Collective Brands Inc. Q3 2009 Earnings Call Transcript

| About: Collective Brands, (PSS)

Collective Brands Inc. (NYSE:PSS)

Q3 2009 Earnings Call

December 2, 2009 5:00 pm ET


James Grant – Director Investor Relations

Douglas Treff – Executive Vice President, Chief Administrative Officer

Matthew Rubel – Chairman, President, Chief Executive Officer

Douglas Boessen – Chief Financial Officer


[Clair Gallagher – Capstone Investments]

David Mann – Johnson Rice

Christopher Svezia – Susquehanna

Jonathan Braatz – Kansas City Capital

[Ryan Rentaria – Karsh Capital]

Jeff Stein – Soleil Securities

Patrick McKeever – MKM Partners


Welcome to the Collective Brands third quarter 2009 earnings call. (Operator Instructions) I’d now like to turn the conference over to our host, Mr. James Grant.

James Grant

Good afternoon and welcome to Collective Brands conference call for the financial results on the third quarter of fiscal 2009. I’m James Grant, Director of Investor Relations. Our call today will begin with Doug Treff, Executive VP and Chief Administrative Officer, followed by Matt Rubel, Chairman, CEO and President. Also with us today for the Q&A portion of our call is Chief Financial Officer, Doug Boessen. After we complete our prepared remarks, Matt, Doug and Doug will take your questions.

Today’s remarks will contain non-GAAP financial measures. The financial measures are non-GAAP because they exclude adjustments as defined in our financial press release issued today. Management believes that these non-GAAP measures will help you to better understand underlying performance trends in our business.

For a reconciliation of these measures to the nearest GAAP measure, please see our financial press release and visit our website at and click on the Investor Relations and Presentations and Webcasts links.

Also, our remarks today contain forward-looking statements which are not historical facts and are subject to a number of risks and uncertainties. Actual results may differ materially. Please refer to today’s financial press release and our SEC filings for more information on risk factors and other factors that could impact forward-looking statements.

Now I’d like to turn the call over to Doug Treff.

Douglas Treff

Good afternoon everyone. Third quarter 2009 net earnings attributable to Collective Brands were $37 million or $0.57 a share. Including adjustments for this year and last year, our third quarter net earnings were $39 million in 2009 or $0.61, up 52% over last year’s third quarter.

We had excellent operating results for the quarter. Some of the highlights included a 3.1% comp store sales increase led by Payless Domestics 5.4% comp store increase, increases in EBITDA, operating profit and operating margin all of which benefited from having a stronger gross margin rate and leveraging fixed costs.

On the balance sheet, net debt and inventory was significantly lowered due to the good business performance and effective inventory management. And free cash flow year to date increased $151 million to $242 due to strong operating results, improved working capital and lower capital expenditures.

I’ll now take you through the key drivers and line items of our third quarter 2009 financial results in more detail. Let’s start with sales.

Collective Brands third quarter net sales increased .5% on a GAAP basis, or 3% excluding the Tommy Hilfiger sale from the third quarter last year. The company’s comparable store sales increase of 3.1% was the primary driver with Payless domestic comps increasing 5.4%.

Sales were favorably impacted by a marketing event that coincided with Payless Guest designer Christian Siriano’s appearance on the Oprah Winfrey show and Matt will elaborate on this in a minute.

Strong boot sales have benefited event more from cool temperatures in October. Higher children’s sales at retail led by Payless due to strong back to school seasons. Accessory increases at Payless driven by women’s accessories, fifth average retail prices and units both grew nearly 2% at Payless while customer conversion improved as well. And finally the performance in Lifestyle group, or PLG, saw increases once again in Suacony and Sperry Top-Sider.

These drivers of sales increases were partially offset by sales declines in PLG wholesale due to the expiration of the Tommy Hilfiger adult footwear license as well as declines in Keds and Stride Rite children’s group.

Looking at gross margin, our third quarter 2009 gross margin rate increased 140 basis points on a GAAP basis and 180 basis points on an adjusted basis as a result of lower product costs due to commodity prices and leveraging size and scale of our global supply chain, lower occupancy expenses due to renegotiation of a number of our store leases, lower freight and distribution costs related to the new distribution centers being fully operational along with the closure of the Topeka distribution center in the second quarter, and higher sales which leveraged our fixed costs.

