1 of 22 Pages
Exhibit Index
Appears on Page 18
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 27, 1999
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______ to ______.
Commission File Number: 1-4404
THE STRIDE RITE CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-1399290
(State or other jurisdiction (I.R.S. Employer Identified No.)
of incorporation)
191 Spring Street, P. O. Box 9191 Lexington, Massachusetts 02420
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 824-6000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common stock, $.25 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
As of October 6, 1999, 45,999,962 shares of the Registrant's common stock,
$.25 par value, and the accompanying Preferred Stock Purchase Rights were
outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
August 27,
1999 November 27,
(Unaudited) 1998
---------- -----------
<CAPTION>
Assets
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 44,558 $ 42,427
Accounts and notes receivable,net 86,166 56,475
Inventories 98,578 128,472
Deferred income taxes 25,796 24,758
Prepaid expenses 3,392 6,097
-------- -------
Total current assets 258,490 258,229
Property and equipment,net 65,865 58,350
Other assets 23,675 18,917
-------- -------
Total assets $348,030 $335,496
======== ========
</TABLE>
Theaccompanying notes are an integral part of the condensed
consolidated financial statements.
2
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in Thousands)
<TABLE>
August 27,
1999 November 27,
(Unaudited) 1998
----------- ------------
<CAPTION>
Liabilities and Stockholders' Equity
Current Liabilities:
<S> <C> <C>
Accounts payable $ 21,394 $ 40,951
Income taxes payable 24,822 14,130
Accrued expenses and other
liabilities 31,761 29,646
--------- --------
Total current liabilities 77,977 84,727
Deferred income taxes 6,134 6,042
Stockholders' Equity:
Preferred stock, $1.00 par value
Shares authorized - 1,000,000
Shares issued - none - -
Common stock, $.25 par value
Shares authorized - 135,000,000
Shares issued - 56,946,544 14,237 14,237
Capital in excess of par value 21,833 22,063
Retained earnings 357,003 337,943
Less cost of 10,549,467 shares of
common stock held in treasury
(10,565,526 on November 27, 1998
and 10,051,557 on August 28,1998) (129,154) (129,516)
--------- ---------
Total stockholders' equity 263,919 244,727
--------- ---------
Total liabilities and
stockholders' equity $348,030 $335,496
========= ========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the periods ended August 27, 1999 and August 28, 1998
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 27, August 28, August 27, August 28,
1999 1998 1999 1998
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $155,952 $168,516 $470,390 $440,677
Cost of sales 98,157 105,772 296,846 279,820
Selling and
administrative expenses 39,501 42,973 129,362 122,151
Nonrecurring charge 3,254 - 3,254 -
-------- ------- -------- --------
Operating income 15,040 19,771 40,928 38,706
Other income(expense):
Interest income 1,920 1,022 3,585 2,795
Interest expense (402) (551) (1,706) (1,494)
Other, net (187) 64 (834) 2,343
-------- ------- ------- -------
1,331 535 1,045 3,644
-------- ------- ------- -------
Income before income taxes 16,371 20,306 41,973 42,350
Provision for income taxes 6,258 7,540 15,948 15,587
-------- ------- ------- -------
Net income $10,113 $ 12,766 $26,025 $ 26,763
======= ======== ======= ========
Net income per common share:
Diluted $ .22 $ .27 $ .56 $ .56
====== ====== ====== ======
Basic $ .22 $ .27 $ .56 $ .57
====== ====== ====== ======
Dividends per common share $ .05 $ .05 $ .15 $ .15
====== ====== ====== ======
Average common shares used in
per share computations:
Basic 46,440 47,261 46,418 47,275
======= ======= ======= =======
Diluted 46,644 47,707 46,761 47,647
