SRR Stride Rite Corp

The Stride Rite Corporation (NYSE: SRR) today reported record 2005 sales on increased fourth quarter and fiscal year 2005 net sales. Net sales for the fourth quarter and full year of fiscal 2005 were $131.7 million and $588.2 million, increases of 13% and 5%, respectively, compared to the same periods in the prior year. Fiscal 2005 contained 52 weeks compared to the 53 weeks in 2004, which had one extra week in the fourth quarter. The fourth quarter of 2005 also included $23.2 million of Saucony net sales for the 11 weeks subsequent to the September 16, 2005 acquisition date. The fourth quarter net loss totaled $3.1 million or $.08 per diluted share, a decrease compared to the net income of $51 thousand or $.00 per diluted share in the fourth quarter of 2004. Net income for the 2005 fiscal year totaled $24.6 million, a decrease of 4% from the $25.7 million reported in the comparable period in 2004. The fiscal 2005 diluted earnings per share of $.66 were flat versus last year. The fourth quarter includes a pre-tax expense of $5.4 million related to the write-up of inventory purchased in the Saucony acquisition as required by GAAP accounting rules. In addition, the current quarter includes pre-tax acquisition related integration expenses of $800 thousand. Excluding acquisition related integration costs and the inventory write-up, net income would have been $0.5 million and $28.6 million for the fourth quarter and the year, respectively, while diluted earnings per share would have been $.01 and $.77 for the fourth quarter and the year, respectively. See the section entitled "Non-GAAP Pro Forma Financial Measures" and the "Reconciliation of Non-GAAP Measures" provided in this release for additional description of these Non-GAAP Measures. David Chamberlain, Chairman and CEO of Stride Rite, commented that 2005 was a significant year for Stride Rite. "With the purchase of Saucony, we added a highly-respected $150 million brand in performance running. We see growth opportunities for Saucony in running, international and children's. We expect that 2006 will be a year of transition for Saucony as we set the platform for 2007." "Children's Group had a third year of record performance driven by strong retail performance and store growth. We expect to add 33 new doors in 2006 for a total of 316 doors, including 14 existing Saucony doors." "Sperry Top-Sider enjoyed a fourth year of increased sales and significant profit growth. Our products are strong, and we expect continued growth in all retail channels as well as in the women's area." "International had strong sales and record profit, helped in part by Tommy Hilfiger. With Saucony, we double our international business presence and add significantly to sales in Europe - an area of focus for us." "Keds had a challenging year as we repositioned the brand back to its 1916 heritage as 'America's sneaker' with Mischa Barton as spokesperson. We believe we have effectively accomplished our marketing strategy, as Footwear News recently named Keds 'The Marketing Brand of the Year'. Success in 2006 will depend upon the retail performance of our products." "Our Tommy Hilfiger business was impacted predominantly by softness in men's sales. The pending sale of Tommy Hilfiger Corp. to Apax Partners, with their objective of focusing on the higher-end business, is a positive announcement." "We enter 2006 with sound strategies in place and strong management teams. We anticipate a solid year of progress and growth." Mr. Chamberlain continued, "Assuming reasonable retail and economic conditions in 2006, we are projecting sales growth of 23% to 27% and earnings per share of $.82 - $.88, including a full year of Saucony financial results. Included in the projected earnings is the annual impact related to the expensing of stock options, which is projected at approximately $.05 per diluted share. In addition, these projections include the cost of sales impact related to the write-up of inventory purchased in the Saucony acquisition, which is estimated to reduce earnings per diluted share by $.05. Acquisition related integration costs of approximately $2 million or $.03 per share are also included in the earnings projections." FINANCIAL