10-Q 1 qtr210q.txt FORM 10-Q FOR QUARTER ENDED MAY 28, 2004 1 of 31 pages -------------------------------------------------------------------------------- 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 May 28,2004 ( ) 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 .10 ---- ---- 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 June 30, 2004, 37,726,486 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
May 28, May 30, 2004 November 28, 2003 (Unaudited) 2003 (Unaudited) --------------- -------------- ------------ (In thousands) Assets Current Assets: Cash and cash equivalents $79,574 $103,272 $81,463 Accounts and notes receivable, net 79,278 51,058 70,151 Inventories 80,749 81,925 76,654 Deferred income taxes 15,178 14,393 20,588 Other current assets 10,734 19,452 5,215 -------- -------- ------- Total current assets 265,513 270,100 254,071 Property and equipment, net 57,793 60,802 64,092 Other assets 13,193 14,315 15,350 -------- -------- -------- Total assets $336,499 $345,217 $333,513 ======== ======== ========
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)
May 28, May 30, 2004 November 28, 2003 (Unaudited) 2003 (Unaudited) --------------- -------------- ------------- (In thousands, except for share data) Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $20,529 $23,887 $12,006 Income taxes payable 17,111 16,815 20,196 Accrued expenses and other liabilities 20,816 23,273 19,936 ------- -------- ------- Total current liabilities 58,456 63,975 52,138 Deferred income taxes 844 381 531 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 15,371 16,825 17,408 Retained earnings 431,519 415,988 414,471 Accumulated other comprehensive loss (7,927) (7,798) (6,770) Less cost of 19,223,032 shares of common stock held in treasury (17,607,304 on November 28, 2003 and 17,527,919 on May 30, 2003) (189,146) (171,536) (170,179) --------- --------- --------- Total stockholders' equity 264,054 267,716 269,167 --------- --------- --------- Total liabilities and stockholders' equity $336,499 $345,217 $333,513 ======== ======== ========
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 six months ended May 28, 2004 and May 30, 2003 Three Months Ended Six Months Ended ------------------ ---------------- (In thousands, except for per share data)
May 28, May 30, May 28, May 30, 2004 2003 2004 2003 ------------ ------------ ------------ ---------- Net sales $165,009 $154,286 $301,143 $306,608 Cost of sales 101,507 93,308 184,628 187,589 -------- -------- -------- -------- Gross profit 63,502 60,978 116,515 119,019 Selling and administrative expenses 44,589 44,002 85,929 88,378 -------- -------- -------- --------- Operating income 18,913 16,976 30,586 30,641 Investment income 473 923 1,044 l,606 Interest expense (82) (102) (156) (172) Other expense, net (70) (1) (148) (164) --------- --------- --------- --------- 321 820 740 1,270 --------- --------- --------- --------- Income before income taxes 19,234 17,796 31,326 31,911 Provision for income taxes 7,334 6,577 11,942 11,871 --------- --------- --------- --------- Net income $ 11,900 $ 11,219 $ 19,384 $ 20,040 ========= ========= ========= ========= Net income per common share: Diluted $ .30 $ .28 $ .49 $ .50 ========= ========== ========= ========== Basic $ .31 $ .29 $ .50 $ .51 ========= ========== ========= ========== Dividends per common share $ .05 $ .05 $ .10 $ .10 ========= ========== ========= ========== Average common shares used in per share computations: Diluted 39,450 39,895 39,887 39,866 ========= ========== ========= ========== Basic 38,637 39,362 39,029 39,394 ========= ========== ========= ==========
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 six months ended May 28, 2004 and May 30, 2003
2004 2003 -------------- ------------- Cash flows from operating activities: (In thousands) Net income $19,384 $20,040 Adjustments to reconcile net income to net cash used for operations: Depreciation and amortization 6,495 7,622 Deferred income taxes (322) - Gain related to long-term investments - (1,071) Loss on disposals of property and equipment 226 69 Changes in: Accounts and notes receivable (28,220) (22,076) Inventories 1,176 21,559 Other current assets 9,718 8,398 Other current liabilities (5,531) (16,838) Other long-term assets 1,122 (2,436) Contribution to pension plan (1,000) - ------ ------- Net cash provided from operating activities 3,048 15,267 ------ ------- Cash flows from investing activities: Additions to property and equipment (3,712) (3,492) Distributions from long-term investments - 1,071 ------- ------- Net cash used in investing activities (3,712) (2,421) -------- ------- Cash flows from financing activities: Proceeds from sale of stock under stock plans 3,368 1,146 Cash dividends paid (3,947) (3,943) Repurchase of common stock (22,455) (1,691) -------- ------- Net cash used in financing activities (23,034) (4,488) -------- ------- Net increase (decrease) in cash and cash equivalents (23,698) 8,358 Cash and cash equivalents at beginning of the period 103,272 73,105 ------- ------- Cash and cash equivalents at end of the period $79,574 $81,463 ======= =======
