You’d think that in this brutal economic environment, cheap shoes would be appealing above expensive brand names. But that just isn’t the case at Collective Brands, Inc. (NYSE:PSS), parent of Payless ShoeSource and Stride Rite shoe stores.
The company posted an ugly $35 million loss in its most recent earnings report. The stock is off 43% so far in 2011. And after posting numbers, the company announced plans to close hundreds of stores.
So is this the beginning of the end for Payless and Stride Rite?
Well, the good news for fans of the chains is it’s not likely Collective Brands will disappear. The loss was due to a mammoth $83.6 million one-time charge tied to the declining value of its stores — a simple accounting adjustment showing that its assets now are worth much less than they were a few years ago. That’s a harsh reality many normal Americans have had to deal with, too. The company actually has paid down a bit of its long-term debt, has decent cash on hand and has posted annual profits in both fiscal 2010 and fiscal 2011 after a rough 2009.
But the bad news is 475 Collective Brands locations will close, almost 10% of its current count of over 4,800 stores — mostly under the Payless nameplate.
Worse for investors is the Payless store closures will result in charges of $19 million related to the restructuring in the current quarter. Future charges for the closings could add up to $25 million to $35 million, according to industry estimates.
In short, Collective Brands is suffering from a decline in its brand name, a decline in its footprint (pardon the pun) and an uptick in expenses to reflect the new reality. Not encouraging signs for investors in PSS stock.
Furthermore, consumers appear to be willing to pony up more cash for quality. Take Steve Madden (NASDAQ:SHOO), which has seen its shares rise more than 20% year-to-date in 2011 thanks to robust sales. Or Deckers Outdoor (NASDAQ:DECK), maker of Ugg boots, which has posted a small gain since Jan. 1 despite a decline for the broader stock market. If investors want to play apparel and retail, they have other options.
Shares rebounded from a brutal 52-week low of $9.11 earlier in the week but remain off almost 50% from a peak earlier in 2011. And if this ugly earnings report is any indication, Payless parent Collective Brands is in store for further declines — or at best, a bumpy future as it muddles through the next several months.
Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.