The increase in gross margin was partially offset by litigation related to Crocks. The dispute was settled during the quarter to the mutual satisfaction of both parties.

Selling, general and administrative expense, our third quarter 2009 SG&A dollars increased due to greater variable incentive compensation as a result of company performance as well as severance costs. As a percentage of sales, SG&A was up slightly, but taking into account adjustments, we actually leveraged our SG&A ratio.

Now on to operation margins and EBITDA, the increased sales, higher gross margin and management of SG&A expenses all contributed to operating margin expansion. Operating margin was up 80 basis points and taking adjustments into account, operating margin was up 190 basis points. Third quarter 2009 EBITDA was approximately $100 million, up from $89 million in the same period last year.

Income taxes, the income tax provision was 18% in the third quarter of 2009 compared to a benefit of 36% in the third quarter of 2008. During last year’s third quarter we reduced projections for North American full year income impacting the mix of earnings by tax jurisdiction resulting in a tax benefit.

Looking at liquidity and leverage, we ended the third quarter of 2009 with cash and cash equivalents of $471 million. Excluding the excess cash we had on the balance sheet last year as a result of drawing on a revolving credit facility, cash was up $162 million from the end of the third quarter 2009. We currently have nothing drawn on the facility.

Our total liquidity at quarter end which includes the availability on our revolving credit facility was $708 million. Net debt at the end of the third quarter was $420 million, lower by $189 million versus the prior year.

At quarter end, our leverage ratio which is net debt to EBITDA was 1.8 times, well below the loan agreement covenant requirement of 4.2 times.

Inventory, Collective Brands inventory was $403 million at the end of the quarter, down $64 million versus last year. The decrease was driven primarily by good inventory management, lower products costs and higher Payless sales.

Our third quarter inventory was lower at both Payless and the Performance and Lifestyle group. Inventory units in aged inventory were lower as well. Our inventory condition is fresh and well positioned.

Capital expenditures, our year to date third quarter capital expenditures were $61 million, down $46 million compared to last year. The decline was due primarily to having completed spending on our distribution centers and reduced spending on our stores.

And as for free cash flow during the first three quarters of this year, free cash flow was $342 million, up $151 million compared to last year.

Now regarding Collective Brands financial outlook, our effective tax rate for 2009 is expected to be a mid to high teens percentage excluding discrete events primarily associated with the resolution of any outstanding tax audits.

Depreciation and amortization is expected to be approximately $145 million this year. Capital expenditures for the year are expected to total approximately $85 million. We anticipate reducing the number of Collective Brands retail stores this year by 55 net of our store openings.

Payless International anticipates adding 21 stores net of closings. The Performance and Lifestyle group is expected to add eight stores net of closings and Payless Domestic expects to close 84 stores net of openings.

Finally, we continue to communicate in our non-GAAP presentation the impact of the Tommy Hilfiger license that expired last year. As a result, $17 million of sales and $3 million in operating profit will not recur in the fourth quarter of 2009. Tommy Hilfiger sales and operating profit for the full year of 2008 was $77 million and $14 million respectively.

Now I’ll turn the call over to Matt.

Matthew Rubel

Our operating results in the third quarter reflect the talents of our 31,000 associates to execute our strategy in a challenging economic environment. We focused on the consumer and connected with her by offering innovative product, great customer services and effective marketing strategies.

The results speak clearly. We achieved sales increases. We realized gross margin expansion, leveraged a lower cost structure and managed inventory levels effectively. These results together contributed to and demonstrate the strong cash flow generating capability of the company. These are the proof points that our strategy is taking hold and impacting results.

We made significant progress in the third quarter on our 2009 goals. We gained retail market share, increased our free cash flow and lowered our operating cost structure. While our results improved, we do remain cautious as unemployment is at the highest level in decades, affecting our consumers particularly in the mass and mid tier channels.

