Shoes are a weird business. You never can tell what is going to resonate with the public at any particular point in time - after all, people have fallen over themselves trying to get a hold of plastic shoes, shoes with little clear windows in the heel and shoes that allegedly build muscle. At the same time, it is a ridiculously competitive industry with price points all over the map.

With that backdrop, perhaps it should not be so surprising that the performance of shoe companies and retailers is also all over the map. Companies like DSW (NYSE:DSW) and Timberland (NYSE:TBL) have leveraged solid financial momentum into good stock performance, while the stocks of more bargain-oriented retailers like Collective Brands (NYSE:PSS) and Brown Shoe (NYSE:BWS) have had some struggles.

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Brown Shoe, DSW Not Looking So Green
Brown Shoe has been all over the map for years, and Tuesday's poor earnings report will not help. Not only did sales growth of 7% miss estimates, but the margins were a mess. Overall gross margin fell more than 200 basis points, due solely to the wholesale business. Wholesale margins fell 800 basis points because of sourcing problems and order fulfillment issues tied to a new IT system. All in all, the company missed its EPS target by a pretty meaningful amount and the market was merciless to the shares.

For DSW, Tuesday's results were more of a surprise - at least given DSW's relatively better financial momentum in recent quarters. Sales jumped 16% and exceeded even the high end of the analyst range and the company posted nearly 15% same-store sales growth. On the other hand, while operating income grew 24% and margins expanded by about 40 basis points, that was not quite good enough and the company did miss estimates. (For more, see The Bottom Line On Margins.)

So What's Going On Out There?
At the time of this writing, Shoe Carnival (Nasdaq:SCVL) and Finish Line (Nasdaq:FINL) are still to report and their results might cast a bit more light on what's going on in the sector. That said, there are not a lot of obvious takeaways to separate the winners and losers.

A rebound in demand has created sourcing issues for a lot of companies, and a bigger effort to push shoe sales at Wal-Mart (NYSE:WMT) and Kohl's (NYSE:KSS) has to be having some effect. That said, maybe it just comes down to merchandise.

Collective Brands, Brown Shoe, and DSW all lean toward "everyday" shoes, while Finish Line and Foot Locker (NYSE:FL) focus on athletic shoes and those stocks have been stronger over the past year. Likewise, Timberland and Wolverine (NYSE:WWW) have been outperformers - more evidence that shoppers are less interested in everyday wear or a sign shoppers want more expensive merchandise as the economy recovers?

Is Now The Time To Jump In?
Timberland and Wolverine run different business models and have consistently delivered better free cash flow and returns on capital than the retailers. Both stocks have done quite well and while these are quality companies, they are not screaming bargains.

Bottom Line
Among the retailers, it is interesting to see that different merchandise assortments, operating philosophies and target audiences do not seem to translate into drastically different financial performance (though Finish Line is on the high end of the range). That suggests minimal economic advantage to any of these business models and a likelihood of ongoing cutthroat competition. (For related reading, see The Shoe Lover's Investment Portfolio.)

That said, Brown Shoe has been a stock that has worked on a "buy the dip" basis many times over the past 15 years. The company is taking some logical steps to diversify its merchandise (expanding its athletic/outdoor offerings), and being the number three retailer in the country gives some advantages of scale. As long as investors realize that this is not likely to be a permanent relationship, Brown Shoe is a company and a stock worth a further look after getting smacked hard on disappointing results. (For more, see If The Shoe Fits, Buy The Stock.)

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Tickers in this Article: DSW, TBL, PSS, BWS, FINL, FL, WWW

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