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 May 28, 2004 and May 30, 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 May 28, 2004 and May 30, 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. PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Stock Purchase and Option Plans At May 28, 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 Six Months Ended
May 28, May 30, May 28, May 30, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ (In thousands, except for per share data) Net income, as reported $11,900 $11,219 $19,384 $20,040 Add: Stock based employee compensation expense included in net income, net of related tax effects 6 - 6 9 Deduct: Total stock based employee compensation expense determined under fair value based method for all awards, net of related tax effects (434) (616) (940) (931) -------- --------- --------- --------- Pro forma net income $11,472 $10,603 $18,450 $19,118 ======= ======== ======== ======== Earnings per share: Basic - as reported $ .31 $ .29 $ .50 $ .51 ======= ======== ======== ======== Basic - pro forma $ .30 $ .27 $ .47 $ .49 ======= ======== ======== ======== Diluted - as reported $ .30 $. 28 $ .49 $ .50 ======= ======== ======== ======== Diluted - pro forma $ .29 $ .27 $ .46 $ .48 ======= ======== ======== ========
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 Six Months Ended Ended ------------------- ------------------
May 28, May 30, May 28, May 30, 2004 2003 2004 2003 --------- -------- -------- -------- (In thousands, except for per share data) Net income $11,900 $11,219 $19,384 $20,040 Calculation of shares: Weighted average common shares outstanding (basic) 38,637 39,362 39,029 39,394 Dilutive effect of stock options 813 533 858 472 ------- ------- ------- ------- Weighted average common shares outstanding (diluted) 39,450 39,895 39,887 39,866 ======= ======= ======= ======= Net income per common share (basic) $ .31 $ .29 $ .50 $ .51 ===== ===== ===== ===== Net income per common share (diluted) $ .30 $ .28 $ .49 $ .50 ===== ===== ===== =====
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: Second Quarter First Six Months ------------------- ------------------
2004 2003 2004 2003 -------- --------- -------- -------- (In thousands) Options to purchase shares of common stock 1,079 521 318 550
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 Six Months Ended ---------------------- -------------------- May 28, May 30, May 28, May 30, 2004 2003 2004 2003 ----------- --------- ---------- --------- (In thousands) Net income $11,900 $11,219 $19,384 $20,040 Other comprehensive income(loss): Foreign currency translation adjustments (127) 326 (129) 476 -------- -------- -------- -------- Total comprehensive income $11,773 $11,545 $19,255 $20,516 ======== ======== ======== ======== Components of accumulated other comprehensive loss consist of the following: May 28, November 28, May 30, 2004 2003 2003 --------------- ---------------- ------------ (In thousands) Foreign currency translation adjustments $ (346) $ (217) $ (49) Minimum pension liability adjustments, net of taxes (7,581) (7,581) (6,721) -------- -------- --------- Accumulated other comprehensive loss $ (7,927) $ (7,798) $ (6,770) ========= ========= =========
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 ------------------------------------------------------------------------------- May 28, 2004 (In thousands) Gross carrying amount $3,067 $2,980 $6,047 Accumulated amortization $(2,159) $(1,290) $(3,449) November 28, 2003 Gross carrying amount $3,068 $2,980 $6,048 Accumulated amortization $(2,160) $(1,290) $(3,450) May 30, 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 Six Months Ended --------------------- --------------------
May 28, May 30, May 28, May 30, 2004 2003 2004 2003 ---------- --------- --------- ------- (In thousands) Service Cost $ 413 $ 303 $ 851 $ 606 Interest Cost 876 763 1,806 1,526 Expected return on assets (997) (704) (1,995) (1,408) Net loss recognized 353 322 728 644 Amortization of prior services cost 5 6 10 12 ---------- --------- --------- ------- Net periodic benefit cost $ 650 $ 690 $1,400 $1,380 ========== ========= ========= =======
During the first quarter of fiscal 2004, the Company contributed $1.0 million to its defined benefit pension plan. The Company does not intend to make any further contributions to its defined benefit pension plan during fiscal year 2004. No contributions were made to the Company's defined benefit plans during the first two quarters of fiscal 2003. PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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; labor disputes; 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 ------------- 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. Results of Operations --------------------- The following table summarizes the Company's performance for the second quarter and first six months of fiscal 2004 as compared to the results for the same periods in fiscal 2003: Increase (Decrease) Percent vs. 2003 Results: ---------------------------------------------