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements
4
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended August 27, 1999 and August 28, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
August 27, August 28,
1999 1998
---------- ----------
Cash was provided from (used for) Operations:
<S> <C> <C>
Net income $26,025 $26,763
Adjustments to reconcile to net cash provided
from (used for)operations:
Depreciation and amortization 7,497 7,054
Deferred income taxes, net (946) 869
Compensation expense related to executive stock plans 296 248
Equity in loss (income) of affiliate 813 (925)
Loss(gain)on disposals of property and equipment 935 (3,255)
Changes in:
Accounts and notes receivable (29,691) (50,088)
Inventories 29,894 25,819
Prepaid expenses 2,706 17
Accounts payable, income taxes, accrued expenses
and other current liabilities (7,393) (15,134)
-------- --------
Net cash provided from (used for) operations 30,136 (8,632)
-------- --------
Investments:
Short-term investments - 9,417
Additions to property and equipment (15,804) (13,045)
Proceeds from sales of property and equipment - 8,342
Purchase of noncurrent marketable securities (320) (1,666)
Increase in other assets (4,857) (688)
-------- --------
Net cash provided from (used for) investments (20,981) 2,360
--------- --------
Financing:
Proceeds from sale of stock under stock plans 385 1,642
Cash dividends paid (6,961) (7,082)
Repurchase of common stock (448) (7,774)
-------- --------
Net cash used for financing (7,024) (13,214)
Net increase (decrease) in cash and cash equivalents 2,131 (19,486)
Cash and cash equivalents at beginning of period 42,427 41,663
-------- --------
Cash and cash equivalents at end of period $44,558 $22,177
======== ========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements
5
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
The financial information included in this Form 10-Q of The Stride Rite
Corporation (the "Company") for the periods ended August 27, 1999 and August 28,
1998 is unaudited and subject to year-end audit adjustments. However, such
information includes all adjustments (including all normal recurring
adjustments) which, in the opinion of management, are considered necessary for a
fair presentation of the consolidated results for those periods. The results of
operations for the nine-month period ended August 27, 1999 are not necessarily
indicative of the results of operations that may be expected for the complete
fiscal year. The year-end condensed balance sheet data was derived from the
Company's audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. The Company filed audited
consolidated financial statements for the year ended November 27, 1998 on Form
10-K which included all information and footnotes necessary for such
presentation.
The Company's preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the reported
periods. The most significant estimates included in these financial statements
include valuation allowances and reserves for accounts receivable, inventory and
income taxes. Actual results could differ from those estimates.
NOTE 2
In the third quarter of 1999, the Company recorded a nonrecurring charge
in connection with the Company's realignment of corporate and divisional
operations. The total amount of the charge of approximately $3.2 million,
(amounting to $2.0 million after taxes or $.04 per share), is composed of $2.4
million related to employee termination payments, $0.6 million of other employee
related costs, and $0.2 million of other costs. As a result of the
restructuring, approximately 125 positions were eliminated from the Company's
administrative staff.
NOTE 3
Basic earnings per share excludes dilution and is computed by dividing net
earnings available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if options to issue common stock were
exercised.
