Cool weather in the early summer killed demand for sandals, and Payless ShoeSource ( PSS) is paying the price. For the second time in less than two weeks, the company slashed its earnings forecast for the quarter, according to a statement released Tuesday, and reported that it may not meet certain financial obligations to lenders as inventories pile up. Sandals are traditionally a key category for the retailer in its fiscal second quarter ending Aug. 2, and Payless now expects sales at stores open at least a year to have double-digit declines, thanks to the unusually cool weather in May and early June. The retailer intends to defend its market share, and clear spring and summer merchandise, through a series of promotions and more aggressive markdowns that will hurt profit. As a result, Payless expects a "nominal loss to a slight profit" for the quarter and pressure on sales and margins to persist throughout the second half of the year. On June 5, Payless warned that it would miss both its quarterly earnings forecast of 40 cents to 45 cents per share, and its annual forecast of $1.25 to $1.35 per share. The retailer may not meet the most restrictive covenants of its credit agreements with lenders, a fixed charge coverage ratio. It intends to amend its fixed charge coverage ratio requirement, according to the press release, and it is evaluating its capital structure. While Payless could make no assurances that it would succeed in resolving this issue, the company believes it will be able to amend the covenants, based on its positive cash flow from operations, the company's history of paying down borrowings faster than required and its ample coverage levels under the other covenants.
The company's outstanding indebtedness on its term loan declined to $200 million in early May from $293.3 million last year. As of May 3, no amounts were drawn against the company's $200 million line of credit, but the availability under the line of credit was reduced by $13.4 million in outstanding letters of credit. Shares of Payless trading on the New York Stock Exchange were down 9.9%, or $1.36, at $12.44 Tuesday morning.