<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended November 2, 1996
Commission File Number 1-11633
PAYLESS SHOESOURCE, INC.
(Exact name of registrant as specified in its charter)
Missouri 48-0674097
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3231 Southeast Sixth Street, Topeka, Kansas 66607-2207
(Address of principal executive offices) (Zip Code)
(913) 233-5171
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past
90 days. YES X NO
--------- ---------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value
39,917,143 shares as of November 29, 1996
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Millions)
Nov. 2, Oct. 28, Feb. 3,
ASSETS 1996 1995 1996
-------- --------- ---------
Current Assets:
Cash and cash equivalents $ 228.5 $ 4.6 $ 4.6
Accounts receivable, net 4.1 4.7 4.4
Merchandise inventories 330.9 419.4 398.0
Other current assets 35.5 20.3 43.9
--------- --------- ---------
Total Current Assets 599.0 449.0 450.9
Property and Equipment, at cost 857.6 899.9 868.5
Accumulated Depreciation (348.3) (324.8) (308.5)
--------- --------- ---------
Net Property and Equipment 509.3 575.1 560.0
Other Assets 3.2 3.4 3.4
--------- --------- ---------
Total Assets $ 1,111.5 $ 1,027.5 $ 1,014.3
========= ========= =========
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Current maturities of
capital lease obligations $ 1.3 $ 1.2 $ 1.2
Accounts payable 84.1 87.2 65.0
Accrued expenses 151.2 80.5 152.7
--------- --------- ---------
Total Current Liabilities 236.6 168.9 218.9
Capital Lease Obligations 9.1 10.5 10.3
Deferred Income Taxes 9.4 9.2 8.9
Other Liabilities 23.3 22.4 23.3
Shareowners' Equity 833.1 816.5 752.9
--------- --------- ---------
Total Liabilities and
Shareowners' Equity $ 1,111.5 $ 1,027.5 $ 1,014.3
========= ========= =========
The accompanying notes to condensed consolidated financial
statements are an integral part of this balance sheet.
2
<PAGE>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
(Millions, except per share)
13 Weeks Ended 39 Weeks Ended
-------------------- ---------------------
Nov. 2, Oct. 28, Nov. 2, Oct. 28,
1996 1995 1996 1995
-------- --------- --------- ---------
Net Retail Sales: $ 576.8 $ 586.4 $ 1,810.8 $ 1,778.7
Cost of sales $ 407.5 $ 421.9 $ 1,276.4 $ 1,271.2
Selling, general and
administrative
expenses 122.6 121.8 384.0 363.7
Interest (income)
expense, net (2.2) 0.2 (3.6) 0.7
-------- -------- --------- ---------
Earnings before income
taxes 48.9 42.5 154.0 143.1
Provision for income
taxes 19.5 16.8 61.4 56.7
-------- -------- --------- ---------
Net Earnings $ 29.4 $ 25.7 $ 92.6 $ 86.4
======== ======== ========= =========
Earnings per Share $ .74 $ .64 $ 2.30 $ 2.14
======== ======== ========= =========
Average shares 40.0 40.4 40.3 40.4
outstanding ======== ======== ========= =========
The accompanying notes to condensed consolidated financial
statements are an integral part of this statement.
3
<PAGE>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Millions) 39 Weeks Ended
-----------------------
Nov. 2, Oct. 28,
1996 1995
--------- ---------
Operating Activities:
Net earnings $ 92.6 $ 86.4
Depreciation and amortization 68.0 70.4
Change in working capital (excluding
cash, cash equivalents and 94.2 (39.1)
short-term debt) -------- --------
Total Operating Activities 254.8 117.7
-------- --------
Investing Activities:
Net additions to property and equipment (17.4) (54.9)
-------- --------
Total Investing Activities (17.4) (54.9)
-------- --------
Financing Activities:
Net repayments of capital lease
obligations (1.2) (1.0)
Net transactions with May 0 (63.8)
Repurchases of common stock (12.3) 0
--------- --------
Total Financing Activities (13.5) (64.8)
-------- --------
Increase in Cash
and Cash Equivalents $ 223.9 $ (2.0)
Cash and Cash Equivalents,
Beginning of Year 4.6 6.6
Cash and Cash Equivalents, -------- --------
End of Period 228.5 4.6
======== ========
The accompanying notes to condensed consolidated financial
statements are an integral part of this statement.