6
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - continued
The following is a reconciliation of the number of shares used in the
basic and diluted earnings per share computations (shares in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 27, August 28, August 27, August 28,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net income applicable to common
<S> <C> <C> <C> <C>
shares $10,113 $12,766 $26,025 $26,763
======= ======= ======= =======
Calculation of shares:
Weighted average number of common
shares outstanding(basic) 46,440 47,261 46,418 47,275
Common shares attributable to
assumed exercise of dilutive
stock options and stock
purchase rights using the
treasury stock method 204 446 253 372
------- ------- -------- -------
Average common shares and common
equivalents outstanding during
the period (diluted) 46,644 47,707 46,671 47,647
======= ======= ======= =======
Net income per common share (basic) $ .22 $ .27 $ .56 $ .57
===== ===== ===== =====
Net income per common share (diluted) $ .22 $ .27 $ .56 $ .56
===== ===== ===== =====
</TABLE>
The following options were not included in the computation of diluted EPS
because the options' exercise price was greater than the average market price of
the common shares:
<TABLE>
<CAPTION>
Third Quarter First Nine Months
------------------- ------------------------
1999 1998 1999 1998
--------- -------- ----------- -----------
Options to purchase shares of
<S> <C> <C> <C> <C>
common stock (in thousands) 2,494 268 2,463 369
</TABLE>
7
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. We caution investors that any forward-looking statements
presented in this report and presented elsewhere by management from time to time
are based on management's beliefs and assumptions made by, and information
currently available to, management. When used, the words "anticipate,"
"estimate," "project," "should," "expect" and similar expressions are intended
to identify forward-looking statements. Such statements are subject to risks,
uncertainties and assumptions and are not guarantees of future performance,
which may be affected by various trends and factors that are beyond our control.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated or projected. Accordingly, past results and trends
should not be used by investors to anticipate future results or trends. Some of
the key factors that may have a direct bearing on our results are as follows:
Mature markets; Competition; Consumer Trends
Our strategy for growth depends upon increasing the acceptance of our
current brands in our major markets, expanding into new markets and increasing
the number of footwear products and brands that we sell. There can be no
assurance that we will be able to successfully develop new branded products or
acquire existing brands from third parities. The bulk of our sales are in the
U.S. and Canada where the market is mature for many of our products. To grow our
business, we must increase our market share at the expense of our competitors,
and there can be no assurance we will be successful. Our efforts to expand sales
outside the U.S. and Canada may not succeed.
The footwear industry specifically, and the fashion industry in general,
are subject to rapid and substantial shifts in consumer tastes and preferences.
There are many competitors in our markets with substantially greater financial
resources, production, marketing and product development capabilities. Our
performance may be hurt by our competitors' product development, sourcing,
pricing, innovation and marketing strategies. In addition, we expect the
footwear industry in the U.S. to continue to experience substantial foreign
competition.
The fashion industry and retail industry is exposed to sudden shifts in
consumer trends and consumer spending, on which our results are, in part,
dependent. Consumer acceptance of our new products may fall below expectations
and the launch of new product lines may be delayed. Our results are affected by
the buying plans of our customers in the wholesale business, which include large
department stores, as well as smaller retailers. Our wholesale customers may not
inform us of changes in their buying plans until it is too late for us to make
the necessary adjustments to our product lines and marketing strategies. While
we believe that purchasing decisions in many cases are made independently by
individual stores or store chains, we are exposed to a decision by the
controlling owner of a store chain, to decrease
8
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
the amount of footwear products purchased from us. Moreover, the retail industry
periodically experiences consolidation. We face a risk that our wholesale
customers may consolidate, restructure, reorganize or realign in ways which
could decrease the number of stores, or the amount of shelf space, that carry
our products. The impact that electronic commerce will have in the future on the
retail industry is uncertain, but there is no assurance that any such impact
will not adversely affect our business.
Inventory Obsolescence
The fashion-oriented nature of our industry, the rapid changes in customer
preferences and the extended product development and sourcing lead times, also
leaves us vulnerable to an increased risk of inventory obsolesce. While we have
in the past and believe we can in the future successfully manage this risk, if
we are unable to do so, our revenue and operating margins will suffer.
Retention of Major Brand License
We have derived significant revenues and earnings in the past from our
exclusive licensing arrangement with Tommy Hilfiger Licensing, Inc. to produce
and sell Hilfiger branded footwear. Our Hilfiger license expires December 31,
2001 and we have one option to renew the license for an addition three-year
term. Whether our license with Hilfiger will remain in effect depends on our
achieving certain minimum sales levels for the licensed products. We believe
that our relationship with Hilfiger is good and that we will be able to renew
the license at the end of the current term, however, there can be no assurance
that we will be able to do so. If we lose the Hilfiger license, our business
could be materially and adversely affected
Overseas Production and Raw Material Procurement
We purchase substantially all of our product lines and raw materials
overseas and expect to do so for the foreseeable future. Our international
sourcing subjects us to the risks of doing business abroad. Such risks include
expropriation, acts of war, political disturbances, political instability and
similar events, including trade sanctions, loss of normalized trade relations
status, export duties, import controls, quotas, and other trading restrictions,
as well as fluctuations in currency values. Moreover, we rely heavily on
independent third-party manufacturing facilities, primarily located in China, to
produce our products. If trade relations between the U.S. and China, or other
countries in which we manufacture our products, deteriorate or are threatened by
instability, our business may be adversely impacted. We cannot predict the
effect that changes in the economic and political conditions in China could have
on the economics of doing business with Chinese manufacturers. Although we
believe that we could find alternative manufacturing sources for our products
with independent third-party manufacturing facilities in other countries, the
loss of a substantial portion of our Chinese manufacturing capacity could have a
material adverse effect on our business. Also, if we were required to relocate a
substantial portion of our manufacturing outside of China, there can be no
assurance that we could obtain as favorable economic terms, which could
adversely affect our performance.
