Brown Shoe Co. (BWS 5.80%), the parent company of footwear retailers such as Famous Footwear and Shoes.com, has just released its fourth-quarter report to conclude fiscal 2013. The shares initially reacted by falling much lower but they then took a turn and headed higher, so let's take a look at the results and determine if this is our opportunity to buy or if we should avoid this stock for now.
Source: Brown Shoe's Facebook
The results
Brown Shoe released its fourth-quarter report before the market opened on March 14 and the results were mixed in comparison with expectations; here's a breakdown and a year-over-year comparison:
| Metric | Reported | Expected |
| Earnings Per Share | $0.14 | $0.10 |
| Revenue | $600.0 million | $622.6 million |
Source: S&P Capital IQ
Source: Famous Footwear Blog
Brown Shoe's earnings per share increased 55.6% and revenue decreased 3% year-over-year. Famous Footwear's sales fell 8.6% to $347.4 million as same-store sales declined 1.8%; Famous Footwear still makes up the largest stream of revenue for Brown Shoe, as it represents 57.9% of sales.
The company noted that severe winter weather negatively affected running shoe sales, but the weather positively affected boot sales at the same time. Wholesale came as a bright spot in the report as sales rose 13.5% to $196.3 million, driven by the Naturalizer, Sam Edelman, and Franco Sarto brands.
Also, gross profit declined 2.4% to $241.4 million and the gross margin expanded 20 basis points to 40.2%; it's impressive that the company showed margin expansion during the highly promotional retail environment of the holiday season. Overall, Brown Shoe reported a decent quarter at best and its outlook on fiscal 2014 is not much better...
A dim outlook on the year ahead
In the report, Brown Shoe also handed over guidance for fiscal 2014 which fell below the consensus estimates. Here's an overview of both sets of expectations:
| Metric | Company Outlook | Consensus Estimate |
| Earnings Per Share | $1.45-$1.55 | $1.62 |
| EPS Growth | 2.8%-9.9% | 14.9% |
| Revenue | $2.58 billion-$2.60 billion | $2.61 billion |
| Revenue Growth | 2.7%-3.6% | 4% |
Source: S&P Capital IQ
Source: Famous Footwear Blog
Brown Shoe added that it expects same-store sales at Famous Footwear to rise in the low-single digits and it expects gross margin expansion of about 10 basis points to 40.5%.
These dismal expectations call for very little growth and I believe this caused the initial decline we saw in the stock; as for the rebound and the 10%-plus move higher, I feel this run is unwarranted and the stock needs to come back down to reflect a fair value.
A star in the industry
Skechers (SKX +0.00%), the footwear manufacturer and retailer, has seen its stock rise over 15% in the last few weeks and its earnings release on Feb. 12 drove this outperformance. Skechers shoes appear in Brown Shoe's stores, so here's a breakdown of the company's fourth-quarter report and how it stacked up in comparison with analysts' expectations:
| Metric | Reported | Expected |
| Earnings Per Share | $0.28 | $0.16 |
| Revenue | $450.74 million | $448.58 million |
Source: Benzinga
Source: Skechers Facebook
Skechers' earnings per share increased 250% and revenue increased 13.9% year-over-year, as the company experienced strong growth in all of its segments. Best of all, the momentum continued to build in the fourth quarter and the company's chief executive stated that he sees this as "the beginning of a growth trend" going into the new fiscal year.
Skechers' bullish outlook on 2014 offers a positive sign for Brown Shoe as well, but it is not enough to change my mind on the stock at current levels. With this said, Skechers is definitely worth a deeper look if you are seeking an investment in the industry.
This needs to change quickly
Even with the immense sizes of Famous Footwear and Shoes.com's presences in the footwear industry, neither sells Under Armour (UA 17.00%) products. This is troubling because consumers who seek these performance products must shop elsewhere and they may never return to Brown Shoe's stores. To show just how in-demand Under Armour's products are, check out the fourth-quarter earnings report the company released on Jan. 30:
| Metric | Reported | Expected |
| Earnings Per Share | $0.59 | $0.53 |
| Revenue | $682.76 million | $620.09 million |
Source: Benzinga
Source: Under Armour's Instagram
Under Armour's earnings per share increased 25.5% and revenue increased 35% year-over-year, which marked the 15th consecutive quarter of at least 20% total growth. The footwear segment is very small in comparison with Under Armour's apparel segment, but it still saw its revenue rise 24% to $55 million, led by running shoe sales; running shoe sales were a weak part of Brown Shoe's quarter, but Under Armour proved that the demand was there.
Kevin Plank, Under Armour's chief executive, added, "While we are proud of what we have accomplished to date, we firmly believe we are just getting started and that our performance in 2013 is indicative of the opportunity that lies ahead for Under Armour." I think Mr. Plank is spot-on with his outlook and Brown Shoe needs to take immediate action by bringing Under Armour's products to its stores. If this happened, I think its stock would push higher on that news alone.
The Foolish bottom line
Brown Shoe's rise in share price following the mixed quarter and dismal outlook on 2014 is unwarranted and I believe the stock should be avoided today. Its outlook came as the most troubling part of the report and I think the company needs to make some immediate changes to get back on the path of high growth; I believe adding Under Armour's products in its stores would be a great place to start. However, until changes are made, Foolish investors who seek an investment in the footwear industry should go with a brand that has shown strength over the last few quarters, such as Skechers.
