<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 August 2, 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
37,502,724 shares as of August 30, 1997
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Millions)
August 2, August 3, Feb. 1,
ASSETS 1997 1996 1997
- ------ --------- --------- ---------
Current Assets:
Cash and cash equivalents $ 187.2 $ 205.5 $ 193.6
Accounts receivable, net 3.7 4.5 4.3
Merchandise inventories 347.6 322.2 354.9
Other current assets 36.9 34.8 39.4
--------- --------- ---------
Total Current Assets 575.4 567.0 592.2
Property and Equipment, at cost 861.9 855.2 834.1
Accumulated Depreciation (373.4) (333.1) (331.6)
--------- --------- ---------
Net Property and Equipment 488.5 522.1 502.5
Other Assets 3.6 3.3 3.2
--------- --------- ---------
Total Assets $ 1,067.5 $ 1,092.4 $ 1,097.9
========= ========= =========
LIABILITIES AND SHAREOWNERS' EQUITY
- -----------------------------------
Current Liabilities:
Current maturities of
capital lease obligations $ 1.3 $ 1.3 $ 1.3
Accounts payable 86.3 70.1 82.9
Accrued expenses 115.6 151.4 119.1
--------- --------- ---------
Total Current Liabilities 203.2 222.8 203.3
Capital Lease Obligations 6.8 9.3 8.2
Deferred Income Taxes 9.3 9.4 6.1
Other Liabilities 27.7 26.4 27.3
Shareowners' Equity 820.5 824.5 853.0
--------- --------- ---------
Total Liabilities and
Shareowners' Equity $ 1,067.5 $ 1,092.4 $ 1,097.9
========= ========= =========
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 26 Weeks Ended
---------------------- ----------------------
August 2, August 3, August 2, August 3,
1997 1996 1997 1996
--------- --------- --------- ---------
Net Retail Sales: $ 716.7 $ 632.5 $ 1,361.7 $ 1,234.0
Cost of sales $ 497.3 $ 443.0 $ 945.2 $ 870.3
Selling, general and
administrative
expenses 145.9 126.4 291.0 260.0
Interest (income)/
expense, net (2.4) (1.7) (4.2) (1.4)
--------- --------- --------- ---------
Earnings before income
taxes 75.9 64.8 129.7 105.1
Provision for income
taxes 30.3 25.9 51.7 41.9
--------- --------- --------- ---------
Net Earnings $ 45.6 $ 38.9 $ 78.0 $ 63.2
========= ========= ========= =========
Earnings per Share $ 1.17 $ .96 $ 1.98 $ 1.56
========= ========= ========= =========
Average Shares
Outstanding 39.1 40.4 39.5 40.4
========= ========= ========= =========
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) 26 Weeks Ended
August 2, August 3,
1997 1996
--------- ---------
Operating Activities:
Net earnings $ 78.0 $ 63.2
Depreciation and amortization 45.1 45.8
Change in working capital (excluding
cash, cash equivalents and
short-term debt) 13.4 96.8
--------- ---------
Total Operating Activities 136.5 205.8
--------- ---------
Investing Activities:
Capital expenditures (35.1) (31.5)
Disposition of property and equipment 4.1 23.5
--------- ---------
Total Investing Activities (31.0) (8.0)
--------- ---------
Financing Activities:
Net repayments of capital lease
obligations (1.3) (1.0)
Amortization (Issuance) of
stock compensation 2.5 4.1
Issuance (Purchase)
of common stock, net (113.1) -
--------- ---------
Total Financing Activities (111.9) 3.1
--------- ---------
(Decrease) Increase in Cash
and Cash Equivalents $ (6.4) $ 200.9
Cash and Cash Equivalents,
Beginning of Year 193.6 4.6
--------- ---------
Cash and Cash Equivalents,
End of Period 187.2 205.5
========= =========
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 August 2, 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 26 weeks ended August 2, 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 $0.8
million pre-tax for the second quarter 1997, with an additional
$1.6 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.
5
<PAGE>
Note 5. Store Openings/Closings. During the second quarter, the
Company opened 36 Payless stores and 1 Parade store. The Company
closed 3 Parade and 49 Payless stores.
The Company announced that it plans to open five stores in Canada
under the Payless ShoeSource name during fiscal 1997. The stores
will offer dress, casual, athletic and specialty shoes for women,
men and children.