9
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
Dependence on Logistical System
Our business operations are dependent on our logistical system, which
includes our computerized warehouse network, enabling us to procure our footwear
products from overseas manufacturers, transport it to our warehouses, store it
and deliver it to our customers on time, in the correct size and styles. A
disruption to the logistical system could adversely impact our business. In
addition, to improve overall efficiency, we are in the process of changing the
computer software system that controls our order entry and inventory control
system. While we expect that the implementation of the new software system will
go smoothly, if we experience problems with such implementation, we could
experience disruptions to our business that could have an adverse effect on our
business.
Intellectual Property Risk
We believe that our patents and trademarks are important to our business
and are generally sufficient to permit us to carry on our business as presently
conducted. We cannot, however, know whether we will be able to secure patents or
trademark protection for our intellectual property in the future or that
protection will be adequate for future products. Further, we face the risk of
ineffective protection of intellectual property rights in the countries where we
source and distribute our products. Finally, we cannot be sure that our
activities will not infringe on the proprietary rights of others. If we are
compelled to prosecute infringing parties, defend our intellectual property, or
defend ourselves from intellectual property claims made by others, we may face
significant expenses and liability.
Year 2000 Exposure
Statements of our expectations regarding the current status, date of
completion and costs of our Year 2000 compliance programs and the anticipated
compliance of our major customers and suppliers are forward-looking statements.
These statements are our best estimates based on information currently
available. Therefore, they are inherently subject to risks and uncertainties
which could cause actual results to differ and which may have a material adverse
effect on our business, financial position, results of operations or capital or
liquidity needs.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The following table summarizes the Company's performance for the third
quarter and first nine months of fiscal 1999 as compared to the results for the
same periods in fiscal 1998:
<TABLE>
<CAPTION>
Increase (Decrease) Percent vs. 1998 Results:
Third Quarter Nine Months
<S> <C> <C>
Net sales (7.5%) 6.7%
Gross profit (7.9%) 7.9%
Selling and administrative expenses (8.1%) 5.9%
Operating income before nonrecurring charges (7.5%) 14.1%
Operating income (23.9%) 5.7%
Income before income taxes (19.4%) (0.9%)
Net income (20.8%) (2.8%)
</TABLE>
Operating Ratios as a Percentage to Net Sales:
<TABLE>
<CAPTION>
Third Quarter Nine Months
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Gross profit 37.1% 37.2% 36.9% 36.5%
Selling and administrative expenses 25.3% 25.5% 27.5% 27.7%
Operating income before nonrecurring charges 11.7% 11.7% 9.4% 8.8%
Operating income 9.6% 11.7% 8.7% 8.8%
Income before income taxes 10.5% 12.1% 8.9% 9.6%
Net income 6.5% 7.6% 5.5% 6.1%
</TABLE>
Net Sales
Net sales in the third quarter of fiscal 1999 decreased $12.6 million or
7.5% versus the net sales level for the same period of fiscal 1998. In the third
quarter of fiscal 1999, revenues of the Company's wholesale businesses decreased
9.7%, while retail sales increased 6.3% from the same period in fiscal 1998. For
the first nine months of fiscal 1999, consolidated net sales were above the same
period of fiscal 1998 by $29.7 million or 6.7%. Revenues from the Company's
wholesale businesses increased 6.5% during the first nine months of fiscal 1999.