Collective Brands third quarter results were driven by strong performances in Payless domestic and select performance in Lifestyle group wholesale brands. Some key highlights include sales growth. We recorded sales increases in a number of brands and categories.

Among the biggest successes of the quarter was a strong back to school period for Payless. We focused on Mom. We drew her into the stores. We offered her tremendous value and selection and saw strong growth in children’s which helped capture market share. We also had significant sales growth in boots and accessories at Payless.

Within the Performance and Lifestyle group, Saucony and Sperry Top-Sider again produced strong sales growth. The brands gained market share and had continued success across multiple categories and multiple selling channels.

Gross margin expansion; we saw the benefits we anticipated in the third quarter from lower product costs. At the same time, we continued to realize benefits from our efforts to reduce occupancy costs.

Advancements and innovation; we increased sales of high tech products such as [VisyPro, night running apparel and Stride Rite, sensory response technology shoes for children. We were also recognized for our product leadership as we won trade industry awards at Saucony and Sperry Top-Sider.

Strong cash flow; we ended the third quarter with significantly higher free cash flow and significantly lower net debt, showing the strength of our strategy and our hybrid business model. Challenges still remain going forward that will impact our business. Consumer spending remains soft and unemployment remains high in the United States, and economies internationally are in different points in the economic cycle.

Now I’ll address more specifically some of the third quarter 2009 accomplishments, initiatives and progress in the context of the four Collective Brands operating segments on Payless domestic.

In the third quarter Payless had strong sales growth in children’s footwear, contributing to a successful back to school season. Several related factors drove the higher results such as great price value offerings, extended sizes in all stores, targeted marketing and promotions, strength in girls and canvas and increased breadth of assortment and stock positions.

Payless also recorded very strong growth in boots for the quarter as our merchandizing emphasis on cozy and comfort styles was well received by consumers and we benefited from a cool October.

Our accessory strategy including the roll out of new fixtures now in all stores produced strong quarterly sales increases as well. This strategy is providing a winning platform for growth particularly in jewelry and sunglasses.

During the third quarter we strengthened our brand equity through a special event in which our guest designer, Christian Siriano appeared on the Oprah Winfrey show. The show culminated by announcing by Oprah, a half off promotion for about one day resulting in a large increase in consumer traffic and sales.

The event made it possible to connect with hundreds of thousands of new customers and validate Payless as a store for fashionable and affordable footwear and accessories. In establishing these connections, we collected information on many new customers that should produce long term benefits. Many teams within Payless made this event a success and I congratulate them and thank them all.

Our customer relationship management program continues to generate both traffic and transactions and strong financial returns. Payless now has customer information on more than one in five households in America. We have improved our understanding on how to better meet their needs, reach them, and connect emotionally.

We have leveraged these insights to identify market opportunities and use several vehicles to connect with our best customers including text messaging, email and direct mail. These programs performed very well at back to school and continue to scale nicely.

Customer relationship management has become a platform for growth. What’s more, these capabilities, disciplines and customer insights are readily transferrable to our other lines of business.

Payless also made progress in the third quarter on reducing its operating cost structure. We continued to rationalize occupancy costs. We anticipate occupancy costs will continue to decline in 2009 and again in 2010 compared to having grown on average below to mid single digit percentage over the last few years.

We leveraged the size and buying power of Collective Brands to reduce the cost of purchasing goods and services not for resale and we continue to roll out our energy management programs to Payless stores. We also strategically realigned some positions during the third quarter.

And lastly, Collective Licensing International has seen more interest in its brand and a greater willingness to extend or enhance existing agreements with licenses. CLI is also strengthening its international pipeline with new agreements and extensions of existing agreements.

Some examples would include Vision street wear, apparel and accessories in Japan, Airwalk footwear and apparel in Argentina, and Airwalk apparel and hard goods in the United Kingdom.

Now on to Payless International and its operating segment; several performance metrics in Canada improved in the third quarter. We saw year over year improvements in customer conversion and customer satisfaction. We saw sequential improvement in the rate of change in sales and customer traffic. Operational and financial improvements in Canada were driven by stronger boot and flipper merchandise programs and lower costs in product, rent and payroll.