Note 6. Earnings Per Share. Earnings per share for 1997 and 1996
are 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. Year 2000. In 1996 the Company began modifying its
computer systems to enable continued processing of transactions in
the year 2000 and beyond. Anticipated spending for modifications
will be expensed as incurred and is not expected to have a
significant impact on the Company's ongoing results of operations.
Note 9. 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. Under the new accounting standard, EPS for the
periods ended August 2, 1997 and August 3, 1996 are stated below:
13 Weeks Ended 26 Weeks Ended
-------------------- --------------------
August 2, August 3, August 2, August 3,
1997 1996 1997 1996
--------- --------- --------- ---------
Basic Earnings
Per Share $ 1.17 $ 0.96 $ 1.98 $ 1.56
Diluted Earnings
Per Share $ 1.15 $ 0.96 $ 1.96 $ 1.56
Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding
during the period. Diluted earnings per share includes the effect
of conversions of options.
6
<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:
August 2, August 3, Feb. 1,
1997 1996 1997
--------- --------- ---------
Current Ratio 2.8 2.5 2.9
Debt-Capitalization Ratio* 1.0% 1.3% 1.1%
Fixed Charge Coverage** 3.6x 2.1x 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
50.5%, 50.0% 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
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 3.7x, 3.0x
and 3.4x for the periods referred to above.
The Company's fixed charge coverage ratio for the 52 weeks ended
August 2, 1997 increased as compared with the 52 week period ended
August 3, 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 six months in 1997 totaled
$35.1 million with an additional $94.9 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 decrease in cash of $6.4 million resulted from earnings before
depreciation and amortization of $123.1 million offset by higher
capital expenditures primarily from the acquisition of Parade and
the repurchase of the Company's common stock.
7
<PAGE>
During the second quarter, the Company acquired 1.9 million shares
of its common stock in open market transactions pursuant to Rule
10b-18 for an aggregate price of $100.3 million.
Results of Operations
Net retail sales represent the sales of stores operating during the
period. Sales percent increases are as follows:
Second Quarter First Six Months
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
Total 13.3% 1.6% 10.4% 3.5%
Store-for-Store 7.2% 5.0% 6.7% 5.1%
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 second quarter and first six
months of 1997 and 1996.
First
Second Quarter Six Months
-------------- -----------
1997 1996 1997 1996
----- ----- ----- -----
Cost of sales 69.4% 70.0% 69.4% 70.5%
Selling, general and
administrative expenses 20.3 20.0 21.4 21.1
Interest income/(expense), net .3 .2 .3 .1
---- ---- ---- ----
Earnings before income taxes 10.6% 10.2% 9.5% 8.5%
==== ==== ==== ====
Effective income tax rate 39.9% 39.9% 39.9% 39.9%
==== ==== ==== ====
Net Earnings 6.4% 6.2% 5.7% 5.1%
==== ==== ==== ====
Cost of sales was $497.3 million in the 1997 second quarter, up
12.2% from $443.0 million in the 1996 second quarter. For the
first six months of 1997, cost of sales was $945.2 million, a 8.6%
increase from $870.3 million in the 1996 period. Sales increased
13.3% and 10.4% for the second quarter and first six months of
1997, respectively. For the second quarter and first six months,
cost of sales, as a percent of revenues, decreased 0.6% and 1.1%,
respectively. Gross margin improvement in the second quarter was
primarily due to the leverage of occupancy costs gained through
positive same store sales.
8
<PAGE>
Selling, general and administrative expenses were $145.9 million in
the 1997 second quarter, up 15.4% from $126.4 million in the 1996
second quarter. For the first six months of 1997, selling, general
and administrative expenses were $291.0 million compared with
$260.0 million in the 1996 period, an 11.9% increase.
The increase during the second quarter was attributed to the
operation of the Parade of Shoes division, Parade related start-up
costs, and increased stores payroll. For the first six months of
1997, the increase in selling, general and administrative expenses
was primarily due to the addition of Parade to the Company's sales
base and modestly higher advertising expenditures over 1996 levels.
At the end of the second quarter, the Company operated 4,223
Payless ShoeSource stores in 50 states, Guam, Puerto Rico and the
U.S. Virgin Islands and 183 Parade of Shoes stores. The following
table presents the change in store count for the second quarter and
first six months of 1997 and 1996.