Retail also increased, up 8% in the first nine months of 1999 as compared to the
same period in 1998. With respect to the wholesale businesses of the Company,
unit shipments of current line merchandise during the first nine months of 1999
were slightly higher than the comparable period in fiscal 1998. During the first
nine months of fiscal 1999, sales of discontinued products were 12% higher than
the comparable period in fiscal 1998.
11
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Keds sales in the third quarter of fiscal 1999 decreased 20% from 1998 as
last year's sales had benefited from the strong sell-in of Keds updated basics,
the Ready to Wear(R) and Relaxed Fit(R) product lines. In the third quarter of
1998, Keds sales had increased 49% from the prior year. Sales of Keds
Stretch(TM) products, which were introduced during the third quarter of 1999,
generally exceeded retailer expectations, but the new line could not fully
offset the lower sales of the updated basics. In addition, the Keds basic
Champion(R) style has continued to decline. During the third quarter, reorders
were weaker than last year as consumer trends appeared to be favoring fashion
product and open toe footwear. For the first nine months, Keds net sales
decreased 1% compared to the same period in 1998, with the sales of current line
merchandise down by 3% from 1998. Sales of Keds women's products declined 8%
from the prior year, while children's product sales increased 9% from 1998.
Sales of the Stride Rite Children's Group in the third quarter of fiscal
1999 were flat with the third quarter of 1998 as a 6% increase in retail sales
was offset by a 5% decrease in sales to independent accounts. During the third
quarter of 1999, sales at comparable company-owned retail stores increased 1.9%
from 1998. For the first nine months of fiscal 1999, sales of the Stride Rite
Children's Group increased 1% from the same period in 1998, with sales to
independent accounts down 5% and sales at company-owned retail stores up 8% from
the 1998 period. Sales at comparable company-owned retail stores increased 5.2%
during the first nine months of 1999. At the end of the third quarter of fiscal
1999, the Company operated 205 stores, up 5% from the 196 stores open at the end
of the third quarter in fiscal 1998.
Sales of Tommy Hilfiger products in the third quarter of 1999 increased 20%
as compared to the same period in 1998. Sales for the first nine months of
fiscal 1999 for the Tommy Hilfiger division increased 59% as compared to the
same period in 1998 as revenues associated with the Tommy Hilfiger women's line
offset lower sales of Tommy Hilfiger men's products. The lower men's revenues
were predominantly caused by a 50% reduction in the sales of discontinued
styles. Additionally, product line changes away from higher priced basketball
styles and more competitive market conditions resulted in an average selling
price in 1999 which was 6% lower than the first nine months of 1998.
Compared to the same period in fiscal 1998, sales of the Sperry Top-Sider
division increased 9% in the third quarter of fiscal 1999. Sales of Sperry
products increased 11% for the first nine months of fiscal 1999 as the brand has
achieved success with newly introduced styles for the office casual market. For
the nine-month period, Sperry sales in 1999 were above 1998 levels across all
shoe categories, with sales of current line merchandise up 13%, and offsetting a
33% decrease in discontinued styles. International revenues in the third quarter
of 1999 were below the comparable period of 1998
12
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
by $2.2 million or 26%, which was principally the result of a restructuring of
the Company's international operations that converted distribution arrangements
to license agreements in certain countries. For the first nine months of 1999,
international revenues declined $3.7 million or 15% from the comparable period
of fiscal 1998.
During the third quarter of fiscal 1998, the Company began shipping Levi's
men's and boys' products under a license agreement with Levi Strauss & Co. Sales
of Levi's footwear for the third quarter of 1998 were $4 million. In October
1998, after evaluating the initial retail results and assessing the general
strength of the Levi's brand and competitive conditions in the young men's
footwear market, the Company and Levi Strauss & Co. mutually agreed to
discontinue Levi's footwear at the end of the Fall 1998 season. The Company
recorded a one-time, pre-tax charge of approximately $5 million ($.07 per share)
in the fourth quarter of fiscal 1998 to cover estimated losses on the disposal
of inventory and severance costs associated with this decision.