HIGHLIGHTS: -- Net sales for the fourth quarter and year ended December 2, 2005 and December 3, 2004 are summarized in the tables as follows: -0- *T The Stride Rite Corporation Net Sales (in thousands) For the Quarters Ended December 2, 2005 and December 3, 2004 Fourth Quarter -------------------- Percent 2005 2004 Change ---------- --------- -------- (Unaudited) Stride Rite Children's Group - Wholesale $16,678 $19,996 (17)% Stride Rite Children's Group - Retail 45,720 44,715 2% ---------- --------- -------- Stride Rite Children's Group - Combined 62,398 64,711 (4)% Keds 13,659 17,615 (22)% Sperry Top-Sider 13,221 12,610 5% Tommy Hilfiger Adult 14,303 18,402 (22)% International 7,032 5,680 24% Saucony 23,181 - 100% Intercompany Eliminations (2,099) (2,219) (5)% ---------- --------- -------- Total $131,695 $116,799 13% ========== ========= ======== The Stride Rite Corporation Net Sales (in thousands) For the Years Ended December 2, 2005 and December 3, 2004 Twelve Months -------------------- Percent 2005 2004 Change ---------- --------- -------- (Unaudited) Stride Rite Children's Group - Wholesale $90,926 $96,468 (6)% Stride Rite Children's Group - Retail 175,335 157,208 12% ---------- --------- -------- Stride Rite Children's Group - Combined 266,261 253,676 5% Keds 126,030 136,322 (8)% Sperry Top-Sider 73,817 58,882 25% Tommy Hilfiger Adult 75,560 92,307 (18)% International 33,919 27,125 25% Saucony 23,181 - 100% Intercompany Eliminations (10,604) (9,988) 6% ---------- --------- -------- Total $588,164 $558,324 5% ========== ========= ======== *T -- Stride Net sales of the Stride Rite Children's Group-Retail division increased 2% and 12% in the fourth quarter and for the year, respectively, versus the prior year. Sales at comparable Children's Group retail stores (open 52 weeks in each fiscal year) increased 4.4% for the fourth quarter of 2005 and 5.2% for the full year. At the end of fiscal 2005, the Stride Rite Children's Group-Retail operated 271 stores. This is a net increase of 20 stores, or 8% from the end of last year. -- Stride Rite Children's Group-Wholesale net sales decreased 17% for the quarter and 6% for the year, respectively, as compared to the prior year. This decrease was primarily attributable to decreased sales of first quality product, mainly in the Tommy Hilfiger and Munchkin children's product lines as well as overall decreases in the department store business and promotional product sales. -- Net sales of Tommy Hilfiger men's and women's products for the fourth quarter and the year decreased 22% and 18%, respectively, primarily due to a reduction in the men's business across various channels of distribution. Saucony net sales were $23.2 million for the 11 week period subsequent to the September 16, 2005 acquisition date. Sperry Top-Sider net sales increased 5% and 25% for the fourth quarter and full year, respectively, on strong sales of men's boat shoes and the overall women's product line. Net sales in the Keds division decreased 22% and 8% for the fourth quarter and the full year, respectively, as the sales growth in premium channels could not offset decreases in the moderate and value retail sales channels. International net sales increased 24% in the quarter and 25% for the fiscal year, respectively, on higher sales of Tommy Hilfiger in Latin America, Keds footwear in Europe and Asia, and Sperry Top-Sider in Europe and South Africa. -- Excluding the inventory write-up, the gross profit percentage increased 1.7 percentage points to 39.8% for the year. Keds, Stride Rite Children's Group-Retail and Sperry Top-Sider all had strong gross profit percentage improvements versus last year. -- Operating expenses increased 12% and 11% for the fourth quarter and the year, respectively. As planned, the major operating cost increases related to higher advertising costs and the Stride Rite Children's Group-Retail store expansion. Also contributing to the increase were 11 weeks of Saucony expenses, as well as integration costs and certain other acquisition related costs. -- Accounts receivable increased 33% compared to last year on a 13% quarterly sales increase. DSO was 39 days, an increase of 2 days versus the same period last year. The