Profits Up at Collective, Firm to Trim Expenses

NEW YORK — Though it reported last week nearly double third-quarter profits, Collective Brands Inc. is well aware of the economic climate and plans to curb expenses and manage cash flows for the remainder of the fiscal year and beyond.

“It is in this uncertain economic environment that Collective Brands is elevating its brands and product while managing for free  cash flow. We will use excess cash to strengthen our balance sheet, improve our capital structure and drive strategic growth. We are focused on liquidity and cash generation by prudently managing operating costs, capital spending and inventory,” Matt Rubel, president, chairman and CEO, said on the firm’s post-earnings conference call last Wednesday, held after the close of the markets.

Though its total debt — largely stemming from the purchase last year of Stride Rite Corp. — increased to $1.1 billion during the quarter from $926 million a year ago, Rubel said the firm plans to use its $523.6 million in cash to “maintain strong liquidity and reduce outstanding debt.”

John Shanley of Susquehanna Financial Group was optimistic Collective can pay down debt, writing in a report that he expects the firm to be cash-flow positive in fiscal 2009. In general, Shanley said that due to the strength of Collective’s international division, expected contributions to sales and earnings from higher-priced private brands at Payless and Stride Rite and “a potential trade-down effect from consumers,” the company is well positioned to weather the difficult economic environment.

Investors also like Collective’s prospects and boosted the firm’s shares by 26.7 percent to $9.20 last Thursday, amid a down day for the broader market.

In terms of cost cutting, Rubel said the firm has “decreased non-productive payroll hours in stores and has reduced discretionary spending.” He added that “operating and capital-saving opportunities exist in a number of areas across the company. We believe this is a multimillion-dollar opportunity annually, beginning next year.”

One area where the firm won’t trim costs, however, is its plans to open in the Middle East via a franchisee, M.H. Alshaya. The first store will bow in late spring, Rubel said, adding that “the entire nine-country Middle Eastern region where Alshaya operates could support more than 200 stores.”

The firm said, however, that due to the uncertain economy it is not maintaining or updating its prior long-term operating profit outlook.

Topeka, Kan.-based Collective said that for the three months ended Nov. 1, it earned $47.5 million, or 75 cents a diluted share, versus a profit of $25.5 million, or 39 cents, a year ago. Adjusted for litigation expenses and purchase accounting, stemming the Stride Rite acquisition, the firm said it would have earned 42 cents — matching analysts’ expectations — versus year-ago earnings of 48 cents.

Net revenues rose 4 percent to $862.7 million, and same-store sales fell 3.2 percent. Payless store comps fell 3 percent, though the firm’s total average unit retail prices rose 5 percent. Collective said comps and Payless net sales were hurt by economic factors, a high single-digit percentage decline in store traffic and a decline in sales of athletic footwear.

Among some of its brands, Sperry Top-Sider had a double-digit sales increase during the quarter; Collective cited “execution of its strategies to grow the women’s business better, serve younger customers and become more diversified in lifestyles.” In total, Stride Rite Group sales increased 11 percent to $197.6 million, boosted by a double-digit increase in international sales.

At Payless, strong third-quarter results came from its American Eagle and Airwalk brands. Availability of the American Ballet Theatre brand rose by more than 400 doors to 3,500 during the quarter and had double-digit percentage sales gains, Rubel said.

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