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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 February 28, 2003
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 1-4404
THE STRIDE RITE CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-1399290
-------------------------------
(State or other jurisdiction) (I.R.S. Employer Identified No.)
191 Spring Street, Lexington, Massachusetts 02421
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617)824-6000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
Common stock, $.25 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes(X) No ( )
As of April 11, 2003, 39,367,187 shares of the Registrant's common stock,
$.25 par value, and the accompanying Preferred Stock Purchase Rights were
outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
February 28, March 1,
2003 November 29, 2002
(Unaudited) 2002 (Unaudited)
---------------- --------------- -----------
Assets
Current Assets:
Cash and cash
equivalents $ 31,719 $ 73,105 $ 27,948
Accounts and notes
receivable, net 98,376 48,075 95,287
Inventories 88,177 98,213 93,284
Deferred income taxes 20,588 20,588 24,245
Other current assets 5,121 13,613 4,746
-------- -------- --------
Total current assets 243,981 253,594 245,510
Property and equipment, net 67,108 68,291 72,496
Other assets 15,389 12,914 15,069
-------- -------- --------
Total assets $326,478 $334,799 $333,075
======== ======== ========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
2
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in Thousands)
February 28, March 1,
2003 November 29, 2002
(Unaudited) 2002 (Unaudited)
--------------- ------------- -------------
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $15,314 $31,513 $17,559
Income taxes payable 19,778 17,407 19,139
Accrued expenses and other
liabilities 20,268 20,630 23,140
-------- -------- --------
Total current liabilities 55,360 69,550 59,838
Deferred income taxes 531 531 4,858
Pension obligation 11,677 11,677 -
Stockholders' Equity:
Preferred stock, $1 par value
Shares authorized - 1,000,000 - - -
Shares issued - None
Common stock, $.25 par value
Share authorized - 135,000,000
Shares issued - 56,946,544 14,237 14,237 14,237
Capital in excess of par
value 17,796 18,043 18,677
Retained earnings 405,224 398,368 387,902
Accumulated other
comprehensive loss (7,096) (7,246) -
Less cost of 17,636,127
shares of common stock
held in treasury
(17,504,140 on November
29, 2002 and 14,970,372
on March 1, 2002) (171,251) (170,361) (152,437)
--------- --------- ---------
Total stockholders' equity 258,910 253,041 268,379
--------- --------- ---------
Total liabilities and
stockholders' equity $326,478 $334,799 $333,075
======== ======== ========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the three months ended February 28, 2003 and March 1, 2002
(In Thousands Except Per Share Data)
2003 2002
--------- ---------
Net sales $152,322 $140,733
Cost of sales 94,281 88,967
Selling and administrative expenses 44,376 40,084
--------- ---------
Operating income 13,665 11,682
Other income (expense):
Investment income 683 327
Interest expense (70) (303)
Other income (expense), net (163) (170)
--------- ----------
450 (146)
---------- ----------
Income before income taxes 14,115 11,536
Provision for income taxes 5,294 3,997
--------- ---------
Net income $ 8,821 $ 7,539
========= =========
Net income per common share:
Diluted $ .22 $ .18
========= =========
Basic $ .22 $ .18
========= =========
Dividends per common share $ .05 $ .05
========= =========
Average common shares used in per share
computations:
Diluted 39,838 42,187
========= =========
Basic 39,425 41,906
========= =========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three months ended February 28, 2003 and March 1, 2002
(Dollars in Thousands)
2003 2002
-------------- -------------
Cash provided from (used for):
Operations:
Net income $ 8,821 $ 7,539
Adjustments to reconcile to net cash
provided from (used for) operations:
Depreciation and amortization 3,654 3,737
Sales of trading securities - 14
Gain related to long-term investments (321) -
Loss on disposals of property and equipment 39 29
Increase in other long-term assets (2,475) (2,479)
Changes in:
Accounts and notes receivable (50,301) (50,548)
Inventories 10,036 19,197
Other current assets 8,492 9,534
Other current liabilities (13,953) (8,745)
-------- --------
Net cash used for operations (36,008) (21,722)
-------- --------
Investments:
Additions to property and equipment (2,510) (3,950)
Distributions from long-term investments 321 -
------- -------
Net cash used for investments (2,189) (3,950)
-------- --------
Financing:
Short-term borrowings - (26,000)
Proceeds from sale of stock under stock plans 457 620
Cash dividends paid (1,976) (2,093)
Repurchase of common stock (1,670) (66)
-------- --------
Net cash used for financing (3,189) (27,539)
-------- --------
Net decrease in cash and cash equivalents (41,386) (53,211)
Cash and cash equivalents at beginning of the
period 73,105 81,159
------- -------
Cash and cash equivalents at end of the period $31,719 $27,948
======= =======
The accompanying notes are an integral part of the
condensed consolidated financial statements.
