Investors Should Pay Less For Collective Brands

By Ryan C. Fuhrmann | March 06, 2012 AAA

Collective Brands (NYSE:PSS) is best known for its chain of Payless ShoeSource retail locations. A previous management team attempted to move up the footwear food chain by selling higher priced merchandise, but ended up alienating its core customer base. It will take some time for the current team to reverse course, and investors may be best served waiting on the sidelines. (For more, see Earning Forecasts: A Primer.)

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Full-Year Recap
Net sales advanced 2.5% to $3.5 billion as the closure of domestic "underperforming and low volume, non-strategic stores" was offset by the opening of franchised locations in international markets. And, as judging by the fourth quarter results, comparable store trends were decent, as was growth in smaller divisions that sell the Sperry Top-Sider and Stride Rite brands in the company's own retail stores. Collective ended the year with nearly 4,500 company-owned stores and 13 franchised locations. These brands are also sold to outside retailers, and through the wholesale channels to customers such as Macy's (NYSE:M), J.C. Penney (NYSE:JCP) and Sears (Nasdaq:SHLD).

Collective fell into the red for the year, reporting negative operating income of $26.8 million. This followed a gain of $189.7 million in 2010. Hefty interest expense and income taxes resulted in negative net income of $164.5 million, or negative $2.73 per diluted share. Free cash flow was also negative at $53.2 million, or about a loss of 88 cents per diluted share.

Outlook
For the coming year, management expects to close another 50 stores. Analysts project Collective to eke out sales growth of less than 2% and achieve total sales of nearly $3.5 billion for 2012. They collectively expect earnings of 99 cents per share.

The Bottom Line
Collective is returning to its roots of selling more moderately priced footwear and related accessories to its core customer base. Its foray into higher selling prices, including the brands and specialty stores it now owns, proved unsuccessful and it will take some time for the company to return to its former strategy. At a forward P/E of about 12, the valuation appears somewhat rich given the time it is going to take for a turnaround to occur. And from a comparative standpoint, rivals such as Wolverine World Wide (NYSE:WWW) look much more reasonably valued. Wolverine trades at a forward P/E of 12.9 and has consistently grown sales and profits for at least the last decade. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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