Tickers in this Article: PSS, BWS, NKE, KSWS, FL, WMT, TJX
In most respects, these are pretty good days to be in value-oriented retail. Companies like Family Dollar (NYSE:FDO), Ross Stores (Nasdaq:ROSS) and TJX (NYSE:TJX) all are seeing their stocks trade near 52-week highs, and analyst estimates have been an upward match.

That stands in pretty sharp comparison to the shoe sector, where leading value-oriented companies like Brown Shoe (NYSE:BWS) and Collective Brands (NYSE:PSS) (owner of Payless and Stride Rite) are struggling. With Collective Brands reporting a very disappointing first quarter, it is worth asking whether there is something fundamentally different about the shoe business, or whether the absence of institutional demand for these stocks makes for a buying opportunity for value investors.

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A Tough Quarter for Several Reasons
Collective Brands announced that revenue for the fiscal first quarter fell a bit more than 1%, which is not so bad until it's considered that the company missed the average estimate by about 5%. Although the company's very profitable PLG Wholesale business saw revenue rise almost 23%, overall company results were hurt by a 9% drop in domestic Payless revenue (which was fueled by a greater than 8% drop in same-store comps). International sales were also weak, as poor performance in Canada pushed the Payless international revenue down by almost 3%.

With less revenue, profits collapsed. Gross margin fell about two and a half points from last year, while operating profit was nearly cut in half. Operating margin at Payless domestic was less than 3% this quarter (nearly 9% a year ago), while PLG Wholesale came in at 11.9%. Collective Brands also ended the quarter with 23% more inventory on the books, due in part to the sales shortfall but also higher costs leading to higher inventory values. (For more, see The Best And Worst Of Times In Shoes.)

Not Just a Payless Problem
Lest anyone think that Collective's problems are all of its own making, rival Brown Shoe also reported rather weak numbers, with same-store sales down almost 4% and a year-on-year decline in sales were it not for an acquisition made in February. Brown Shoe also indicated that full-year results were likely to trend toward the lower edge of guidance, suggesting low single-digit same-store growth.

Though not in exactly the same niche, K-Swiss (Nasdaq:KSWS) also recently disappointed Wall Street with its financial performance, and analysts have lowered their numbers as a result. That all contrasts with the recent performance of higher-end shoe retailers like Shoe Carnival (Nasdaq:SCVL), Foot Locker (NYSE:FL) and Finish Line (Nasdaq:FINL), the latter two of which trade near 52-week highs, as well as Nike (NYSE:NKE). (For more, see Shows March Ahead.)

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Economics 101
Collective Brands is a retail play that ties directly into the health of lower-income consumers. Unfortunately, the poor employment numbers, very weak wage growth and rising cost of goods (like gasoline) are squeezing this segment yet again. That's leading more consumers to delay purchases or shop aggressively for sales and discounts at stores like Wal-Mart (NYSE:WMT).

In the meantime, Collective Brands (as well as Brown Shoe) just does not have enough momentum with international sales or up-market offerings to offset the weak sales environment in that core value market. Things should get better, but that is not much of a thesis on its own, and there is a decided lack of visibility with these companies right now.

The Bottom Line - What's the Price of Fear?
Collective Brands seems just too cheap today. Running today's price through a reversed cash flow model suggests that the market believes the company will reset back to its long-term average cash flow margin (about 3.5% of sales) and grow only about 1% a year thereafter. Even allowing that Collective Brands may not be a growth champion and that lower-income consumers are going to see sustained economic pressure, that seems like a bleak outlook and one that probably tilts the risk/reward profile here towards "reward". (For more, see Investors Willing To Pay More For Payless.)

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