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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 27, 2004
( ) 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 2, 2004, 39,068,243 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 27, February 28,
2004 November 28, 2003
(Unaudited) 2003 (Unaudited)
--------------- -------------- ------------
Assets
Current Assets:
Cash and cash
equivalents $67,833 $103,272 $31,719
Accounts and notes
receivable, net 88,487 51,058 98,376
Inventories 83,355 81,925 88,177
Deferred income taxes 14,393 14,393 20,588
Other current assets 15,438 19,452 5,121
-------- -------- --------
Total current assets 269,506 270,100 243,981
Property and equipment, net 59,373 60,802 67,108
Other assets 14,266 14,315 15,389
-------- -------- --------
Total assets $343,145 $345,217 $326,478
======== ======== ========
Theaccompanying 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)
(Dollars in Thousands)
February 27, February 28,
2004 November 28, 2003
(Unaudited) 2003 (Unaudited)
--------------- -------------- --------------
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $13,215 $23,887 $15,314
Income taxes payable 20,305 16,815 19,778
Accrued expenses and other
liabilities 22,178 23,273 20,268
------- -------- -------
Total current liabilities 55,698 63,975 55,360
Deferred income taxes 381 381 531
Pension obligation 13,145 13,145 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 16,143 16,825 17,796
Retained earnings 421,496 415,988 405,224
Accumulated other
comprehensive loss (7,800) (7,798) (7,096)
Less cost of 17,451,388
shares of common stock
held in treasury
(17,607,304 on November
28, 2003 and 17,636,127
on February 28, 2003) (170,155) (171,536) (171,251)
--------- -------- --------
Total stockholders' equity 273,921 267,716 258,910
--------- -------- --------
Total liabilities and
stockholders' equity $343,145 $345,217 $326,478
========= ======== ========
Theaccompanying 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 February 27, 2004 and February 28, 2003
(In Thousands, Except Per Share Data)
2004 2003
------------ ------------
Net sales $136,134 $152,322
Cost of sales 83,121 94,281
-------- ---------
Gross profit 53,013 58,041
Selling and administrative expenses 41,340 44,376
-------- ---------
Operating income 11,673 13,665
Investment income 571 683
Interest expense (74) (70)
Other expense, net (78) (163)
--------- ---------
Income before income taxes 12,092 14,115
Provision for income taxes 4,608 5,294
-------- ---------
Net income $ 7,484 $ 8,821
======== =========
Net income per common share:
Diluted $ .19 $ .22
======== =========
Basic $ .19 $ .22
======== =========
Dividends per common share $ .05 $ .05
======== =========
Average common shares used in per share
computations:
Diluted 40,325 39,838
======== =========
Basic 39,420 39,425
======== =========
Theaccompanying 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 February 27, 2004 and February 28, 2003
(Dollars in Thousands)
2004 2003
-------------- -------------
Cash flows from operating activities:
Net income $7,484 $8,821
Adjustments to reconcile net income to net
cash used for operations:
Depreciation and amortization 3,227 3,654
Gain related to long-term investments - (321)
Loss on disposals of property and equipment 34 39
Changes in:
Accounts and notes receivable (37,429) (50,301)
Inventories (1,430) 10,036
Other current assets 5,014 8,492
Other current liabilities (8,269) (13,953)
Other long-term assets 49 (2,475)
Contribution to pension plan (1,000) -
-------- -------
Net cash used in operating activities (32,320) (36,008)
-------- --------
Cash flows from investing activities:
Additions to property and equipment (1,832) (2,510)
Distributions from long-term investments - 321
------- -------
Net cash used in investing activities (1,832) (2,189)
-------- --------
Cash flows from financing activities:
Proceeds from sale of stock under stock plans 1,810 457
Cash dividends paid (1,967) (1,976)
Repurchase of common stock (1,130) (1,670)
-------- --------
Net cash used in financing activities (1,287) (3,189)
-------- --------
Net decrease in cash and cash equivalents (35,439) (41,386)
Cash and cash equivalents at beginning of the
period 103,272 73,105
------- -------
Cash and cash equivalents at end of the period $67,833 $31,719
======= =======
Theaccompanying 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 February 27, 2004 and February
28, 2003 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 27, 2004 and February 28, 2003 are not necessarily indicative of the
results of operations that may be expected for the complete fiscal year. The
year-end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. The Company filed with the Securities and Exchange
Commission audited consolidated financial statements for the year ended November
28, 2003 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,
sales returns allowances, markdowns (which reduce revenues), inventory and
income taxes; assumptions related to the defined benefit pension plan; and
estimates of future undiscounted cash flows on property and equipment that may
be impaired. Actual results could differ 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.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
At February 27, 2004, the Company had three stock-based compensation plans,
which are described more fully in Note 10 to the Company's consolidated
financial statements for the fiscal year ended November 28, 2003 as contained on
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. 148, to stock-based compensation.
