Can Shoe Pavilion be mended?
Shoppers looking for inexpensive shoes have, in many parts of the country, three good options from which to choose. Shoe Pavilion Inc. (Nasdaq: SHOE), DSW Inc. (NYSE: DSW), and Payless Shoesource Inc. (NYSE: PSS) all offer a similar bare-bones store format, featuring aisle after aisle of stacked shoe boxes containing flip flops and tennis shoes, pumps and stilettos, all marked down from the regular retail price.
All of these stores are a bargain shopper’s paradise and many of the shoppers who exit with a bag full of discounted goods probably don’t know the difference between one shoe outlet and the other.
Not so investors. While DSW and Payless Shoesource are both solid businesses with multi-billion dollar valuations, Shoe Pavilion is a struggling small-cap stock, which has lost more than half its market share since the start of the year and is now valued at just over $30 million.
Sherman Oaks, Calif.-based Shoe Pavilion operates 108 stores in the western United States and has long attracted shoppers to its low-priced shoes, handbags and accessories. Revenues in fiscal 2006 grew to $131.3 million, from $102.5 million in 2005 and $85.8 million.
The company’s net income has been somewhat more erratic, partly due to costs associated with its aggressive expansion plans. The company earned $1.9 million last year, down from $2.6 million in 2005 and $2.1 million in 2004.
Choppy earnings notwithstanding, things had been going along pretty well for the company until it kicked off 2007 with a disappointing first quarter earnings report and a warning that business could remain weak for much of the year.
Investors were unforgiving. Today Shoe Pavilion’s stock is selling around $3.16 per share, down from $7.33 at the start of the year.
It may be hard to understand how a relatively stable, 28-year-old company, could take such a hit to its stock price because of a couple of soft quarters. Indeed, the severe share price might be seen as a buying opportunity if you can make a case that the company’s latest financial troubles are just a temporary stumble.
Here are the basic numbers:
In May, Shoe Pavilion reported a first quarter net loss of $1.2 million, or $0.13 per share on revenues of $36.2 million, and said that slow traffic in many of its stores, especially newly opened stores, could pressure results for the rest of the year. It forecast second-quarter net income of between $0.01 and $0.02 per share, well below the then mean analyst estimate of a profit of $0.04 per share. Shoe Pavilion’s second quarter revenue forecast of $37 million to $39 million was closer to analysts’ forecast of $39 million.
Then there was the forecast for the rest of the year. Shoe Pavilion said it expected to report a loss of between $0.21 and $0.26 per share, on revenue of between $155.5 million and $160.5 million for the full year. Such results would show that sales are growing well but that its rapid expansion is cutting into profits.
Shoe Pavilion is in the process of shutting older stores in less trafficked areas and replacing them with new outlets in newer malls and shopping centers. After opening 24 new stores in 2006, the company this year plans to open between 16 and 18 new stores and close between five and seven older ones as part of a strategy to enhance its merchandising. While this shift requires hefty one-time costs, the recent weakness shown at some of the company’s newest stores suggests possible problems with the site selection.
Shoe Pavilion says that the trouble at the newer stores is probably temporary, reflecting the fact that many of these outlets are in brand new malls that have not yet built up a lot of foot traffic.
But some analysts question whether this is a problem that can be quickly fixed. Last month, Roth Capital Partners analyst Elizabeth Pierce downgraded Shoe Pavilion to a “hold” from a “buy,” saying that the company’s troubles could last a while.
“Even though we believe the reasons behind the shortfall are legitimate, i.e., construction and weather, and even though the shortfall was pretty much confined to new stores,” she wrote, “we believe the primary issues that impacted first quarter results will linger throughout 2007 and possibly into 2008.”
Maybe they will. Indeed, the company’s chief financial officer, Bruce Ross, quit his post last month, never a good sign for a struggling business.
Then again, there is a chance that Shoe Pavilion, already aware of the cause of its troubles, will move swiftly to get things in orders.
It’s a story that’s worth watching closely for potential upside.
