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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 4, 2005
( ) 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
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes(X) No ( )
As of April 6, 2005, 36,209,673 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)
March 4, February 27,
2005 December 3, 2004
(Unaudited) 2004 (Unaudited)
--------------- -------------- --------------
Assets
Current Assets:
Cash and cash
equivalents $24,222 $20,005 $14,983
Marketable securities 20,400 70,850 52,850
Accounts and notes
receivable, net 90,257 47,730 88,487
Inventories 94,785 87,790 83,355
Deferred income taxes 12,816 13,123 14,393
Other current assets 18,372 15,681 15,438
------- ------- -------
Total current assets 260,852 255,179 269,506
Property and equipment, net 52,708 54,246 59,373
Other assets 13,795 11,871 14,266
-------- -------- --------
Total assets $327,355 $321,296 $343,145
======== ======== ========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in Thousands)
March 4, February 27,
2005 December 3, 2004
(Unaudited) 2004 (Unaudited)
--------------- -------------- --------------
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $19,556 $21,046 $13,215
Income taxes payable 19,019 15,316 20,305
Accrued expenses and other
liabilities 19,355 21,377 22,178
------- ------- -------
Total current liabilities 57,930 57,739 55,698
Deferred income taxes 487 487 381
Pension obligation and other
long-term liabilities 16,164 16,208 13,145
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
Shares outstanding -
36,062,434 on March 4,
2005, 35,907,478 on
December 3, 2004 and
39,495,156 on February
27, 2004
Capital in excess of par
value 15,168 15,969 16,143
Retained earnings 440,497 434,147 421,496
Accumulated other
comprehensive loss (9,153) (9,398) (7,800)
Less cost of 20,884,110
shares of common stock
held in treasury
(21,039,066 on December
3, 2004 and 17,451,388
on February 27, 2004) (207,975) (208,093) (170,155)
--------- --------- ---------
Total stockholders' equity 252,774 246,862 273,921
--------- --------- ---------
Total liabilities and
stockholders' equity $327,355 $321,296 $343,145
========= ========= =========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the three months ended March 4, 2005 and February 27, 2004
(In Thousands, Except Per Share Data)
2005 2004
-------- ---------
Net sales $150,591 $136,134
Cost of sales 90,059 83,121
-------- --------
Gross profit 60,532 53,013
Selling and administrative expenses 47,451 41,340
-------- --------
Operating income 13,081 11,673
Investment income 300 571
Interest expense (81) (74)
Other expense, net (57) (78)
--------- ---------
Income before income taxes 13,243 12,092
Provision for income taxes 5,082 4,608
-------- --------
Net income $ 8,161 $ 7,484
======== ========
Net income per common share:
Diluted $ .22 $ .19
======== ========
Basic $ .23 $ .19
======== ========
Dividends per common share $ .05 $ .05
======== ========
Average common shares used in per share
computations:
Diluted 36,963 40,325
======== ========
Basic 36,007 39,420
======== ========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three months ended March 4, 2005 and February 27, 2004
(Dollars in Thousands)
2005 2004
-------------- -------------
Cash flows from operating activities:
Net income $8,161 $7,484
Adjustments to reconcile net income to net
cash used for operations:
Depreciation and amortization 3,145 3,227
Deferred income taxes 307 -
Compensation expense related to stock plans 119 -
Gain related to long-term investments (61) -
(Gain)loss on disposals of property and
equipment (35) 34
Changes in:
Accounts and notes receivable (42,601) (37,482)
Inventories (7,014) (1,458)
Other current assets 313 5,323
Other current liabilities 135 (8,462)
Other long-term assets (1,925) 49
Other long-term liabilities (44) -
Contribution to pension plan (3,000) (1,000)
-------- --------
Net cash used in operating activities (42,500) (32,285)
-------- --------
Cash flows from investing activities:
Additions to property and equipment (1,573) (1,832)
Investments in marketable securities
available for sale (9,725) (10,800)
Proceeds from sale of marketable securities
available for sale 60,175 50,100
Distributions from long-term investments 61 -
------- -------
Net cash provided from investing activities 48,938 37,468
------- -------
Cash flows from financing activities:
Proceeds from sale of stock under stock plans 4,984 1,810
Cash dividends paid (1,795) (1,967)
Repurchase of common stock (5,692) (1,130)
-------- --------
Net cash used in financing activities (2,503) (1,287)
-------- --------
Effect of exchange rate changes on cash and
cash equivalents 282 (35)
Net increase in cash and cash equivalents 4,217 3,861
Cash and cash equivalents at beginning of the
period 20,005 11,122
------- -------
Cash and cash equivalents at end of the period $24,222 $14,983
======= =======
The accompanying notes are an integral part of the
condensed consolidated financial statements.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
The financial information included in this Form 10-Q of The Stride Rite
Corporation (the "Company") for the periods ended March 4, 2005 and February 27,
2004 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 March 4, 2005 and
February 27, 2004 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 December 3, 2004 on Form
10-K, which included all information and footnotes necessary for such
presentation.