4
<PAGE>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Interim Results. These unaudited condensed consolidated
financial statements of Payless ShoeSource, Inc. (the "Company")
have been prepared in the ordinary course of business for the
purpose of presenting information with respect to the Company's
quarter ending November 2, 1996. The Company believes that all
adjustments (none of which were other than normal recurring
accruals) necessary for a fair presentation of the Company's
financial position and operating results have been made. However,
certain items are included in these statements based on estimates
for the entire year. The condensed consolidated financial
statements should be read in conjunction with the financial
statements of the Company included in its Form 10 Registration
Statement that became effective on April 15, 1996 (the "Form 10"),
and the MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND LIQUIDITY AND CAPITAL RESOURCES (pages 21-25) in the Form 10.
The results of operations for the 13 weeks and 39 weeks ended
November 2, 1996, are not necessarily indicative of results for the
entire fiscal year ended February 1, 1997.
Note 2. Inventories. Merchandise inventories are stated on the FIFO
(First-In-First-Out) cost basis.
Note 3. Spin-Off. In January 1996, The May Department Stores Company
announced its intention to spin-off the Company. The spin-off was
completed effective May 4, 1996, as a tax-free distribution to The May
Department Stores Company shareowners. The Company's financial
statements presented herein reflect operations on a stand-alone basis
independent of The May Department Stores Company.
As discussed in the Form 10, the Company is incurring special retention
costs associated with the spin-off (spin-off retention charge)
establishing Payless as an independent company. Those costs totaled
$2.2 and $10.5 million pre-tax for the third quarter and first nine
months of 1996,respectively, with an additional $2.2 million pre-tax
estimated to be incurred in the remainder of the current fiscal year.
Note 4. Store Closings. During the first two quarters, the Company
closed 362 stores and during the third quarter, the Company closed an
additional 51 stores, all as part of its previously announced plan to
close underperforming stores. The projected cost of the store-closing
program was recorded as a charge to earnings in the fourth quarter of
1995 and is included in accrued expense.
Note 5. Earnings Per Share. The Company's 1995 outstanding shares were
calculated based on the number of Company shares issued and outstanding
as of May 4, 1996, the date of the spin-off from The May Department
Stores Company.
5
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
A summary of key financial information for the periods indicated is
as follows:
Nov. 2, Oct. 28, Feb. 3,
1996 1995 1996
------- -------- -------
Current Ratio 2.5 2.7 2.1
Debt-Capitalization Ratio* 1.2% 1.4% 1.5%
Fixed Charge Coverage** 2.2x 3.1x 2.0x
* Debt-to-capitalization has been computed by dividing total
debt, which includes current and long-term capital lease
obligations, by capitalization, which includes current and
long-term capital lease obligations, non-current deferred
income taxes and equity. The debt-to-capitalization ratio,
including the present value of future minimum rental payments
under operating leases as debt and capitalization would be
49.9%, 52.5% and 54.1% for the periods referred to above.
** Fixed charge coverage, which is presented for the trailing 52
weeks in each period ended above, is defined as earnings before
income taxes, gross interest expense, and the interest component
of rent expense, divided by gross interest expense and the
interest component of rent expense. All costs and expenses of
the Company relating to special retention costs and the special
non-recurring charge associated with the spin-off are included in
the above calculation. Excluding these costs, the fixed charge
coverage would be 3.1x, 3.1x and 2.8x for the periods referred to
above.
Company's fixed charge coverage ratio for the 52 weeks ended
November 2, 1996 decreased as compared with the 52 week period ended
October 28, 1995, due primarily to the loss before taxes experienced
in the fourth quarter fiscal 1995 for the one-time special and
non-recurring charges.
The Company has in place a $200 million revolving credit facility
with a bank syndication group on which no borrowings were outstanding
at the end of the quarter.
Capital expenditures during the first nine months in 1996 totaled
$48.8 million with an additional $43.9 million estimated to be
expended in fiscal year 1996. The Company anticipates that cash
flow from operations and the credit facility will be sufficient to
finance projected capital expenditures.
The increase in cash of $223.9 million resulted from earnings before
depreciation and amortization of $160.6 and improved working capital,
primarily attributable to lower inventories. Lower inventory levels
were the result of the closing of unprofitable stores and the
associated reduction in inventory. The Company also has taken action
to increase inventory turnover as well as reduce the amount of aged
inventory in the stores.