Other international wins include the continuing roll out of new stores in Columbia and the growth of our franchise business. Payless now has six franchise stores in the Middle East. We continue to prepare for franchise openings in Russia next year and as announced on our second quarter earnings call that will be a focus for us.

Earlier, we announced our intention to franchise Payless stores in the Philippines through an agreement with franchise partners, Stores Specialist Inc. SSI has a strong background in developing well known international brands in the Philippines and is the leading fashion specialty retailer in the country, managing 72 well-known brands and 340 retail stores.

The first Payless store should be open by mid 2010 and long term; we believe that that market could support over 75 stores.

Also during the quarter, continued incremental tariffs in Ecuador offset other international successes, so in response, we’re working on a number of initiatives to improve Payless International financial results.

In Canada, we’re investing in consumer insight studies and customer relationship management to better connect with consumers. We’ve had a lot of success in these areas domestically and we’re also confident that we can replicate that success north of the border. We also intend to devote greater resources to children’s initiatives in Canada given the strong response there to our extended size programs.

In Latin America, we’re focused on cash conversion, ensuring that our inventory is lean and competitively priced. We are also realizing marketing savings and expect to benefit from procuring select accessories locally.

Lastly, we focused on reducing costs throughout our entire international footprint just as Payless has done in the U.S.

Third of the four are Collective Brands operating segments is the Performance and Lifestyle group; wholesale first. Suacony again recorded excellent sales gains in the third quarter driven by innovative product and great styling. The brand saw broad based strength and sales growth across all of its selling channels domestically, in Europe and in Canada.

The team is doing a terrific job and continues to build a strong pipeline of new product and generate results from core platforms including the Ride and Guide. For the fall season, Saucony successfully launched an updated model of the Triumph running shoe at the New York Marathon and the highly reflective Visipro apparel line.

Visipro has not only seen strong sell through but is also helping to build a strong brand name for Saucony in innovation in running apparel. Saucony also drove results by connecting with young consumers through a successful grass roots spike marketing program targeted to young cross country athletes.

During the third quarter Saucony re-launched its brand website, you should take a peek, with e-commerce capability and an expanded community platform designed to drive a more interactive brand relationship. The team added to its long list of trade awards during the quarter.

Saucony Pro Grid Ride Two was named Shoe of the Year by the Independent Running Retailers Association, the trade association of specialty running retailers. The same organization inducted Saucony Executive Fred Doyle into its Hall of Fame, joining other notable running executives such as Phil Knight and Jim Davis. I think that shows the magnitude of that award and congratulations to Fred.

And the Pro Grid Ride Two was awarded Best of Distance in Shape Magazine’s fall 2009 shoe awards.

Sperry Top-Sider increased sales and had a strong third quarter by other measures as well. Sperry was awarded Brand of the Year by Footwear News, a leading trade publication. This is particularly prestigious award for which I’d like to take a change to congratulate and thank the entire Sperry team. Great job.

The third quarter financial results were strong due to a great back to school season and increased demand for both boat shoes and categories extending well beyond boat shoes. The women’s segment showed strength in the quarter and is becoming an increasingly larger percentage of the total business, consistent with our stated strategy.

Growth came from all strategic channels of distribution. The premium channel was particularly strong which elevates the brand and better positions Sperry for long term growth.

We also saw a great response among younger consumers who value the authenticity of the brand. Sperry’s successful quarter came from a diversity of product categories, geographies and selling channels.

Keds; Keds is achieving success against its plan and its strategy. The team is improving profitability through more first quality sales and more favorable merchandising mix, emphasizing its flagship silhouette, the Champion, and building a core program around the sport category.

Keds launched its new redesigned website during the third quarter which allows users to purchase and design custom sneakers. Take a peak. Get your orders in now for Christmas.

The Keds target customers tend to live online, so a strong internet presence is very meaningful for the brand. They’re marketing the Keds site with a strong social media campaign and through the introduction of our Keds collective.

The brand is gaining traction with premium and trend leading accounts through the continued creation of designer collaborations to further elevate its positioning. Internationally, Keds continues to see good results in Europe, across both women’s and men’s.

