The Best Shoe Investment Is a Well-Kept Secret

The shoe business is one that has been doing well, from shoemakers to shoe retailers. However, when digging deeper into the shoe business, there appears to be one retailer in particular that is set up for a strong 2014.

Brown Shoe (NYSE: BWS  )  is one of the most overlooked plays in the shoe industry. It only has five analysts following the stock, while the likes of DSW  (NYSE: DSW  ) , Foot Locker, and The Finish Line all have more than 14 each. But with Brown Shoe's strong growth opportunities and positioning across the shoe spectrum, the company should prove to be one of best performers during 2014.

In brief, Brown Shoe operates various stores but also designs footwear. Its key brands include Naturalizer, Dr. Scholl's Shoes, LifeStride, Ryka, Sam Edelman, Franco Sarto, Via Spiga, Fergie and Fergalicious by Fergie, Carlos by Carlos Santana, Vera Wang, and Vince.

The latest quarter was quite solid for Brown Shoe. Sales were up 1% year over year, earnings per share were up 12.5%, operating margin was up 50 basis points, and same-store sales were up 4.9%. Its operating margin last quarter was up to 6.4%, though the shoe company has a long-term goal of getting its operating margin up to 8%. A couple of key drivers for its recent performance include Dr. Scholl's growth at the mid-tier level, and growth in casual footwear. The stock is now up nearly 50% for the past 12 months.

BWS Chart

Brown Shoe data by YCharts

Shoes are the new handbag
When it comes to shoes, Nike (NYSE: NKE  ) and Adidas are generally considered the leaders; however, athletic shoes only make up about 30% of industry-wide footwear sales. The leading segment in the shoe market is men's and women's casual/dress shoes, making up about 40% of the market. That's one of Brown Shoe's key markets. 

Where a lack of new trends in footwear is pressuring some shoe companies, Brown Shoe is performing quite well. Outside of athletic-footwear trends, short boots are the hottest trend in casual footwear. The short-boot trend is showing no signs of slowing down, as these ankle boots look great in jeans or on bare legs.

Compared to top competitor DSW, Brown Shoe is a discount buy. Brown Shoe trades at 17 times forward earnings and at nine times enterprise value/earnings before interest, taxes, depreciation, and amortization, while DSW is at 20 times and 11.7 times, respectively. In addition, Brown Shoe's Famous Footwear has more than three times the retail stores as DSW does. Famous Footwear is Brown Shoe's multibranded chain. For the third quarter, Famous Footwear saw same-store sales up 4.9% and quarterly sales came in at a record $439 million.

A path for continued success
Brown Shoe has managed to beat EPS estimates in each of the last four quarters. Brown Shoe has also been aggressive in paying down debt, which should help drive earnings for the interim as it sees its interest expenses lowered. During 2013, Brown sold off two divisions, using that cash to pay down debt.

Another one of Brown Shoe's big growth opportunities is Vince. The brand is a small part of its contemporary fashion portfolio, but it continues to see strong growth. By 2014 end, the company expects to have doubled the number of doors of Vince. It also attacks the market from a variety of angles, including booties, heels, flats, and sneakers.

Yet, it's not all about the casual space--Brown Shoe is also seeing strength in the athletic space. For Q3, the No. 1 running shoe in all of athletic selling was Nike's Flex, which is a shoe that Brown Shoe carries. That's the first time this has ever happened for Brown Shoe.

Meanwhile, Nike continues to do a killer job. The stock is growing nicely despite its size, and it has an impressive opportunity in Asia. China has been a lag for the shoe company in the past year or so, but it's looking to turn that around. Its August-ended quarter showed that future orders were up 8% year over year compared to 6% for the same quarter last year. And the good news? China saw future orders up 3%.

Bottom line
Brown Shoe has some of the best expected growth (in terms of EPS) in the industry and it has the potential to accelerate earnings growth beyond expectations with debt reduction. The company also has a robust brand portfolio. It's much cheaper than major peer DSW and should continue its strong stock performance for the next year. Brown Shoe also offers investors a 1% dividend yield.

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