In the first quarter of fiscal 2005 the Company concluded that it was
appropriate to classify its auction rate securities as current marketable
securities. These securities are considered available for sale. Previously, such
securities had been classified as cash and cash equivalents. Accordingly, the
Company has revised the classification in all periods presented to report these
securities as short-term marketable securities in its condensed consolidated
balance sheets. The Company has also made corresponding adjustments to its
condensed consolidated statements of cash flows to reflect the gross purchases
and sales of these securities as investing activities rather than as a component
of cash and cash equivalents. This change in classification does not affect
previously reported cash flows from operating or from financing activities in
its condensed consolidated statements of cash flows or previously reported
condensed consolidated statements of income.
Also in the first quarter of fiscal 2005, the Company recorded a one-time
non-cash charge to conform its accounting policies with generally accepted
accounting principles related to the timing of rent expense for certain
locations. Previously, the Company followed a practice prevalent across the
retailing industry, in which it began recording rent expense at a time the store
opened and the lease term commenced. The Company now records rent expense when
it takes possession of a store, which occurs before the commencement of the
lease term and approximately 30 to 60 days prior to the opening of the store.
This results in an acceleration of the commencement of rent expense for each
lease, as we will begin recording rent expense during the pre-opening period,
but a reduction in monthly rent expense, as the total rent due under the lease
is amortized over a greater number of months. Financial results for prior
periods will not be restated due to the immateriality of these amounts to the
consolidated statement of income and the consolidated balance sheet of each
prior year. This will not affect historical or future cash flows or the timing
or amounts of payments under related leases, as this related solely to
accounting treatment. Furthermore, it is not expected to have any material
impact on future earnings.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 valuation
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.
At March 4, 2005, 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 December 3, 2004 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", (APB 25)and related interpretations.
In January 2005, the Company issued performance-based restricted stock to
certain employees. These shares have both service and performance criteria that
must be met. Depending on the performance achievement level, the amount of
restricted stock can be increased up to 150% or decreased to zero. These shares
also earn dividend equivalents until they vest. The Company accounted for these
shares in accordance with APB 25 and FASB Interpretation No. 28, "Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans" (FIN
28). The Company is recognizing compensation expense based on market values at
the end of each quarterly period.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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
--------------------------------------------
March 4, February 27,
2005 2004
-------------------- --------------------
(In thousands, except for per share data)
Net income, as reported $8,161 $7,484
Add: Stock-based employee
compensation expense included in
net income, net of related tax
effects 83 -
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards, net
of related tax effects (497) (505)
------ ------
Pro forma net income $7,747 $6,979
====== ======
Earnings per share:
Basic - as reported $ .23 $ .19
====== ======
Basic - pro forma $ .22 $ .18
====== ======
Diluted - as reported $ .22 $ .19
====== ======
Diluted - pro forma $ .21 $ .17
====== ======
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
------------------------------------
March 4, February 27,
2005 2004
----------------- --------------
(In thousands, except per share
data)
Net income $ 8,161 $ 7,484
======= =======
Weighted average common shares
outstanding (basic) 36,007 39,420
Dilutive effect of stock options 956 905
------ ------
Weighted average common shares
outstanding (diluted) 36,963 40,325
====== ======
Earnings per common share:
Basic $ .23 $ .19
===== =====
Diluted $ .22 $ .19
===== =====
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
----------------------------
2005 2004
------------ ------------
(In thousands)
Options to purchase shares of common
stock 399 200
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Comprehensive Income
Comprehensive income is as follows:
Three Months Ended
---------------------------------
March 4, February 27,
2005 2004
-------------- --------------
(In thousands)
Net income $8,161 $7,484