Three Months Ended
--------------------------------------------
February 27, February 28,
2004 2003
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(In thousands, except for per share data)
Net income, as reported $7,484 $8,821
Add: Stock based employee
compensation expense included in
net income, net of related tax
effects - 9
Deduct: Total stock based
employee compensation expense
determined under fair value
based method for all awards, net
of related tax effects (505) (315)
------- -------
Pro forma net income $6,979 $8,515
====== ======
Earnings per share:
Basic - as reported $ .19 $ .22
====== ======
Basic - pro forma $ .18 $ .22
====== ======
Diluted - as reported $ .19 $ .22
====== ======
Diluted - pro forma $ .17 $ .21
====== ======
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Earnings Per Share
Basic earnings per common share excludes dilution and is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted earnings per common
share reflects the potential dilution that could occur if options to issue
common stock were exercised.
The following is a reconciliation of the number of shares used in the
basic and diluted earnings per share computations:
Three Months Ended
------------------------------------
February 27, February 28,
2004 2003
----------------- --------------
(In thousands, except per share data)
Net income $ 7,484 $ 8,821
======= =======
Calculation of shares:
Weighted average common shares
outstanding (basic) 39,420 39,425
Dilutive effect of stock options 905 413
------- -------
Weighted average common shares outstanding
(diluted) 40,325 39,838
======= =======
Net income per common share (basic) $ .19 $ .22
===== =====
Net income per common share (diluted) $ .19 $ .22
===== =====
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
----------------------------
2004 2003
------------ ------------
(In thousands)
Options to purchase shares of common
stock 200 1,599
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 27, February 28,
2004 2003
-------------- --------------
(In thousands)
Net income $ 7,484 $ 8,821
Other comprehensive income(loss):
Foreign currency translation adjustments (2) 150
-------- -------
Total comprehensive income $ 7,482 $ 8,971
======= =======
Components of accumulated other comprehensive loss consist of the following:
February 27, November 28, February 28,
2004 2003 2003
--------------- ---------------- ------------
(In thousands)
Foreign currency translation
adjustments $ (219) $ (217) $ (375)
Minimum pension liability
adjustments, net of taxes (7,581) (7,581) (6,721)
-------- -------- --------
Accumulated other
comprehensive loss $(7,800) $(7,798) $(7,096)
======== ======== ========
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Intangible Assets and Goodwill
The following table summarizes the Company's intangible assets and
goodwill balances:
Intangible assets not subject to amortization
------------------------------------------------
Trademark
Goodwill Rights Total
- -------------------------------------------------------------------------------
February 27, 2004 (In thousands)
Gross carrying amount $3,068 $2,980 $6,048
Accumulated amortization $(2,160) $(1,290) $(3,450)
November 28, 2003
Gross carrying amount $3,068 $2,980 $6,048
Accumulated amortization $(2,160) $(1,290) $(3,450)
February 28, 2003
Gross carrying amount $3,073 $2,980 $6,053
Accumulated amortization $(2,165) $(1,290) $(3,455)
Note 5 - Benefit Plans
During the first quarter of fiscal 2004, the Company adopted the interim
disclosure provisions of SFAS No. 132(revised 2003), "Employers' Disclosure
about Pensions and Other Postretirement Benefits, an Amendment of FASB
Statements No. 87, 88 and 106 and a Revision of FASB Statement No. 132." This
statement revises employers' disclosures about pension plans and other
post-retirement benefit plans.
