Footwear retailer Payless Shoesource
First, a quick overview of last evening's first-quarter earnings release. Payless beat Wall Street's top-line projections by posting a 4.9% increase in total sales and 5% improvement in same-store sales, the ninth straight quarter of positive comps. Reported profits grew 8.1% to $38.9 million. Earnings per share would have been at least 10% higher, if not for a couple of special charges, some related to costs for enhancing the company's distribution centers.
Management expects to further ramp up its supply-chain spending as the company readies itself for brand management and the bold acquisition of Stride Rite. In recent months, Payless has also inked deals with Nike
Back in March, in tandem with the year-end earnings release, Payless announced the purchase of privately held Collective International, along with skateboard and snowboard footwear brands such as Airwalk. Little did investors know the moves would culminate with the acquisition of Stride Rite and an upcoming corporate name change to "Collective Brands."
Stride Rite owns the venerable Keds brand, as well as the Sperry and Saucony names. It also owns a few hundred children's shoe stores and close to 100 outlet stores, and it leases several stores-within-stores at Federated Department Stores'
At first glance, Stride Rite could be a prime candidate to benefit from the financial discipline Payless management has been able to instill in the corporate structure as it cuts costs and moves toward a higher-end, more fashionable merchandise mix. Shoe branding is also a higher-margin affair; Stride Rite, Steve Madden
Absorbing Stride Rite exposes Payless to integration risk, even though it expects to pay down the additional debt taken on to make the purchase within a couple of years. At present, management can hold its head high; restructuring efforts to date have come in as promised, increasing investor confidence that the company knows what it's doing by forming Collective Brands. CEO Matthew Rubel's past experience at Cole Haan and J. Crew hasn't hurt, either.
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Fool contributor Ryan Fuhrmann is long shares of Nike but has no financial interest in any other company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.