Fool on the Street: Collective Brands Marches On

Thanks to recent acquisitions of Stride Rite and a private company called Collective International, Payless Shoesource has quickly morphed from a pure retailer into a seller and owner of footwear brands. The combination is now known as Collective Brands (NYSE: PSS  ) , and integration efforts are just in their early stages. That made a recent presentation at the 14th annual Goldman Sachs global retailing conference particularly timely, especially since the company just reported a tough second quarter.

CEO Matt Rubel presented at the conference and is the architect for the new corporate strategy "to create the preeminent, consumer-centric, global" company for "footwear, accessories and lifestyle" brands. The corporate-speak, admittedly a bit stuffy, refers to Collective's ambition to evolve from a retailer of moderately priced footwear and related apparel to an owner and licensor of shoe brands across an array of sales locations, whether its own retail stores or outside avenues.

The first stage was to position Payless toward higher-end fashion, a move that started to pay off -- even though I was initially skeptical. Early on, Rubel worked wonders by cutting costs in a retail concept that had lost its way as top-line trends slowed and profitability suffered before his coming on board in 2005.

The pace of top- and bottom-line growth quickly picked up last year, but just as quickly, Rubel added another twist by building a "house of brands" through acquisitions, such as the March 7 purchase of Collective International and its skating and snowboard brands, including Airwalk. Shortly afterward, he acquired Stride Rite, a move that added an appealing children's emphasis with brands such as Sperry, Keds, and Saucony.

The new brands are starting to make their way to Payless store shelves, and the company intends to add more wholesale revenue to department stores and other retailers. In can now also pursue licensing and co-development of shoes, as illustrated by deals with Disney (NYSE: DIS  ) and Nike (NYSE: NKE  ) to do just that.

The presentation went only so far to suggest that the new business model "may drive higher return on invested capital," which is a very worthy Foolish investment metric and could end up working well. After all, footwear companies that own their own brands, such as Skechers (NYSE: SKX  ) , Steve Madden (NYSE: SHOO  ) , and Wolverine Worldwide (NYSE: WWW  ) , tend to be more profitable than retailers such as Foot Locker (NYSE: FL  ) or the erstwhile Payless.

Collective is also adding distribution centers to "improve speed-to-market, better serve stores, and reduce transportation costs" as it grows its sales reach. It's also adding new Payless store designs and sees off-mall potential for Stride Rite, which also had retail and outlet locations. The potential seems limitless. Rubel listed countless initiatives, such as focusing on women with the Sperry Top-Sider brand, and growing international businesses.

So while management is clearly excited about the opportunities that lie ahead, investors appear increasingly skeptical, since acquisitions increase integration risk and the company just released weaker-than-expected results in its Payless business during the second quarter. It's hard to tell whether infrastructure spending and merger-related charges or negative same-store and overall sales were the primary culprits for a 23% drop in earnings, but the end result was a new 52-week low in the stock.

Share-price weakness could easily prove a nice entry point, should Collective realize at least some of the potential it described at the retail conference. I'm staying on the sidelines for the moment, but any positive news could have me lacing up my portfolio for a new position in the footwear industry.               


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