increase was due to the addition of Saucony which generally has offered somewhat longer credit terms to retailers. -- Inventories of $116.1 million were up 32% compared to the end of 2004. The increase was due primarily to the addition of Saucony and included the inventory write-up as required by GAAP purchase accounting rules. Excluding Saucony, the 2005 year-end inventory balance increased 3% compared to last year. -- Cash and cash equivalents were $33 million at the end of the fiscal year with $60 million in outstanding debt. The Company borrowed $85 million in mid-September 2005 to fund the closing of the acquisition of Saucony. COMPANY OVERVIEW & CONFERENCE CALL INFORMATION: The Stride Rite Corporation markets the leading brand of high quality children's shoes in the United States. Other footwear products for children and adults are marketed by the Company under well-known brand names, including Keds, Sperry Top-Sider, Tommy Hilfiger, Saucony, Grasshoppers, Munchkin, Spot-bilt and Hind. Apparel products are marketed by the Company under the Saucony and Hind brand names. Information about the Company is available on our website - www.strideritecorp.com. The Company will provide a live webcast of its fourth quarter conference call. The live broadcast of Stride Rite's quarterly conference call will be available on the Company's website and at www.streetevents.com, beginning at 10:00AM ET on January 12, 2006. An on-line replay will follow shortly after the call and will continue through January 18, 2006. Information about the Company's brands and product lines is available at www.striderite.com, www.keds.com, www.sperrytopsider.com and www.saucony.com. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: This announcement includes forward-looking statements which reflect our current views with respect to the events or financial performance discussed in the release, based on management's beliefs and assumptions and information currently available. When used, the words "believe", "anticipate", "estimate", "project", "should", "expect", "appear" and similar expressions, which do not relate solely to historical matters identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future events or performance, which may be affected by known and unknown risks, trends and uncertainties. Should one or more of these risks or uncertainties materialize, or should our assumptions prove incorrect, actual results may vary materially from those anticipated, projected or implied. Factors that may cause such a variance include, among others: the inability to fully realize the anticipated benefits from the acquisition of Saucony; the challenges of achieving the expected synergies with Saucony; the possibility of incurring costs or difficulties related to the integration of the businesses of Stride Rite and Saucony; the possible failure to retain the Tommy Hilfiger footwear license; the opening of new stores may be delayed; the volume of anticipated sales may decline; revenues from new product lines may fall below expectations; the launch of new product lines may be delayed; new retail concepts may not achieve expected results; general retail sales trends may be below expectations; current license agreements may be terminated; consumer fashion trends may shift to footwear styling not currently included in our product lines; our retail customers, including large department stores, may continue to consolidate or restructure operations resulting in unexpected store closings; and additional factors discussed from time to time in our filings with the Securities and Exchange Commission. We expressly disclaim any responsibility to update forward-looking statements. NON-GAAP PRO FORMA FINANCIAL MEASURES: This release contains certain non-GAAP financial measures. In particular, Stride Rite provides historic and anticipated net income and diluted earnings per share excluding certain cash and non-cash charges, which are non-GAAP financial measures. These results are included as a complement to results provided in accordance with GAAP because management believes these non-GAAP financial measures help indicate underlying trends in Stride Rite's business and provide useful information to both