Collective Brands reports better earnings in Q2

04 Sep '08

5 min read

The second quarter 2008 income tax benefit was $2.8 million. The tax benefit was primarily due to a reduction in the 2008 effective tax rate driven by tax deductions for litigation items in the U.S., a relatively high tax rate jurisdiction. Excluding the impact of litigation items and discrete events associated with the resolution of outstanding tax audits, the Company anticipates an effective income tax rate of approximately 21% for 2008. Tax efficient business initiatives, including integration opportunities, are expected to have a long-term favorable impact to cash flow.

Collective Brands ended second quarter 2008 with $451.4 million in cash and cash equivalents compared to $327.4 million at the end of second quarter 2007.

Collective Brands inventory was $483.3 million at the end of second quarter 2008, up $113.3 million compared to the same period last year due to the addition of $136.9 million of Stride Rite inventory. Average inventory in Payless stores was down 2.4% versus second quarter 2007. Payless aged inventory was also lower than last year reflecting a cleaner inventory position.

Total debt at the end of the second quarter of 2008 was $1.1 billion. The increase in debt of $932.5 million over the comparable period last year is primarily due to the bank term loan related to the acquisition of Stride Rite and the use of the revolving credit facility. Net debt at the end of the second quarter of 2008 was $682.3 million, down $6.8 million compared to the end of the first quarter of 2008.

Year-to-date capital expenditures for 2008 totaled $78.2 million compared to $93.0 million in the prior year period. The decline was primarily due to investments last year in store technology and supply chain. During the second quarter 2008, Collective Brands added 17 new stores (13 Payless and 4 Stride Rite), closed 29 stores (28 Payless and 1 Stride Rite), and relocated 12 stores (10 Payless and 2 Stride Rite).

Outlook for Collective Brands
• Collective Brands anticipates an operating profit growth rate in the mid-teens over time. This long-term goal is predicated on low-single-digit comparable store sales growth. This year, as previously disclosed, the Company anticipates that comparable store sales growth may be below its long-term goal. Collective Brands intends to mitigate the anticipated near-term sales environment with prudent inventory and expense control.

• Excluding the impact of purchase accounting, the Stride Rite acquisition is expected to be accretive to earnings in 2008 as Stride Rite's operating profit contribution including synergies is expected to exceed the incremental interest expense. Due to the impact of purchase accounting, the Stride Rite acquisition is not expected to be earnings per share accretive in 2008 on a GAAP basis.

• Capital expenditures in 2008 are expected to total approximately $130 million.

• The 2008 effective tax rate is expected to be approximately 21% excluding litigation items and discrete events associated with the resolution of outstanding tax audits.

• Depreciation and amortization in 2008 is expected to total approximately $145 million, due to greater investments in supply chain and stores in recent years as well as the 2007 acquisition of Stride Rite.

Collective Brands Inc

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