Famous footwear maker Stride Rite (NYSE: SRR) laced up its results for the fiscal first quarter yesterday, and the market didn't like the fit. Should the company slip into your portfolio, or are these soles worn out?
Net sales grew by 6%, coming in at $194.7 million. Net income was $11.1 million ($0.30 per diluted share) versus $8.3 million ($0.22 per diluted share) in last year's comparable quarter. On an adjusted basis, which takes into account acquisition costs and integration charges, net income for the current quarter would remain at $0.30 per diluted share, while the previous year's bottom line would have changed to $0.28 per diluted share.
In response to all of this news, the market cut Stride Rite's stock price by 10% yesterday. Was this an overreaction? The company did have weaknesses that are worth pointing out -- the Keds and Hind brands experienced sales decreases of 9% and 31%, respectively, driving an overall 1% decrease in wholesale revenues. A 3% increase in operating expenses and no share repurchases during the quarter certainly didn't help.
On the plus side, children's retail sales were up by 14%, driving an energetic 9% overall gain for the children's group. In addition, the gross profit margin increased 90 basis points to 40.8%. As Matthew Crews mentioned in a previous article on Stride Rite's earnings, margins are where it's at for this shoemaker. The company wants to concentrate on a proper product mix that will allow it to expand margins over time so that it can continue to effectively compete with players such as Skechers (NYSE: SKX), Payless (NYSE: PSS), Brown Shoe (NYSE: BWS), DSW (NYSE: DSW), and Nike (NYSE: NKE).
Stride Rite has been investing via acquisitions to grow its business. A look at the latest 10-K shows that more than $180 million in acquisitions were made during the past two fiscal years. That's way more than the roughly $82 million in cash from operations over that same time period. Management is betting that it has a good buying eye; the addition of the Robeez and Saucony brands have helped to improve the top line, and they hopefully will help to spur bottom-line growth in the coming years.
I don't think this quarter wasn't anything to write home about. The stock is currently yielding about 1.8%, and if I were to be interested in Stride Rite as an investment idea, I'd need to see a higher yield. I'll also need to see how things develop as far as the acquisitions are concerned -- will cash flow improve this year as a result, or will it remain stagnant? In addition, as Ryan Fuhrmann observed back in September, it would be great to see all brands pulling their respective weight.
Simply put, I'm not ready to walk in these shoes just yet.
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Fool contributor Steven Mallas owns none of the companies mentioned. As of this writing, he was ranked 10,562 out of 25,209 investors in Motley Fool CAPS. Don't know what CAPS is? Check it out. The Fool has a disclosure policy.
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