5
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 February 28, 2003 and March 1,
2002 is unaudited, however, such information includes all adjustments (including
all normal recurring adjustments) which, in the opinion of management, are
considered necessary for a fair presentation of the consolidated results for
those periods. The results of operations for the periods ended February 28, 2003
and March 1, 2002 are not necessarily indicative of the results of operations
that may be expected for the complete fiscal year. The year-end condensed
balance sheet data was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
The Company filed audited consolidated financial statements for the year ended
November 29, 2002 on Form 10-K which included all information and footnotes
necessary for such presentation.
The Company's preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
respective periods. The most significant estimates included in these financial
statements include valuation allowances and reserves for accounts receivable,
inventory and income taxes. Actual results could differ from those estimates.
Stock Purchase and Option Plans
During the first quarter of fiscal 2003, the Company adopted the disclosure
provisions of Financial Accounting Standards Board (FASB)- Statement of
Financial Accounting Standard (SFAS) No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure" (SFAS No. 148). SFAS No. 148 amends
SFAS No. 123, "Accounting for Stock-Based Compensation" to provide two
additional alternative transition methods if a company voluntarily decides to
change its method of accounting for stock-based employee compensation to the
fair-value method. SFAS No. 148 also amends the disclosure requirements of SFAS
No. 123 by requiring that companies make quarterly disclosures regarding the
proforma effects of using the fair-value method of accounting for stock-based
compensation, effective for interim periods beginning after December 15, 2002.
At February 28, 2003, the Company has three stock-based compensation plans,
which are described more fully in Note 10 to the Company's consolidated
financial statements for the fiscal year ended November 29, 2002 as contained in
Form 10-K. The Company accounts for these plans under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. The following table provides the effect
on net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, to stock-based compensation.
6
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended
--------------------------------------------
February 28, March 1,
2003 2002
-------------------- --------------------
(In thousands)
Net income, as reported $8,821 $7,539
Add: Stock based employee
compensation expense included in
net income, net of related tax
effects 9 25
Deduct: Total stock based
employee compensation expense
determined under fair value
based method for all awards, net
of related tax effects (315) (341)
------- -------
Pro forma net income $8,515 $7,223
====== ======
Earnings per share:
Basic - as reported $ .22 $ .18
====== ======
Basic - pro forma $ .22 $ .17
====== ======
Diluted - as reported $ .22 $ .18
====== ======
Diluted - pro forma $ .21 $ .17
====== ======
7
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Earnings Per Share
Basic earnings per common share excludes dilution and is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted earnings per common
share reflects the potential dilution that could occur if options to issue
common stock were exercised.