The following table summarizes the components of net periodic benefit cost
for the Company:
Three Months Ended
----------------------------------
2004 2003
---------------- ---------------
(In thousands)
Service cost $438 $303
Interest cost 930 763
Expected return on assets (998) (704)
Net loss recognized 375 322
Amortization of prior service cost 5 6
---- ----
Net periodic benefit cost $750 $690
==== ====
During the first quarter of fiscal 2004, the Company contributed $1.0
million to the Company's defined benefit pension plan. At this time, the Company
does not plan to make any further contributions to its defined benefit pension
plan during fiscal year 2004. The Company made no contributions during the first
quarter of fiscal 2003.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
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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: 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
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
consolidation or restructuring of such customers, including large chain and
department stores, which may result in unexpected store closings; dependence on
China manufacturing; the ability to secure raw materials; delays and increased
costs of freight and transportation to meet delivery deadlines; the impact on
product development or manufacturing as a result of health risks; changes in
business strategy or development plans; general risks associated with doing
business outside the United States, including, without limitation, import
duties, tariffs, quotas and political and economic instability; acts of war or
terrorism; changes in government regulations; liability and other claims
asserted against the Company; the ability to attract and retain qualified
personnel; and other factors referenced or incorporated by reference in this
report and other reports.
The risks included here are not exhaustive. Other sections of this report
may include additional factors which could adversely affect the Company's
business and financial performance. Moreover, the Company operates in a very
competitive and rapidly changing environment. New risk factors emerge from time
to time and it is not possible for management to predict all such risk factors,
nor can it assess the impact of all such risk factors on the Company's business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors should not place
undue reliance on forward-looking statements as a prediction of actual results.
Investors should also be aware that while the Company does communicate with
securities analysts from time to time, it is against our policy to disclose to
them any material non-public information or other confidential information.
Accordingly, investors should not assume that we agree with any statement or
report issued by any analyst irrespective of the content of the statement or
report. Furthermore, the Company has a policy against issuing or confirming
financial forecasts or projections issued by others. Therefore, to the extent
that reports issued by securities analysts contain any projections, forecasts or
opinions, such reports are not the responsibility of the Company.
The Company discussed a number of significant trends and specific factors
affecting the footwear industry in general and our business in particular in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", Item 7 of our Annual Report on Form 10-K for the fiscal year 2003.
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, 2003 for additional information.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Contingencies
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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 2003, we negotiated
the renewal of the agreement for an additional term. In early January 2004, we
finalized the terms of the license agreement, which will expire in March 2007.
Whether our license with Tommy Hilfiger will remain in effect depends on our
achieving certain minimum sales levels for the licensed products. We expect to
continue to meet the minimum sales levels required by the Tommy Hilfiger license
agreement. We believe that no provision is currently required for costs related
to the potential loss of this license. If we lose the Tommy Hilfiger license,
our business would be materially and adversely affected.
Results of Operations
- ---------------------
The following table summarizes the Company's performance for the first
quarter of fiscal 2004 as compared to the results for the same period in fiscal
2003:
Decrease Percent vs. 2003 Results:
- ----------------------------------
First Quarter
-------------
Net sales (10.6)%
Gross profit (8.7)%
Selling and administrative expenses (6.8)%
Operating income (14.6)%
Income before income taxes (14.3)%
Net income (15.2)%
Operating Ratios as a Percent of Net Sales:
- -------------------------------------------
First Quarter
--------------------------------
2004 2003
-------------- --------------
Gross profit 38.9% 38.1%
Selling and administrative expenses 30.4% 29.1%
Operating income 8.6% 9.0%
Income before income taxes 8.9% 9.3%
Net income 5.5% 5.8%
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net Sales
- ---------
The first quarter breakdown of net sales is as follows:
Percent
Change
2004 vs.
