Is there any price too high to pay for a comfortable shoe, something you'll be wearing for years? Is there any price too high to pay for a great stock, one you intend to own for years? (For the record, I answer "yes" to both questions.) Tomorrow we'll get an updated price check on shoemaker Stride Rite (NYSE:SRR) as it reports its fiscal Q1 2006 numbers before market-open.

What analysts say:

  • Buy, sell, or waffle? Only three analysts follow this $500 million company. Two of them rate it a buy and one a hold.
  • Revenues. Thanks in part to the company's recent acquisition of Hidden Gems pick Saucony, sales are expected to leap 28% year over year, to $192.6 million.
  • Earnings. Profits are only expected to rise half that amount. 14% growth and $0.25 per share is the target.

What management says:
Management's most recent forecast concerned all of fiscal 2006, rather than just the first quarter. That said, the company anticipates roughly 25% growth in sales this year and about $0.85 per share in annual profits. This sum takes into account anticipated charges totaling $0.13 for, in order of importance, stock option expense, inventory writedowns, and integration costs (from the Saucony merger). CEO David Chamberlain termed 2006 a "year of transition," and cited Tommy Hilfiger and Keds as the firm's two brands most in need of improvement.

What management does:

Margins %

8/04

12/04

3/05

6/05

9/05

12/05

Gross

37.7

38.1

38.4

39.1

39.9

39.9

Op.

7

7.2

7.3

7.2

7.5

7.3

Net

4.5

4.6

4.6

4.6

4.8

4.2
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
When management uses words like "transition" and "challenging" (the latter in reference to Keds sales), investors get nervous. That's usually the right reaction, but in Stride Rite's case, we're seeing rising gross margins, and operating margins that, if not rising consistently, still look better than they did 18 months ago. The net margin looks worse right now, but that's primarily because of restructuring costs recorded last quarter.

Tomorrow, I'd recommend looking past the slew of one-time, non-cash charges to GAAP earnings necessitated by the Saucony acquisition, and focusing on cash profitability instead. In that regard, Stride Rite generated $33.9 million in free cash flow over the last four quarters (excluding acquisitions), versus GAAP net income of just $24.6 million. Keep an eye on that cash flow -- it'll serve you as a better guide to the firm's health than will the GAAP numbers in this "year of transition."

Competitors:

  • Brown Shoe (NYSE:BWS)
  • Nike (NYSE:NKE)

Fool contributor Rich Smith has no interest, short or long, in any company named above.