Times are tough for most retailers these days, and the shoe biz is no exception. With consumers tightening their belts, discounters like Wal-Mart (NYSE:WMT) are drawing an increasing share of foot traffic -- leaving specialty footwear players like DSW (NYSE:DSW) and Brown Shoe (NYSE:BWS) little option but to tighten up their operations and wait for better days.

Watch your step
DSW reported a sizeable second-quarter earnings improvement of $0.25 per share, compared to $0.15 last year. But careful watchers of the company remember that last year's quarter last year was a complete washout, with management pulling out all the promotional stops to sell down a bloated inventory.

Gross margin improved 500 basis points this year, with inventory more in line with sales trends. Comp sales slipped 6.9% -- perhaps not as bad as it looks, when you consider the prior-year promotional sales, but still not a healthy trend.

I think we're reaching the point where comparing current-year results to two years ago may present a more enlightening picture. In 2006, DSW earned $0.35 in the second quarter -- on 15% less sales than 2008. In short, operating profit fell from 7.7% of sales to 5% in just two years.

Investors are also troubled by that company beat second-quarter estimates by $0.15 a share, but still kept full-year guidance unchanged. Management noted on its conference call that the third quarter will be a challenge, but the company hopes to make up some ground in the fourth quarter. DSW sees same-store sales continuing to slide in the mid-single-digit range over the back half of the year, but management expects careful inventory management to yield margin improvements.

Falling out of fashion
Brown Shoe reported a stunning 77% decline in earnings per share, but under the shoebox lid, it appears that things aren't quite so bad. Allowing for reported one-time charges in both years, the earnings slide was closer to 33%. But management also mentioned several other puts and takes -- like a lower tax rate, and adjustments to bonus accruals -- that left some analysts deeply confused about the quarter's earnings picture.

Sales results seem a bit more straightforward. Total sales slipped 1.3%. Comps in Famous Footwear locations were down 2.9%, while Naturalizer stores and the e-commerce segments reported sales about flat with prior year. Brown Shoe also generates one-third of its business by wholesaling to other shoe retailers. That segment reported a more than 9% drop in sales; according to management, its retail partners are cutting back on orders and inventories.

The company was very clear that the back half of the year isn't shaping up as expected. It now predicts earnings between $1.10 and $1.27 per share, netting out all unusual items. That didn't get analysts very excited, since they were expecting $1.39-- and it looks to me like the company will have to work pretty hard in the next two quarters to achieve even these lowered expectations. Two years ago, in contrast, Brown Shoe earned $1.51 per share.

If the shoe fits...
Longtime Fool readers know I've been perpetually wary of investing in the (non-athletic) shoe business. Sure, it's a staple product everyone needs. But competition ranges across a wide swath of the retail world, from discounters like Target (NYSE:TGT) to department stores like Macy's (NYSE:M), and nearly everywhere in between.

DSW strikes me as one of the players with the best long-term prospects. It's a strong brand with room to grow, and I look favorably on companies whose CEOs are stocking up on shares of their own business.

I'm less enamored with Brown Shoe, primarily because I've rarely seen a combination retail-and-wholesale approach work. Competing with your own customers feels like a shaky business model.

Next week, we'll see whether Collective Brands (NYSE:PSS) can rise above its legal spat with German footwear giant adidas (OTC: ADDYY). Meanwhile, my advice is if the shoe fits, wear it -- but try it on for size carefully.  

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Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles, and owns shares of Wal-Mart, but none of the other companies mentioned in this article. The Fool has a disclosure policy. Wal-Mart is an Inside Value selection.