The Stride Rite children’s group gained some momentum in some of its adult brands for the adult take downs such as licensed brands like Jessica Simpson and owned brands Keds and Saucony. Stride Rite also continues to make progress on its new sensory response technology footwear and has developed an exciting partnership with the American Academy of Pediatrics on this innovation. Overall, the group’s wholesale business is focused on increasing the mix of higher growth adult brands to drive long term growth.

As for performance in Lifestyle group retail, our last operating segment, the third quarter net sales increased due to ten more stores, higher sales at outlet stores and good results in children’s athletics led by Saucony.

As discussed previously, increased profitability remains a focus and a challenge at our PLG retail group. We are implementing several programs to strengthen our brand’s promise and improve upon retail store operations to drive operational excellence.

As we enter 2010, we are reorganizing our store level service structure. We also instituted formal retail operations review meetings with a disciplined cadence to better analyze metrics and make customer driven business decisions. The PLG retail team is developing merchandize stories that are strategically driven with renewed emphasis on consumer insights.

Spanning all of our operating segments are our global supply chain operations. In the third quarter product costs were lower due to a variety of factors related to commodity prices and Collective Brands greater size and scale which creates synergies for procuring materials and placing factory orders.

In the fourth quarter of 2009 we do expect product costs to decline by about 10% at Payless with decreases across all of our PLG brands as well.

Our U.S. distribution network is now complete with the final consolidation coming in the third quarter to shift the Stride Rite children’s group facility from Indiana to Ohio. The new network is reducing distribution costs primarily through lower freight and the elimination of redundancies. Pairs are moving faster too, as we have removed one to two days from the replenishment cycle for stores.

Before I wrap up, I want to share how Payless is working to help children of families in need this holiday season with our Payless Give Shoes for Kids program. This year’s program is expanding to Canada, Puerto Rico, and in ten Latin American countries in which we have stores.

Together for North America through Latin America, we will give away more than $1.2 million in free shoes to children in need this year. We’ll again utilize a grass roots approach by partnering with hundreds of local charities to distribute shoe coupons. Receipts were announced today, and we repeated Payless Gives this year because in economic crisis, the hardest hit tends to be the under privileged.

We know that there’s a significant need for children’s shoes and our Payless team has stepped up to help out and I want to thank them very much for what they’ve done as well as when they welcome these young children into our stores this December.

In closing, we strengthened Collective Brands in a hybrid model by focusing in a distinctive way on each of the diverse consumer segments that we serve as we build out platforms through growth throughout our portfolio of brands and by collecting on opportunities for efficiency and continuous improvement.

The result has been a company that’s well positioned for long term growth, leaner in cost structure and poised to leverage a variety of investment across more market segments. We realize though that this early stage of economic recovery, unemployment remains high, affecting many of our consumers. Job growth will be a key factor to having continued success.

That concludes our prepared remarks. We will now take your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from [Clair Gallagher – Capstone Investments]

[Clair Gallagher – Capstone Investments]

Congratulations on a great quarter. Within your Payless domestic stores, given the success that you are seeing with the women’s and the children’s products, have you allocated or are you thinking about allocating less space maybe to the men’s segment just in order to increase the floor space to the women’s, the kid’s, the accessories, and whatnot?

Matthew Rubel

I’m going to answer that in a round about way and the answer is we have more than enough space in our stores to support all of our categories in what they need. I think one of the things that LuAnn and the team are doing over in Payless, is they are really looking at merchandizing platforms within the women’s category and some new category platforms that they want to grow.

So you’ll see some things in the fitness category coming out this spring, some other areas that they’re doing in accessories, and that shouldn’t impact the men’s assortment at all. You have to remember we’re a family footwear store and one of the things that’s masked in the men’s number is sometimes that’s kids with big feet too.

And so we really want to make sure that we don’t diminish our assortments in men’s beyond a certain point, and we feel that right now we have the appropriate amount of space to support that while continuing to platform new areas in women’s which LuAnn has some very specific plans for.

[Clair Gallagher – Capstone Investments]

I spend a lot of time in your stores and I saw this signage that you had in the stores talking about the extended children’s sizes and I was just wondering, have you had any other kind of marketing materials or any other way to communicate to your customers that these extended children’s sizes were available?

