While it certainly does feel good to pay less for shoes, the question on investors' minds today is what price Wall Street will be paying for shares of Payless Shoesource (NYSE:PSS) tomorrow. By this time Wednesday, Payless will have reported its Q1 2006 earnings numbers. Could you use a few clues on what the news will contain? Read on, Fool.
What analysts say:
- Buy, sell, or waffle? Five analysts follow Payless. Hold ratings are in the majority; just one buy and one sell attach to the stock.
- Revenues. On average, analysts are looking for just 2% sales growth tomorrow, to $706.8 million.
- Earnings. Profits are expected to slide 15% to $0.40 per share.
What management says:
Actually, forget the revenues estimate -- Payless shot down hopes of a sales increase when it reported a 0.1% drop in year-over-year sales earlier this month. Better news came in the form of a 0.4% increase in same-store sales. But that still leaves the question of profits up in the air.
According to CEO Matthew Rubel, sales for the quarter were "solid." Rubel went further than that, though, calling it "important" to note that "full price selling picked up as we moved into Spring, with a correspondingly favorable impact on gross margin." Whether tomorrow's earnings slide as badly as Wall Street expects, therefore, will depend on whether margins ticked up far enough to offset the lower-than-hoped-for sales.
Last quarter, Rubel identified the company's priorities as:
- Posting low-single-digit positive same-store sales
- Delivering mid-teens growth in earnings per share, and
- Improving margins.
Let's see how Payless has been doing here.
What management does:
Same-store sales, as already noted, were up in the sub-low-single-digits. No points for that one. Profits are expected to slide, so give Payless no credit there. How about margins?
Here, Payless deserves some kudos. The company has done an admirable job of improving each of its gross, operating, and net margins -- particularly the latter, since the company's now netting eight times as much profit from each dollar of revenue than it collected 18 months ago.
|
Margins % |
10/04 |
1/05 |
4/05 |
7/05 |
10/05 |
1/06 |
|---|---|---|---|---|---|---|
|
Gross |
29.8 |
30.9 |
31.9 |
32.5 |
33.1 |
33.4 |
|
Op. |
2.4 |
3.3 |
4.2 |
4.1 |
4.5 |
4.5 |
|
Net |
0.3 |
(0.1) |
0.5 |
1.1 |
1.7 |
2.5 |
One Fool says:
Essentially, all of Payless' bottom-line improvement derives from its expanding gross margins. Over the last six months, for example, we saw Payless grow its sales less than 1% year over year. Meanwhile, the cost of goods sold declined 2%. Rubel's statement in the earnings guidance update suggests that gross margins have improved because the company has charged higher prices, rather than getting its raw materials at lower prices. It's also worth pointing out that Payless has been taking two steps forward and one step back in some respects. Even as gross margins expanded, Payless let its operating costs rise 5% during the period, trimming the profit gains it could otherwise have claimed.
Tomorrow, Fools should watch for signs that Payless can keep its operating costs better aligned with trends in sales growth.
Competitors:
- Kohl's (NYSE:KSS)
- Jones Apparel (NYSE:JNY)
- Sears Holdings (NASDAQ:SHLD)
- Shoe Pavilion (NASDAQ:SHOE)
- Target (NYSE:TGT)
- Wal-Mart (NYSE:WMT)
Wal-Mart is a Motley Fool Inside Value recommendation. To discover more of the best companies in Wall Street's bargain bin, sign up for a free 30-day guest pass.
Fool contributor Rich Smith does not own shares of any company named above.