2004 2003 2003
--------- --------- ----------
(In millions, except percentages)
Stride Rite Children's Group - Wholesale $ 25.0 $ 28.7 (12.6)%
Stride Rite Children's Group - Retail 29.1 25.6 13.7%
--------- --------- ----------
Stride Rite Children's Group 54.1 54.3 (0.2)%
Keds 42.4 55.6 (23.7)%
Tommy Hilfiger Footwear 20.2 24.8 (18.3)%
Sperry Top-Sider 14.7 14.4 2.6%
Stride Rite International 6.7 6.2 8.3%
Elimination of intercompany sales (2.0) (3.0) n/a
--------- --------- ----------
Total net sales $136.1 $152.3 (10.6)%
========= ========= ==========
During the first quarter of fiscal 2004, consolidated net sales decreased
$16.2 million to $136.1 million, or 10.6% below the sales level achieved in the
first quarter of fiscal 2003. Wholesale net revenues decreased 15.7% for the
first quarter of 2004, while overall retail sales increased $3.6 million or
13.9% 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
6.9% less than the comparable period in 2003. The Company's average first
quality wholesale selling price declined 4.9% from the first quarter of 2003. In
addition, closeout sales decreased $1.2 million during the first quarter of
fiscal 2004 as compared to the prior year. Royalty revenues at $1.8 million were
slightly higher in the 2004 first quarter versus the same quarter last year.
Net sales of the Stride Rite Children's Group were unchanged for the first
quarter of fiscal 2004, compared to the same period of fiscal 2003. Sales to
independent retailers decreased 12.6% during the first quarter of 2004 as
compared to the same quarter last year. This decrease was primarily attributable
to the Footstar bankruptcy, the loss of the Munchkin business in certain
mid-tier accounts and lower Tommy Hilfiger children's sales to department stores
versus last year. Generally, the continued weak economy also contributed to
lower sales as retailers appeared cautious in their purchases of the Company's
product lines. Offsetting this decrease were increased sales of the Children's
Group's company-owned retail stores, which were up 13.7% from the same quarter
last year. Sales at comparable Children's Group retail stores (stores open for
52 weeks in each fiscal year) increased 11.8% for the first fiscal quarter of
2004. Driving this increase in the
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
comparable stores category was the larger number of newer stores which have
generally had greater sales increases than our more mature stores. At the end of
the first quarter of fiscal 2004, the Stride Rite Children's Group operated 233
stores. This is an increase of 3 stores, or 1% from the end of the same period
in the prior year. Current plans call for the opening of approximately 21 retail
stores and the closing of 5 underperforming locations during the 2004 fiscal
year. During the first quarter of 2004 the Company opened 5 new stores and
closed 4 underperforming locations for a net increase of 1 store.
The decrease in sales of the Keds product line was primarily the result of
fewer shipments of seasonal fashion products. In the first quarter of fiscal
2003, the Keds brand initially experienced strong sales of its Spring line;
however, its performance at retail did not meet expectations. This resulted in
weak Keds sales in the second quarter last year. The general disappointment with
last year's Spring product's performance also resulted in retailers becoming
cautious in their initial purchasing of the Keds 2004 Spring line. Early
indications are that the Microstretch(TM) product, an updated basic sneaker, has
had success at several major accounts. If this trend continues, we expect better
sales performance in this year's second quarter than a year ago.
The decrease in sales of Tommy Hilfiger men's and women's footwear products
during the first quarter of fiscal 2004 was primarily attributable to continued
decreases in the department store channel, as well as men's product styles that
did not perform well across all distribution channels. Sales results were also
adversely affected by a lower average selling price product mix. The product
shift by retailers from higher priced canvas styles to lower priced sandals and
beachwear styles reduced the first quarter average selling price by
approximately 16%. In addition, last year's first quarter sales performance
benefited from a more significant expansion of retail channels of distribution.
