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The name Brown Shoe doesn't quite conjure up the image of a fast-growth small-cap stock. Yet the St. Louis shoe retailer, which operates 900 Famous Footwear and 400 Naturalizer stores, and does a thriving wholesale business, earned the No. 10 spot on BusinessWeek/Standard & Poor's Small-Cap 600 list this year, thanks to its 70% one-year and 150% three-year stock-price returns through mid-February.
Just how does a 125-year-old shoe business deliver those kinds of results? Think turnaround story. Brown Shoe (BWS
) has actually been through several revamps in its long history, but the latest started in the mid-'80s, when management divested a lot of its nonshoe businesses and closed domestic manufacturing plants. It acquired a wholesale division, added some new store chains and shoe brands, and revitalized its aging Buster Brown and Naturalizer lines.
Brown Shoe's historic past masks what's really going on, says Wells Fargo analyst John Shanley, the only Wall Street analyst to cover the $450 million market-cap company. More than simply offering new styles, the key to Brown Shoe's recent success has been management's basic blocking and tackling. Chairman and Chief Executive Ron Fromm's two-year-old program of cost-cutting and strict financial management led to a greater than 50% jump in operating profits from 2001 to 2002.
NEW SOLES. "We looked realistically at the fact that we didn't return a competitive operating margin, and we saw a number of things we could do," says Fromm. Building in tighter inventory controls, closing unprofitable Naturalizer stores, and eliminating overlap in operations were his main moves.
While improving efficiency, Brown Shoe has created new processes for developing brands -- including Naturalizer, Dr. Scholl's, and Carlos (by famed latin/rock guitarist Carlos Santana) -- and improving competitiveness. He also brought in new merchandising talent. Wells Fargo's Shanley is particularly impressed with the hiring in 2002 of former Finish Line exec Joseph Wood as president of Famous Footwear stores.
Brown Shoe's steep ascent has slowed due to weakness in the retail sector, as consumer spending has declined and fierce winter storms kept shoppers out of the stores in the Northeast. Since early February, the stock has been trading around $27 (it closed at $26.97 on Mar. 20).
GROWING OUT. On Mar. 6, Brown Shoe announced that same-store sales at both its Famous Footwear and Naturalizer chains fell about 8% in the four weeks ended Mar. 1 compared to the same period in 2002. But Fromm said he was encouraged that both stores increased their profit margins anyway, due to stronger sales of full-price items.
At its Feb. 26 conference call reporting annual results, Brown Shoe forecast that fiscal 2003 earnings would climb to $2.75 a share, a modest 12% gain, which management admitted was conservative. To achieve that, Shanley estimates sales would have to grow an additional 5%, to $1.92 billion. The plan this year will emphasize building the wholesale division and traffic in Famous Footwear stores, says Fromm.
Despite the recent sales slowdown, Shanley still rates Brown Shoe a buy and has a price target of $33. Among the catalysts he expects to produce future growth: expansion of its athletic shoe line and fresh new merchandise for women, including bright strappy sandals for summer and a big line of trendy high-heeled boots due for fall.
"POWERHOUSE." Shanley also says the earnings power generated by Brown Shoe's wholesale division, which handles footwear merchandising and overseas shoe manufacturing for department stores and discounters like Wal-Mart (WMT
), Target (TGT
), and Payless Shoes (PSS), is often overlooked. Although it doesn't get much attention, the wholesale division made up over half of operating profits while representing only 30% of sales in 2002.
"We are excited about what we've accomplished and believe we still have room to improve in areas like the turnover rate and introducing fresh and compelling products more often," says Fromm.
Shanley believes Brown Shoe is 70% through its turnaround plans and will soon be "an incredible powerhouse" in mid-range shoes in the U.S. Granted, the stock isn't as cheap as it once was. Wendell Perkins, chief investment officer at Racine (Wis.)-based Johnson Asset Management, bought Brown Shoe in 1999 when he deemed it "exceptionally cheap." He has since sold the stock, noting that valuations aren't as compelling. The stock's price-earnings ratio on 2003 earnings is 10, which is lower than the S&P 500's 16 but still at a premium to other stocks in the shoe business.
THE HIKE AHEAD. Plus, Brown Shoe's management is under a lot more pressure to deliver results than it was in the earlier stages of the turnaround. "Given how well the company has done, the forward expectations are pretty high. We were uncomfortable because usually when management can't meet those expectations, the stock craters," says Perkins.
For fiscal 2002, ended Jan. 31, Brown Shoe reported net income of $44 million, or $2.45 a share, up from $28.3 million, or $1.61 a share, in 2002 (excluding some nonrecurring events both years). Sales in that time grew only 5%, to $1.84 billion, from $1.76 billion in fiscal 2001.
Brown Shoe has made big returns in a bear market look like a walk in the park for the past three years. The challenge going forward is to keep that pace even if the retail environment remains in a slump. The potential is definitely there.
MARCH 24, 2003 |
Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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