Shares of Kenneth Cole Productions (NYSE:KCP) crossed my radar about a month ago when they were regularly making 52-week lows. Since my wife and I have more pairs of Kenneth Coles than I care to divulge -- all bought on sale, of course -- I made a note to follow up, and I'm glad I did.
There is more to Kenneth Cole than fashionable shoes with cute names. The company has established a strong brand in shoes domestically and is now well on its way into apparel and accessories. However, if you're looking for an overnight growth boom, you may want to look elsewhere.
My favorite trait in a small-cap growth investment is the ability to fuel growth with cash flow from operations, even if that means a bit slower growth. A little bit of debt is not a worry, but expansion fueled or hurried with debt, a la Gap (NYSE:GPS) a few years ago, makes me nervous. Kenneth Cole on the other hand is like a decaffeinated Starbucks (NASDAQ:SBUX). The balance sheet is debt-free, but since the company is pushing $100 shoes and not $4 lattes, the growth is a bit slower.
To keep costs light, Kenneth Cole designs its shoes in-house and outsources to manufacturing partners primarily in Europe and Brazil. This gives the company flexibility, and to date the company seems to have managed this arrangement well. Outside of the footwear department, Kenneth Cole licenses its name to other manufacturers for items such as fragrances and clothing. By working closely with licensees to ensure supply and focusing on value and style at a reasonable price, Kenneth Cole has been increasingly successful at expanding beyond its footwear roots.
An interesting bit of info in last year's annual report reveals that department store sales are consistently higher in cities that also have a company-operated retail presence. Instead of cannibalizing sales -- as I expected -- Kenneth Cole believes that the stores enhance brand awareness and drive sales increases. I'd question this logic, but while my wife will pass by a Tommy Hilfiger (NYSE:TOM) or a Ralph Lauren (NYSE:RL) without a second thought, we always have to stop at a Kenneth Cole shop when she spots one.
Kenneth Cole shares have appreciated by over 25% since hitting lows in October. However, the price is still reasonable, with the company's trailing price-to-earnings ratio of 17, buckets of cash, a debt-free balance sheet, and plenty of room for product expansion and brand development. And for Income Investors who are interested in tapping into the small-cap growth pool, there is a dividend yield of just under 2%.
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Fool contributor Nathan Parmelee is impressed by the creativity Kenneth Cole used in launching his company. He owns shares in Starbucks, but none of the other companies mentioned.
