Some shoe stocks sure have stunk up the joint lately. Ponder the flameouts of Heelys (Nasdaq: HLYS) and Crocs (Nasdaq: CROX), or the way Timberland (NYSE: TBL) can't seem to reboot. I know footwear stocks can be risky -- such fashion can be particularly fickle -- but there's one that's caught my eye as a compelling stock idea.

It's Skechers (NYSE: SKX), which offers a wide array of casual shoes, boots, and athletic footwear. Like some of its peers, its stock has taken quite a beating, but I suspect this shoe retailer has been scuffed up just a little too much.

If the shoe fits, wear it
Skechers is a California-based company that's been kickin' it old school since 1992. It's no one-trick pony, offering boots, sandals, casual shoes, and athletic footwear. (In footwear, variety is definitely a competitive advantage.) That said, of course, it has a well-dressed closetful of competitors, including Crocs, Timberland, VF's (NYSE: VFC) Vans, Nike (NYSE: NKE), and a personal favorite, Dr. Martens.

Skechers makes sure men, women, and children are all well shod; its core customer is aged 12 to 24, but it branches out further with some brands. Take SoHo Lab; it targets women aged 16 to 34 and consists of trendy, higher quality shoes made in Europe and Brazil as well as in China.

Sales channels include domestic and international wholesale, international distributors, its own retail stores, and e-commerce. As of last year, Skechers operated 50 concept stores, 61 factory outlets, and 33 warehouse outlet stores domestically, and 10 concept stores and two factory outlet stores overseas. The company says most of its retail stores are profitable, which has a positive effect on its operating results.

That 10-K is "hot"
Form 10-K filings can be rough reading, and Paris Hilton rarely makes an appearance, but then I guess you don't know Skechers. The company claimed in its latest 10-K that celebrities spotted wearing Skechers include People magazine types like Paris, Denis Leary, Debra Messing, and Nicole Ritchie.

Pop culture's a major strategy, judging by Skechers' copious use of celebrity-driven marketing. For example, Ashlee Simpson was celebrity endorsee in 2006. Its endorsees are often tied to popular TV shows, too. For example, it has signed celebrities tied to American Idol and Lost. More recently, the company made an agreement with bebe (Nasdaq: BEBE) Sport for a line of footwear supported by Eva Longoria of Desperate Housewives fame.

For all that Skechers seems edgy -- its cryptic marketing philosophy is "Unseen, Untold, Unsold" -- it does rely on some shockingly traditional forms of advertising. Skechers makes use of television and magazine ads, and its newsstand venues include GQ, Cosmopolitan, Seventeen, Maxim, Us Weekly, Star, and the aforementioned People.

Skechers' aggressive attention to playing the pop culture card may lend it key differentiation from other brands. Whether we like it or not, Americans pay rapt attention to what celebrities are doing -- and wearing.

These boots are made for walkin'
Last year this time, Skechers traded at about 24 times earnings. However, slower growth in 2007 caused the stock to lose traction -- it's down 37% since those heady times. Talk about pinched toes.

However, now Skechers is trading at just 13.8 times trailing earnings, lower than the industry's price-to-earnings ratio of 18. In another good indicator of a bargain-priced stock, Skechers has a PEG ratio of 0.73.

Along with its stylish valuation, Skechers also has a decent balance sheet, with $304 million in cash (or $6.50 per share) and just $16 million in debt. A debt-to-capital ratio of just 2.6% gives potential shareholders little to fret about (the industry's debt-to-capital ratio is 18.8%).

Unfortunately, its free cash flow generation has been lumpy over the years; it may have generated $102.3 million in FCF in 2002, but in 2006, FCF was negative. However, analysts do expect Skechers to report 14% earnings growth over the next five years.

Meanwhile, Skechers looks reasonable compared to many of its rivals in the footwear space, especially given the depth and breadth of its product line.


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*All data from Yahoo! Finance, as of 2/22/08.

Best foot forward, or more shoes to drop?
Does the phrase, "That's so yesterday" ring a bell? Unfortunately for Skechers, running a business tied to rapidly changing fashion trends adds risk to the company's ability to please its trendy customers. One fashion faux pas could turn consumers sour on a brand and leave unwanted inventory sitting on the company's shelves. Added to its fickle audience, signs of a recession create challenges for retailers to get shoppers to shell out enough cash for full-priced items.

Further, Skechers relies on several large retail customers. Although no one customer represents more than 10% of its net sales, the loss of one of these major distributors -- or consolidation, which is always a possibility -- could hurt Skechers' business.

Although Skechers discusses the importance of protecting its own intellectual property, it certainly riles up rivals sometimes, and that strikes me as a risk. For example, earlier this year Skechers and VF's Vans scuffled over some Skechers offerings with checkerboard designs. In fashion, imitation can be a sincere form of flattery; it can also land your favorite companies in court and cost them big bucks.

There are also some red flags in corporate governance. Although Chairman and CEO Robert Greenberg owns a formidable stake -- something Fools like to see -- Skechers also has a dual-class structure, with the Greenberg family owning all Class B shares. Shareholders have very little power in any matters that require a shareholder vote. Plus, it has stringent antitakeover provisions, such as a classified board and lack of cumulative voting.  

Personally, Skechers' reliance on traditional advertising methods strikes me as a long-term risk when magazines face dwindling readership and television advertising is now threatened by the TiVo generation. However, it seems like Skechers will have no problem finding new and innovative ways to generate buzz and street cred.

A step in the right direction
Tough times in the economy have been harsh on retailers, dragging Skechers' stock price down to a cheaper valuation. But I believe Skechers boasts a popular and trendy brand name without being attached to a trendy fad, which provides for a strong, long-term retail investment.

For a few more steps with the Fool:

bebe Stores is a Motley Fool Stock Advisor recommendation. VF is an Income Investor pick. Try either service free fro 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.