The following is a reconciliation of the number of shares used in the
basic and diluted earnings per share computations (shares in thousands):
Three Months Ended
---------------------------------
February 28, March 1,
2003 2002
-------------- --------------
Net income $ 8,821 $ 7,539
======= =======
Calculation of shares:
Weighted average common shares
outstanding (basic) 39,425 41,906
Dilutive effect of stock options 413 281
------- -------
Weighted average common shares outstanding
(diluted) 39,838 42,187
======= =======
Net income per common share (basic) $ .22 $ .18
===== =====
Net income per common share (diluted) $ .22 $ .18
===== =====
The following options were not included in the computation of diluted
earnings per share because the options' exercise prices were greater than the
average market price of the common shares:
First Quarter
----------------------------
2003 2002
------------ ------------
Options to purchase shares of common
stock (in thousands) 1,599 1,610
8
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
---------------------------------
February 28, March 1,
2003 2002
---------------------------------
(In thousands)
Net income $ 8,821 $ 7,539
Other comprehensive income:
Foreign currency translation adjustments 150 -
------- -------
Total comprehensive income $ 8,971 $ 7,539
======= =======
Components of accumulated other comprehensive loss consist of the following:
February 28, November 29, March 1,
2003 2002 2002
-------------- ----------------- ----------
(In thousands)
Foreign currency translation
adjustments $ (375) $ (525) $ -
Minimum pension liability
adjustments, net of taxes (6,721) (6,721) -
------- ------- ------
Accumulated other
comprehensive loss $(7,096) $(7,246) $ -
======== ======== ======
9
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Intangible Assets and Goodwill
The Company adopted Statement of Financial Accounting Standard No 142,
"Goodwill and Other Intangible Assets", (SFAS 142) effective November 30, 2002.
In accordance with SFAS 142, goodwill and intangible assets with indefinite
useful lives will no longer be amortized, but instead will be measured for
impairment at least annually, or when events indicate that impairment exists.
Intangible assets that are determined to have finite useful lives will continue
to be amortized over their useful lives.
As required by SFAS 142, the Company performed impairment tests on goodwill
and other indefinitely lived intangible assets, which consisted only of certain
trademarks, as of November 30, 2002. As a result of this testing, the Company
does not believe that the carrying value of goodwill or any indefinitely lived
intangible assets have been impaired.
The following table summarizes the Company's intangible assets and goodwill
balances:
Intangible assets not subject to amortization
------------------------------------------------
Trademark
Goodwill Rights Total
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February 28, 2003 (In Thousands)
Gross carrying amount $3,073 $2,980 $6,053
Accumulated amortization $(2,165) $(1,290) $(3,455)
November 29, 2002
Gross carrying amount $3,048 $2,980 $6,028
Accumulated amortization $(2,165) $(1,290) $(3,455)
March 1, 2002
Gross carrying amount $2,748 $2,980 $5,728
Accumulated amortization $(2,068) $(1,187) $(3,255)
Amortization expense, which is included in selling and administrative
expenses, was $0 and $68,000 for the three-month periods ended February 28, 2003
and March 1, 2002, respectively. The estimated amortization expense for
intangible assets for future periods is zero, because the Company does not have
any intangible assets with finite useful lives.
The results for the three-month period ended March 1, 2002 do not reflect
the provisions of SFAS 142. Net income for the three-month period was $7,539.
Had the Company adopted SFAS 142 on December 1, 2001, for the three-month period
ended March 1, 2002, we would have recorded net income of $7,583 as a result of
not recording $68,000 of amortization. Basic and diluted earnings per share
would not have changed.
10
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Guarantees
The Company adopted Financial Accounting Standards Board Interpretation No.
45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34 (FIN
45) during the first quarter of fiscal 2003. This interpretation clarifies the
requirements of FASB Statement No. 5, "Accounting for Contingencies" relating to
the guarantor's accounting for, and disclosure of, the issuance of certain types
of guarantees. The provisions for initial recognition and measurement are
effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002.
The significant subsidiaries of the Company, as defined in the revolving
credit agreement between the Company and its bankers, guarantee the repayment of
any debt outstanding under the $75 million revolving credit agreement. In the
event that the Company is unable to meet its debts, the significant subsidiaries
could be required to fulfill these obligations. There were no borrowings
outstanding under the revolving credit facility as of February 28, 2003.