Second Quarter Six Months -------------- ---------- Net sales 6.9% (1.8)% Gross profit 4.1% (2.1)% Selling and administrative expenses 1.3% (2.8)% Operating income 11.4% (0.2)% Income before income taxes 8.1% (1.8)% Net income 6.1% (3.3)%
Operating Ratios as a Percent of Net Sales: -------------------------------------------
Second Quarter Six Months -------------- ------------------- 2004 2003 2004 2003 ------ ------ -------- -------- Gross profit 38.5% 39.5% 38.7% 38.8% Selling and administrative expenses 27.0% 28.5% 28.5% 28.8% Operating income 11.5% 11.0% 10.2% 10.0% Income before income taxes 11.7% 11.5% 10.4% 10.4% Net income 7.2% 7.3% 6.4% 6.5%
PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Second Quarter 2004 Compared to Second Quarter 2003 --------------------------------------------------- Net Sales --------- The second 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 $20.5 $19.2 6.8% Stride Rite Children's Group - Retail 43.2 39.3 9.8% --------- --------- ----------- Stride Rite Children's Group 63.7 58.5 8.8% Keds 48.7 50.2 (2.9)% Tommy Hilfiger Footwear 28.7 24.1 18.8% Sperry Top-Sider 19.7 18.5 6.4% Stride Rite International 7.0 5.6 25.8% Elimination of intercompany sales (2.8) (2.6) n/a --------- --------- ----------- Total net sales $165.0 $154.3 6.9% ========= ========= ===========
During the second quarter of fiscal 2004, consolidated net sales increased $10.7 million to $165.0 million, or 6.9% above the sales level achieved in the second quarter of fiscal 2003. Wholesale net revenues decreased 5.6% for the second quarter of 2004, while overall retail sales increased $3.9 million or 9.8% when compared to the same period in the prior year. Unit shipments of current line merchandise for the wholesale brands during the second quarter were 6.1% greater than the comparable period in 2003. The Company's average first quality wholesale selling price declined 3.2% from the second quarter of 2003. In addition, closeout sales increased 3.9% during the second quarter of fiscal 2004 as compared to the prior year. Royalty revenues at $1.8 million were 13.4% higher in the 2004 second quarter versus the same quarter last year. Net sales of the Stride Rite Children's Group increased 8.8% for the second quarter of fiscal 2004, compared to the same period of fiscal 2003. Sales of the Children's Group to independent retailers increased 6.8% during the second quarter of 2004 as compared to the same quarter last year. This increase was primarily attributable to higher sales of Tommy Hilfiger Children's products, a strong performance by sandals and increased closeout sales. These increases were partially offset by continued weakness in the Munchkin brand as well as a greater number of returns. Adding to the increases from the wholesale side of the division were increased sales of the Children's Group's company-owned retail stores, which were up 9.8% from the same quarter last year. Sales at comparable Children's Group retail stores (stores open for 52 weeks in each fiscal year) increased 7.8% for the second fiscal quarter of 2004. Driving this increase in the comparable stores PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS category was the addition of newer stores which have generally had greater sales increases than our more mature stores. At the end of the second quarter of fiscal 2004, the Stride Rite Children's Group operated 240 stores. This is an increase of 10 stores, or 4% from the end of the same period in the prior year. Current plans call for the opening of approximately 18 retail stores and the closing of 4 underperforming locations during the 2004 fiscal year. During the second quarter of 2004 the Company opened 7 new stores and had no store closings. Keds sales decreased in the second quarter of fiscal 2004 due in part to initial retailer caution in ordering Keds products, based on poor performance at retail in Spring 2003. In addition, the Keds seasonal product lines did not generate the anticipated level of reorders in the quarter. Partially offsetting the disappointing performance of Keds seasonal styles, the Microstetch product line's sales results were strong during the second quarter, continuing a trend that began in the first quarter. The Tommy Hilfiger footwear division recorded stronger sales during the second quarter of fiscal 2004 after the weak sales in fiscal 2004's first quarter. The improvement was primarily the result of a strong beach program in the women's category, along with the introduction of both the "H" Hilfiger line and the Tommy Girl line. These increases were partially offset by weakness in the men's athletic category. Additionally, closeout sales increased in the quarter and good performance on key programs resulted in a decrease in sales allowances. The 6.4% increase in the 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. Sales declines in the women's product category in the second quarter, primarily caused by weaknesses in canvas styles, offset a portion of the gains in men's products. The Stride Rite International division had a 25.8% increase in net sales during the second quarter of fiscal 2004 in comparison to the same period in the prior year. While this sales performance was solid in most product categories, it was largely the result of the continued strong sales of the Tommy Hilfiger footwear product line, particularly in Asia and Latin America. 