Stride Rite Is Stepping Right

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.

For related Foolishness:

Have an opinion on Stride Rite or any of its competitors? Let us know at Motley Fool CAPS, where investors just like you can sound off on stocks for free. Join up today!

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.


Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 519815, ~/Articles/ArticleHandler.aspx, 9/20/2014 6:07:23 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement