group
retail stores and the closing of 13 underperforming retail locations.
The Stride Rite Children's Group - Retail operating income decreased due to
a lower gross profit percentage and higher operating expenses which offset the
income impact of higher sales versus the prior year. The gross profit margin
decline was primarily the result of a high level of promotional events in our
retail stores and a lower gross profit dollar product mix. The operating expense
increase is primarily related to the additional number of stores and certain
increased indirect store costs.
Stride Rite Children's Group - Wholesale
- ----------------------------------------
Net sales decreased $0.2 million or 0.8% during the first quarter of 2007
as compared to the same quarter last year. This slight decrease was primarily
attributable to lower sales of first quality products to department stores,
mainly in the Stride Rite and Tommy Hilfiger product lines, as well as a
decrease in closeout products sales. Offsetting these declines were higher sales
of Sperry Top-Sider and Saucony children's products.
The Stride Rite Children's Group - Wholesale operating income declined
slightly versus the prior year. The decline was primarily related to the impact
of the lower net sales and the corresponding reduction in gross profit dollars
due to a shift in product mix, being largely offset by decreases in operating
expenses.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other Wholesale Footwear
- ------------------------
The slight overall decrease in net sales of the Other Wholesale Footwear
segment was primarily attributable to decreases in Keds and Hind product sales.
These decreases were partially offset by increases in Saucony and Sperry
Top-Sider product sales.
During the first quarter of fiscal 2007, the increase in Saucony domestic
sales was driven by strong sales of several new technical and athletic product
introductions. Offsetting a portion of this was a decrease in promotional
product sales.
The Sperry Top-Sider sales increase was attributable to strong sales of
both men's and women's product lines. The growth in the Sperry Top-Sider product
sales in the first quarter resulted from increases in the premier department
store and independent retail channels. Offsetting a portion of this sales growth
was a decrease in promotional product sales.
The Stride Rite International division's net sales growth in the first
quarter of fiscal 2007 was primarily the result of strong sales of Saucony
products in Europe, Keds sales increases in Canada, Europe and Australia and
Sperry Top-Sider's sales in Europe, Asia and Latin America. Offsetting a portion
of this increase were lower Tommy Hilfiger sales in Canada and Latin America.
The Keds sales decline during the first quarter of fiscal 2007 versus the
same period last year was partially attributable to a decrease in core product
sales in the mid-tier and value channels, as well as lower children's sales. We
have continued to add new distribution in the younger-oriented specialty stores
and premier department stores. These updated product offerings have performed
well in these channels.
The Hind sales decline was primarily related to sales declines in the
outdoor channel. We expect this trend to continue through the remainder of
fiscal 2007 as we reposition the technical apparel strategy and introduce new
product offerings.
The increased operating income versus the prior year in this segment was
primarily related to the impact of higher net sales in Saucony and Sperry
Top-Sider and the corresponding increases in gross profit dollars. Also
contributing to the favorable operating income comparison is the $2.6 million
expense recorded in last year's first quarter for the flow through of the
remaining purchase accounting write-up of acquired Saucony inventory to fair
value. Offsetting these increases were the impact of lower net sales in Keds and
Hind and the corresponding decreases in gross profit dollars.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Tommy Hilfiger Footwear, Inc.
- -----------------------------
The net sales of Tommy Hilfiger footwear adult products increased by 3.6%
during the first quarter of fiscal 2007. This was primarily attributable to
positive trends in both women's and men's product lines sales to family shoe
store accounts. In fiscal 2007, under this license, we are projecting an
improved sales trend, although still an overall sales decline.
The Tommy Hilfiger operating income increase versus prior year was
primarily related to the impact of higher net sales and the corresponding
increase in gross profit dollars coupled with decreases in operating expenses.
Robeez
- ------
The first quarter of fiscal 2007 was the first complete quarter in which
Robeez' results of operations were included in the Company's results. Robeez
sales for the first quarter of fiscal 2007 were $7.1 million. Net sales of
Robeez products met the Company's expectations on the strength of its soft-soled
products for infants and children to age four.
Robeez' operating income of $398 thousand for the quarter related to gross
profit dollars generated from sales less operating expenses.
Liquidity and Capital Resources
- -------------------------------
At the end of the first fiscal quarter of 2007, our balance sheet reflected
a current ratio of 4.1 to 1.0 with $98.5 million in long-term debt. Last year's
first quarter balance sheet reflected a current ratio of 4.3 to 1.0 with $95
million in long-term debt. Our cash and cash equivalents totaled $20.0 million
at March 2, 2007, a decrease of $3.2 million from the total cash and cash
equivalents of $23.2 million at the end of the first quarter of fiscal 2006. The
decrease in our cash balance, versus the comparable quarter last year, is
primarily attributable to funding a portion of the Robeez acquisition which was
completed in September 2006.
