<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 May 3, 1997
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
39,594,821 shares as of May 31, 1997
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Millions)
May 3, May 4, Feb. 1
ASSETS 1997 1996 1997
- ------ -------- -------- --------
Current Assets:
Cash and cash equivalents $ 201.4 $ 92.3 $ 193.6
Accounts receivable, net 4.0 5.9 4.3
Merchandise inventories 387.1 366.3 354.9
Other current assets 39.1 45.6 39.4
-------- -------- --------
Total Current Assets 631.6 510.1 592.2
Property and Equipment, at cost 851.0 865.1 834.1
Accumulated Depreciation (353.2) (321.5) (331.6)
-------- -------- --------
Net Property and Equipment 497.8 543.6 502.5
Other Assets 3.1 3.3 3.2
-------- -------- --------
Total Assets $1,132.5 $1,057.0 $1,097.9
======== ======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
- -----------------------------------
Current Liabilities:
Current maturities of
capital lease obligations $ 1.4 $ 1.3 $ 1.3
Accounts payable 83.8 68.3 82.9
Accrued expenses 131.6 164.7 119.1
-------- -------- --------
Total Current Liabilities 216.8 234.3 203.3
Capital Lease Obligations 7.2 9.4 8.2
Deferred Income Taxes 7.7 8.9 6.1
Other Liabilities 27.1 23.3 27.3
Shareowners' Equity 873.7 781.1 853.0
-------- -------- --------
Total Liabilities and
Shareowners' Equity $1,132.5 $1,057.0 $1,097.9
======== ======== ========
The accompanying notes to condensed consolidated financial
statements are an integral part of this balance sheet.
2
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PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
(Millions, except per share) 13 Weeks Ended
-----------------------
May 3, May 4,
1997 1996
-------- --------
Net Retail Sales $ 645.1 $ 601.4
Cost of sales $ 447.9 $ 427.2
Selling, general and
administrative expenses 145.1 133.6
Interest (income)
expense, net (1.8) .3
-------- --------
Earnings before
income taxes 53.9 40.3
Provision for income taxes 21.5 16.1
-------- --------
Net Earnings $ 32.4 $ 24.2
======== ========
Earnings per Share $ .81 $ .60
======== ========
Shares Outstanding 39.9 40.4
======== ========
The accompanying notes to condensed consolidated financial
statements are an integral part of this statement.
3
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PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Millions) 13 Weeks Ended
----------------------
May 3, May 4,
1997 1996
Operating Activities: -------- --------
Net earnings $ 32.4 $ 24.2
Depreciation and amortization 22.6 23.3
Change in working capital (excluding
cash, cash equivalents and (16.7) 43.9
short-term debt) -------- --------
Total Operating Activities 38.3 91.4
-------- --------
Investing Activities:
Net additions to property and equipment (17.9) (6.8)
-------- --------
Total Investing Activities (17.9) (6.8)
-------- --------
Financing Activities:
Net repayments of capital lease (0.9) (0.9)
obligations
Issuance (Purchase)
of common stock, net (11.7) 4.0
-------- --------
Total Financing Activities (12.6) 3.1
-------- --------
Increase in Cash
and Cash Equivalents $ 7.8 $ 87.7
Cash and Cash Equivalents,
Beginning of Year 193.6 4.6
-------- --------
Cash and Cash Equivalents,
End of Period 201.4 92.3
======== ========
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 May 3, 1997. 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 1996 Annual Report to
Shareowners (the "Annual Report"), including the MANAGEMENT'S
DISCUSSION AND ANALYSIS (pages 12-15) and NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (pages 19-23) in the Annual Report. The
results of operations for the 13 weeks ended May 3, 1997, are not
necessarily indicative of results for the entire fiscal year ended
January 31, 1998.
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 Annual Report, the Company is incurring special
retention costs associated with the spin-off which established
Payless as an independent company. Those costs totaled $2.2
million pre-tax for the first quarter 1997, with an additional $2.4
million pre-tax estimated to be incurred in the remainder of the
current fiscal year.
Note 4. Parade of Shoes. On January 14, 1997, the Company
announced the acquisition of the Parade of Shoes division
("Parade") from J. Baker, Inc. On March 10, 1997, the Company
acquired for approximately $28 million in cash, the Parade inventory
and trademarks, and assumed leases on 186 stores. Parade sells women's
footwear and accessories in 14 states. Parade had sales of $123 million
in 1996. The Company is operating Parade as a separate division
supported by existing Payless sourcing, distribution, information
systems, real estate and financial organizations.
The Parade acquisition has been accounted for as a purchase, and
accordingly, the operating results of the acquired stores have been
included in the company's consolidated results since March 10,
1997. The acquisition did not have a material effect on the
results of operations or financial position of the Company during
the first quarter of 1997.
