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Original Source: FD (FAIR DISCLOSURE) WIRE
. Ron Cooperman, PAYLESS SHOESOURCE INC, VP Business Planning and
IR . Ullrich Porzig, PAYLESS SHOESOURCE INC, SVP, CFO . Matt Rubel, PAYLESS SHOESOURCE INC, CEO . David Mann, Johnson Rice, Analyst
. Margaret Mager, Goldman Sachs, Analyst . Chris Svezia, Susquehanna Financial Group, Analyst . Robert Samuels, JPMorgan, Analyst . Ronald Bookbinder, Sterne, Agee, Analyst . Jon Braatz, Kansas City Capital, Analyst . Sam Poser, Mosaic Research, Analyst . Adam Comora, EnTrust Capital, Analyst . Jeff Gates, Gates Capital Management, Analyst . Michael Christodolou, Inwood Capital, Analyst
PSS reported 2Q06 sales of $706m, an increase of 1.8% from 2Q05 and producing net earnings of 32.5m or $0.48 diluted EPS. 1H06 sales were $1.4b with net earnings of $68.5m and diluted EPS of $1.01. Mgt. sees opportunities for business model to leverage performance and achieve goal of EPS growth in mid teens over time.
A. Key Data From Call 1. 2Q06 sales = $706m 2. 1H06 sales = $1.4b
3. 2Q06 net earnings = $32.5m 4. 1H06 net earnings = $68.5m 5. 2Q06 diluted EPS = $0.48 6. 1H06 diluted EPS = $1.01 7. 2Q06 gross margin = 34.5% 8. 2Q06 ending inventories = $351m 9. 2Q06 common share repurchase = co. repurchased $30m or approx. 1.2m shares of common stock
S1. Overview (U.P.) 1. 2Q06 Results: 1. PSS made progress toward goal of achieving more consistent sales and earnings performance.
2. 2Q06 sales $706m, increase of 1.8% from 2Q05. 3. Same store sales increased 2.2% in 2Q06. 4. Results driven by strong sales in women's category, particularly in women's athletic shoes, women's casuals, girls shoes and men's dress and casual shoes.
1. Weaker categories include women's dress shoes, children's
athletics and accessories. 2. 1H06 Results: 1. 1H06 sales $1.4b, a 0.9% increase over 1H05. 2. 1H06 same store sales increased 1.3%.
3. Margin Detail: 1. Average footwear unit retail increased 12.3% from 2Q05. 2. Unit sales [of] footwear decreased by 8.3% from 2Q05.
3. Gross margin was 34.5% in 2Q06 vs. 33.9% in 2Q05. 4. Merchandise margins improved 1.5% from 2Q05, driven primarily by favorable initial mark on relative to 2Q05, and partially offset by increases in markdowns in the 2Q06. 1. Improvement in merchandise margin also partially offset by increases in occupancy costs compared to 2Q05. 5. Gross margin benefited by 0.3% by gain of insurance recoveries
due to hurricane. 6. 1H06 gross margin was 35.7% vs. 34.5% in 1H05. 4. Other Detail: 1. SG&A were 27.5% in 2Q06 vs. 29% in 2Q05. 1. Decrease driven by $7.9m in management transition costs incurred in 2Q05 or 1.1% of sales in 2005. 2. Also offset by receipt of Visa check Mastermoney, antitrust settlement proceeds of $2.3m or 0.3% of sales partially offset increased advertising expenses during 2Q06. 3. 1H06 SG&A were 28.1% vs. 28.6% in 1H05.
2. Net earnings were $32.5m or $0.48 per diluted share for 2Q06.
1. Compared to net earnings of $19.9m or $0.29 per diluted share in 2Q05. 2. 66% increase in diluted EPS. 3. 1H06 net earnings were $68.5m and diluted EPS was $1.01. 1. Compares with net earnings of $50.1m and diluted EPS of $0.74 in 1H05. 4. 2Q06 and 1H06 results include expenses related to adoption of FAS 123(R), a share based payment effective at beginning of FY06.
