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Collective Tones Up, Looks for Back-Half Bounce

The retailer is diving deeper into the toning arena.

By
with contributions from Arnold J. Karr
business/news

NEW YORK — Despite a mixed first quarter, Collective Brands Inc. is well positioned for the remainder of the year, analysts said last week.

The Topeka, Kan.-based company is banking on the strength of toning product and new back-to-school strategies at Payless ShoeSource and innovative product across its wholesale roster.

On a conference call last week, Chairman, President and CEO Matthew Rubel said the fitness and toning arenas are big growth sectors for the retailer. As reported, Payless launched Champion Fitness toning footwear in March.

The firm will roll out a Payless marketing campaign this week, including TV, print and online advertisements, to highlight the fitness products.

“We anticipate that we will be able to get [toning and fitness] to 3 percent of our business this year in the second half of 2010, and as much as 5 percent for the full-year 2011,” said Rubel.

Claire Gallacher, senior analyst at Capstone Investments, agreed that toning product will be a strong point for the company.

“It does seem to be a trend that has attracted a lot of consumer interest. They rolled it out earlier this year and it sold out without [using] any marketing money,” said Gallacher. “If they have the product in stock and put the marketing dollars behind it, they could do very well.”

Some investors were concerned about the firm’s sales results during the quarter — total company same-store sales were down 1.2 percent and Payless domestic sales fell 4 percent — but analysts said the company’s long-term prospects are sound.

“The biggest concern clearly was the sales number at Payless. It was disappointing, but it’s overlooking the fact that the margins were better,” said Dorothy Lakner, managing director of consumer research at Caris & Co. “The company is doing a lot of things to run the business better and leverage the size of the organization, which could continue to help them into 2011.”

In the quarter ended May 1, Collective generated net income of $54.2 million, or 83 cents a diluted share, 8 cents better than the consensus estimate of 75 cents compiled by Yahoo Finance. In the year-ago period, earnings tallied $38.2 million, or 59 cents.

Net sales increased roughly 2 percent to $878.8 million from $862.9 million in the 2009 period. Gross margin jumped to 38 percent of sales from 34 percent, attributed to lower markdowns resulting from a cleaner inventory position. The sum of cost of goods sold and selling, general and administrative costs declined $5.2 million to $797.2 million.

“We reported strong first-quarter earnings growth, driven primarily by double-digit percentage sales increases in wholesale and in international, as well as gross-margin expansion in all areas of our portfolio,” said Rubel. “Our strategies are working at the consumer and brand levels to position us for long-term earnings growth as we continue to drive profitability with both our retail and wholesale customers.”

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