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 second quarter of fiscal 2004, the Company's gross profit of $63.5 million increased $2.5 million or 4.1% above the amount recorded during 2003's second quarter. Increased revenues at the company-owned retail stores was a significant contributor to the improvement in gross profit. The gross profit rate for fiscal 2004's second quarter decreased one percentage point to 38.5% as compared to the 39.5% rate achieved in the prior year's second quarter. The reduction in gross profit percentage was primarily attributable to lower in-line product gross profit margins, related to higher freight costs, and greater closeout and inventory obsolescence costs. These reductions were partially offset by the higher relative percentage of retail sales and decreased returns and allowances. Operating Costs --------------- During the second quarter of fiscal 2004, selling and administrative expenses were $44.6 million, an increase of $0.6 million or 1.3% as compared to the second quarter of fiscal 2003. As a percent of sales, operating costs were 27.0% in the second quarter of fiscal 2004 compared to 28.5% in the second quarter of fiscal 2003. This decrease in operating costs as a percentage of net sales resulted from the Company's expense containment being leveraged by the increase in net sales for the 2004 second quarter. During the second quarter of fiscal 2004, advertising costs were 5.3% of net sales versus 5.6% in fiscal 2003. The increase in operating costs was primarily attributable to higher expenses in Children's Group retail stores, chiefly associated with the increase in the number of company-owned retail stores and an increase in costs related to distribution. Other Income and Taxes ---------------------- Other income (expense) increased pre-tax income by $0.3 million in the second quarter of fiscal 2004 and by $0.8 million in the second quarter of 2003. Investment income decreased $0.4 million in the second fiscal quarter of 2004 as compared to the same quarter last year. Investment income related to the Company's cash equivalents increased $0.3 million in the first fiscal quarter of 2004, due to greater average investment balances. Offsetting this increase was the $0.7 million that was received in the second quarter of 2003 related to Stride Rite's sale of its interest in a joint venture footwear manufacturing facility. Interest expense was slightly lower in the second quarter of fiscal 2004 as compared to the second quarter of fiscal 2003. No short-term borrowings were made during the second quarters of either fiscal year 2004 or 2003. 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 $0.8 million in the second quarter of fiscal 2004 as compared to the similar period in fiscal 2003. This increase was primarily due to the higher pre-tax income amount, combining with a higher effective income tax rate. Our effective tax rate was 38.1% in the second quarter of fiscal 2004 as compared to 37.0% in the second quarter of fiscal 2003. The higher tax rate in the second quarter of fiscal 2004 reflects fewer tax saving items in 2004 than in the prior year. Net Income ---------- Net income for the second quarter of fiscal 2004 was $11.9 million, an increase of $0.7 million, or 6.1% as compared to the same period in the prior year. Higher net sales and the resulting increase in gross profit dollars were somewhat offset by the increases in operating costs and the higher effective income tax rate. The Company's return on net sales of 7.2% in the second fiscal quarter of 2004 declined versus the 7.3% return on sales recorded for the second fiscal quarter of 2003. PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS First Six Months of 2004 Compared to the First Six Months of 2003 ----------------------------------------------------------------- Net Sales --------- The first six months breakdown of net sales is as follows:
Percent Change 2004 vs. 2004 2003 2003 ---- ---- ---------- (In millions, except percentages) Stride Rite Children's Group - Wholesale $45.6 $47.9 (4.8)% Stride Rite Children' Group - Retail 72.2 64.9 11.3% ------- ------- ------- Stride Rite Children's Group 117.8 112.8 4.5% Keds 91.1 105.8 (13.8)% Tommy Hilfiger Footwear 48.9 48.9 - Sperry Top-Sider 34.4 32.9 4.8% Stride Rite International 13.8 11.8 16.6% Elimination of intercompany sales (4.9) (5.6) n/a ------ ------ ------ Total net sales $301.1 $306.6 (1.8)% ====== ====== =======
