Before the opening bell, Payless ShoeSource (NYSE:PSS) reported that same-store sales for May increased by 4.1%. That marked a great improvement over April, when that same figure declined by 2.8%, and it got the company's numbers back on track for the year, where, to date, same-store sales have increased by 3.1%. The continued good news sent the stock up as much as 9%, and it is trading up a further 5% at the time of this writing.
When I first started looking at Payless, it had just rolled out its strategic plan to increase shareholder value. And looking at the year-to-date sales ending in May, you may be wondering why shares have almost doubled since hitting a 52-week low of $9.20 when revenue has grown by only 0.9%. Well, it's because sometimes, less revenue is more profitable than more revenue.
The company's plan was to exit its Parade business (181 stores along with other facilities) and to close 32 stores in Chile and Peru as well as 265 stores with longer lease-agreement lives. Closing down stores means a loss of revenue, but it also means better profitability if the stores were in the red. And as Timothy Otte rightly pointed out, operating leases can hide debt obligations and be a huge cost driver. So getting rid of lease obligations and their payments reduces the opportunity cost of that capital.
The unused capital has started to flow to marketing, as evidenced by the increase in selling, general, and administrative expenses from 27.2% of sales to 28.3%. A wise choice. At my house, Payless is known for value-priced kids' and women's shoes with a wear-and-tear strength that differentiates them from their competitors.
Another mature company that has gone against the grain to create shareholder value is Midas (NYSE:MDS). In fact, it has divested revenues to regain profitability and generate cash flow. That may be counterintuitive, but it does show that growth without profitability destroys value.
After seeing Payless' sales decline ever so slightly from fiscal 2003 to fiscal 2004, I'm encouraged to see revenue starting to pick up and the company getting more out of its smaller store base. Payless will do well by continuing to execute on its strategic plan and focusing on providing good values to its core customers. Too bad other investors have already noticed the bargain, bid the shares up, and eliminated that value opportunity.
Fool contributor David Meier does not own shares in any of the companies mentioned. Find other great stocks for shareholder value in our Inside Value newsletter. The Motley Fool has a disclosure policy.