6
<PAGE>
Results of Operations
Net retail sales represent the sales of stores operating during the
period. Sales percent increases are as follows:
Third Quarter First Nine Months
------------------- -----------------------
1996 1995 1996 1995
------- ------- ------- -------
Total (1.6%) 8.6% 1.8% 11.1%
Store-for-Store 1.5% (4.7%) 3.9% (3.6%)
Store-for-store sales represent sales of those stores open during
comparable periods.
The Company believes that it continues to benefit from consolidation
in the footwear industry and the resulting closure of competitors' stores.
The following table presents the components of costs and expenses,
as a percent of revenues, for the third quarter and first nine
months of 1996 and 1995.
First
Third Quarter Nine Months
------------- -------------
1996 1995 1996 1995
------ ----- ------ -----
Cost of sales 70.7% 71.9% 70.5% 71.6%
Selling, general and
administrative expenses 21.2 20.8 21.2 20.4
Interest (income)/expense, net (.4) .0 (.2) .0
----- ----- ----- -----
Earnings before income taxes 8.5% 7.3% 8.5% 8.0%
===== ===== ===== =====
Effective income tax rate 39.9% 39.6% 39.9% 39.6%
===== ===== ===== =====
Net Earnings 5.1% 4.4% 5.1% 4.9%
===== ===== ===== =====
Cost of sales was $407.5 million in the 1996 third quarter, down 3.4%
from $421.9 million in the 1995 third quarter. For the first nine
months of 1996, cost of sales was $1,276 million, a 0.4% increase
from $1,271 million in the 1995 period. Sales for the third quarter
1996 decreased 1.6% from 1995 levels while sales for the first nine
months of 1996 were up 1.8% over 1995. For the third quarter and first
nine months, cost of sales, as a percent of revenues, decreased 1.2% and
1.1%, respectively. The higher gross margins achieved were primarily
driven by improved markdown performance and a reduction in occupancy
expense rates due to the closure of underperforming stores.
7
<PAGE>
Selling, general and administrative expenses were $122.6 million in
the 1996 third quarter, up 0.6% from $121.8 million in the 1995 third
quarter. For the first nine months of 1996, selling, general and
administrative expenses were $384.0 million compared with $363.7 million
in the 1995 period, a 5.6% increase. The increases are related to a $2.2
and $10.5 million retention charge associated with the spin-off for the
third quarter and first nine months of 1996, respectively, and higher sales
volume. Selling, general and administrative expenses, as a percent of
revenues, increased 0.4% and 0.8% for the third quarter and first nine
months of 1996, respectively, as compared with 1995. The increase was
the result of three major circumstances. First, there were costs incurred
in 1996 related to the Company's executive retention program. Second, there
were added costs associated with being an independent company. Third, costs
related to the Company's performance-based compensation program were higher
as a result of the strong results in the second and third quarters of 1996.
Excluding the spin-off retention charge (as discussed in Note 3), selling,
general and administrative expenses, as a percent of revenues, increased
0.2% and 0.2% for the third quarter and first nine months of 1996,
respectively.
At the end of the third quarter, the Company operated 4,264 stores in 50
states, Puerto Rico and the U.S. Virgin Islands. The following table
presents the change in store count for the third quarter and first nine
months of 1996 and 1995.
First
Third Quarter Nine Months
------------- ------------
1996 1995 1996 1995
----- ----- ----- -----
Beginning store count 4,280 4,586 4,549 4,435
Stores opened 35 40 128 265
Stores closed (51) (44) (413) (118)
----- ----- ----- -----
Ending store count 4,264 4,582 4,264 4,582
===== ===== ===== =====
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, future store
openings, possible strategic alternatives and similar matters. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward looking statements. In order to comply with the terms of the
safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect
the operations, performance, development and results of the Company's
business include, but are not limited to the following: Changes in
consumer spending patterns, consumer preferences and overall economic
conditions, the impact of competition and pricing, changes in weather
patterns, the financial condition of the suppliers and manufacturers
from whom the Company sources its merchandise, changes in existing or
potential duties, tariffs or quotas, availability of suitable store
locations and appropriate terms, and ability to hire and train associates.
8
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which registrant or
any of its subsidiaries is a party or of which any of their property
is the subject.
Item 2 - Changes in Securities None.
Item 3 - Defaults Upon Senior Securities None.