Gross Profit
During the first nine months of fiscal 1999, gross profit increased $12.7
million, a gain of 7.9% compared to the net sales increase of 6.7% for the same
period. The consolidated gross profit percent for the first nine months of 1999
increased 0.4 percentage points, finishing at 36.9% in 1999 compared to 36.5% in
1998. The gross profit performance in the third quarter of 1999 was slightly
lower than the same period in fiscal 1998, 37.1% in 1999 compared to 37.2% in
the 1998 third quarter. In 1999, the Company's gross profit performance
benefited from a lower inventory obsolescence provision. In 1998, the gross
profit performance in the first nine months had been impacted negatively by
increased inventory obsolescence charges, particularly in the Tommy Hilfiger
division, and by sales allowances related to the disappointing Levi's product
line. The Company's nine month gross profit performance in 1998 was also
negatively affected by $1.7 million in start-up costs related to new licensed
product lines, all of which began shipping in the third quarter of 1998. The
Company's LIFO provision had an unfavorable impact on gross profit comparisons
for the first nine months of 1999, with LIFO increasing gross profit by only
$0.1 million in 1999 compared to an increase of $2.7 million (0.6% of net sales)
in the comparable period of 1998. In the third quarter, the LIFO provision
increased gross profit by $0.9 million (0.6% of net sales) in 1999 compared to
an increase of $1.2 million (0.7% of net sales) in 1998.
13
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Operating Costs
Selling and administrative expenses in the first nine months of fiscal 1999
were above the comparable period of the prior year, increasing $7.2 million or
5.9% as compared to the overall increase in net sales of 6.7% during the same
period. Operating costs as a percentage of sales decreased from last year by 0.2
percentage points in the first nine months (27.5% in 1999 compared to 27.7% in
1998). In the third quarter of 1999, operating expenses decreased $3.5 million
or 8.1% from 1998 compared to the sales decline of 7.5%. In the third quarter of
1999, selling and administrative expenses as a percent to net sales declined by
0.1 percentage points as compared to the comparable period of 1998. Increased
spending in information technology continued in the third quarter, primarily
related to the costs of installing enhanced systems and achieving year 2000
(Y2K) compliance. These efforts resulted in additional costs of $2.2 million
compared to 1998. Operating costs in the first nine months of 1998 had included
$3 million of product development and other selling and administrative costs
related to the launch of the Levi's, Tommy Hilfiger women's and Nine West Kids
product lines which began shipping in the third quarter of 1998. Advertising
costs increased by $3.2 million or 11% in the first nine months of fiscal 1999.
As a percentage of net sales, advertising expense represented 6.6% of sales in
the first nine months of 1999, which was higher than the spending rate of 6.3%
of sales in the comparable period in 1998. This higher spending level was due to
the increased advertising related to the Tommy Hilfiger women's product line.
The increased costs in the 1999 nine-month period were partially offset by the
elimination of certain International division overhead costs of $2.3 million and
various other administrative expense decreases.
Nonrecurring Charges
A nonrecurring charge of $3.2 million related to a realignment of corporate
and divisional operations was recorded in the third quarter of 1999, in order to
competitively position the Company for future expansion and increased
profitability. The actions, which should be completed during the fourth quarter
of 1999, include the consolidation of certain merchandising, finance and
operations functions, resulting in the elimination of approximately 125
positions from the Company's administrative staff.
