Payless ShoeSource

Payless ShoeSource Inc. (Topeka, Kansas) has reported a net loss of $2 million for its fiscal year ended Jan. 29, 2005. The retailer said these results are preliminary and unaudited. It said it has undertaken a comprehensive review of its accounting treatment for leases and lease-related items. The company, in consultation with its independent registered public accounting firm, Deloitte & Touche LLP, decided to change its accounting practices in this area, and to restate its historical financial statements. The impact of the lease accounting corrections on net earnings does not exceed $1 million in any of fiscal years 2004, 2003 or 2002.

In addition, said the company, an error was discovered relating to its accounting for deferred income taxes. But it said it doesn’t that these errors resulted in a material misstatement of its consolidated financial statements for any annual or interim periods previously reported.

During the fourth quarter of fiscal 2004, the company recorded a net loss of $26.5 million, partly from discontinued operations such as its Parade chain, its operations in Peru and Chile and a small number of North American Payless ShoeSource stores. Sales were flat for the year and same-store sales decreased 0.5 percent.

Sales for the fourth quarter were down 1.7 percent and same-store sales decreased 2.3 percent.

During the third quarter of 2004, Payless announced a series of strategic initiatives as part of a plan designed to sharpen the company’s focus on its core business strategy, reduce expenses, accelerate decision-making, increase profitability, improve operating margin and build value for shareowners over the long-term. These strategic initiatives included: exiting all 181 Parade stores, and related operations; exiting all 32 Payless ShoeSource stores in Peru and Chile and related operations; closing 491 Payless ShoeSource stores in North America, including 230 stores that had originally been scheduled for closing or relocation as a part of the normal course of business in fiscal 2004; reducing wholesale businesses that provide no significant growth opportunity; and reducing the company’s expense structure.

In the fourth quarter 2004, the company opened 81 new stores and closed 463, for a net decrease of 382 stores. During fiscal 2004, the company opened 302 new stores and closed 704, for a net reduction of 402 stores. Total store count at the end of the year was 4640.

During the 2005 fiscal year, Payless said it intends to open approximately 30 new stores and close approximately 70, for a net reduction of approximately 40 stores. The company also intends to relocate approximately 70 stores. Payless ShoeSource opened its first test store in Japan during the fourth quarter 2004. The company will continue to evaluate performance of this test store before considering any additional locations in Japan. Payless has curtailed any other expansion into new international markets to focus on its core business.

Company sales for the month of February 2005 are currently estimated to be up approximately 11 percent. Same-store sales increased 13.5 percent.

“During the fiscal year 2004, Payless ShoeSource continuing operations achieved 30.9 percent gross margin, and significant improvements in operating profit and earnings, despite lower sales than last year,” said chairman and ceo Steven Douglass. “Payless also achieved the following objectives: reduced and improved the quality of our merchandise inventory and positioned the company for improved performance in 2005; substantially completed our strategic initiatives; reduced the company’s operating expense structure through the reduction of 8% of its store base and the elimination of approximately 200 management and administrative positions in the second half of 2004; and modified certain tactics — including more focused and intensified messaging, simplified merchandise planning processes — and we are achieving better balance of tasks and customer service in our stores.”