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.

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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.

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