Other comprehensive income(loss):
Foreign currency translation adjustments 245 (2)
------ -------
Total comprehensive income $8,406 $7,482
====== ======
Components of accumulated other comprehensive loss consist of the following:
March 4, December 3, February 27,
2005 2004 2004
------------- -------------- -------------
(In thousands)
Foreign currency translation
adjustments $ 80 $ (165) $ (219)
Minimum pension liability
adjustments, net of taxes (9,233) (9,233) (7,581)
---------- ----------- - -------
Accumulated other
comprehensive loss $(9,153) $(9,398) $(7,800)
========== =========== ========
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
- -------------------------------------------------------------------------------
March 4, 2005 (In thousands)
Gross carrying amount $3,067 $2,980 $6,047
Accumulated amortization (2,159) (1,290) (3,449)
December 3, 2004
Gross carrying amount $3,067 $2,980 $6,047
Accumulated amortization (2,159) (1,290) (3,449)
February 27, 2004
Gross carrying amount $3,068 $2,980 $6,048
Accumulated amortization (2,160) (1,290) (3,450)
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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
----------------------------------
2005 2004
---------------- ---------------
(In thousands)
Service cost $530 $438
Interest cost 955 930
Expected return on assets (1,120) (998)
Net loss recognized 505 375
Amortization of prior service cost 5 5
---------- ----
Net periodic benefit cost $875 $750
========== ====
During the first quarter of fiscal 2005, the Company contributed $3.0
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 the 2005 fiscal year. The Company made $1.0 million in contributions
during the first quarter of fiscal 2004.
Note 6 - Contingencies
The sale of Tommy Hilfiger branded footwear is a significant portion of our
business. The Tommy Hilfiger footwear sales are contingent on our licensing
agreement with Tommy Hilfiger Licensing, Inc. During fiscal 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.
We expect to meet our obligations under the Tommy Hilfiger license agreement and
accordingly, 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.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The following discusses The Stride Rite Corporation's results of operations
and liquidity and capital resources. The discussion, including known trends and
uncertainties identified by management, should be read in conjunction with the
condensed consolidated financial statements and related notes.
This Form 10-Q contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934. We caution investors that any forward-looking
statements presented in this report and presented elsewhere by management from
time to time are based on management's beliefs and assumptions made by, and
information currently available to, management. When used, the words
"anticipate", "believe", "expect", "intend", "may", "plan", "estimate",
"project", "should", "will be" and similar expressions which do not relate
solely to historical matters are intended to identify forward-looking
statements. Such statements are subject to risks, uncertainties and assumptions
and are not guarantees of future performance, which may be affected by known and
unknown risks, trends, uncertainties and factors that are beyond our control.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated or projected. We expressly disclaim any
responsibility to update forward-looking statements. Accordingly, past results
and trends should not be used by investors to anticipate future results or
trends.
Risks and uncertainties that may affect future performance are detailed
from time to time in reports filed by the Company with the SEC, including Forms
10-Q and 10-K, and include, among others, the following: 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 2004.
Those trends and factors continue to be relevant to the Company's performance
and financial condition.
Critical Accounting Policies and 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 policies
and estimates in the Company's Annual Report on Form 10--K for the fiscal year
ended December 3, 2004 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
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 2005 as compared to the results for the same period in fiscal
2004:
Increase Percent vs. 2004 Results:
First Quarter
Net sales 10.6%
Gross profit 14.2%
Selling and administrative expenses 14.8%
Operating income 12.1%
Income before income taxes 9.5%
Net income 9.0%
Operating Ratios as a Percent of Net Sales:
First Quarter
--------------------------------
2005 2004
-------------- --------------
Gross profit 40.2% 38.9%
Selling and administrative expenses 31.5% 30.4%
Operating income 8.7% 8.6%
Income before income taxes 8.8% 8.9%
Net income 5.4% 5.5%
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net Sales
The first quarter breakdown of net sales is as follows:
Percent
Change
2005 vs.
