This summary is based on the second quarter fiscal 2007 earnings call conducted by Payless Shoesource Inc. (PSS) on August 29, 2007.
CEO and President: Matthew E. Rubel
Senior VP and Chief Financial Officer: Ullrich E. Porzig
Director, Investor Relations: James Grant
Key Investors Issues
- The earnings per share dropped from 48 cents in the prior year to 38 cents.
- Quarterly revenue dropped to $699.3 million from $706.1 million.
- In Q2, the company repurchased 141,000 shares for $4.6 million.
Second Quarter Fiscal 2007 Financial Highlights
The net earnings were $25 million or 38 cents per diluted share, down 23% versus the second quarter of 2006.
This 10 cents per diluted share decline was impacted by the following:
- Second quarter 2007 expenses related to the company’s distribution center initiative including the exit from one facility and the temporary redundancies between facilities. Those expenses totaled $3.6 million pretax or 4 cents per diluted share.
- The expenses related to the integration and planning of Stride Rite totaled $1.8 million pretax or 2 cents per diluted share.
The second quarter sales totaled $699 million, a decrease of 1% over the second quarter of 2006.
Same-store sales were down 1.4% for the second quarter of this year. Importantly, the firm did pick up market share during the quarter according to industry reports.
The second quarter 2007 sales were unfavorably driven by the following factors:
- The weak results in sandal business which caused total unit sales to decline by 2%.
- Certain key markets shifted there as school start dates a couple of weeks later.
These factors were mostly offset by the following related favorable drivers:
- The firm converted a higher percentage of customers in its stores and sold more units per transaction.
- Athletic and casual footwear performed particularly well and average unit retails were up 1%.
Gross margin was 34.4% of sales in the second quarter of 2007, down 20 basis points.
The gross margin rate was driven principally by the higher initial mark-on enhanced by more direct sourcing, mark-downs on most types of sandals, investments in distribution center infrastructure and last years’ hurricane insurance recoveries. The latter two factors negatively impacted the gross margin by a combined 73 basis points.
Selling, general and administrative expenses as a percent of sales was 28.7% in the second quarter of 2007 versus 24.7% last year, an increase of 130 basis points.
The de-leverage was due primarily to lower sales of sandals rather than a growth in expenses. SG&A expenses for the quarter were $201 million, up 3.9% versus last year. The increase was primarily driven by higher payroll, last years’ antitrust settlement and the Stride Rite integration planning costs, principally professional services. The latter two factors negatively impacted SG&A by combined 59 basis points.
The firm had net interest expense of $800,000 in the second quarter of 2007 versus net interest income of $700,000 in the same period last year.
The change was driven by lower cash balances this year. The company financed the portion of its acquisition of Stride Rite with a $725 million term loan B at a variable rate of 8.3% over seven years. On August 24, 2007, company entered into an interest rate swap arrangement for $540 million, which provides for a fixed interest rate of approximately 7.75%, portions of which mature on a series of dates over the next five years.
The income tax provision was $12.7 million in the second quarter of 2007 versus $17.3 million in the prior year period.
The lower tax provision was due in part to lower pretax earnings. The effective income tax rate of 32.8% compared to 34% last year due primarily to reinstating of certain federal employment tax credits and a decrease in the effective tax rate related to international operations. The full year effective tax rate on continuing operations, including discrete events known at this time is projected to be approximately 33%.