During the first six months of fiscal 2004, consolidated net sales decreased $5.5 million to $301.1 million, or 1.8% below the sales level recorded in the first six months of fiscal 2003. Wholesale net revenues decreased 5.4% for the first half of 2004, while overall retail sales increased $7.6 million or 11.4% when compared to the same period last year. Unit shipments of current line merchandise for the wholesale brands during the first half of 2004 were 1.0% lower than last year's first half. The Company's average first quality wholesale selling price declined 4.1% from the first six months of 2003. In addition, closeout sales decreased 1.9% in the first six months of fiscal 2004 as compared to the prior year. Royalty revenues at $3.6 million were 7.8% higher in the first half of 2004 than in the same period in the prior year. Net sales of the Stride Rite Children's Group increased 4.5% for the first half of fiscal 2004, compared to the same period of fiscal 2003. Sales to independent retailers decreased 4.8% during the first six months of 2004 versus the same period last year. The decrease in sales to independent retailers was principally the result of the Footstar bankruptcy, continued weakness with the Munchkin product line, and cautious buying activity in the department store channel. Partially offsetting these declines were increases in closeout sales and promotional products for certain accounts. As compared to the first half of last year the Children's Group has seen a shift in sales of the Tommy Hilfiger Kids products from the department store channel to the mid-tier channel. Offsetting the decrease in the wholesale side of the division, were the increased sales of the Children's Group's company-owned retail stores, which were up 11.3% during the first six months of fiscal 2004 versus the same period last year. Sales at comparable Children's Group retail stores (stores open for 52 weeks in each fiscal year) increased 9.4% for the first half of fiscal 2004. A major reason for the 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 store sales results was the addition of a number of newer stores, which have generally recorded better sales performance than many of our more mature stores. Keds sales decreased in the first half of fiscal 2004 due in part to continued retailer caution in ordering Keds products, based on poor performance at retail in Spring 2003. In addition, the Keds seasonal product lines did not generate the anticipated level of reorders. Sales of Grasshoppers, which are included in the Keds results, were also down as compared to the same period last year, due principally to their loss of shelf space at certain major department store customers. Partially offsetting the disappointing performance of their seasonal styles, Keds experienced strong sales with its newly introduced Microstretch(TM) products. The Tommy Hilfiger footwear unit's sales performance during the first six months of fiscal 2004 was flat with the same period in the prior year. Compared with last year's first half, there was an overall decrease in the men's business. Offsetting this decrease were increased sales of ProKeds products in addition to strong performance by the women's beach programs. During the first half of fiscal 2004 both the "H" Hilfiger and the Tommy Girl lines were introduced. Sales of Sperry Top-Sider products increased for the first six months of fiscal 2004. This increase was primarily the result of strong performance in the men's product lines, particularly in the performance category. This strong showing was partially offset by weaknesses in the women's line, principally in the canvas category. Sales were also adversely affected by the acquisition by West Marine of Boat U.S. retail operations, two important accounts for the division. The Stride Rite International division had a 16.6% increase in net sales for the first half of 2004, versus the same period in the prior year. The addition of new distributors of the Company's brands in Asia and increased sales of Tommy Hilfiger and Sperry Top-Sider products in Latin America were the primary reasons for the increase. Gross Profit ------------ During the first half of fiscal 2004, the Company's gross profit of $116.5 million decreased $2.5 million or 2.1% below the amount recorded during the same period last year. The gross profit rate for the first six months of fiscal 2004 decreased slightly as compared to the same period last year, 38.7% to 38.8%. The decrease in first half gross profit was primarily the result of the lower level of wholesale sales during the period. The additional gross profit that was generated by the higher levels of retail sales was insufficient to offset the impact from the decline in gross profit resulting from the lower wholesale sales. The decline in gross profit percentage versus last year was due primarily to increased freight costs and a higher level of returns which was offset somewhat by the gross profit percentage impact of the greater percentage of retail sales. PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Results ----------------- Operating expenses