Item 4 - Submission of Matters to a Vote of Security Holders None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Restated Articles of Incorporation of the Company (1)
3.2 Amended and Restated Bylaws of the Company (2)
*11 Computation of Net Earnings Per Share
*27 Financial Data Schedule
* Filed herewith
(1) Incorporated by reference from the Company's 10-Q (File
No 1-11633) for the Quarter ended May 4, 1996 (Exhibit
3.1)
(2) Incorporated by reference from the Company's 10-Q (File
No 1-11633) for the Quarter ended August 3, 1996
(Exhibit 3.2)
(b) Reports on Form 8-K
No reports have been filed on Form 8-K during the quarter
ended November 2, 1996.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PAYLESS SHOESOURCE, INC.
Date: 12/10/96 /s/ Steven J. Douglass
-------------- ----------------------------
Steven J. Douglass
Chairman and
Chief Executive Officer
Date: 12/10/96 /s/ Ullrich E. Porzig
-------------- ----------------------------
Ullrich E. Porzig
Senior Vice President and
Chief Financial Officer
10
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
11 Computation of Net Earnings Per Share
27 Financial Data Schedule
<PAGE>
<PAGE>
Exhibit 11
PAYLESS SHOESOURCE, INC.
COMPUTATION OF NET EARNINGS PER SHARE
13 Weeks Ended 39 Weeks Ended
------------------ ------------------
(Thousands, except per share) Nov. 2 Oct. 28 Nov. 2 Oct. 28
1996 1995 1996 1995
-------- -------- -------- --------
Net earnings $ 29,405 $ 25,688 $ 92,573 $ 86,382
Common shares outstanding 40,006 40,365 40,311 40,365
-------- -------- -------- --------
Net earnings per share $ .74 $ .64 $ 2.30 $ 2.14
======== ======== ======== ========
Primary Computation:
Net earnings $ 29,405 $ 25,688 $ 92,573 $ 86,382
Common shares outstanding 40,006 40,365 40,311 40,365
Net effect of dilutive stock
options based on the treasury
stock method 63 0 101 0
-------- -------- -------- --------
Outstanding shares for primary
earnings per share 40,069 40,365 40,412 40,365
======== ======== ======== ========
Primary earnings per share $ .73 $ .64 $ 2.29 $ 2.14
======== ======== ======== ========
Fully Diluted Computation:
Net earnings $ 29,405 $ 25,688 $ 92,573 $ 86,382
Common shares outstanding 40,006 40,365 40,311 40,365
Net effect of dilutive stock
options based on the treasury
stock method 97 0 101 0
-------- -------- -------- --------
Outstanding shares for fully
diluted earnings per share 40,103 40,365 40,412 40,365
======== ======== ======== ========
Fully Diluted earnings per share $ .73 $ .64 $ 2.29 $ 2.14
======== ======== ======== ========
Note: The Company's 1995 outstanding shares was calculated on the number
of Company shares issued and outstanding as of May 4, 1996, the date of the
spin-off from The May Department Stores Company.
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27 -- THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM PAYLESS SHOESOURCE, INC. CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE 39 WEEKS ENDED NOV 2, 1996, AND CONDENSED CONSOLIDATED BALANCE SHEET
AS OF NOV 2, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001008802
<NAME> PAYLESS SHOESOURCE,INC.
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-04-1996
<PERIOD-END> NOV-02-1996
<CASH> 228,500<F1>
<SECURITIES> 0<F2>
<RECEIVABLES> 4,100<F3>
<ALLOWANCES> 0<F3>
<INVENTORY> 330,900
<CURRENT-ASSETS> 599,000
<PP&E> 857,600
<DEPRECIATION> 348,300
<TOTAL-ASSETS> 1,111,500
<CURRENT-LIABILITIES> 236,600
<BONDS> 9,100<F4>
<COMMON> 400
0
0
<OTHER-SE> 832,700<F5>
<TOTAL-LIABILITY-AND-EQUITY> 1,111,500
<SALES> 1,810,800<F6>
<TOTAL-REVENUES> 1,810,800
<CGS> 1,276,400
<TOTAL-COSTS> 1,276,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,600)
<INCOME-PRETAX> 154,000
<INCOME-TAX> 61,400
<INCOME-CONTINUING> 92,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 96,600
<EPS-PRIMARY> 2.30<F7>
<EPS-DILUTED> 2.29<F7>
<FN>
<F1>Includes cash equivalent securities.
<F2>Any "securities" are shown under "Cash".
<F3>Receivables are net after deduction of allowances.
<F4>Consists of Capital Lease Obligations.
<F5>Reflects Retained Earnings and Additional Paid In Capital.
<F6>Reflects net sales.
<F7>Expressed in dollars.
</FN>
<PAGE>
</TABLE>