Matthew Rubel

Yes. We do it in store. We also have demand vehicles like FSI’s. We have online marketing. We have direct mail that we do. So all of them highlight and call out the extended sizes as well as some other initiatives around that and we have some special symbols that we’ve done that carry throughout our whole kids program that we’re working on.

So we basically hit it through every media and call it out in a very thoughtful manner so it’s not just, oh I got in the store and I found it.

[Clair Gallagher – Capstone Investments]

When was the Oprah Winfrey show? When was this big sale?

Matthew Rubel

It was the last Friday of the quarter. It was the 29th of October and the promotion ran through the 30th. So it started late Thursday and ran through the end of the day Friday.


Your next question comes from David Mann – Johnson Rice.

David Mann – Johnson Rice

On the Oprah event, thanks for giving us the comp impact. Can you give us a sense on what that did to gross margin?

Matthew Rubel

Not explicitly. I think we tried to kind of say here’s what it did to comp but it really didn’t make us more money, any kind of material amount of money. I think we were 50 off. That’s public information so you can kind of do the math on that.

David Mann – Johnson Rice

So in light of that, your gross margin would have been meaningfully higher.

Matthew Rubel

There’s all sorts of ins and outs on that as it relates to how much you swept out in marked down product and what that does to releasing something on one end and lowering something on another end, so there’s multiple impacts. And since it’s not a material change, we’re not expressly calling that out.

David Mann – Johnson Rice

In terms of its effect on your quarter end inventory, how do you feel about how those levels were as you entered the fourth quarter in terms of any impact on sales in November or pulling forward sales from November?

Matthew Rubel

Our decline in inventory was driven by Payless and the Oprah event did pull some sales forward. So I think that in looking at that, some sales were probably pulled forward from Q4 into Q3 and done at virtually no gross margin. So I think that it will have an impact on the early part of our fourth quarter, would be my guess because you don’t suck that much inventory out of something at the last minute and not have it impacted, especially since it was the entire store.

So it wasn’t like oh, we’ll mark down the bad stuff and not the good stuff. We had to do everything to have Oprah say, “Go shop at Payless.”

David Mann – Johnson Rice

In terms of the product cost that you called out and the benefit in gross margin, the orders that you place for Q1, can you give us a sense on what kind of benefit you’re seeing in terms of reduced product cost?

Matthew Rubel

At this point we’re still negotiating some Q1 stuff, so it’s really too early to say. It’s going to be lower, how much, they actually have a merchandizing meeting going on in the next week or so which is going to finalize some of that so it would be premature for me to call something out. But we are giving you a heads up it will be lower and we gave you what the fourth quarter number would be at this point, so we’re trying to keep ahead of it with you.


Your next question comes from Christopher Svezia – Susquehanna.

Christopher Svezia – Susquehanna

When you look at the businesses, Saucony, Sperry Top-Sider, Keds and you think about as you go into the spring selling season, what’s been the response from retailer’s willingness to look at the order book and pre-book product versus at once. Just some color in terms of what you’re seeing so far even whether as you go through as well in terms of what you’re seeing in response to how the order book looks.

Matthew Rubel

We don’t give future guidance around it, so I’ll give you kind of a macro view which you can’t quantify or one, it doesn’t mean a number. First of all, our response on our offerings, it looks like we’re getting some great stuff. The premium channel is reacting appropriately which is great and they’re kind of looking at women’s as a great growth opportunity as well as kind of the new categories in men’s. So we’re doing fine there.

Keds is really getting more interest from accounts especially amongst the core Champion as they’re seeing that take away. We’re really focused on the premium channels there and the kind of buzz generating groups and getting great sell off there.

In terms of how far in advance they’re booking, retailers are buying tighter. It’s not at an once thing, because we’re not as you can see from our inventories, we’re not holding the inventory for it to be at once driven. But the booking cycles are tighter, so people are looking at business a little bit closer in than they usually would.

