Shoe Pavilion, Inc. Reports Third Quarter 2007 Financial Results

Business Wire, Nov 26, 2007

Company Expanding Business Strategy to Add Branded Consignment Denim, Sportswear, Accessories and Fragrance

SHERMAN OAKS, Calif. -- Shoe Pavilion, Inc. (Nasdaq:SHOE) today reported financial results for its third quarter ended September 29, 2007.

Third Quarter Results

Net sales for the third quarter of fiscal year 2007 increased 18.2%, or $5.7 million, to $37.3 million from $31.6 million in the same period of fiscal year 2006. Comparable store net sales for the third quarter increased 2.3% from the same period last year. The Company reported a net loss of $10.2 million, or $1.07 per diluted share, as discussed below.

Gross margin as a percent of sales was 12.8% in the third quarter compared to 31.6% in the same period last year. The decrease is primarily due to an inventory lower of cost or market adjustment of $2.3 million related to the Company's plan to clear floor space for the introduction of consignment merchandise assortment, discussed below, as well as a non-cash impairment expense of $1.7 million related to seven underperforming stores. Gross margin was also impacted by higher occupancy expenses and a reduction in selling margin due to increased markdown activity. Excluding the inventory lower of cost or market reserve and asset impairment charge, gross margin for the third quarter of 2007 was 23.6%.

Selling, general and administrative expenses as a percent of sales increased to 34.0% compared to 32.7% in the same period of the prior year primarily reflecting higher store costs and Sarbanes-Oxley compliance expenses.

The net loss of $10.2 million, or $1.07 per diluted share, was incurred in the third quarter, compared to a net loss of $0.32 million, or $0.03 per diluted share, for the third quarter of 2006. The net loss was impacted by the aforementioned $2.3 million inventory lower of cost or market adjustment and $1.7 million asset impairment charge as well as a $4.8 million charge to income tax expense related to establishing a partial valuation allowance against its deferred tax assets.

During the quarter, Shoe Pavilion opened seven new stores and closed two stores for which the leases had expired, bringing the total number of stores that it operated as of September 29, 2007 to 113 stores.

Dmitry Beinus, President and Chief Executive Officer, stated, "While we were pleased that our sales and comparable store sales increased in the third quarter compared to the prior-year period, we are continuously reviewing opportunities to optimize our performance and improve store productivity while bringing new product offerings to our customers. To that end, we are excited that we successfully tested a new initiative to bring branded consignment denim, sportswear, accessories and fragrance merchandise into our stores. We signed consignment merchandise agreements for denim and fragrances in September and October of 2007, respectively. We will be rolling out this initiative into all of our stores through the next fiscal year. In addition to this new initiative, we will continue to focus on improving our store base, leveraging our operating model and enhancing our footwear merchandise."

Expanding Business Strategy

Shoe Pavilion also announced today that the Company is expanding its business model by adding consignment merchandise to its product offerings in order to improve store productivity. The new business model will broaden the Company's product offerings to include branded denim, sportswear, accessories and fragrances. A pilot program for the new initiative began in September 2007, and has been well received by customers.

The Company currently intends to place consignment merchandise into all of its stores within the next fiscal year. Approximately 14 new Shoe Pavilion stores are expected to be opened in fiscal year 2008 and new consignment products will also be offered in these stores. The Company presently anticipates that the branded consignment merchandise will grow to represent between 10% to 20% of net sales on an annual basis.

In order to dedicate floor space to this new initiative, the Company has commenced a markdown program to reduce certain inventory in the stores. As a result of the roll out of this new initiative and the associated markdown program, the Company anticipates that it may record additional inventory lower of cost or market adjustment in the fourth quarter of this year and the first quarter of fiscal year 2008 similar to the inventory lower of cost or market adjustment taken in the third quarter of 2007.

Mr. Beinus concluded, "In our continuous effort to improve our operations, we conducted a full review of the merchandise carried in our stores and evaluated alternative uses for floor space which contained product that was not consistent with our sell through objectives. During this process, we also determined that there was significant interest from wholesale companies searching for new avenues of retail distribution for consignment products. Our new branded consignment merchandise initiative will enable us to provide a wider array of appealing products in our stores. Importantly, we anticipate the expansion of our business model will generate improvement in both our top and bottom lines over time. Additionally, as a result of this initiative, we expect to reduce our working capital needs as less of our inventory will be owned."