Collective Brands will close about 475 underperforming and low-volume Payless ShoeSource and Stride Rite Children stores over the next three years in the U.S., Canada and Puerto Rico as part of a strategic review. More than 300 of the closings will be carried out by the end of the current fiscal year finishing in January.
About 400 Payless stores and 75 Stride Rite stores are scheduled for closure, representing nearly 10 percent of Payless' and around 20 percent of Stride Rite's networks. This year about 270 Payless stores will be closed along with some 45 Stride Rite locations, mainly around January. In the 2010 fiscal year, the stores slated for closure this year had combined sales of about $110 million.
The company booked non-cash asset impairment charges of $19 million in the second quarter related to the store closures. Future lease termination, severance and other cash exit costs associated with the store closings could be in the range of $25-35 million. Lease termination costs will be recorded when the stores are closed or lease terminations are negotiated with the landlords.
Once these stores are closed, Collective Brands anticipates an annual improvement in operating profits of $18-22 million including the benefit of estimated sales transferring to remaining locations from closed stores.
The American company's board and management will conduct a strategic and financial review to further enhance shareholder value. They will work with the advisers, Perella Weinberg Partners and Kurt Salmon, and explore a full range of alternatives for the company. The group warned that there is no assurance that the review will lead to additional measures.
The board adopted a short-duration Rights Plan to protect shareholders while the review is being conducted. Under the plan, the rights will become exercisable if a person or group acquires 15 percent or more of Collective Brands' common stock. The rights expire on Aug. 15, 2012, unless redeemed or terminated earlier.
The company is also working on aggressive actions involving the positioning of brands, boosting growth, and improving profitability and return on invested capital, as well as strengthening the management team and group structure.
The company stressed that many core clients of its Payless chain, such as African-Americans, are being hit by the economic slowdown and there is no indication that the situation will improve in the near future. The retailer's woes were worsened by its strategy of inreasing prices and margins. Payless will no longer pursue that path and will focus on budget-conscious customers.
It will seek to boost traffic and transactions by encouraging higher spending by loyal clients and winning back old customers by improving pricing and local assortments. Significant changes in store management are expected in the fourth quarter.
The announcement accompanied results for the second quarter ended on July 30, which showed that revenues increased by 4.9 percent to $882.4 million, beating market forecasts of $865.5 million. But the company unexpectedly booked a loss due to impairment charges.
Sales were driven by growth at the Performance + Lifestyle Group's (PLG) wholesale and retail businesses and Payless's international activity. In the meantime Payless's domestic activity recorded a 2.7 percent drop in revenues to $494.5 million. Same-store sales were down by 2 percent in the quarter.
The decline in revenues is due to an 11 percent drop in sandal sales, the retailer's largest single product category. The group noted that 15 percent of footwear clients did not buy sandals this year. This was due to the economic environment, less appealing designs for its core clients and pricing.
Payless International increased sales by 6.7 percent to $117.2 million, driven by a 3 percent rise in comparable store sales stemming primarily from Latin American stores, where they rose by a high-single-digit rate. Overall comparable store sales for the Collective Brands group declined by 0.7 percent.
PLG's wholesale turnover was up by 24.6 percent to $217.7 million, led by the brand Sperry Top-Sider. The Saucony and Stride Rite lines also enjoyed significant growth. PLG retail boosted sales by 8.6 percent to $53.0 million, lifted by new Sperry Top-Sider stores and a 4 percent increase in comparable store sales. The division's backlog for delivery in the third quarter was up by 36 percent year-on-year to $153 million. It is expected to lift wholesale sales by more than 20 percent in the third quarter and improve operating margins.
Following the announced store closures, the group's overall retail network will decrease by nearly 300 stores at the end of January compared with a year earlier. Collective Brands will continue to expand the Sperry Top-Sider network as well as Payless and Stride Rite franchises abroad.
At the end of July, the group had 4,857 wholly owned and joint venture stores worldwide, of which 4,472 were managed by Payless and 385 by PLG's brands Stride Rite and Sperry. The company also had 114 franchised stores in 14 markets, of which 103 were under the Payless banner and 11 were Stride Rite. At the end of January, the company anticipates it will have 4,206 Payless stores and 346 PLG stores, representing a total of 4,552 stores. In the meantime, the number of franchised stores is due to reach 140 in 17 markets.
The number of franchised stores is expected to rise to 700 by the end of 2014 and double to 1,400 over time as the group grows outside the Americas. The group plans to aggressively convert franchise stores into joint ventures to further benefit from the expected growth of those businesses. In the meantime, expansion of the retail footprint in Latin America will be achieved through joint venture stores.
The consolidated margin in the quarter slumped to 23.6 percent from 34.4 percent a year earlier. Excluding adjustments related to store and trade name impairments, the gross margin fell by 3.6 percentage points to 30.8 percent. The net loss attributable to Collective Brands was $35.0 million compared with a $21.1 million profit. Excluding certain impairment and severance charges, adjusted net earnings reached $9.9 million.
In the quarter, the company recorded impairment and severance charges that reduced pre-tax income by $83.6 million, of which $76.8 million was non-cash. Inventory at the end of the quarter was $585.0 million, up by 17.6 percent. The increase was driven principally by higher product costs, more PLG footwear units and additional Payless accessories.