Christopher Svezia – Susquehanna

Just to go back to this inventory for a second, it’s been down roughly 14% or there about. How should we look at that as you go through the fourth quarter? Does that start to build a little bit as you go through to be ready for spring?

Matthew Rubel

Yes it does. It’s got a little earlier Easter, so we’ll start to have stuff in the pipeline toward the end of the quarter. Also the Oprah event took some stuff down which you can basically based on how we gave the numbers, you can get to the basic number on that as well. So you’ll see an inventory build. We’re lower in inventory than we’d like to be right now.

Christopher Svezia – Susquehanna

And then on this boot trend, and I think you mentioned fitness as well, a lot of talk about fitness and wellness, but on the boot trend, has boot become a bigger piece of the business as you go into the fourth quarter and how sustainable is that trend as you go into first quarter? It seems to be a bigger and bigger first quarter sort of boot business as we go through the past couple of years. I’m curious as to your thoughts about that.

Matthew Rubel

I guess I’ll talk to the Damocles sword. You want to have boots but you want to out of them because when it’s over, it’s over. So I would say on the Payless side, and looking at LuAnn is doing, I think she’s going to carry it a little longer, but not a lot, and not a lot more.

So we’re not looking to, we’d rather be out and be fresh. We might miss some business on that. I don’t know. But we’re going to kind of throw the fresh product at that point.

And in terms of fitness, we’ve got some things we’re working on in the wellness category that will give us the ability to democratize wellness just as we’ve democratize fashion and design in other categories.


Your next question comes from Jonathan Braatz – Kansas City Capital.

Jonathan Braatz – Kansas City Capital

A question about how aggressive you are at trying to reduce your occupancy costs. For example, if you might have a store with four years remaining on their lease, are you attempting to renegotiate that lease or more just on the near terms.

Matthew Rubel

I guess I’d have to say picture yourself as a landlord with a four year lease with a company that has good cash flows and let’s say you have two other stores with them and you’re a small landlord. You’re not going to go and take that cost down. You’re not going to do it. I think maybe we had one guy who sent us a note and said I’m going to take your rent down because I should. That’s a special human being.

So the answer is not. If you have a large portfolio with some of the large landlords, you certainly can get out an extra year perhaps, but you’re not going to get out three years and four years. They’re just not going to let you out.

Given that our leases renew approximately every five years, during this cycle we were able to get after certainly about two years worth 40% near to 50% of those, so we continue to work through it throughout ’09. We worked on it in ’08. We believe there’s opportunity in 2010 as well.


Your next question comes from [Ryan Rentaria – Karsh Capital]

[Ryan Rentaria – Karsh Capital]

I was curious on the debt side of things, it looks like your total debt position really hasn’t changed very much throughout the course of the year and you’re building up cash. When should we expect some further debt pay down?

Matthew Rubel

We’re studying that right now and we’ve got some other things that we’re looking at as well, but we will probably strengthen our capital structure a little bit here in the near term by taking out some of our debt.

[Ryan Rentaria – Karsh Capital]

I was also curious if you’re noticing any benefit from Wal Mart reducing some of its footwear SKU’s or if it’s too small and early to be able to quantify that or get a sense for that?

Matthew Rubel

We’ve been asked this question multiple times. I try not to talk too much about other people and that. We study our overall competition. We are very respectful of the great merchants that they are and we’re just trying to focus on the consumer and pick up market share and we seem to be able to do that at this point.


Your next question comes from Jeff Stein – Soleil Securities.

Jeff Stein – Soleil Securities

On the issue of market share, if you look at some of the competitors in the family footwear sector, Brownshoe, Shoe Carnival, DSW, they did report higher comps and even on a two year basis so I’m just kind of curious, do you really think you’re holding your market share and are there any categories where you think you’re missing? The reason I bring this up, if you back out the 3% benefit from the Christian Siriano event, it would seem like the normalized comp was more like maybe a plus 2% for the quarter domestically.

Matthew Rubel

The first thing is, it’d be higher than that because is was 5.4% domestically. We don’t make up market share so it doesn’t matter who sends out a newsletter saying we do, we don’t. It’s a quantitative thing that we get from who’s gaining market share in certain channels overall and that’s kind of what we give you. Whether we’re at 101 index or 102 or 103, we don’t provide that and we don’t intend to.

