Stride Rite (NYSE: SRR ) reported solid fourth-quarter earnings today. And while selling shoes is a difficult way to create shareholder value, I think this shoe retailer has its feet pointed in the right direction.
But first, a look at the results. Sales for the fourth quarter rose 8% on an organic basis and 15% when including the Robeez acquisition. For the full year, sales were $707 million, up 20% from fiscal 2006's $588 million. Much of the increase was driven by a full year's inclusion of sales from Saucony, which Stride Rite acquired in September 2005. The growing retail division's sales climbed 10% for the quarter, driven in part by a 2.5% increase in comparable same-store sales. Sales for the retail group's full year increased 14%, helped by a 3.4% increase in same-store sales.
Net income for the quarter was $628,000, up from an accounting loss of $3.1 million. However, the company has had several acquisition-related costs that are depressing the reported earnings. Stripping out the inventory-related acquisition costs, adjusted net income for the quarter was $1.5 million, up from $455,000 in Q4 2005. Once again, a good deal of the gains, as well as the losses, were acquisition-related.
On the profitability side, margins for the quarter and full year were also depressed, because of the acquisition costs related to the Saucony and Robeez purchases. When stripping those costs out, the margins showed signs of improvement. On a non-GAAP basis, which should be more representative moving forward, the gross margins and operating margins for the year were 41.3% and 8.5%, respectively.
These margin improvements are also a positive sign that management is making progress toward the 10% operating margins it is targeting to achieve by 2008. As to whether those margins are possible, I still need convincing. Stride Rite's operating margins are currently superior to those of Brown Shoe (NYSE: BWS ) and Payless (NYSE: PSS ) and on par with DSW's (Nasdaq: DSW ) . And while it's doubtful that Nike's (NYSE: NKE ) 12%-plus operating margins are achievable, it does show that Stride Rite's goals are still realistic.
Those margins will get help from the shift toward selling at the retail level, which carries higher margins and is less asset-intensive, especially given the favorable accounting treatment of operating leases. If Stride Rite can achieve its profitability targets, then the shoe company is on its way toward generating economic profits.
And this Fool knows that economic profits are necessary to create long-term equity value. Add the growing revenue base, and it becomes clear that Stride Rite is definitely headed in the right direction.
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Fool contributor Matthew Crews welcomes your feedback -- really! He has no financial position in any of the companies mentioned. The Motley Fool has a disclosure policy.