14
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Other Income and Taxes
Other income (expense) increased pre-tax income by $1.0 million in the
first nine months of fiscal 1999 compared to an increase of $3.6 million in the
comparable period of 1998. In the first nine months of fiscal 1998, other income
included a pre-tax gain of $3.8 million from the March 1998 sale of real estate
formerly used as a distribution center for the Company's wholly-owned
subsidiary, Stride Rite Children's Group, Inc. Interest income in 1999 increased
$0.8 million for the first nine months of 1999 versus the comparable period in
1998. Interest expense in the first nine months of 1999 increased to $1.7
million compared to $1.5 million in 1998. Average short-term borrowings in the
first nine months of 1999 were $37.2 million, up from the average borrowings of
$30.8 million in the comparable period of 1998.
The provision for income taxes increased $0.4 million in the first nine
months of fiscal 1999 as compared to the similar period in fiscal 1998 primarily
due to a higher effective income tax rate, 38.0% compared to 36.8% in 1998.
Reduced tax savings related to a company-owned life insurance program caused the
higher effective tax rate in 1999.
Net Income
Excluding one-time items in each year, net income for the nine-month period
increased 15%, $28 million in 1999 compared to $24.3 million in 1998. Net income
for the first nine months of fiscal 1999 was negatively impacted by the $3.2
million (pre-tax) nonrecurring charge, while the comparable period of 1998 was
favorably impacted by the one-time gain from the sale of real estate of $3.8
million (pre-tax). Net income for the first nine months of fiscal 1999 decreased
$0.7 million, down 2.8% from the income earned in the comparable period of
fiscal 1998. The Company's after-tax return on net sales in the first nine
months of fiscal 1999 decreased by 0.6 percentage points (5.5% of sales in 1999
compared to 6.1% in 1998).
15
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources
At August 27, 1999, the Company's balance sheet reflects a current ratio of
3.3 to 1 with no long-term debt. The Company's cash and short-term investments
totaled $44.6 million at the end of the latest quarter, significantly above the
cash and investments total of $22.2 million at the end of the third quarter of
fiscal 1998. In 1999, other assets also included $10.8 million of investments in
intermediate-term, fixed income instruments, even with the level of investments
at the end of third quarter 1998. During the first nine months of 1999, the
Company's operations generated $30.1 million of cash, compared to a negative
cash flow from operations of $8.6 million in the comparable period in 1998.
At August 27, 1999, receivables and inventory levels totaled $184.7
million, a decrease of $26 million or 12% from the $210.7 million asset amount
at the end of the first nine months of fiscal 1998. Accounts receivable of $86.2
million at the end of the third quarter of 1999 decreased 15.4% from the 1998
amount, a level of decrease above the sales decline of 7.5% in the quarter.
Inventories at the end of the first nine months of 1999 were also lower, down
$10.3 million or 9.5% from the 1998 level.
Additions to property and equipment totaled $15.8 million in the first nine
months of fiscal 1999 compared to $13 million in the same period of fiscal 1998.
A large portion of the Company's capital expenditures over the last two years
has been related to upgrading its information systems in order to prepare for
the Year 2000 transition. Capital expenditures in the first nine months of 1998
had included $3.2 million in expenditures related to the Company's purchase of
its Huntington, Indiana distribution facility.
On August 10, 1999, the Company's Board of Directors authorized the
repurchase of an additional two million shares of common stock. This action
brought the authorized total to 2,242,000 shares during fiscal 1999 as the
Company had repurchased 1,758,000 shares under a prior two million share
authorization. Through October 5, 1999, the Company has repurchased 450,000
shares under these authorizations at an aggregate cost of $3.3 million, leaving
1,792,000 shares authorized for future repurchases.
16
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other Matters
During the quarter, the Company continued its efforts to minimize the risk
of disruption from the "Year 2000 (`Y2K') problem." This problem is a result of
computer programs having been written using two digits (rather than four) to
define the applicable year. The Company's overall plan to address the Y2K
problem is described more fully in its 1998 Annual Report on Form 10-K, and the
following is an update of the information included therein.
Information Technology ("IT") Systems:
Remediation efforts (including testing and certification) continued during
the first nine months of fiscal 1999 with respect to the Company's previously
identified "critical" and "important" IT business systems. The majority of the
Company's systems have now been tested and are certified as Y2K compliant.
