Economy Impacts Collective in Q2

NEW YORK — Although Collective Brands Inc. took a hit in the second quarter, few were sounding alarms over the company’s tepid results.

Matthew Rubel, chairman, CEO and president of the

Topeka, Kan.-based company, assured analysts on a conference call that the loss of the Tommy Hilfiger adult footwear license last year, and unfavorable foreign exchange rates, were largely to blame for Collective’s second-quarter slide, and that the firm is on track to rebound in the third and fourth quarters.

“The second quarter really represented the bottom,” he said. “We are seeing solid business at back-to-school — and we’re seeing tremendous opportunity as we move forward.”

Christopher Svezia, a senior analyst at Susquehanna Financial Group, said that Rubel had already “telegraphed that the second quarter was going to be tough, although it was a little tougher than people expected.”

Consumers shopped sparingly in the second quarter, and all of Collective’s business units bore the brunt, as total revenue slid 8 percent to $836.3 million. Same-store sales dropped 7.3 percent in total, which included declines of 6 percent at the company’s Payless ShoeSource chain and 2.7 percent at its Stride Rite stores.

“The retail environment continues to be challenging. Overall spending and retail traffic were down at a consumer level and in the footwear marketplace,” said Rubel. “Footwear consumers reduced spending and were very deal-conscious.”

The company’s Stride Rite division reported the biggest drop in sales, at 13 percent, thanks to the expiration of the Tommy Hilfiger license, but Collective’s Payless International, Payless Domestic and Stride Rite retail divisions also were down, by 11 percent, 7 percent and 1 percent, respectively.

There was some good news during the period though. Sales in children’s footwear were flat across the company, and Payless’ accessories business was up both in net sales and comp-store sales. Rubel pointed to Payless’ new expanded sizes program as a “home run” and said that Saucony, which falls under the Stride Rite wholesale division, was up double digits.

Although Rubel would not quantify his expectations for the coming months, the CEO noted that August sales had “tracked to expectations” and that most of Collective’s businesses continue to gain market share.

Svezia expects the company’s product and occupancy costs to come down in the third and fourth quarters, positively affecting its bottom line. “This isn’t a top-line story,” Svezia said, noting that cutting costs is helpful, but ultimately, the firm needs to realize sales growth, which may not happen until next year. “If [the company] sees some directional improvement in the third quarter, they can get to a flattish [comp-store sales] number in the fourth quarter, but the mall business is still tough.”

Collective last week reported a profit of $18.7 million, or 29 cents a diluted share, compared with $8.1 million, or 13 cents, in the year-ago period. However, without the impact of foreign currency exchange rates and the expiration of the Tommy Hilfiger license during the same period last year, the company’s net income in the second quarter of 2008 would have been $32 million, or 50 cents a diluted share.

Also during the quarter, Collective opened 20 retail stores, but closed 33 locations and relocated five. The company expects to end the year with 60 fewer stores in total.

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