management and investors by excluding certain items that are not indicative of Stride Rite's core operating results. These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. The non-GAAP information provided by Stride Rite may be different from the non-GAAP information provided by other companies. -0- *T The Stride Rite Corporation Summarized Financial Information for the periods ended December 2, 2005 and December 3, 2004 Statements of Income (in thousands) Fourth Quarter Twelve Months -------------- ------------- 2005 2004 2005 2004 --------- --------- ---------- ---------- (Unaudited) (Unaudited) Net sales $131,695 $116,799 $588,164 $558,324 Cost of sales 86,643 71,903 359,179 345,728 --------- --------- ---------- ---------- Gross profit 45,052 44,896 228,985 212,596 Selling and administrative expenses 49,881 44,430 191,496 172,190 --------- --------- ---------- ---------- Operating income (loss) (4,829) 466 37,489 40,406 Other income (expense), net (541) (371) 524 503 --------- --------- ---------- ---------- Income (loss) before income taxes (5,370) 95 38,013 40,909 Provision for (benefit from) income taxes (2,309) 44 13,446 15,255 --------- --------- ---------- ---------- Net income (loss) $(3,061) $51 $24,567 $25,654 ========= ========= ========== ========== Earnings (loss) per share: Diluted $(0.08) $0.00 $0.66 $0.66 Basic $(0.08) $0.00 $0.68 $0.68 Weighted average shares outstanding: Diluted 37,325 37,197 37,223 38,753 Basic 36,316 36,495 36,197 37,976 Balance Sheets 2005 2004 --------- --------- Assets: (Unaudited) Cash and cash equivalents $33,094 $20,005 Marketable securities - 70,850 Accounts receivable 63,368 47,730 Inventories 116,095 87,790 Deferred income taxes 12,637 13,123 Other current assets 31,689 15,681 --------- --------- Total current assets 256,883 255,179 Property and equipment, net 51,367 54,246 Goodwill 56,729 908 Trademarks 58,590 1,690 Other assets 17,790 9,273 --------- --------- Total assets $441,359 $321,296 ========= ========= Liabilities and Stockholders' Equity: Current liabilities 73,022 57,739 Long-term debt 60,000 - Deferred income taxes and other liabilities 41,659 16,695 Stockholders' equity 266,678 246,862 --------- --------- Total liabilities and stockholders' equity $441,359 $321,296 ========= ========= Reconciliation of Non-GAAP Measures Unaudited Non-GAAP Pro Forma Statements of Income (in thousands) For the Quarter Ended December 2, 2005 Reported Pro forma Fourth Fourth Quarter Pro forma Quarter 2005 Adjustments 2005 ---------- ----------- ---------- Net sales $131,695 $131,695 Cost of sales 86,643 ($5,400)(a) 81,243 ---------- ----------- ---------- Gross profit 45,052 5,400 50,452 Selling and administrative expenses 49,880 (764)(b) 49,116 ---------- ----------- ---------- Operating income (loss) (4,828) 6,164 1,336 Other income (expense), net (542) (542) ---------- ----------- ---------- Income (loss) before income taxes (5,370) 6,164 794 Provision for (benefit from) income taxes (2,309) 2,648(c) 339 ---------- ----------- ---------- Net income (loss) $(3,061) $3,516 $455 ========== =========== ========== Non-GAAP earnings (loss) per share: Diluted $(0.08) $0.01 Basic $(0.08) $0.01 Weighted average shares outstanding: Diluted 37,325 37,325 Basic 36,316 36,316 For the Year Ended December 2, 2005 Reported Pro forma Twelve Twelve Months Pro forma Months 2005 Adjustments 2005 ---------- ----------- ---------- Net sales $588,164 $588,164 Cost of sales 359,179 ($5,400)(a) 353,779 ---------- ----------- ---------- Gross profit 228,985 5,400 234,385 Selling and administrative expenses 191,496 (881)(b) 190,615 ---------- ----------- ---------- Operating income 37,489 6,281 43,770 Other income, net 524 524 ---------- ----------- ---------- Income before income taxes 38,013 6,281 44,294 Provision for income taxes 13,446 2,222(c) 15,668 ---------- ----------- ---------- Net income $24,567 $4,059 $28,626 ========== =========== ========== Non-GAAP earnings per share: Diluted $0.66 $0.77 Basic $0.68 $0.79 Weighted average shares outstanding: Diluted 37,223 37,223 Basic 36,197 36,197 Pro forma adjustments: (a) Relief of the inventory step-up (pre-tax) (b) Saucony integration costs (pre-tax) (c) Income tax effect at GAAP rate *T