The 2.6% increase in sales of Sperry Top-Sider products during the first
quarter of the 2004 fiscal year was primarily attributable to strong sales of
men's casual footwear and performance boat shoes. The first quarter sales were
adversely affected by the merger of Boat U.S. and West Marine, two important
retail accounts for the brand. In addition, there was a sales decline in the
women's product category in the first quarter when compared to the same period
last year.
The Stride Rite International division had an 8.3% increase in net sales
during the first quarter of fiscal 2004 in comparison to the same period in the
prior year. This sales growth was largely the result of increased sales of the
Tommy Hilfiger footwear product line in Latin America and Asia, as well as the
Sperry Top-Sider product line in Europe.
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 three months of fiscal 2004, the Company's gross profit of
$53.0 million decreased $5.0 million or 8.7% below the amount recorded during
2003's first quarter. The lower level of wholesale sales was a significant
factor, resulting in a decline of $6.6 million in gross profit. Increased
revenues at the company-owned retail stores contributed $2.5 million of
additional gross margin. The gross profit rate for fiscal 2004's first quarter
improved 0.8 percentage points to 38.9% as compared to the 38.1% rate achieved
in the prior year's first quarter. The improved gross profit percentage was
primarily attributable to higher in-line product gross profit margins, lower
inventory obsolescence costs and a higher relative percentage of retail sales.
These gains were partially offset by increased returns and allowances in the
quarter as compared to the prior year.
Operating Costs
- ---------------
During the first three months of fiscal 2004, selling and administrative
expenses were $41.3 million, a decrease of $3.0 million or 6.8% as compared to
the first quarter of fiscal 2003. As a percent of sales, operating costs were
30.4% in the first quarter of fiscal 2004 compared to 29.1% in the first quarter
of fiscal 2003. This increase in operating costs as a percentage of net sales
resulted from the Company's expense reductions not fully offsetting the decline
in net sales. During the first quarter of fiscal 2004, advertising costs were
4.6% of net sales versus 5.2% in fiscal 2003. The decrease in operating costs
was primarily attributable to reduced advertising costs across all brands. The
lower advertising spending in the first quarter of 2004 compared to the prior
year reflects a change in the timing of advertising programs versus last year.
In addition, operating costs in various other administrative areas were also
reduced including outbound freight, bad debt, and selling expenses.
Other Income and Taxes
- ----------------------
Other income (expense) increased pre-tax income by $0.4 million in the
first quarters of fiscal 2004 and 2003. Investment income decreased $0.1 million
in the first fiscal quarter of 2004 as compared to the same quarter last year.
Investment income related to the Company's cash equivalents increased $0.2
million in the first fiscal quarter of 2004, due to greater average investment
balances. This increase was offset by a $0.3 million reduction in income related
to a prior year payment received in the first quarter of 2003, which was
associated with a longer-term investment. Interest expense remained flat in the
first quarter of fiscal 2004 as compared to the first quarter of fiscal 2003 as
no short-term borrowings were made during the first quarters of both years.
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 decreased $0.7 million in the first quarter
of fiscal 2004 as compared to the similar period in fiscal 2003. This decrease
was primarily due to the lower pre-tax income amount, offset somewhat by a
higher effective income tax rate. Our effective tax rate was 38.1% in the first
quarter of fiscal 2004 as compared to 37.5% in the first quarter of fiscal 2003.
The higher tax rate in the first quarter of fiscal 2004 reflects fewer tax
saving items in 2004 than in the prior year.
Net Income
- ----------
Net income for the first quarter of fiscal 2004 was $7.5 million, a
decrease of $1.3 million, or 15.2% as compared to the same period in the prior
year. Lower net sales and the corresponding decrease in gross profit dollars
were not completely offset by the reductions in operating costs. The Company's
return on net sales of 5.5% in the first fiscal quarter of 2004 declined versus
the 5.8% return on sales recorded for the first fiscal quarter of 2003.
