Footwear retailer Payless ShoeSource (NYSE:PSS) is well along the restructuring path. It hasn't yet broken a sweat as initial cost-cutting efforts proved an easy hurdle and a more recent sales recovery also appears on solid footing. But higher-margin licensing and branding deals are in the works and represent new terrain for the company.

Payless reported fourth-quarter and year-end 2006 results after the market close yesterday. Quarterly results beat analyst expectations, while full-year sales advanced nearly 5% on a respectable 3.5% same-store sales improvement. Earnings included a gain related to releasing some income tax reserves, but improved significantly year over year.

Annual operating cash flow was nearly twice reported net income even though it grew only 1% for the year. And capital expenditures nearly doubled as the company is still spending to update older stores and move to a more upscale merchandise mix. At least the increased capital spending appears to be paying off; comparable store sales have now grown for eight straight quarters.

So far so good on the restructuring front, but Payless is paving a new walking trail. In similar fashion to footwear peers Skechers (NYSE:SKX), Steve Madden (NASDAQ:SHOO), Wolverine Worldwide (NYSE:WWW), and shoe-giant Nike (NYSE:NKE), Payless is entering the realm of brand ownership and licensing relationships. It recently announced a deal with Nike to develop women's athletic shoes and sandals and also has a deal in the works with Disney (NYSE:DIS) over jointly developing kids shoes with Disney characters.

Along with the earnings release yesterday, Payless also announced an intention to acquire privately-held Collective International and its skater and snowboard shoe brands such as Airwalk. The price tag of $91 million represents nearly 70% of 2006 capex and demonstrates that Payless means business in pursuing more licensing and branding control over the shoes it sells.

I have to give management the benefit of the doubt, as everything it's done has worked out well for shareholders so far. But Payless may finally start to perspire as improvement efforts become more of an uphill battle.

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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.