Picture this image. A woman, arms overflowing with multicolored shoes, wearing a bright red clown nose.

Could that be the winner of a new reality show, something involving silly shoe shopping shenanigans? No, it's the 2005 annual report cover for Shoe Carnival (NASDAQ:SCVL), which last week made some noise in an otherwise dreary week for the stock market.

The company announced record fourth-quarter earnings Thursday that caused its stock to step up a lively $3.46 per share, nearly a 12% gain. The reason for that big hop was a 68% increase in EPS to $0.37 a share from $0.22 in last year's fourth quarter.

Digging into the numbers makes it clear "the Carnival" is headed in the right direction. Fourth-quarter sales were up 8.3%. Gross profit slipped 50 basis points to 28.6%, which the company attributed to start-up expenses for an expanded distribution center. But selling, general, and administrative expenses were favorable compared with last year by a whopping 200 basis points, down to 23.6% from 25.6%. This combination resulted in the operating margin (earnings before income and taxes) improving to a healthy 4.5% from the prior year's 3%.

Ditto for the full year 2006, as the company posted EPS growth of 23% to $1.73 per share, and it did it the hard way. While sales for the year were up only 4%, margins improved and expenses were lower. That's how retailers are supposed to do it, managing markdowns and mix to enhance margins, and keeping a tight rein on expenses: The company controlled 2006 expense growth to a measly 1.4%.

This is the second year in a row of noticeably improved operating performance for Shoe Carnival, after it suffered through three consecutive years of negative comparable store sales and flat to down earnings from 2002 to 2004. Clearly, merchandising and store operations have improved, evident from two years of positive comps. The company made a large investment in distribution last year, converting its 200,000-square-foot distribution center to a 410,000-square-foot facility. New store performance is also encouraging. Stores opened in 2006 sprinted out of the gates at 90% of the chain's average sales per square foot, a solid result compared with new store sales results in earlier years.

Without much fanfare, or analyst attention, the "shoes only" segment of retail has had a good run the past two years. Compare the charts of Shoe Carnival with Brown Shoe (NYSE:BWS) here and Payless ShoeSource (NYSE:PSS) here. All three companies have nearly doubled their stock price since May of 2005.

Should you consider moving some of your precious investment dollars into this retail segment? I remain unconvinced. All three companies sport P/E ratios of 18 to 20 times trailing 12-month earnings, on expected sales growth rates in the mid-single digits for 2007. That's not as pricey as DSW (NYSE:DSW), but DSW is growing faster. And let's not forget athletic shoe retailers Finish Line (NASDAQ:FINL) and Foot Locker (NYSE:FL). I have to wonder if there's any upside left.

Regarding Shoe Carnival in particular, the brand and the story are not compelling enough for me. Not when Foolish investors have alternative retail choices like Bed Bath & Beyond (NASDAQ:BBBY), with a history of knocking the cover off the ball like clockwork, year after year. But I give kudos to Shoe Carnival management for a noteworthy turnaround, and investors in the stock have made good money the past few years. So if the shoe fits ...

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Fool contributor Timothy M. Otte surveys the retail scene from Dallas and doesn't own shares any of the companies mentioned in this article. He sticks with sandals whenever possible, and welcomes comments on his articles.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.