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Betting Against This Shoe Company May Give Your Portfolio Blisters

Nickey Friedman
December 1, 2013

It's always a risky move to bet against a company due to one weak-ish quarter. Brown Shoe Company (NYSE: BWS) is no exception. The future for the shoe retailer looks brighter than ever, especially in light of the results and outlooks of competitors DSW (NYSE: DSW) and Foot Locker (NYSE: FL).

Brown Shoe Company reported third-quarter results on Nov. 26. Excluding discontinued operations, net sales inched up 1% to $702.8 million. Net earnings popped 12.4% to $27.3 million or $0.63 per share. Adjusted earnings per share hopped up 5% to $0.63. While the growth was somewhat anemic, the details and outlook are much better.

Sales came in at record levels although they only rose 1%. Brown Shoe Company saw strength across "all geographies, climate zones and genders." This suggests excellent company execution rather than purely any macro trends. Same-store sales leaped up 4.9% while wholesale business jumped by 4.5%. Most interesting, back-to-school same-store sales rocketed up 5.6%.

The specialty retail business lagged behind, dropping by 7.8% to $57.9 million. This muddied the overall results. However, the specialty retail business now only makes up around 8% of sales. Investors should focus on the other 92% of the business.

Several store closings and relocations of underperforming stores negatively affected results this quarter although this will likely lead to long-term positive results. The company raised its guidance for adjusted EPS from $1.27-$1.32 to $1.36-$1.40. This implies fourth-quarter adjusted EPS between $0.09 and $0.13.

While the fourth-quarter forecast is substantially below the third-quarter results, Brown Shoe Company's best seasonal quarter and most of its earnings tend to occur during the third quarter and back-to-school season. This period tells you more than any other how well Brown Shoe Company is executing, similar to a flower shop around Mother's Day.

DSW seems to be experiencing similar results. The company reported its results