Brown Shoe (NYSE:BWS), the third-largest footwear retailer in the country and a major wholesaler to other retailers like Wal-Mart (NYSE:WMT) and Kohl's (NYSE:KSS), has seemingly been in perpetual turnaround for the better part of a decade. Although the company still has much to prove to the Street and the stock is off its lows, sustained operational improvements could make this stock a real winner in the years to come. (For more, see Earning Forecasts: A Primer.)

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A Two-Part Business
Many readers will be familiar with Brown Shoe through its retail system. Brown Shoe operates the third-largest chain of footwear stores (Famous Footwear) after Collective Brands' (NYSE:PSS), Payless ShoeSource and Foot Locker (NYSE:FL), as well as specialty stores like Naturalizer. Perhaps less familiar is the company's wholesale business - a business that supplies brands like Sam Edelman to stores like Nordstrom (NYSE:JWN) and Saks (NYSE:SKS).

Problems On Both Parts
In recent years, Brown Shoe has struggled to deliver consistent, positive performance. Plenty of footwear retailers have had their challenges in recent years, pressured by weaker consumer spending and rising product costs, but Brown Shoe has committed more than a few self-inflicted wounds. One of the biggest problems has been toning shoes. Brown Shoe did alright tagging along in the wake of Skechers (NYSE:SKX) but missed the turn in this fad and found itself stuck with a lot of inventory to run off.

The wholesale business has had its challenges as well. Margins have suffered as the company has been slow to integrate acquired brands and made operational mistakes that have increased costs (including the need to ship more costly rush orders to accommodate merchandising mistakes).

Along the way, management has lost a lot of credibility with the Street. It feels like there's always another restructuring on the way; the company has done the right thing in closing stores and selling underperforming brands, but the company seems to struggle to either communicate its expectations or meet them. It's also worth noting that the implementation of a new IT system has been an ongoing nightmare that has cost significantly more than initially advertised.

Now The Good News
Brown Shoe is far from lost. The company's returns on capital and free cash flow production are quite feeble now, but the company has survived the worst more or less intact. What's more, higher-value brands like Sam Edelman and Franco Sarto are becoming a larger part of wholesale sales and that carries the prospect of better sales and better margins.

Brown Shoe is also positioned in what should be a good niche for years to come. The company can't and won't compete in the high-end of athletic shoes like Nike (NYSE:NKE), nor in the high-fashion market, but the company's core is in shoes that offer solid value propositions. If we are in fact in a long-term period of less spending and more saving, that wide swath of value brands could do well. What's more, even for those who are a little better off (and/or more willing to spend) Brown Shoe has something to offer with these higher-end brands.

The Bottom Line
Brown Shoe has much to do and much to prove. The decision to make the former COO the new CEO still does not make abundant sense to me (given the operational missteps), but the company seems to be on a smarter course now and she deserves her chance. While there are risks that the company cannot control, like higher wage costs in China and another recession in America, those apply equally across the sector.

Although Brown Shoe has long been an underperformer in terms of cash flow production, the good news is that the stock could still have better than 40% upside even if the company never closes the performance gap with Collective Brands or Foot Locker. And if the company can become a peer or above-peer performer, then the rewards could be even greater. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.