Payless ShoeSource Profits Fall 59 Percent

NEW YORK – Payless ShoeSource Inc., the nation's largest shoe retailer, Wednesday said its third-quarter profits tumbled 59 percent, and warned of a fourth-quarter loss after a restructuring to trim staff and costs.

The restructuring, announced Tuesday, called for the closure of four U.S. division offices and the elimination of 81 jobs, including nine in senior management.

Payless said it would take a fourth-quarter charge of $18 million to $20 million to implement the plan, which is expected to save $10 million in annual administrative costs.

Payless operates more than 4,900 value-priced, self-service shoe stores under the Payless and Parade of Shoes brand names.

Analysts said the restructuring is a good long-term move, but noted that the Topeka, Kansas-based retailer still faces significant pricing pressures as it tries to offer better-quality products at prices that might be higher than customers are willing to pay in these recession-wary times.

David Mann, analyst with Johnson Rice, said while a value-priced retailer like Payless might typically benefit from a challenging economic climate, as do other off-price and discount retailers, its recent attempts to upgrade its product, and subsequently its prices, has turned some consumers off.

"They're not positioned as well as we think they should be," Mann said. "In this kind of retail environment, the consumer is looking for price first and the offering second, so Payless is coming under a lot more pressure than it should."

Shares of Payless, which have lost about 10.5 percent of their value over the past year, were up $1.21, or 2.15 percent, at $57.36 on the New York Stock Exchange shortly after midday.

Payless said it expects a fourth-quarter loss of 10 to 20 cents a share, including the charge, and forecast full-year earnings of $3.26 to $3.41.

Excluding the restructuring charge, the company expects to earn 35 to 40 cents a share in the fourth quarter, and $3.81 to $3.91 for full-year 2001.

Estimates gathered by research firm Thomson Financial/First Call, which typically excludes one-time items such as restructuring charges, ranged as widely as a loss of 16 cents to a profit of 36 cents for the fourth quarter, with a mean profit estimate of 24 cents a share. For the full year, the range was $3.32 to $3.85, with a mean estimate of $3.71.

Payless also said it expected same-store sales, at outlets open at least one year -- a key measure of retail growth -- would fall in the mid-single digit percentage range in the fourth quarter.

"The company has made a lot of announcements over the last few weeks (and) the outlook really has not changed," Mann said, adding that he expects sales to remain depressed through the fourth quarter.

"Clearly they're taking a very aggressive stance on their restructuring in terms of changes in personnel and letting a lot of people go, and that really should position them much better for next year," Mann said.

For the third quarter ended Nov. 3, Payless said net income fell to $13.3 million, or 59 cents a share, from $32.4 million, or $1.44 a share, in the year-ago period.

Analysts polled by First Call had expected earnings of 56 to 58 cents a share, with a mean estimate of 57 cents.

Total sales for the quarter fell 3.6 percent to $697.1 million from $723.0 million, while same-store sales fell 6.3 percent.

During the third quarter, the company opened 96 new stores and closed 50, bringing the total count to 4,964.

Payless said it continues to expand internationally, with 46 stores open in the Central America and Caribbean regions at the end of the third quarter, ahead of the company's original plan to have 40 to 45 stores open by the end of the year.

The company said it expects to be operating 60 to 65 stores by the end of the year in these regions and believes it has the opportunity to grow to as many as 150 to 200 stores.

Payless also opened 12 new stores in Canada during the quarter, bringing the total Canadian store count to 260.