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Note 5. Store Openings/Closings. During the first quarter, the Company
opened 27 Payless stores. The Company closed 1 Parade and 27 Payless
stores.
Note 6. Earnings Per Share. For 1997 earnings per share is
computed by dividing net earnings by the average common shares
outstanding during the period.
The Company's first quarter 1996 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.
Note 7. Reclassifications. Certain prior period amounts have been
reclassified to conform to the current year presentation.
Note 8. New Accounting Standard. In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128") effective
December 15, 1997. SFAS 128 will simplify the calculation of
earnings per share (EPS) and require the reporting of "basic" and
"diluted" EPS to replace the current primary and fully diluted EPS,
respectively. The Company will adopt SFAS 128 when it reports 1997
annual results and will restate previously reported EPS upon
adoption. Adoption and restatement will not have a material impact
on the Company's reported EPS.
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:
May 3, May 4, Feb. 1,
1997 1996 1997
-------- -------- --------
Current Ratio 2.9 2.2 2.9
Debt-Capitalization Ratio* 1.0% 1.3% 1.1%
Fixed Charge Coverage** 3.3x 2.0x 3.2x
* 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
49.6%, 52.9% and 49.1% 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
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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 3.5x, 2.8x
and 3.4x for the periods referred to above.
The Company's fixed charge coverage ratio for the 52 weeks ended
May 3, 1997 increased as compared with the 52 week period ended May
4, 1996, due primarily to increased earnings over the previous 52
weeks.
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 three months in 1997 totaled
$20.5 million with an additional $109.5 million estimated to be
expended in the remainder of fiscal year 1997. The Company
anticipates that cash flow from operations and the credit facility
will be sufficient to finance projected capital expenditures (See
cautionary statement on next page as to this and other forward-
looking statements).
The increase in cash of $7.8 million resulted from earnings before
depreciation and amortization of $55.0 million offset by higher
inventory levels and higher capital expenditures primarily from the
acquisition of Parade. Higher inventory levels were primarily the
result of the acquisition of Parade.
During the first quarter, the Company acquired 315,000 shares of
its common stock in open market transactions pursuant to Rule 10b-
18 for an aggregate price of $12.8 million.
Results of Operations
Net retail sales represent the sales of stores operating during the
period. Sales percent increases are as follows:
First Quarter
-----------------
1997 1996
------ ------
Total 7.3% 5.6%
Store-for-Store 6.4% 5.3%
Store-for-store sales represent sales of those stores open during
comparable periods.
The following table presents the components of costs and expenses,
as a percent of revenues, for the first quarter of 1997 and 1996.
7
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First Quarter
----------------
1997 1996
------ ------
Cost of sales 69.4% 71.0%
Selling, general and
administrative expenses 22.5 22.2
Interest (income)/expense, net (.3) .1
---- ----
Earnings before income taxes 8.4% 6.7%
==== ====
Effective income tax rate 39.8% 39.9%
==== ====
Net Earnings 5.0% 4.0%
==== ====
Cost of sales was $447.9 million in the 1997 first quarter, up 4.8%
from $427.2 million in the 1996 first quarter. Sales for the first
quarter 1997 increased 7.3% from 1996 levels. The higher gross
margins achieved were primarily driven by positive same store sales
and a reduction in occupancy expense rates due to the closure of
underperforming stores.
Selling, general and administrative expenses were $145.1 million in
the 1997 first quarter, up 8.6% from $133.6 million in the 1996
first quarter. The increase was attributed to three primary causes:
the addition of Parade to the Company's sales base; the added costs
associated with being an independent company; and the Company has
modestly increased its advertising expenditures over 1996 levels.
At the end of the first quarter, the Company operated 4,236 Payless
ShoeSource stores in 50 states, Puerto Rico and the U.S. Virgin
Islands and 185 Parade of Shoes stores. The following table
presents the change in store count for the first quarter of 1997.
Payless Parade
First Quarter First Quarter
------------- -------------
1997 1996 1997 1996
------ ------ ------ ------
Beginning store count 4,236 4,549 0
Stores opened 27 43 186 N/A
Stores closed (27) (115) (1)
----- ----- -----
Ending store count 4,236 4,477 185
===== ===== =====
8
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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, capital expenditures, 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.
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
(a) The annual meeting of shareowners of registrant was held on
May 23, 1997.
(b) At the annual meeting of shareowners of registrant held on
May 23, 1997, action was taken with respect to the election
of two directors of registrant: 35,226,201 shares were voted
for Richard A. Jolosky while authority was withheld with respect
to 118,844 shares; 35,226,472 shares were voted for Robert L.
Stark while authority was withheld with respect to 118,573 shares;
Other directors whose term of office continued after the
meeting include: Steven J. Douglass, Howard R. Fricke,
Thomas A. Hays, Michael E. Murphy.
