Shoe Company Stocks — Find the Right Fit

by Lawrence Meyers | July 3, 2012 10:45 am

There’s a common scam in New Orleans. A guy approaches you and says,”Hey, I bet you five bucks I know where you got them shoes.” You, knowing this stranger couldn’t possibly have that information, agree.  He then says, ‘You got them shoes on your feet, on Bourbon Street, in the city of New Orleans.”

Sure, you can’t argue with that, but the good news is that you can make those five bucks back by investing in any number of footwear stocks.

Nike (NYSE:NKE[1]) is the struggling giant[2]. But the thing about Nike is this: it’s a solid global brand with almost $3 billion in net cash, plenty of free cash flow, virtually no debt and a giant footprint (so to speak).

Right now, things are tough. But if you look at Nike’s stock historically, it goes through big drops of 30-60% every few years. Presently it’s about 20% off its high and is expensive on a P/E basis. I think there’s a lot to like here if the stock revisits the 60’s.

Steve Madden Ltd. (NASDAQ:SHOO[3]), which sells shoes under many names, is faring much better — thanks to the advantage that smaller niche players often have over massive behemoths.

Analysts foresee a 26% rise in sales in this year with a 19% increase in earnings. It carries almost $70 million in cash and has no debt. The company rarely has any capital expenditures to speak of, so it generates strong free cash flow. The stock only trades at 13x earnings, and I think it probably should be trading for closer to 15x. This looks like a value play.

Kenneth Cole Productions (NYSE:KCP[4]) is another niche play, which also offers items that extend beyond footwear. While not exactly a pure-play footwear stock, the fact that it offers diversity is why I mention it. Pure-plays are rarely things you want to invest in. And some of you may know that the founder just bought out his own company, so the stock won’t even be trading much longer. The $245 million price tag gives the company a 19x multiple, suggesting competitors should be around 15x-17x earnings.

Wolverine World Wide (NYSE:WWW[5]) is what remains of the big public boot-makers after Timberland got bought out. It’s a solid 10% grower, has $123 million in cash along with no debt, and generally puts up decent cash flow. It trades at 14x estimates, which is a bit pricey for its growth rate.

Deckers Outdoor Corp (NASDAQ:DECK[6]) is an interesting potential turnaround play. Its advantage — the UGG brand — is also its disadvantage. Like Crocs (NASDAQ: CROX[7]), they rely on one product, which accounts for about 80% of sales. That won’t stay the same forever, and we’ve seen free cash flow turn negative in FY 2011, with 2012 earnings set to fall YOY.

With $228 million in cash and no debt, the company has the ability to expand its product line. It’s expensive at 10x this year’s earnings with uncertainty in the future, but may make for a good speculative play that could provide big returns.

Lawrence Meyers does not own shares in any company mentioned.

  1. NKE:
  2. the struggling giant:
  3. SHOO:
  4. KCP:
  5. WWW:
  6. DECK:
  7. CROX:

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