1. Incremental impact of FAS 123(R) on net earnings for 2Q06
was approx. $2m pretax or loss of $0.02 per diluted share. 2. 1H06 incremental impact of FAS 123(R) was approx. $4m pretax or loss of $0.04 per diluted share. 3. Currently estimates incremental impact for 2006 will be approx. $8m or loss of $0.08 per diluted share. 5. Total inventories at end of 2Q06 were $351m compared to $362m at end of 2Q05. 1. Inventory per store decreased by 2.2% for 2Q06. 2. Co. believes inventories well positioned with low level of aged merchandise. 5. Latin America and Japan:
1. Co. is committed to refining international business strategy
and is very pleased with growth and operating performance in
Latin America. 1. Built strong platform for growth in Latin America through investments in operations and building brand recognition. 2. In order to focus on additional opportunities for expansion in this region, co. will exit retail operations in Japan, closing its one test location. 1. Exit of operation planned to be substantially completed by end of 3Q06. 2. Total exit costs estimated between $2-3m, with virtually all costs incurred in 3Q06. 3. Results of Japan retail operations for all periods will be reported as discontinued operations beginning 3Q06.
S2. Strategy Overview (M.R.) 1. Summary: 1. Continued making progress implementing strategy. 2. Focused on four key elements:
1. On trend targeted product. 2. Effective brand marketing.
3. Great shopping experience. 4. Efficient operations.
3. 2Q06 marks sixth consecutive quarter achieving positive same
store sales results. 1. Also marks first time in five years PSS reported increase in total sales in a second quarter.
4. Pleased with improved consistency of sales and customers'
response to improved product line and value proposition. 5. 2Q06 continued to make good progress on women's business. 2. On Trend:
1. [Bored] and at leisure trends were in demand from customers
and delivered styles wanted driving strong results in women's
athletics and casual categories. 2. In transition to Fall, will continue to support major trends in casual footwear, dress product and boots. 1. Will further enhance athletic offering to include assortment of performance athletic products. 2. Will be delivering Spalding marathon series, extending democratization of fashion with performance of athletic line of footwear. 3. The AMP, first shoe in Spalding marathon series provides the performance of a $90.00 running shoe at $37.99 for men and $34.99 for women.
3. For Fall, seeing clear direction in market towards emerging
trends in dress shoes. 1. Responding with balanced line of dress shoes and boots featuring material interests and heel treatments consistent with trends. 4. Continue to see positive long term opportunities for growth in the accessory category. 1. Putting together organization to capitalize on opportunity. 2. In Spring, needed to moderate assortments to be more balanced both in styles offered and at the different price ranges. 3. Recently hired new vice president working toward developing and implementing a comprehensive strategy, specifically for accessories. 4. Over time, will be injecting a wider range of accessories into stores with a focus on handbags that will complement the footwear. 3. Improving Impact and Efficiency of Media: 1. Fine tuning free standing insert strategy for Fall. 1. Expanding distribution to more key markets and adjusting insertion timing to match peak sales weeks.
2. Already made improvements to planning and execution to support inventory coverage for key items featured in free standing inserts.
2. Will continue to build relationships with fashion media.
1. In 2Q06 garnered broad coverage from Women's Wear Daily, USA
Today, Footwear News, [L Lucky], Oprah, Glamour and In Style, amongst others. 2. These influential media channels help increase reach and visibility with target customer. 4. Brand Marketing: 1. In June, officially launched new PSS logo. 1. First redesign of logo in 20 years. 2. Incorporates key design elements to leverage rich heritage and communicates new and improved PSS. 1. A brand that is essentially contemporary, fun, friendly, and above all stylish. 2. Logo will amplify new PSS essence and inspire fun fashion
possibilities for the family. 3. New logo first appeared to consumers on PSS shopping bags. 4. Going forward PSS will use new logo on all marketing and communications, including television and print in stores and online at Payless.com. 5. All new stores opening in 2006 will feature new logo on store fronts. 6. Current stores will receive new exterior signage in a phased approach.
2. As PSS continues implementing product and branding components
of strategy, beginning to see meaningful progress …