Foolish Forecast: Collective Brands Kicks It Up a Notch

A couple of weeks ago, to little fanfare, Payless ShoeSource completed the acquisition of Stride Rite and changed its name to Collective Brands (NYSE: PSS  ) . Investors, clearly unenthused by the merger, have kicked Collective to the curb; the stock is fast approaching its 52-week lows. But for contrarian-minded Fools, negativity can bring opportunity. We'll know more when Collective reports second-quarter results tomorrow.

What analysts say:

• Buy, sell, or waffle? Six analysts follow Collective Brands; all are bullish on the stock.
• Revenues. Analysts project $715.1 million in second-quarter sales, just more than 1% greater than last year's second-quarter sales amount.
• Earnings. Analysts expect quarterly earnings of $0.45, or about 6% less than the $0.48 reported last year.

What management says:
Back when the erstwhile Payless announced first-quarter results, management said it expected the Stride Rite purchase to be accretive to earnings by fiscal 2008; that 2006-2009 annual operating profit growth should exceed 20%; and that the stand-alone Payless business should continue posting low single-digit increases in same-store sales. The company also expects to pay down the debt it incurred to acquire Stride Rite within "two to three [years] of the deal's consummation."

What management does:
Prior to the Stride Rite acquisition, a management team that first took the helm in 2004 had successfully cut costs and steered Payless onto a stronger path of sales and earnings growth. The improvement in gross, operating, and net margins is testament to the enhancement. And with the purchase of Stride Rite's stable of shoes and upcoming co-development deals with Disney (NYSE: DIS  ) and Nike (NYSE: NKE  ) , Collective Brands is well on its way to brand management.     

Margins	01/06	04/06	07/06	10/06	02/07	05/07
Gross	33.4%	33.9%	34.0%	34.4%	35.1%	35.3%
Operating	4.8%	5.2%	5.4%	5.9%	6.5%	6.7%
Net	2.5%	2.7%	3.2%	3.4%	4.4%	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:
The shoe is definitely starting to fit at Payless, as the company evolves from a pure retailer of so-so brands to a seller, marketer, and owner of brands, particularly in the faster-growing children's-shoe category. Controlling brands is also more lucrative, as firms such as Nike, K-Swiss (Nasdaq: KSWS  ) , and Steve Madden (Nasdaq: SHOO  ) can attest.

Collective Brands has become quite proactive in consolidating the fragmented casual footwear space. The move looks savvy for a number of reasons -- in addition to the higher profit potential, owning brands gives the company greater control over marketing and distribution. Finally, shoe retailing is tough, with firms such as Foot Locker (NYSE: FL  ) and Finish Line (Nasdaq: FINL  ) floundering to find an identity. An appealing outlook, combined with a weak share price for Collective Brands, could be the key ingredients for sizable investment gains going forward.

Disney is a Motley Fool Stock Advisor recommendation.

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