Shares of Stride Rite (NYSE:SRR) have traded up over the past couple of days, after releasing a favorable second-quarter earnings report on Tuesday. The company has had an uneven growth track record over the past few years; do recent results suggest that's finally starting to change?
In case you're not familiar with the company, Stride Rite is a footwear company that sells internally owned brands such as a namesake children's group, Keds, Tommy Hilfiger, and Sperry Top-Sider. It acquired Saucony last year for about $170 million. Like Steve Madden (NASDAQ:SHOO), Stride Rite primarily sells shoes wholesale to department stores and other shoe retailers. However, it also has a retail presence, selling children's footwear at 195 namesake stores and about 70 outlet stores. Wholesale comprises about 70% of sales, with retail making up the rest.
Sales for the quarter rose 21.6%, while earnings grew a strong 43.8%. That topped some analysts' projections, although some of the benefit came from a lower tax rate during this quarter. Management also offered full-year guidance, expecting sales to grow 20%-22%. That's not bad, but I'm a bit skeptical that Stride Rite has really turned the corner to consistent growth.
Stride Rite has a number of recognized brands, with histories going back almost 100 years in some cases, but sales growth over the past five years has been rather anemic, averaging only a couple of percent annually. The more recent past shows results all over the board; the company's own retail stores have been performing well, up 21% for the quarter, but the Keds brand struggled as sales fell 16%. Tommy Hilfiger fell a more dramatic 41%.
Earnings haven't moved much, either. Over the past three years, earnings have stagnated at about $0.64 to $0.66 per share, even after a decreasing amount of shares outstanding. On a brighter note, operating cash flow exceeds net income. It has also treaded water since 2003, but free cash flow is strong because capital expenditure levels are pretty low. It largely avoids high levels of fixed costs through a business model similar to Nike's (NYSE:NKE), letting independent foreign firms manufacture its shoes.
Right now, I can't find many reasons to add Stride Rite to my watch list. Recent results could signal that total growth will continue at a decent clip, but until management proves it can consistently boost top-line expansion -- and translate that into earnings and cash flow growth -- I'll steer clear. The shares aren't overly expensive, trading at a forward P/E of about 15. However, Nike is a much stronger company, yet surprisingly trades at a lower P/E-to-growth valuation. Check out my recent overview of Nike's earnings if you're interested in learning more.
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Fool contributor Ryan Fuhrmann is long shares of Nike but has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
