It has been about a year since I last wrote on Brown Shoe (NYSE:BWS) and what a year it has been. While I had previously been skeptical of the board's selection of Diane Sullivan as CEO, the hyperbole around a share buyback, and the company's general strategic direction, I did hold out the hope that the company was washing out its bad news and was ready to get back to a real recovery. Since then, though, the stock has nearly doubled and it may fairly be asked if the company can still really be called a turnaround story.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers

Second Quarter Results Show Progress
Given the fact that sales were still down from last year, Brown Shoe clearly has room left for improvement. That said, the company has already made some meaningful improvements in its expense structure.

Revenue fell a little more than 3% this quarter, basically in line with expectations. Although Famous Footwear sales rose a little less than 2% on a reported basis, same-store sales actually rose nearly 4%. Likewise, while wholesale revenue declined 9% as reported, sales here were down only about 3% after adjusting for brands that the company is exiting.

Better cost control remains a focus of management, and the results are showing it. Gross margin improved nearly a point and a half, while a small reported operating profit reversed a year-ago loss. Looking at adjusted performance, the company saw a low single-digit operating margin and significant year-on-year performance as the company closed underperforming stores and two distribution centers.

SEE: Understanding The Income Statement

Caution Seems Well-Founded
While management's tone on the conference call may suppress some of the market's enthusiasm for the stock, I like it. This is still not an easy operating environment, as the core market for Famous Footwear is still not especially strong. What's more, Brown Shoe still has work to do to improve performance of its large retail chain - rivals Shoe Carnival (Nasdaq:SCVL) and DSW (NYSE:DSW) are still showing pretty solid comps, while retailers like Walmart (NYSE:WMT), Target (NYSE:TGT) and Kohl's (NYSE:KSS) continue to push their own expansion in value-priced footwear retail.

By the same token, paying close attention to costs is going to pay dividends. Slimming down the cost structure and jettisoning lagging brands could do a lot to lift margins and cash flow generation, and Brown Shoe frankly doesn't have the resources to support all of these efforts. In other words, a stronger company could afford to direct some resources towards buying/fixing laggards, but a company in Brown Shoe's situation needs to focus more on building a winning platform.

Will Competitive Disruption Help?
Brown Shoe may be in a position to benefit from some disruption as a major competitor. Collective Brands, owner of the Payless chain, is in the process of selling itself to Wolverine (NYSE:WWW) and two private equity groups in a deal that will radically change the company. While Wolverine is taking the brands and operations of Sperry Top-Sider, Saucony, Keds and Stride Rite, the private equity groups are keeping Payless.

Now maybe this will be a seamless, no-fuss transaction, and maybe the company's plans for the back-to-school season are already well in place. But it is more common than not for deals like this to be disruptive to a company's retail operations and it won't hurt Brown Shoe in the least if Payless stumbles for a bit as the new owners settle in.

SEE: Analyzing An Acquisition Announcement

The Bottom Line
With Brown Shoe still transitioning from a beaten-down fixer-upper operation to a company with growth prospects once again, valuation is challenging. A year ago investors could credibly argue that they may not know exactly what Brown Shoe shares were worth, but it had to be more than the going rate. Now, though, the trajectory of margins and free cash flow matter once again, but the company really hasn't stabilized enough yet to give a fair sense of what the "new Brown Shoe" might look like.

The trailing decade-long average of free cash flow conversion is pretty pathetic, but then that includes some pretty bad years - years that should not be repeated again if the company's restructuring efforts have in fact taken hold. If Brown Shoe can get back to a free cash flow margin around 4% in five years' time, and hold that level, you can argue that these shares are worth something into the $20s. But it has been a long time since the company offered that sort of performance, and investors need to balance the upside of what Brown Shoe can be with some skepticism about whether the company can get there.

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

Related Articles
  1. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  2. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  3. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  4. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  5. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  6. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  7. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  8. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  9. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  10. Stock Analysis

    The Biggest Risks of Investing in Amazon Stock

    Find out which risks are most important to Amazon's shareholders. Learn which operational risks impact share prices and which financial risks affect investors.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!