Payless ShoeSource First
Second Quarter Six Months
-------------- ------------
1997 1996 1997 1996
----- ----- ----- -----
Beginning of quarter/year 4,236 4,477 4,236 4,549
Stores opened 36 50 63 93
Stores closed (49) (247) (76) (362)
----- ----- ----- -----
Ending store count 4,223 4,280 4,223 4,280
===== ===== ===== =====
Parade of Shoes First
Second Quarter Six Months
-------------- ------------
1997 1996 1997 1996
----- ----- ----- -----
Beginning of quarter/year 185 0
Stores acquired 0 186
Stores opened 1 N/A 2 N/A
Stores closed (3) (5)
----- -----
Ending store count 183 183
===== =====
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
10
<PAGE>
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 None.
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 August 2, 1997.
11
<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: 9/8/97 /s/ Steven J. Douglass
------------ -----------------------------
Steven J. Douglass
Chairman and
Chief Executive Officer
Date: 9/8/97 /s/ Ullrich E. Porzig
------------ -----------------------------
Ullrich E. Porzig
Senior Vice President and
Chief Financial Officer
12
<PAGE>
<PAGE>
Exhibit 11
PAYLESS SHOESOURCE, INC.
------------------------
COMPUTATION OF NET EARNINGS PER SHARE
-------------------------------------
13 Weeks Ended 26 Weeks Ended
-------------------- --------------------
(Thousands, except per share) August 2, August 3, August 2, August 3,
1997 1996 1997 1996
--------- --------- --------- ---------
Net earnings $ 45,588 $ 38,942 $ 78,015 $ 63,168
Common shares outstanding 39,077 40,369 39,487 40,369
-------- -------- -------- --------
Net earnings per share $ 1.17 $ .96 $ 1.98 $ 1.56
======== ======== ======== ========
Primary Computation:
- --------------------
Net earnings $ 45,588 $ 38,942 $ 78,015 $ 63,168
Common shares outstanding 39,077 40,369 39,487 40,369
Net effect of dilutive stock
options based on the treasury
stock method 446 31 240 25
-------- -------- -------- --------
Outstanding shares for primary
earnings per share 39,523 40,400 39,727 40,394
======== ======== ======== ========
Primary earnings per share $ 1.15 $ .96 $ 1.96 $ 1.56
======== ======== ======== ========
Fully Diluted Computation:
- --------------------------
Net earnings $ 45,588 $ 38,942 $ 78,015 $ 63,168
Common shares outstanding 39,077 40,369 39,487 40,369
Net effect of dilutive stock
options based on the treasury
stock method 671 70 671 70
-------- -------- -------- --------
Outstanding shares for fully
diluted earnings per share 39,748 40,439 40,158 40,439
======== ======== ======== ========
Fully Diluted earnings per share $ 1.15 $ .96 $ 1.94 $ 1.56
======== ======== ======== ========
Note: The Company's 1997 and 1996 outstanding shares was calculated on the
average number of Company shares outstanding during the applicable period.
<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 26 WEEKS ENDED AUGUST
2, 1997, AND CONDENSED CONSOLIDATED BALANCE SHEET AS OF AUGUST 2,
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> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> AUG-02-1997
<CASH> 187,200<F1>
<SECURITIES> 0<F2>
<RECEIVABLES> 3,700<F3>
<ALLOWANCES> 0<F3>
<INVENTORY> 347,600
<CURRENT-ASSETS> 575,400
<PP&E> 861,900
<DEPRECIATION> 373,400
<TOTAL-ASSETS> 1,067,500
<CURRENT-LIABILITIES> 203,200
<BONDS> 6,800<F4>
<COMMON> 400
0
0
<OTHER-SE> 820,100<F5>
<TOTAL-LIABILITY-AND-EQUITY> 1,067,500
<SALES> 1,361,800<F6>
<TOTAL-REVENUES> 1,361,800
<CGS> 945,200
<TOTAL-COSTS> 945,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4,200)
<INCOME-PRETAX> 129,800
<INCOME-TAX> 51,700
<INCOME-CONTINUING> 79,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 78,000
<EPS-PRIMARY> 1.96<F7>
<EPS-DILUTED> 1.94<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>
