Collective Brands Inc.

Collective Brands keeps selling shoes despite the economic downturn as it focuses on designer brands. The company has surprised 3 out of 4 quarters by an average of 28.14%. Collective Brands has a forward P/E of 12.87.

Company Description

Collective Brands Inc. (PSS - Snapshot Report) is a national shoe retailer that is the largest non-athletic footwear company in the Western Hemisphere. The company has three divisions: Payless Shoesource, Stride Rite and Collective Licensing International.

Payless ShoeSource was founded in 1956 and has 4,600 retail stores in all 50 U.S. states, as well as in Puerto Rico, Guam, Saipan, the U.S. Virgin Islands, Canada, Central America, the Caribbean, and South America.

Payless' brands include Dexter, Disney, Champion and designer collections: Abaeté for Payless, Lela Rose for Payless and alice + olivia for Payless. The company now has a footwear and accessory design team in New York City. The goal of its designer collection is to democratize footwear fashion.

The Stride Rite Corporation sells high-quality children's footwear primarily through 300 Stride Rite stores. Brands include Keds, Sperry TopSider, Saucony, and Tommy Hilfiger footwear.

Collective Licensing International supports youth and lifestyle brands such as Airwalk, Vision Street Wear, Sims, Dukes, Rage and Skate Attack.

The company recently showed its Payless spring designer footwear line at New York's Fashion Week. The collection will be in stores in Feb 2009 and all items will average under $45. Its fall collection is currently in stores.

The Adidas Lawsuit

Collective Brands and Adidas are embroiled in a trademark infringement case in Oregon with Adidas about its sneakers. Adidas claims the 2 or 4 stripe sneakers are too similar to Adidas' trademarked 3 stripe sneakers.

The jury found in favor of Adidas but, on Sep 12, the Court lowered the award by 75% to $64.4 million. Collective Brands is appealing the original decision.

Collective Brands Beats Wall Street Estimates for 2Q by 86.21%

On Sep 3, Collective Brands reported its second quarter 2008 earnings and blew away estimates by 25 cents per share. Excluding litigation items, earnings increased 42% to $33.6 million, or 54 cents per share, from $24.9 million, or 38 cents per share. Analysts expected 29 cents.

Sales rose 30.4% to $911.7 million, but that included the addition of Stride Rite. Comparable store sales, including Payless Latin America, rose 0.2%. The company attributed the increase in sales to higher retail prices which offset lower unit volume.

Collective Brands Maintains Long Term Growth Targets

On Sep 23, the company held an analyst conference. The company's forward outlook is strong. The company is focused on international growth. It will close 250 domestic Payless ShoeSource stores over the next 5 years and open 200 additional stores in Latin America. International sales as a percentage of business unit total sales will grow at a 3-year compounded annual growth rate of 9% for Payless and 13% at Stride Rite.

In the near term, the company sees comparable store sales growth below long-term growth rates. But over the long term, it sees a growth rate in the mid-teens. During this rocky period, Collective Brands will be pruning inventory and controlling expenses.

Average inventory in Payless stores was down 2.4% in the second quarter versus the year ago period. Payless aged inventory was also lower than last year reflecting a cleaner inventory position.

Consensus Estimates Rise for the Third Quarter and the Full Year

Covering analysts responded to the company's bullish earnings report and outlook by raising estimates in the last 30 days. Third quarter estimates rose 3 cents to 42 cents per share. Full year estimates jumped 15% to $1.33 from $1.13.

Analysts expect 2008 year over year earnings growth of 12.29%.

Value Fundamentals

Collective Brands has a forward P/E of 12.87. Its price-to-book is 1.65. The company has a one year return on equity (ROE) of 11.35%.

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