The Company's seasonal cash flow patterns typically require the use of cash
during the first quarter of a fiscal year. During the first quarter of fiscal
2007, the Company used $38.9 million of cash to fund operations which was
consistent with the $41.0 million used to fund operations in the first quarter
of fiscal 2006. Inventory levels at the end of the first quarter of fiscal 2007
increased $11.1 million, or 9.6% from the levels recorded at the end of the
prior year's first quarter. The increase in inventory related primarily to the
addition of Robeez product and the timing of certain product receipts. Accounts
receivable at March 2, 2007 were $128.7 million or 6.3% higher than the amount
at the end of last year's first quarter which was largely due to the addition of
Robeez and higher sales in the last month of the fiscal quarter. Days sales
outstanding ("DSO"), which measures the length of the collection period for
accounts receivable for sales during the quarter, was 56 days at the end of the
first fiscal quarter of 2007 which was consistent with the DSO at the end of the
same period last year. Accounts payable, at the end of the first quarter of
fiscal 2007, increased $4.2
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
million from the level recorded at the end of the prior year's first
quarter. The increase was primarily due to the higher inventory balance and
addition of Robeez. During the first fiscal quarter of 2007, the Company did not
contribute to its defined benefit pension plan and, at this time, the Company
does not plan to make any contributions to its defined benefit pension plan
during the remainder of the 2007 fiscal year.
Additions to property and equipment totaled $3.3 million in the first
fiscal quarter of 2007, a decrease versus the $3.9 million in the first fiscal
quarter of 2006. The decrease primarily related to a higher level of capital
expenditures in the first quarter of fiscal 2006 for the renovation of our
corporate headquarters. The capital purchases in the first quarter of 2007
related primarily to the Company's continued retail expansion efforts, a new
brand trade show booth and improvements within our warehousing and distribution
facilities. Funding of our capital expenditures was provided from operations and
our revolving credit facility.
At the end of the first quarter of fiscal 2007, there was $98.5 million
outstanding under the Company's revolving credit facility. The increase in
outstanding debt during the first quarter of fiscal 2007 was the result of
normal seasonal working capital requirements. The facility was entered into in
September 2005 as part of the Saucony acquisition and also to provide funds for
working capital and general corporate purposes. As of March 2, 2007, letters of
credit totaling $34.5 million were outstanding for the purchase of inventories.
The use 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 and
permitted by the terms of the revolving credit agreement. All letters of credit
generally expire within one year.
During the first quarter of fiscal 2006 we returned $2.2 million to
shareholders through cash dividends. Effective with the March 15, 2007 dividend
payment, the Company's Board of Directors increased the quarterly dividend rate
from $0.06 per share to $0.07 per share. This will result in an annual increase
in dividend payments to shareholders of approximately $1.5 million. We did not
repurchase any common shares under our share repurchase program during the first
quarter. As of March 2, 2007 we have approximately 3.0 million shares remaining
on our share repurchase authorization approved by the Board of Directors in June
2004.
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 1, 2006.
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 first quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. As disclosed in our Annual Report on Form 10-K filed
with the Securities and Exchange Commission, we have included Robeez Footwear in
our review and evaluation of internal controls and procedures as of the
beginning of fiscal 2007.
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The Company did not repurchase equity securities during the first quarter
of fiscal 2007. There is a maximum of 2,998,994 shares that may yet to be
purchased under the program as of March 2, 2007.
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
Exhibit No. Description of Exhibit
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2 (i) Share Purchase Agreement between Sandra Wilson, Greg Garrett,
Lorne Fingarson, The Wilson Family Trust NO. 1, the Garret
Family Trust NO. 1, The Fingarson Family Trust NO. 1, 0740613
B.C.LTD. And 0753831 B.C. LTD. and The Stride Rite
Corporation and Stride Rite Canada Limited dated as of
September 5, 2006. This document was filed as Exhibit 2.1 to
the Registrant's Form 8-K on September 12, 2006 and is
incorporated herein by reference.
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 from
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.
10 (i)* Sixth Amendment to the Amended and Restated License Agreement
between Registrant and Tommy Hilfiger Licensing, Inc.
31.1* Certification of the Company's Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2* Certification of the Company's Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1* Certification of the Company's Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2* Certification of the Company's Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*Filed herewith
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: April 10, 2007 By: /s/ Frank A. Caruso
--------------------------
Frank A. Caruso
Chief Financial Officer