Is Kenneth Cole a Stylish Idea?

Kenneth Cole Productions (NYSE: KCP  ) , a maker of fashionable items such as footwear, handbags, and fragrances, reported earnings for its fiscal first quarter yesterday after the market close. Were the results hip enough for investors?

Net sales increased 5.5% to $129.3 million. Diluted earnings per share increased 13% to $0.17. That was a penny higher than the expectations of the Wall Street overlords.

Unfortunately, next time around, things might not be so trendy. For the second quarter, Kenneth Cole expects to earn somewhere between $0.14 and $0.16 per diluted share. Wall Street was sort of hoping for something closer to $0.27 per stub.

Oh, well, can't always satisfy the analysts. Kenneth Cole is an interesting company because of its yield. Right now, it isn't too bad -- you could lock in around 2.8% on your money at today's prices. As fellow Fool Ryan Fuhrmann put it, Kenneth Cole is fashion that pays.

But is Kenneth Cole a dividend investor's dream? A look at the 10-K does show that the dividend obligation was easily covered by free cash flow in fiscal years 2004 and 2005. In the year 2006, a big jump in capital expenditures left behind about $8.1 million in free cash; the dividend payment, however, was a little more than $14 million. In addition, free cash flow has been on the decline -- it was roughly $27.8 million in 2004 and $20.2 million in 2005.

Also, let's consider that Kenneth Cole is beholden to the capricious nature of apparel trends. It's in good company -- entities such as Nike (NYSE: NKE  ) , Steve Madden (NYSE: SHOO  ) , Stride Rite (NYSE: SRR  ) , Foot Locker (NYSE: FL  ) , Polo Ralph Lauren (NYSE: RL  ) , and Coach (NYSE: COH  ) all deal with this issue. It's pretty competitive out there, and I'm not sure Kenneth Cole's growth prospects are wholly appealing, as annual net income has been on the decline.

With a dip in the gross margin, a decline of 1.5% in comps for company-owned stores, and a 10-K that shows a less-than-stellar performance in terms of free cash flow, I personally am not bullish on Kenneth Cole, even with its cool yield. I'd wait for further data in upcoming quarters, and perhaps a significant pullback in share price, before investing here.    

Past Foolish articles on Kenneth Cole:

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Fool contributor Steven Mallas owns none of the companies mentioned. As of this writing, he was ranked 9,722 out of 28,259 investors in the Motley Fool CAPS system. Don't know what CAPS is? Check it out. The Fool has a disclosure policy.

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