The Company also guarantees payments for certain wholly owned subsidiary
lease obligations, which could require the Company to pay up to approximately $3
million per quarter in the event the subsidiary does not make the required
payments. These leases will expire between 2003 and 2013. As of February 28,
2003 the Company has not recorded any liability related to guarantees of wholly
owned subsidiary obligations. The Company does not believe based on historical
experience and information currently available, that it is probable that any
amounts will be required to be paid under wholly owned subsidiary guarantees.
Additionally, the Company has guaranteed the lease payment of a storefront
located in New York, New York for a third party. The storefront is used to
support the marketing of one of the company's product lines. The guarantee,
which runs for five years could require the Company to make annual payments in
the amount of $50,000. The Company has not recorded any liability related to
this guarantee because we do not believe that it is probable that any payments
will be required.
11
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", "might", "plan", "estimate",
"project", "should", "will be", "will result" 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: 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 possible failure to
retain the Tommy Hilfiger footwear license; the ability to secure and protect
trademarks, patents and other intellectual property; performance and reliability
of products; customer service; adverse publicity; the loss of significant
suppliers or customers, such as department stores and specialty retailers, the
consolidation or restructuring of such customers, including large department
stores, which may result in unexpected store closings; dependence on China
12
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
manufacturing; the ability to secure raw materials; delays and increased
costs of freight and transportation to meet delivery deadlines; the impact on
product development or manufacturing as a result of SARS (Severe Acute
Respiratory Syndrome) or other such health risks; changes in business strategy
or development plans; general risks associated with doing business outside the
United States, including, without limitation, import duties, tariffs, quotas and
political and economic instability; acts or war or terrorism; changes in
government regulations; liability and other claims asserted against the Company;
the ability to attract and retain qualified personnel; and other factors
referenced or incorporated by reference in this report and other reports.
The risks included here are not exhaustive. Other sections of this report
may include additional factors which could adversely affect the Company's
business and financial performance. Moreover, the Company operates in a very
competitive and rapidly changing environment. New risk factors emerge from time
to time and it is not possible for management to predict all such risk factors,
nor can it assess the impact of all such risk factors on the Company's business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors should not place
undue reliance on forward-looking statements as a prediction of actual results.
The Company discussed a number of significant trends and specific factors
affecting the footwear industry in general and our business in particular in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", Item 7 of our Annual Report on Form 10-K for the fiscal year 2002.
Those trends and factors continue to be relevant to the Company's performance
and financial condition.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make judgments, assumptions and estimates that affect the
amounts reported. Please refer to the discussion of critical accounting
estimates in the Company's Annual Report on Form 10--K for the fiscal year ended
November 28, 2002 for additional information.
13
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The following table summarizes the Company's performance for the first
quarter of fiscal 2003 as compared to the results for the same periods in fiscal
2002:
Increase Percent vs. 2002 Results:
- ----------------------------------
First Quarter
-------------
Net sales 8.2%
Gross profit 12.1%
Selling and administrative expenses 10.7%
Operating income 17.0%
Income before income taxes 22.4%
Net income 17.0%
Operating Ratios as a Percent of Net Sales:
- -------------------------------------------
First Quarter
--------------------------------
2003 2002
-------------- --------------
Gross profit 38.1% 36.8%
Selling and administrative expenses 29.1% 28.5%
Operating income 9.0% 8.3%
Income before income taxes 9.3% 8.2%
Net income 5.8% 5.4%
Net Sales
- ---------
During the first quarter of fiscal 2003, consolidated net sales increased
$11.6 million to $152.3 million, or 8.2% above the sales level achieved in the
first quarter of fiscal 2002. Wholesale net revenues increased 9.6% for the
first quarter of 2003, while overall retail sales were flat when compared to the
same period in the prior year. Unit shipments of current line merchandise for
the wholesale brands during the first quarter were 8.3% greater than the
comparable period in 2002. The Company's average first quality selling price was
slightly lower for the first quarter of 2003, decreasing 0.7% from the same
period last year.