for the first six months of fiscal 2004 were $85.9 million, a decrease of $2.5 million or 2.8% as compared to the same period in fiscal 2003. As a percent to sales, operating costs were 28.5% in the first half of fiscal 2004 versus 28.8% in the first half of last year. During the first six months of fiscal 2004, advertising expenses as a percent of net sales were 5.0% versus 5.4% on the same period last year. Advertising spending decreased at most of the Company's brands and reflects a change in the timing of our advertising programs from last year. In addition to the lower advertising costs, administrative expenses also decreased. Somewhat offsetting these decreases were higher retail store payroll expenses, due to the increased number of stores and also higher distribution costs. Other Income and Taxes ---------------------- Other income (expense) increased pre-tax income by $0.7 million in the first six months of fiscal 2004 and by $1.3 million in the first six months of fiscal 2003. Investment income in the first half of fiscal 2004 was $0.6 million below the same period of fiscal 2003. Comparisons of investment income to last year are negatively impacted by the receipt in fiscal year 2003 of $0.7 million related to Stride Rite's sale of its interest in a joint venture footwear manufacturing facility. Interest expense in the first half of fiscal 2004 was slightly below the level recorded last year. There were no short-term borrowings during the first half of either fiscal 2004 and 2003. The provision for income taxes increased $0.1 million in the first half of fiscal 2004 as compared to the similar period in fiscal 2003. This slight increase was primarily due to the higher effective income tax rate offsetting the lower pre-tax income amount. During the first half of fiscal 2004, the effective tax rate was 38.1% as compared to the 37.2% rate during last year's first half. The higher tax rate during the first six months of fiscal 2004 is the result of fewer tax saving items this year as compared to fiscal 2003. Net Income ---------- Net income for the first six months of fiscal 2004 was $19.4 million, a decrease of $0.7 million, or 3.3% below that of the same period in the prior year. Decreased net sales and the resulting reduction in gross profit dollars were offset by lower operating expenses. Lower other income (expense) combined with our higher effective income tax rate lead to the reduction in net income during the first half of fiscal 2004 versus the same period last year. The Company's return on net sales of 6.4% in the first fiscal half of 2004 declined slightly as compared to the 6.5% return on sales realized in the first half 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 Liquidity and Capital Resources ------------------------------- At the end of the second fiscal quarter of 2004, our balance sheet reflected a current ratio of 4.5 to 1 with no debt. Our cash and cash equivalents totaled $79.6 million at May 28, 2004, a decrease of $1.9 million from the total cash and cash equivalents of $81.5 million at the end of the second 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 May 28, 2004 or May 30, 2003. The Company's seasonal cash flow patterns typically provide cash from operations during the second quarter of the fiscal year. During the first six months of fiscal 2004, the Company generated $3.0 million of cash from operations. This positive cash flow was below the $15.3 million cash flow generated during the first six months of fiscal 2003. The primary reasons for the lower level of cash flow were greater increases in accounts receivable balances and a lower reduction of inventory levels versus the first half of fiscal 2003. Inventory levels at the end of the second quarter of fiscal 2004 increased $4.1 million, or 5.3% from the levels recorded at the end of the prior year's second quarter. Accounts receivable at May 28, 2004 were $9.1 million or 13.0% higher than the amount at the end of last year's second quarter. This increase is primarily attributable to a greater level of sales that occurred in the last month of the second quarter as compared to fiscal 2003. Days sales outstanding, which is a measure of the length of the collection period of accounts receivable, was 41 days and 40 days at the end of the second fiscal quarters of both 2004 and 2003, respectively. Accounts payable at the end of the second quarter of fiscal 2004 increased $8.5 million from the level recorded at the end of the prior year's second quarter. This difference was primarily the result of an increase in inventory in-transit at the end of the second quarter of fiscal 2004. During the first fiscal quarter of 2004, the Company contributed $1.0 million to its defined benefit pension plan. The Company does not intend to make any additional contributions to its defined benefit pension plan this year. Other current assets at May 28, 2004 were $10.7 million or $5.5 million higher than the amount at the end of last year's second quarter. This difference was primarily caused by an increase in prepaid pension expense, largely due to the $8 million of pension contributions that have occurred since the end of last year's second quarter. Additions to property and equipment totaled $3.7 million in the first half of 2004, which was greater than the $3.5 million in the first half of 2003. During the first half of fiscal 2004, as compared to the same period last year, the Company increased its spending on information technology and e-commerce and had lower spending on new retail stores, store renovations, and at its distribution centers. 