After some initial skepticism on my part, footwear retailer Payless Shoesource's
Payless management has proven adept at cutting costs and closing stores to eliminate underperforming assets, but hadn't been able to revitalize top-line growth until recently. Payless was tripped up last quarter after earnings came in below analyst expectations, but sales started to show signs of life, growing a couple percent while same-store sales also increased 2.2%. Third-quarter results released on Tuesday after the market-close were even better, as total sales advanced 5.5% and store comps jumped 5.2%.
Earnings also impressed, jumping 34.4%. Both top- and bottom-line results came in ahead of analyst expectations, sending the stock up over 14% the day after the earnings release. Not bad, indeed, but what can investors expect going forward?
I haven't been overly bullish on the pure shoe retailers and have preferred companies that own their own brands, have the opportunity to pursue more lucrative licensing deals, and are better able to control the marketing and distribution of their shoe names. Nike
Well, lo and behold, Payless announced two potentially significant licensing deals on Tuesday to exercise brand influence. Payless and Disney
The above licensing deals have definite potential and will take time to contribute meaningfully to sales or earnings. There is no guarantee of success, but they demonstrate that Payless is being proactive in finding ways to become more profitable and increase company value.
Payless is now a couple of years into an active transition to move to more upscale footwear and accessory offerings, and management has finally developed a certain amount of credibility that its moves are working. At 19 times 2006 earnings projections, there is no longer a lot of room for downside, and the industry is extremely competitive. But Payless is a stock to keep an eye on going forward as it has found bold and creative ways to evolve from its stodgy days as a retailer of uninspiring, cheap shoes.
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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.