First quality wholesale gross sales for the quarter increased by $5.7
million, or 5.1% greater than the wholesale gross sales level achieved in the
same quarter in the prior year. The Company recorded a $2.4 million reduction in
closeout items versus the prior year. Sales of special shoes for key accounts
increased $7.0 million in the first quarter of fiscal 2003 as compared to the
prior year. The increased sale of special shoes combined with the greater amount
of first quality wholesale sales were the major reasons for the sales increase
for the first quarter of fiscal 2003 versus the prior year.
14
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Decreased sales allowances and returns during the first quarter of 2003 versus
the prior year contributed to an improvement in net sales comparisons of $0.9
million. Retail store sales were relatively flat, increasing by less than
$100,000 versus the sales levels recorded in the first quarter of fiscal 2002.
Sales of the Stride Rite Children's Group during the first quarter of
fiscal 2003 were $54.3 million, 2.1% higher than the same period in the prior
fiscal year. Sales to independent retailers increased 4.0% during the first
quarter as compared to the same quarter last year. Much of this increase was
attributable to increased sales of Tommy Hilfiger children's products, which are
now being developed, marketed and sold through the Children's Group and the
improved performance of Munchkin products. The sales levels of the Children's
Group's retail stores were nearly unchanged when comparing the first quarters of
fiscal years 2003 and 2002. Sales at comparable Children's Group retail stores
(stores open for 52 weeks in each fiscal year) decreased 6.2% for the first
fiscal quarter of 2003. The economy, the prolonged winter weather in the Eastern
United States and a later Easter were the primary reasons for the decrease in
the comparable store sales performance. At the end of the first quarter of
fiscal 2003, the Stride Rite Children's Group operated 230 stores. This is a
reduction of 11 stores, or 5% from the end of the same period in the prior year.
The 2002 store count included the 46 Federated leased department stores, which
the Company exited at the end of April 2002. Current plans call for the opening
of fewer than ten stores during the 2003 fiscal year. The rate of new store
openings is slowing this fiscal year because the Children's Group is focusing
its efforts on optimizing business in its new and existing store base.
Sales of the Keds division were $55.6 million during the first quarter of
fiscal 2003, an increase of 6.7% versus the results of the same period in the
prior year. This increase was largely the result of the initial Spring product
shipments of certain newly repositioned Keds styles. The subsequent sell-through
performance of these products will determine the level of success that Keds will
have during the second quarter of fiscal 2003. These sales gains were partially
offset by weaker performance of Grasshoppers products. Beginning with the 2003
fiscal year, the Pro-Keds operations and product line was transferred to the
Tommy Hilfiger footwear unit to better align the development and marketing
efforts of Pro-Keds with the younger customer profile of the Tommy Hilfiger
footwear customer.
Sales of Tommy Hilfiger men's and women's footwear products during the
first quarter of the fiscal year were $24.8 million, an increase of 37.0% over
the first quarter of fiscal 2002. The Pro-Keds product line sales are reported
here, although its sales are currently not significant. The Tommy Hilfiger
children's products are now developed, marketed and sold through the Children's
Group. The production and sales of special shoes for key accounts along with the
expansion of retail channels were significant factors in the increase in first
quarter sales as compared to the prior year.
15
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Sales of Sperry Top-Sider products during the first quarter of the fiscal
year were $14.4 million, an increase of 15.1% as compared to the first quarter
of fiscal 2002. The increase in sales was primarily attributable to the
production and sale of special shoes for key accounts combined with the
continued strength in the sales of women's products. Increased closeout product
sales were also a factor.