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. PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS During the first half of fiscal 2004 we returned $26.4 million to shareholders through share repurchases and cash dividends. We spent $21.3 million in the second quarter to repurchase 2,008,900 common shares under our share repurchase program. As of May 28, 2004, 1.4 million shares were remaining on our share repurchase authorization. On June 24, 2004 the Company's Board of Directors increased the authorization under our on-going share repurchase program by 5 million shares. This action had the effect of increasing the shares remaining on our share repurchase authorization to 6.4 million shares. We expect to continue to purchase shares opportunistically through the remainder of the fiscal year. At the end of the second quarter of fiscal 2004, there were no borrowings outstanding under the Company's $75 million revolving credit facility. This is consistent with the second quarter of fiscal 2003. We did not utilize any available credit under the revolving credit line during the first six months of fiscal 2004. Borrowings were not required during this time primarily because we entered the year with no outstanding debt and a significant cash and cash equivalents balance. As of May 28, 2004, letters of credit totaling $56.7 million were outstanding for the purchase of inventories. All letters of credit generally expire within one year. 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 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES Our repurchases of equity securities for the second quarter of fiscal 2004 were as follows:
Total Number Of Maximum Shares Number Purchased Of Shares As Part That May Total Average Of Yet Be Number Price Publicly Purchased Of Paid Announced Under The Shares Per Plans Or Plans Or Period Purchased Share Programs Programs -------------------------------------------------------------------------------- February 28,2004 - March 26, 2004 - - - 3,403,600 March 27, 2004 - April 30, 2004 1,386,000 $10.62 1,386,000 2,017,600 May 1, 2004 - May 28, 2004 622,900 $10.60 622,900 1,394,700 --------- ------ --------- --------- Total 2,008,900 $10.62 2,008,900 1,394,700 ========= ====== ========= =========
In September 2002, the Board of Directors authorized a stock repurchase program allowing the repurchase of up to five million shares of our outstanding common stock. 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 (continued) ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of the Company's shareholders was held on April 15, 2004. The two directors nominated by management were elected by the vote set forth below: Votes ------------------------------ Name of Director For Withheld -------------------------- ------------------------------ Christine M. Cournoyer 33,503,367 3,246,621 James F. Orr III 33,587,123 3,162,865 The Company's other directors, whose term of office continues after the 2004 stockholders' meeting, are as follows: David M. Chamberlain Shira D. Goodman Frank R. Mori Myles J. Slosberg Bruce Van Saun The Company's shareholders also ratified the Company's selection of PricewaterhouseCoopers LLP as auditors of the Company for the 2004 fiscal year by the vote set forth below: Votes ----------------------------------------------- For Against Abstentions --- ------- ---------- 36,255,575 463,367 31,046 The shareholders voted in favor of a proposal requesting that the directors consider and act upon to approve an amendment to The Stride Rite Corporation 2001 Stock Option and Incentive Plan to increase the number of shares of common stock authorized for issuance from 3,000,000 to 6,000,000 by the vote set forth below: Votes -------------------------------------------------------------- Broker For Against Abstentions Non-Vote --- ------- ---------- -------- 21,107,951 7,961,950 2,019,247 5,660,840 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 -------------- ----------- 31.1 Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e), 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-15(e) and 15d-15(e), 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 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. On June 22, 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 six months ended May 28, 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: July 8, 2004 By: /s/ Frank A. Caruso -------------------------- Frank A. Caruso Chief Financial Officer