Bakers' Shares Wear Thin

Bakers Footwear (NASDAQ:BKRS) has had a rough run so far this year. The shares rose by 41% since the company's IPO at $9 in February 2004, but traded at an all-time high of $23 just earlier this year. They reached their current low levels -- $12.67 after Monday's market close -- after the company issued weak first-quarter results late last week. Question is, does this represent a buying opportunity?

Results for the quarter fell below analyst expectations. Net sales increased by nearly 11%, but same-store sales were down 0.8%, a drop the company attributed to weak sales of sandals. Diluted earnings came in at a paltry $0.10, way less than the $0.33 reported for the same quarter in 2005.

For whatever reason, the earnings press release offered only limited balance sheet and cash flow data. What was given detailed that inventories rose 38% quarter over quarter, implying continued weak comparable sales going forward as merchandise piles up on the shelves. Bakers also had negative operating cash flow; it spent more than it took in to open new stores and remodel existing ones to a newer and more upscale concept, in similar fashion to Payless ShoeSource's (NYSE:PSS) current operating strategy

As of the end of the quarter, Bakers operated 245 stores, made up of about 90% namesake and 10% Wild Pair stores. Bakers' namesake stores offer more moderately priced shoes and accessories and target women ages 16-33, while Wild Pair prices are slightly higher and cater to men, according to the company. More profitable private labels make up about 75% of total sales, with branded footwear and accessories making up the balance.

A big drawback I see is that management issued a million shares and some warrants, in April 2005, to fund growth initiatives. It's fine to see that the company needs capital to fund remodeling and growth, but ideally this revenue would come from internally generated funds. Otherwise, the company could end up diluting current shareholder interests, should capital not generate high enough returns.

The shares appear reasonably valued at current levels, trading at a P/E of about 12 for the past 12 months, and 11 on a forward basis. The valuation has come down significantly since the beginning of the year and appears to price in uncertainty regarding uneven organic growth and a move to a newer store format. The multiple is low both on an absolute basis (compared to a market multiple of 20) and when stacked up against other footwear companies Here's a breakdown of recent P/E multiples including footwear competitors Payless, Foot Locker (NYSE:FL), and Finish Line (NASDAQ:FINL). Foot Locker and Finish Line sell more sports-related footwear but are shoe retailers nonetheless.

Bakers is a small retailer, with a market cap of only $80 million, so there's little question that it has plenty of room to expand. But because of a limited operating history as a public company and cash flow being used up on remodeling and growth initiatives, I would recommend waiting on the sidelines until visibility improves and we can tell whether management will be able to grow on a consistent basis, primarily from internally generated funds.

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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned and welcomes your comments.