Sales of the Stride Rite International division during the first quarter of
fiscal 2003 were $6.2 million, a decrease of 22.9% as compared to the same
quarter in the prior fiscal year. This decrease in sales was principally the
result of business weakness in South America and Europe.
Gross Profit
- ------------
During the first three months of fiscal 2003, the Company's gross profit of
$58.0 million increased $6.3 million or 12.1% above the amount recorded during
fiscal year 2002's first quarter. The gross profit rate for fiscal 2003's first
quarter improved 130 basis points to 38.1% as compared to the 36.8% rate
achieved in the prior year's first quarter. Positively affecting the comparison
of gross profit for the first fiscal quarter of 2003 to the same period in the
prior year was $4.0 million related to increased first quality wholesale product
sales and $1.0 million resulting from increased special product and closeout
sales. The gross profit also benefited from improvements in returns and
allowances, which combined to add $0.5 million to current versus prior year
gross profit comparisons. The LIFO provision also had a favorable affect on
gross profit comparisons, improving $0.6 million versus the prior year's first
fiscal quarter.
Operating Costs
- ---------------
During the first three months of fiscal 2003, selling and administrative
expenses were $44.4 million, an increase of $4.3 million or 10.7% as compared to
the first quarter of fiscal 2003. As a percent of sales, operating costs were
29.1% in the first quarter of fiscal 2003 compared to 28.5% in the first quarter
of fiscal 2002. The increased retail store costs associated with our expansion
of company owned retail stores last year, was the major reason for these
operating cost increases. Additionally, increased advertising expenditures of
$1.0 million and higher pension costs of $0.7 million were also significant
components of the operating cost increase. While the overall store count is
lower at the end of the 2003 first quarter, 230 versus the 241 stores at the end
of the first quarter last year, the opening of 58 retail stores during the 2002
fiscal year has resulted in higher costs carried over to fiscal 2003, due to
expenditure requirements for these new stores. Current plans call for the
addition of less than 10 new stores during fiscal 2003.
16
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other Income and Taxes
- ----------------------
Other income (expense) increased pre-tax income by $0.4 million in the
first quarter of fiscal 2003. This compares favorably to the decrease in pre-tax
income of $0.1 million in the first quarter of fiscal 2002. Investment income
increased $0.4 million in the first fiscal quarter of 2003 as compared to the
same quarter in the prior year. Both lower average investments and lower average
interest rates were offset by two hundred thousand dollars in interest payments
associated with the settlement of a tax case with Canadian authorities as well
as three hundred thousand dollars in income associated with a longer-term
investment initially made several years ago. Interest expense decreased $0.2
million in the first quarter of fiscal 2003 as compared to the first quarter of
fiscal 2002 due primarily to the absence of short-term borrowings during the
first quarter of 2003.
The provision for income taxes increased $1.3 million in the first quarter
of fiscal 2003 as compared to the similar period in fiscal 2002. This increase
was primarily due to the higher pre-tax income amount combined with a higher
effective income tax rate of 37.5% in the first quarter of fiscal 2003, as
compared to a rate of 34.6% in 2002. Our effective tax rate in fiscal 2003 is
expected to increase for the year as the prior year's lower tax rate was
affected by reductions in previously established tax accruals, which were no
longer needed. We do not anticipate any further reductions in our current tax
rate related to prior year tax accruals.
Net Income
- ----------
Net income for the first quarter of fiscal 2003 was $8.8 million, an
increase of $1.3 million, or 17.0% as compared to the same period in the prior
fiscal year. Greater net sales and the corresponding increase in gross profit
were sufficient to offset increases in operating costs and a higher provision
for income taxes. The Company's return on net sales of 5.8% in the first fiscal
quarter of 2003 was improved versus the 5.4% return on sales recorded for the
first fiscal quarter of 2002.
