Here's a pop quiz: Name the industries you avoid investing in, and explain why.
For me it's always been airlines. Too much debt, fixed costs too high, and historically airlines have never made much money (with the notable exception of Southwest).
In the retail business I have never liked the shoe segment. It's a very fragmented industry with everyone from discounters like Wal-Mart
But I may be starting to change my tune.
Try these full-year 2006 numbers on for size: total sales grew 11.8% and gross profit increased 16% as gross margin improved by 100 basis points. Selling, general, and administrative expenses were only up 8.2% and improved by 70 basis points, although last year included an unusual charge of 60 basis points. Operating profit climbed 43.6%, and diluted EPS jumped 48%.
If those numbers don't impress you, how about this: Inventory per square foot (the often overlooked retail metric) was down 3% year over year. This marks the sixth straight quarter of improved inventory productivity for the company. I'm starting to take a shine to the shoe business, at least a bit.
For 2007 the company expects to grow EPS 10% to 14%, add 30 new stores, double capital investments from $42 million to $80 million, and still add to its already-healthy cash balance. I particularly enjoyed the portion of the conference call that discussed improving the interest yield on its excess cash. Not a lot of retailers have a surplus of the green stuff lying around.
From a strategic perspective, I'm impressed with DSW's approach to growth. While it operates 228 stand-alone retail stores, it also runs 364 leased shoe departments in other retailers, including all 267 Stein Mart
Last week I wrote about a big hop in earnings at Shoe Carnival. Earlier this month, fellow Fool Ryan Fuhrmann covered Payless stomping on analyst expectations. Brown Shoe
Does this mean you should trade in your not-yet-discovered 40-bagger for a pair of leopard skin pumps, or even loafers? I'm still not ready to jump into this retail sector with both feet (long-held perceptions are hard to break). But clearly DSW and the rest of the shoe "pack" are getting their act together.
Take a walk on the wild side. Check out more shoe mania below:
Fool contributor Timothy M. Otte surveys the retail scene from Dallas, where he's usually spotted about town in a pair of old sandals. He owns stock in Wal-Mart, but none of the other companies mentioned in this article. The Fool has a disclosure policy.