2005 2004 2004
--------- --------- ----------
(In millions, except percentages)
Stride Rite Children's Group - Wholesale $ 25.6 $ 25.0 2.1%
Stride Rite Children's Group - Retail 35.4 29.1 21.9%
-------- -------- --------
Stride Rite Children's Group 61.0 54.1 12.7%
Keds 45.7 42.4 7.6%
Tommy Hilfiger Footwear 18.3 20.2 (9.8)%
Sperry Top-Sider 19.4 14.7 31.9%
Stride Rite International 8.8 6.7 30.8%
Elimination of intercompany sales (2.6) (2.0) n/a
-------- -------- ---------
Total net sales $150.6 $136.1 10.6%
======== ======== =========
During the first quarter of fiscal 2005, consolidated net sales increased
$14.5 million to $150.6 million, or 10.6% above the sales level achieved in the
first quarter of fiscal 2004. Wholesale net revenues increased 7.6% for the
first quarter of 2005, and overall retail sales, including Keds retail and the
e-commerce sites, increased $6.4 million or 21.5% 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 4.8% higher than the comparable
period in 2004. The Company's average first quality wholesale selling price
remained flat with the first quarter of 2004.
First quality wholesale gross sales increased by $4.1 million, or 4.0%
above the wholesale gross sales level achieved in the first quarter of fiscal
2004. In addition, sales from promotional products increased $2.0 million and
returns and allowances decreased $3.4 million from the comparable period in the
2004 fiscal year. Partially offsetting these improvements was a $1.3 million
decrease in closeout sales. The lower level of closeout sales contributed to an
improvement in the quality of net sales. Adding to this overall net increase
from wholesale net sales was an additional $6.4 million increase in retail store
sales from the same period in 2004, which resulted in an overall increase of
$14.5 million in consolidated net sales.
The year over year increase in net sales of the Stride Rite Children's
Group was primarily attributable to the 21.9% increase in net sales from the
Children's Group company-owned retail stores. These results were aided by the
earlier Easter holiday in 2005. Sales to independent retailers increased 2.1%
during the first quarter of 2005 as compared to the same quarter last year. This
increase was primarily attributable to increased sales of first quality and
promotional products, mainly in the department store channel, as well as a
decrease in returns and allowances. Sales at comparable Children's Group retail
stores (stores open for 52 weeks in each fiscal year) increased 7.8% for the
first fiscal quarter of 2005. Driving this increase in the comparable
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
stores category was the larger number of newer stores which have generally
had greater sales increases than our more mature stores as well as the earlier
Easter holiday. At the end of the first quarter of fiscal 2005, the Stride Rite
Children's Group operated 254 stores. This is an increase of 21 stores, or 9%
from the end of the same period in the prior year. Current plans call for the
opening of approximately 22 retail stores and the closing of 2 underperforming
locations during the 2005 fiscal year. During the first quarter of 2005 the
Company opened 4 new stores and closed 1 underperforming location for a net
increase of 3 stores. We recently have concluded that the two Shoe Buzz stores
will not meet our goals and these stores will be converted to Stride Rite
outlets. We do not anticipate a significant financial impact related to this
conversion.
The increase in sales of the Keds product line was primarily the result of
increased first quality sales to higher-end accounts and fewer closeouts. The
main increases were seen in sales of the women's Microstretch and Champion(R)
products as well as decreased returns and allowances. Offsetting a portion of
this increase was a decline in sales of the Grasshopper line due to the loss of
some key accounts.
The decrease in sales of Tommy Hilfiger men's and women's footwear products
during the first quarter of fiscal 2005 was primarily attributable to continued
decreases in the department store and independent channels, as well as women's
athletic and Tommy Girl products that did not perform well across all
distribution channels. The Tommy Hilfiger "H" clothing line, which is being
discontinued, also negatively impacted the first quarter results. Offsetting
some of these declines were increased sales of closeout and promotional products
as well as a decrease in returns.
The increase in sales of Sperry Top-Sider products during the first quarter
of the 2005 fiscal year was primarily attributable to strong sales of men's boat
shoes and the women's product line. The significant men's growth seen in 2005
resulted from increases in the premium department store and outdoor channels.
The women's business had improved distribution in the better department store,
independent and outdoor channels, which resulted in increased sales of boat
shoes, nautical casuals and canvas.
The Stride Rite International division's net sales growth in the first
quarter of fiscal 2005 was the result of strong sales of Tommy Hilfiger footwear
in Canada and Mexico, as well as Sperry and Keds in Canada.
