After some initial optimism on my part, Collective Brands (NYSE: PSS ) quickly kicked it down a notch by reporting a tougher-than-expected quarter. However, based on where the stock is trading, some downside may already be priced into the valuation, which could sit well with prospective investors.
Wednesday evening, Collective Brands, which just changed its name from Payless ShoeSource after it acquired Stride Rite, posted sales and earnings for the second quarter that were below analyst projections. The performance was also below management expectations, as overall sales fell 1% and same-store sales were also weak, falling 1.4%.
The challenging top-line trends appeared to have a domino effect; management was planning for higher sales and organized costs accordingly, meaning that selling, general, and other expenses rose as a percent of sales. Spending on a "distribution center initiative," costs to integrate Stride Rite, and one-time income in last year's quarter all served to exacerbate the tougher sales environment, the end result of which was a 23% fall in earnings.
This wasn't a good quarter to suggest trouble is brewing at the Payless business, because overall uncertainty is running high as Collective Brands evolves into an owner, designer, and seller of shoe brands. The purchase of Stride Rite brings ownership of the well-known Keds, Sperry, and Saucony brands, which also operate in the faster-growing children's shoe category.
Also, Collective Brands recently signed deals with Nike (NYSE: NKE ) and Disney (NYSE: DIS ) to co-develop shoes. The march toward branding definitely makes sense because it generally carries higher profit margins than pure shoe retailing, but management has work to do to prove to investors it can successfully manage the Payless shoe stores with fancier ambitions to own and develop higher-end footwear and accessories.
Collective Brands is also paving a new trail, because the market for casual shoes is highly fragmented. The new corporate name stems from a recent purchase of Collective International and its skater and snowboard brands, such as Airwalk. The purchase of Stride Rite only upped the ante, and if management starts to walk tall with its new business model, rivals such as Skechers (NYSE: SKX ) , Steve Madden (Nasdaq: SHOO ) , Kenneth Cole (NYSE: KCP ) , or Wolverine World Wide (NYSE: WWW ) could start shaking in their boots with worries that they could be next on Collective's shopping list.
For related Foolishness:
- Foolish Forecast: Collective Brands Kicks It Up a Notch
- Is Kenneth Cole a Stylish Idea?
- The Shoe Rests on Steve Madden
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.