Footwear retailer Payless Shoesource (NYSE:PSS) made a bold move last week, announcing the acquisition of rival Stride Rite (NYSE:SRR) in an all-cash deal for $20.50. Prior to the move, Payless had developed a knack for cutting costs and moving more upscale to revitalize conditions at its stodgier store base. Sales trends appeared to be finally coming around, but recent developments put the company on a more aggressive growth path. Tomorrow's first-quarter results will shed more light on why Payless will soon be known as "Collective Brands."

What analysts say:

  • Buy, sell, or waffle? Six analysts currently follow Payless; all are bullish on the stock.
  • Revenues. Analysts are projecting first-quarter sales of $724.1 million, for year-over-year growth of 4.2%.
  • Earnings. Analysts project first-quarter earnings of $0.60 per share, or 11.1% above last year's first-quarter earnings of $0.54.

What management says:
Before announcing the acquisition of Stride Rite, Payless had a goal of growing same-store sales in the low single digits and earnings in the mid-teens. Management believes Collective Brands will allow it to "quickly capitalize on the most promising growth opportunities in the footwear and accessories industry" by focusing on branded shoes, the faster-growing children's and casual footwear categories, and consumer migration to shopping at off-mall locations.

What management does:
Since coming on board in 2004, the new management team at Payless has proven adept at cutting costs and turning around underperforming stores to boost margins and bottom-line earnings. As a result, profitability has steadily improved. More recently, top-line trends had also started to show signs of life, but Payless is entering unchartered waters as it pursues a major acquisition and combines footwear retailing with brand management activities.

Margins

10/05

01/06

04/06

07/06

10/06

02/07

Gross

33.1%

33.4%

33.8%

33.9%

34.4%

35.1%

Operating

4.6%

4.8%

4.9%

5%

5.7%

6.5%

Net

1.7%

2.5%

2.7%

3.2%

3.4%

4.4%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Payless continues to surprise investors with a proactive, aggressive approach to transforming its reputation as a retailer of moderately priced shoes and related accessories. Back in March, the company announced an agreement with Nike's (NYSE:NKE) Exeter Brand Group to work together in selling the Tailwind collection of women's footwear, and a similar deal with Disney (NYSE:DIS) to sell kids' shoes with well-known Disney characters.

The Stride Rite purchase and corporate name change confirm that Payless' march toward branding is for real and pits it against peers such as Skechers (NYSE:SKX), Steve Madden (NASDAQ:SHOO), and Wolverine Worldwide (NYSE:WWW), who handle their own brands and retailing operations.

The future will be more uncertain as Payless pursues its transformation to Collective Brands, but the industry still remains ripe for consolidation thanks to the large number of players. Plus, few can match the footwear titans of Nike and Adidas AG, so combining forces could create a formidable competitor in the non-athletic realm of the shoe industry.

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Fool contributor Ryan Fuhrmann is long shares of Nike but has no financial interest in any other company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.