And again, there’s all sorts of people in the footwear and it isn’t just those people and those people don’t have the largest share that you mentioned. So I appreciate the question, but it’s a quantitative number that we get from an outside source that other people use as well.

Jeff Stein – Soleil Securities

Looking at SG&A in the fourth quarter, should we be expecting the third quarter trend to be kind of the more normal trend going forward or is it more likely to be something in between what we saw in Q3 and the first six months of the year?

Douglas Boessen

I think as I talked a couple of quarters ago about the second half of the year, we anticipate that the decrease in SG&A expense would begin to plane out in the last half of the year and in the third quarter for example, incentive compensation actually makes up more than the full amount of the delta.

Related to Q4, I think the opportunity is to continue to keep the lean operation. As some insight into Q3, and continuing into Q4 would be that actually related to Payless SG&A is down and SG&A in the Performance and Lifestyle group is actually where we are making investments to grow those businesses.


Your next question comes from Patrick McKeever – MKM Partners.

Patrick McKeever – MKM Partners

Just wondering first if you could provide some more detail on your international business by country. You said various countries were in various stages of the economic cycle. Where are things getting better, Canada a little bit but outside of Canada and where things are perhaps getting worse?

Matthew Rubel

You’ve got all sorts of different types of economies in Central America so we don’t break out individual reporting unless there’s something material that’s happening within a country. And since Ecuador has had a material change in its profitability and a material change in its comp store number due to this tax that’s been put on by the government, we’ve called that out just to give you a highlight.

So that was a very profitable country for us and it’s probably at a break even now. So just a slight loss right now. But on a cash flow basis, we should be cash flow positive next year and even in that country.

We just don’t break it out and there’s too many little countries in there to tell you this one’s up two, this one’s down six, that type thing.

Patrick McKeever – MKM Partners

I guess I’ll get a little Oprah question in myself because that was some event I guess if it drove the overall comp up 3%.

Matthew Rubel

Under 3%.

Patrick McKeever – MKM Partners

And that is the total company comp not just the Payless domestic comp?

Matthew Rubel

That’s correct.

Patrick McKeever – MKM Partners

What were your expectations going into that event? How did you plan for it at the stores? It must have been one of your biggest volume days as a company. Will you do something else like this with Oprah in the future? Is there an opportunity for that?

Matthew Rubel

I guess I’d say if you know her, call her. We’d certainly love to, maybe not at 50% off, and we’d prepare for it a little bit better. But our team did an amazing job. Our marketing team, our store operations team, our staff stayed extra hours to clean up the store and to get it prepared. We had lines out the door.

We sold well over a million pairs of shoes in one day and it was our biggest unit day in the history of the company. And the store did an amazing job, and our scores are great. So all I have to say is great job to the team. They prepared, and our inventory management team, we had stores that were out of shoes in some places.

So our logistics team was in starting on Friday moving trucks because when they realized what was happening.

Patrick McKeever – MKM Partners

A little bit bigger picture, I know you don’t give sales and earnings guidance, but when you look at the inflection in your business in the third quarter and think about what’s sustainable and what might not be sustainable, maybe just give us some thoughts there.

Matthew Rubel

The only thoughts I’d give you is, there’s 10.5% unemployment and I do not believe that we are in a growth driven consumer economy right now, so I’ll only speak to the macro because we don’t give guidance.

And that is, it’s a tough market place out there. It’s highly inconsistent. It’s event driven. It’s weather driven. There’s all sorts of things that will tick it up or tick it down. There’s category opportunities. Ultimately, we as a company have got to start looking at share of wallet not just market share in shoes and how do shoes get back to growing share of wallet not just having it be I-pods and other things like that.

So I would just say let’s all be cautious. This is not a recovering economy. It may not be a sinking one, but it’s not a recovering one yet.


There are no further questions. I’ll turn it back to our speakers for any closing remarks.

Matthew Rubel

Thank you very much and have a happy holiday to everybody and please shop online at all of our brands or in our stores. Thank you.

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