Non-IT and Partner Systems:
During the first nine months of 1999, the Company continued its inventory
of third party and internal embedded, or "non-IT" systems. Company
representatives have met with significant sourcing vendors to ensure an
uninterrupted supply of product in the year 2000. The Company has compiled
detailed information regarding all of its significant business partners. In
appropriate cases, the Company has been relying upon vendors' testing and
certification documents to validate that the related systems are Y2K compliant.
Where the Company does not have adequate assurance that remediation efforts by
third parties are on schedule, contingency plans are being developed to minimize
potential disruption from Y2K failures experienced by our business partners.
These plans include avoidance of those partners who may present an unacceptable
level of risk. Validation efforts are expected to continue through October 1999.
Contingency Planning:
Contingency planning has been developed on a case by case basis and
includes encouraging customers to place orders before potential business
disruptions, manual intervention of processes or finding alternative suppliers.
There are, however, many variables and uncertainties surrounding the
effectiveness of contingency planning. Thus, there is no certainty that the
Company's contingency plans will be adequate to mitigate the materially adverse
effect related to a large scale Y2K failure.
17
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Costs:
Total anticipated expenditures related to the Y2K project are estimated at
approximately $26.5 million, of which approximately $20 million is related to
new systems which are being capitalized. Total Y2K project costs expended during
the first nine months of 1999 amounted to approximately $9 million.
18
<PAGE>
Part II - OTHER INFORMATION
THE STRIDE RITE CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Description of Exhibit
Exhibit No.
27 Financial Data Schedule
(b) Reports on Form 8-K
On July 9, 1999, the Company filed a report on Form 8-K describing
the resignation of James A. Eskridge as chairman and Chief
Executive officer of the Company. The Board of Directors named
Myles J. Slosberg as interim Chairman and CEO pending the
successful search and selection of a new Chairman and CEO. For
additional information, reference is made to the Form 8-K filed on
July 9, 1999.
19
<PAGE>
THE STRIDE RITE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
THE STRIDE RITE CORPORATION
(Registrant)
Date: October 8, 1999 By: /s/ John M. Kelliher
--------------------
John M. Kelliher
Chief Financial Officer
20
<PAGE>
THE STRIDE RITE CORPORATION
INDEX TO EXHIBITS
Exhibit No.
Sequential Page No.
27 Financial Data Schedule Page 22
21
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The notes to the condensed consolidated financial statements are an integral
part of such statements and the condensed consolidated financial information in
this schedule. Figures below are in thousands, except per-share data.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-03-1999 DEC-03-1999
<PERIOD-START> MAY-29-1999 NOV-28-1998
<PERIOD-END> AUG-27-1999 AUG-27-1999
<CASH> 44,558 44,558
<SECURITIES> 0 0
<RECEIVABLES> 94,787 94,787
<ALLOWANCES> 8,621 8,621
<INVENTORY> 98,578 98,578
<CURRENT-ASSETS> 258,490 258,490
<PP&E> 108,172 108,172
<DEPRECIATION> 42,307 42,307
<TOTAL-ASSETS> 348,030 348,030
<CURRENT-LIABILITIES> 77,977 77,977
<BONDS> 0 0
0 0
0 0
<COMMON> 14,237 14,237
<OTHER-SE> 249,682 249,682
<TOTAL-LIABILITY-AND-EQUITY> 348,030 348,030
<SALES> 155,952 470,390
<TOTAL-REVENUES> 155,952 470,390
<CGS> 98,157 296,846
<TOTAL-COSTS> 98,157 296,846
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 185 1,208
<INTEREST-EXPENSE> 402 1,706
<INCOME-PRETAX> 16,371 41,973
<INCOME-TAX> 6,258 15,948
<INCOME-CONTINUING> 10,113 26,025
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,113 26,025
<EPS-BASIC> .22 .56
<EPS-DILUTED> .22 .56
</TABLE>