(c) In addition to the election of directors described in 4(b),
action was also taken at the annual meeting of shareowners
of registrant with respect to:
(i) a ratification of the appointment of Arthur Andersen LLP
as independent auditors (35,260,043 votes in favor, 37,991
votes against and 47,011 votes abstained);
9
<PAGE>
(ii) a proposal that the 1996 Stock Incentive Plan, as amended,
be approved (26,798,152 votes in favor, 1,505,158 votes
against, 156,229 votes abstained and 6,885,506 not voted);
(iii) a proposal that the Executive Incentive Compensation Plan be
approved (29,002,210 votes in favor, 474,742 votes against,
185,616 votes abstained and 5,682,477 not voted);
(iv) a proposal that the Payless Stock Ownership Plan be approved
(27,010,845 votes in favor, 1,292,287 votes against, 156,407
votes abstained and 6,885,506 not voted);
Item 5 - Other Information None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
Number Description
------ -----------
3.1 Amended and Restated Articles of Incorporation of the
Registrant.1
3.2 Amended and Restated Bylaws of the Registrant.2
10.5 Payless ShoeSource, Inc. 1996 Stock Incentive Plan, as
amended.3
11.1 Computation of Net Earnings Per Share.*
27.1 Financial Data Schedule*
* Filed herewith
1) Incorporated by reference from Exhibit 3.1 of the Registrant's
Form 10-Q (file Number 1-11633) for the quarter ended May 4,
1996.
2) Incorporated by reference from Exhibit 3.2 of the Registrant's
Form 10-K (file Number 1-11633) for the year ended February 1,
1997.
3) Incorporated by reference from Appendix A(pages A-1 to A-13) of
the Registrant's April 14, 1997, Proxy Statement relating to its
May 23, 1997, annual meeting of shareowners.
(b) Reports on Form 8-K
No reports have been filed on Form 8-K during the quarter
ended May 3, 1997.
10
<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: 6/13/97 /s/ Steven J. Douglass
-------------- --------------------------------------
Steven J. Douglass
Chairman and
Chief Executive Officer
Date: 6/13/97 /s/ Ullrich E. Porzig
-------------- --------------------------------------
Ullrich E. Porzig
Senior Vice President and
Chief Financial Officer
11
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<PAGE>
Exhibit 11.1
PAYLESS SHOESOURCE, INC.
COMPUTATION OF NET EARNINGS PER SHARE
13 Weeks Ended
(Thousands, except per share) ------------------------
May 3, May 4,
1997 1996
---------- ---------
Net earnings $ 32,427 $ 24,226
Common shares outstanding 39,897 40,365
---------- ---------
Net earnings per share $ .81 $ .60
========== =========
Primary Computation:
- -------------------
Net earnings $ 32,427 $ 24,226
Common shares outstanding 39,897 40,365
Net effect of dilutive stock
options based on the treasury
stock method 161 16
---------- ---------
Outstanding shares for primary
earnings per share $ 40,058 $ 40,381
========== =========
Primary earnings per share $ .81 $ .60
========== =========
Fully Diluted Computation:
- -------------------------
Net earnings $ 32,427 $ 24,226
Common shares outstanding 39,897 40,365
Net effect of dilutive stock
options based on the treasury
stock method 176 16
---------- ---------
Outstanding shares for fully
diluted earnings per share $ 40,073 $ 40,381
========== =========
Fully Diluted earnings per share $ .81 $ .60
========== =========
Note: Outstanding shares used in earnings per share calculation
for 1997 is computed by dividing net earnings by the average common
shares outstanding during the period. The Company's first quarter 1996
outstanding shares were calculated based on the number of Company shares
issued and oustanding 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 13 WEEKS ENDED MAY 3,
1997, AND CONDENSED CONSOLIDATED BALANCE SHEET AS OF MAY 3, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001008802
<NAME> PAYLESS SHOESOURCE,INC.
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> MAY-03-1997
<CASH> 201,400<F1>
<SECURITIES> 0<F2>
<RECEIVABLES> 4,000<F3>
<ALLOWANCES> 0<F3>
<INVENTORY> 387,100
<CURRENT-ASSETS> 631,600
<PP&E> 851,000
<DEPRECIATION> 353,200
<TOTAL-ASSETS> 1,132,500
<CURRENT-LIABILITIES> 216,800
<BONDS> 7,200<F4>
<COMMON> 400
0
0
<OTHER-SE> 873,300<F5>
<TOTAL-LIABILITY-AND-EQUITY> 1,132,500
<SALES> 645,100<F6>
<TOTAL-REVENUES> 645,100
<CGS> 447,900
<TOTAL-COSTS> 447,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,800)
<INCOME-PRETAX> 53,900
<INCOME-TAX> 21,500
<INCOME-CONTINUING> 32,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,400
<EPS-PRIMARY> .81<F7>
<EPS-DILUTED> .81<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>
