Betting Against This Shoe Company May Give Your Portfolio Blisters

Betting Against This Shoe Company May Give Your Portfolio Blisters

It's always a risky move to bet against a company due to one weak-ish quarter. Brown Shoe Company is no exception. The future for the shoe retailer looks brighter than ever, especially in light of the results and outlooks of competitors DSW and Foot Locker .

Brown Shoe Company reported third-quarter results on Nov. 26. Excluding discontinued operations, net sales inched up 1% to $702.8 million. Net earnings popped 12.4% to $27.3 million or $0.63 per share. Adjusted earnings per share hopped up 5% to $0.63. While the growth was somewhat anemic, the details and outlook are much better.

Sales came in at record levels although they only rose 1%. Brown Shoe Company saw strength across "all geographies, climate zones and genders." This suggests excellent company execution rather than purely any macro trends. Same-store sales leaped up 4.9% while wholesale business jumped by 4.5%. Most interesting, back-to-school same-store sales rocketed up 5.6%.

The specialty retail business lagged behind, dropping by 7.8% to $57.9 million. This muddied the overall results. However, the specialty retail business now only makes up around 8% of sales. Investors should focus on the other 92% of the business.

Several store closings and relocations of underperforming stores negatively affected results this quarter although this will likely lead to long-term positive results. The company raised its guidance for adjusted EPS from $1.27-$1.32 to $1.36-$1.40. This implies fourth-quarter adjusted EPS between $0.09 and $0.13.

While the fourth-quarter forecast is substantially below the third-quarter results, Brown Shoe Company's best seasonal quarter and most of its earnings tend to occur during the third quarter and back-to-school season. This period tells you more than any other how well Brown Shoe Company is executing, similar to a flower shop around Mother's Day.

DSW seems to be experiencing similar results. The company reported its results on Nov. 26 as well. Sales increased 6.8% to $633 million. Adjusted EPS was up 14% to $0.58. DSW saw record profitability for the third quarter.

DSW did, however, see a 0.7% drop in same-store sales at a time when Brown Shoe Company saw a fairly large increase. This provides further evidence that Brown Shoe Company executed successfully with its individual stores at a time when others such as DSW saw weakness. Overall, DSW was still able to report record profits from opening new stores.

Foot Locker reported its results on Nov. 22. Total sales increased 6.4% to $1.622 billion. Same-store sales increased 4.1%, a bit lower than Brown Shoe Company but much better than DSW. CEO Ken Hicks credited the increases with "a strong team effort." This implies that there's still money to be made in shoes despite the economy, as long as company strategy is outstanding. Foot Locker is looking to see results improve even further "in the next several quarters." This implies a macro outlook that won't stop Foot Locker which bodes well for Brown Shoe Company and DSW as well.

Foolish final thoughts
Follow the same-store sales for these companies as well as their growth in new stores. Together, they will drive results. Also take note that since these companies are able to keep their heads well above water during weak times, any improvement in the economy that provides them with positive momentum could make one, two, or all three of them big winners.

If the shoe fits, wear it.
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published