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 2005, the Company's gross profit of
$60.5 million increased $7.5 million or 14.2% above the amount recorded during
fiscal 2004's first quarter. The higher level of both first quality wholesale
and retail sales along with the decrease in returns and allowances contributed
to the overall increase in gross profit dollars. The gross profit rate for the
fiscal 2005 first quarter improved 1.3 percentage points to 40.2% as compared to
the 38.9% rate achieved in the prior year's first quarter. The higher gross
profit percentage was primarily attributable to increased company-owned retail
store sales, which had improved gross profit percentages from the same quarter
in the prior year. In addition, fewer markdown allowances and decreased closeout
sales also contributed positively to the improved gross profit rate.
Operating Costs
During the first three months of fiscal 2005, selling and administrative
expenses were $47.5 million, an increase of $6.1 million or 14.8% as compared to
the first quarter of fiscal 2004. As a percent of sales, operating costs were
31.5% in the first quarter of fiscal 2005 compared to 30.4% in the first quarter
of fiscal 2004. During the first quarter of fiscal 2005, advertising costs were
5.4% of net sales versus 4.6% in fiscal 2004, with Keds and Sperry Top-Sider
driving most of the increase. Also contributing to the cost increases were
retail store expansion costs and certain headcount related costs. In addition,
the Company recorded a one-time non-cash charge of $0.5 million in the first
quarter of fiscal 2005 to conform our accounting policies with generally
accepted accounting principles related to the timing of rent expense for certain
locations.
Other Income and Taxes
Other income (expense) increased pre-tax income by $0.2 million in the
first quarter of fiscal 2005 versus $0.4 million in the first quarter of fiscal
2004. Investment income related to the Company's cash equivalents and marketable
securities was $0.3 million in the first quarter of fiscal 2005, which was flat
to the similar category of investment income in the same quarter last year. The
lower average investments were offset by higher average interest rates in the
first quarter of fiscal 2005. Interest expense remained flat in the first
quarter of fiscal 2005 as compared to the first quarter of fiscal 2004 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 increased $0.5 million in the first quarter
of fiscal 2005 as compared to the similar period in fiscal 2004. This increase
was primarily due to the higher pre-tax income amount and the higher effective
income tax rate. Our effective tax rate was 38.4% in the first quarter of fiscal
2005 as compared to 38.1% in the first quarter of fiscal 2004. The higher tax
rate in the first quarter of fiscal 2005 reflects fewer tax saving items in 2005
than in the prior year.
Net Income
Net income for the first quarter of fiscal 2005 was $8.2 million, an
increase of $0.7 million, or 9.0% as compared to the same period in the prior
year. Higher net sales and the corresponding increase in gross profit dollars
were the primary reasons for the increase in net income. The Company's return on
net sales of 5.4% in the first fiscal quarter of 2005 was slightly below the
5.5% return on sales recorded for the first fiscal quarter of 2004.
Liquidity and Capital Resources
At the end of the first fiscal quarter of 2005, our balance sheet reflected
a current ratio of 4.5 to 1 with no debt. Our cash, cash equivalents and
marketable securities totaled $44.6 million at March 4, 2005, a decrease of
$23.2 million from the total cash, cash equivalents and marketable securities of
$67.8 million at the end of the first quarter of fiscal 2004. 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
March 4, 2005 or February 27, 2004.
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 2005, the Company used $42.5 million of cash to fund operating needs.
This use of cash to fund operations was higher than the $32.3 million use of
cash required during the first quarter of fiscal 2004. Inventory levels at the
end of the first quarter of fiscal 2005 increased $11.4 million, or 13.7% from
the levels recorded at the end of the prior year's first quarter. The increase
in inventory related primarily to the timing of product receipts and the higher
number of retail stores. Accounts receivable at March 4, 2005 were $1.8 million
or 2.0% higher than the amount at the end of last year's first quarter. This
compares favorably with the 10.6% 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 55 days at the end of the first
fiscal quarter of 2005 and was favorable compared to the DSO of 57 days at the
end of the same period last year. Accounts payable, at the end of the first
quarter of fiscal 2005, increased $6.3 million from the level recorded at the
end of the prior year's first quarter. This increase was primarily the result of
an increase in the year over year inventory in-transit at the end of the first
quarter of 2005. During the first fiscal quarter of 2005, the Company also
contributed $3.0 million to its defined benefit pension plan. The Company does
not plan to make any further contributions to its
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
defined benefit pension plan during the 2005 fiscal year. Other current
assets at March 4, 2005 were $18.4 million or $2.9 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 $3 million of
pension contributions, and prepaid advertising for the Keds division.