Liquidity and Capital Resources
- -------------------------------
At the end of the first fiscal quarter of 2004, our balance sheet reflected
a current ratio of 4.8 to 1 with no debt. Our cash and cash equivalents totaled
$67.8 million at February 27, 2004, an increase of $36.1 million from the total
cash and cash equivalents of $31.7 million at the end of the first quarter of
fiscal 2003. The Company maintains a $75 million revolving credit facility to
fund any seasonal working capital needs. No borrowings under this line of credit
were outstanding as of February 27, 2004 or February 28, 2003.
The Company's seasonal cash flow patterns typically require the use of
funds during the first quarter of a fiscal year. During the first quarter of
fiscal 2004, the Company used $32.3 million of cash to fund operating needs.
This use of cash to fund operations was lower than the $36.0 million use of cash
required during the first quarter of fiscal 2003. Inventory levels at the end of
the first quarter of fiscal 2004 decreased $4.8 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 for certain products and the
careful monitoring of product performance at retail to better forecast product
demand. Accounts receivable at February 27, 2004 were $9.9 million or 10.1%
lower than the amount at the end of last year's first quarter. This compares
with the 10.6% decrease 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 57 days at the end of the first fiscal quarters of both
2004 and 2003. During the first fiscal quarter of 2004, the Company also
contributed $1.0 million to its defined benefit pension plan. Other current
assets at February 27, 2004 were $15.4
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
million or $10.3 million higher than the amount at the end of last year's
first quarter. This was caused primarily by an increase in both prepaid pension
expense, largely due to the $7 million of pension contributions and prepaid
income taxes.
Additions to property and equipment totaled $1.8 million in the first
quarter of 2004, which was below the $2.5 million in the first quarter of 2003.
Much of the difference in spending between this year and last year was
attributable to the costs incurred during the 2003 first quarter relating to a
new retail store merchandise planning system. Funding of our capital
expenditures was provided from internal sources. We expect that all capital
purchases during fiscal 2004 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 2004 we returned $3.1 million to
shareholders through share repurchases and cash dividends. We spent $1.1 million
to repurchase 101,800 common shares under our share repurchase program. As of
February 27, 2004, we have 3.4 million shares remaining on our share repurchase
authorization. We expect to continue to purchase shares opportunistically
through the remainder of the fiscal year.
Our repurchases of equity securities for the first quarter of fiscal 2004
were as follows:
Total Maximum
Total Average Number of Number
Number Price Shares of Shares
Of Paid Purchased that May
Shares Per As Part Yet Be
Period Purchased Share of Plan Purchased
- --------------------------------------------------------------------------------
November 29,2003 - December 26,2003 - $ - 1,494,600 3,505,400
December 27,2003 - January 30,2004 - $ - 1,494,600 3,505,400
January 31,2004 - February 27,2004 101,800 $11.10 1,596,400 3,403,600
At the end of the first quarter of fiscal 2004, there were no borrowings
outstanding under the Company's $75 million revolving credit facility. This is
consistent with the first quarter of fiscal 2003. We did not utilize any
available credit under the revolving credit line during the first quarter of
fiscal 2004. Borrowings were not required during the quarter primarily because
we entered the year with no outstanding debt and a significant cash and cash
equivalents balance. As of February 27, 2004, letters of credit totaling $39.5
million were outstanding for the purchase of inventories. All letters of credit
generally expire within one year.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
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.
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:
Exhibit Number Description
10.1 Third Amendment to Amended and
Restated License Agreement dated
February 2, 2000 between Tommy
Hilfiger Licensing, Inc. and The
Stride Rite Corporation.
31.1 Certification of Principal Executive
Officer pursuant to Exchange Act Rules
13a-14 and 15d-14, as adopted pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial
Officer pursuant to Exchange Act Rules
13a-14 and 15d-14, as adopted pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive
Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial
Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On January 15, 2004, the Company filed a current report on Form
8-K (Item 12) with respect to its press release announcing the
Company's financial results for the three and twelve months
ended November 28, 2003.
On March 25, 2004, the Company filed a current report on Form
8-K (Item 12) with respect to its press release announcing the
Company's financial results for the three months ended February
27, 2004.
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 8, 2004 By: /s/ Frank A. Caruso
--------------------------
Frank A. Caruso
Chief Financial Officer