Liquidity and Capital Resources
- -------------------------------
At the end of the first fiscal quarter of 2003, our balance sheet reflected
a current ratio of 4.4 to 1 with no debt. Our cash and cash equivalents totaled
$31.7 million at February 28, 2003, an increase of $3.8 million from the total
cash and cash equivalents of $27.9 million at the end of the first quarter of
fiscal 2002. The Company uses its $75 million revolving credit facility to fund
seasonal working capital needs. No borrowings under this line of credit were
outstanding as of February 28, 2003 or March 1, 2002.
17
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's usual seasonal shipping and cash flow patterns typically
require the use of funds during the first quarter of the fiscal year. During the
first quarter of fiscal 2003, the Company used $36.0 million of cash to fund
operating needs. This use of cash to fund operations was greater than the $21.7
million use of cash required during the first quarter of fiscal 2002. Inventory
levels at the end of the first quarter of fiscal 2003 decreased $5.1 million, or
5.5% from the levels recorded at the end of the prior year's first quarter. The
Company continues to benefit from the shortening of product lead times and the
careful monitoring of product sell-through performance at retail. Accounts
receivable at February 28, 2003 were $3.1 million or 3.2% higher than the amount
at the end of last year's first quarter. This compares favorably with the 8.2%
increase in quarter-to-quarter net sales comparisons. Days sales outstanding,
which is a measure of the length of the collection period of accounts
receivable, was reduced by 2 days, to 57 days at the end of the first fiscal
quarter of 2003 from the 59 days at the end of the first fiscal quarter of 2002.
Additions to property and equipment totaled $2.5 million in the first
quarter of 2003, which is below the $4.0 million in the 2002 first quarter. Much
of the lower spending is attributable to the lower level of retail store
openings in fiscal year 2003 versus last year's first quarter. Funding of our
capital expenditures was provided from internal sources. We expect that all
capital purchases during fiscal 2003 will be provided for internally, however if
business conditions change and do not allow for internal funding, we will
re-evaluate our plans.
During the first quarter of fiscal 2003 we returned $3.6 million to
shareholders through share repurchases and cash dividends. We spent $1.7 million
to repurchase 214,000 common shares under our share repurchase program. As of
February 28, 2003, we have 4.0 million shares remaining on our share repurchase
authorization. We expect to continue to purchase shares opportunistically
through the remainder of the fiscal year.
At the end of the first quarter of fiscal 2003, there were no borrowings
outstanding under the Company's $75 million revolving credit facility. This is
consistent with the level of borrowings at the end of the first quarter of
fiscal 2002. We did not utilize any available credit under the revolving credit
line during the first quarter of fiscal 2003. Borrowings were not required
during the quarter primarily because we entered the year with no outstanding
debt unlike the prior year when we began fiscal 2002 with $26 million in
short-term debt. During the first quarter of fiscal 2002, short-term borrowing
under the revolving credit facilities averaged $33.5 million. As of February 28,
2003, letters of credit totaling $36.3 million were outstanding for the purchase
of inventories. All letters of credit generally expire within one year.
18
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 and with the participation of the
Company's management, including the Company's 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 the Exchange Act Rule
13a-15. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic filings with the Securities and Exchange
Commission.
(b) Changes in internal controls.
None.
19
PART II - OTHER INFORMATION
THE STRIDE RITE CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are contained in this report:
---------
None
(b) Reports on Form 8-K
-------------------
There were no reports filed on Form 8-K during the most recent
quarterly period.
20
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 14, 2003 By: /s/ Frank A. Caruso
--------------------------
Frank A. Caruso
Chief Financial Officer
21
I, David M. Chamberlain, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ending
February 28, 2003 of The Stride Rite Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 14, 2003 /s/ David M. Chamberlain
-------------- --------------------------------------
David M. Chamberlain, Chairman & CEO
22
I, Frank A. Caruso, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ending
February 28, 2003 of The Stride Rite Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 14, 2003 /s/ Frank A. Caruso
-------------- --------------------------------------
Frank A. Caruso,
Chief Financial Officer
23