A Shoe-Biz Success Story for Payless

With new styles, higher sales and stronger margins, Payless ShoeSource is showing promise for investors

The ballyhooed turnaround at Payless ShoeSource, Inc. (PSS) appears to be gaining traction.

The discount shoe retailer swung to a profit in the fourth quarter on a one-time tax gain and higher profit margins. The Topeka, Kan., company also said on Mar. 6 that it will acquire Collective International LP, a brand development firm.

Net income was $24.6 million, or 37 cents per share, during the three months ended Feb. 3, compared to a loss of $5.6 million, 8 cents a share, during the same period of 2005. Of the profit, about 22 cents per share was related to the release of funds the company had reserved to resolve possible tax issues.

Sales at stores open at least 12 months gained 6.8%, in their eighth consecutive quarter of improvement. Total quarterly sales were $693 million, up 13% from $611 million in 2005, when there was one fewer week. For all of 2006, sales came to $2.8 billion, up from $2.67 billion the previous year. Same-store sales improved 3.5% for all of 2006.

The results blew past Wall Street estimates. Analysts had expected income of 7 cents a share on sales of $639.6 million, according to Thomson Financial.

Investors were pleased by the report, and sent the shares up nearly 7% in aftermarket trading, to $33.61, near a 52-week high of $35.14. In the regular session, Payless stock gained 3.2% to close at $31.43 amid heavy volume on the New York Stock Exchange.

"Payless delivered an outstanding quarter of sales and earnings due primarily to strong results in our women's and children's categories," president and CEO Matthew E. Rubel said in a press release announcing the results.

Rubel -- a veteran retailer who was an executive at Cole Haan, (NKE) J. Crew Group, (JCG) and Revlon (REV) before he was named the Payless CEO in July, 2005 -- has been trying to bolster his company's merchandise mix and image. For example, Payless said March 6 that it's buying Denver-based Collective, which manages brands such as Airwalk and Vision Street Wear, for $91 million. Payless also announced a plan last fall with The Walt Disney Co. (DIS) to create a line of footwear that features Disney and Disney Pixar characters.

As Payless tries to differentiate its shoe offerings in the cut-throat discount retailer industry, the company has also managed to hike prices and reap larger profits on each sale. Gross margin amounted to 33.9% in the fourth quarter compared to 31.2% during the same period last year.

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