Additions to property and equipment totaled $1.6 million in the first
quarter of 2005, which was similar to the $1.8 million in the first quarter of
2004. Much of the difference in spending between this year and last year was
attributable to the costs incurred during the 2005 first quarter relating to new
retail stores and renovations to existing stores. Funding of our capital
expenditures was provided from internal sources. We expect that all capital
purchases during fiscal 2005 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 2005 we returned $7.5 million to
shareholders through share repurchases and cash dividends. We spent $5.7 million
to repurchase 432,200 common shares under our share repurchase program. As of
March 4, 2005, we have 4.1 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 2005, there were no borrowings
outstanding under the Company's $75 million revolving credit facility. This is
consistent with the first quarter of fiscal 2004. We did not utilize any
available credit under the revolving credit line during the first quarter of
fiscal 2005. Borrowings were not required during the quarter primarily because
we entered the year with no outstanding debt and significant cash, cash
equivalents and marketable securities balances. As of March 4, 2005 letters of
credit totaling $38.1 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information previously
reported under Item 7A of the Company's Annual Report on Form 10-K for the
fiscal year ended December 3, 2004.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Within the 90 days prior to the date of this report, the Company carried
out an evaluation under the supervision of and with the participation of the
Company's management, including the participation of its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934, as amended. Based upon that evaluation, as of
the end of the period covered by this report, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended) are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. We continue to review and document our
disclosure controls and procedures and may from time to time make changes aimed
at enhancing their effectiveness and ensuring that our systems evolve with our
business.
(b) Changes in internal controls over financial reporting.
There was no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities
Exchange Act of 1934, as amended) during our first quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
Our repurchases of equity securities for the first quarter of fiscal 2005
were as follows:
Total
Number of Maximum
Shares Number
Purchased of Shares
Total Average As Part that May
Number Price of Yet Be
Of Paid Publicly Purchased
Shares Per Announced Under the
Period Purchased Share Plan Plan
- --------------------------------------------------------------------------------
December 4,2004 - December 31,2004 - - - 4,494,794
January 1, 2005 - February 4, 2005 76,200 $12.31 76,200 4,418,594
February 5, 2005 - March 4, 2005 356,000 $13.35 356,000 4,062,594
In June 2004, the Board of Directors increased the authorization under an
existing stock repurchase program by five million shares. Under the
authorization, the Company can repurchase shares in the open market or through
privately negotiated transactions. The repurchase program does not have an
expiration date. All shares repurchased during the period covered by this report
were purchased under a publicly announced plan.
PART II - OTHER INFORMATION
THE STRIDE RITE CORPORATION
ITEM 6. EXHIBITS
(a) Exhibits. The following exhibits are contained in this report:
Exhibit Number Description
3(i) Restated Articles of Organization of the
Registrant with amendments thereto through
November 28, 1986, incorporated by
reference from Exhibit 4(i) to the
Registrant's Form S-8 filed on October 25,
1996.
3(ii) Articles of Amendment dated April 7, 1987
to Restated Articles of Organization,
incorporated by reference form Exhibit 4(i)
to the Registrant's Form S-8 filed on
October 25, 1996.
3(iii) Articles of Amendment dated December 16,
1987 to Restated Articles of Organization
of the Registrant, incorporated by
reference from Exhibit 4(i) to the
Registrant's Form S-8 filed on October 25,
1996.
3(iv) Articles of Amendment dated December 3,
1991 to the Restated Articles of
Organization of the Registrant,
incorporated by reference from Exhibit 4(i)
to the Registrant's Form S-8 filed on
October 25, 1996.
3(v) Certificate of Vote of Directors
establishing a series of a Class of Stock
dated as of June 18, 1997.
3(vi) By-laws of the Registrant, as amended. This
document was filed as Exhibit 3 of the
Registrant's Form 10-Q for the fiscal
period ended June 1, 1990 and is
incorporated herein by reference.
4(i) Reference is made to Exhibits 3(i), (ii),
(iii) and (iv) referred to above, which are
expressly incorporated herein by reference.
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.
* Filed with this form 10-Q.
** Furnished with this form 10-Q. This certification shall not be
deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, or otherwise subject to the liability of
that section, nor shall it be incorporated by reference into any
filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934.
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 13, 2005 By: /s/ Frank A. Caruso
--------------------------
Frank A. Caruso
Chief Financial Officer