The Consumer Stock Network

We apologize for the lack of new posts over the past few weeks, but we wanted to let readers know that we recently accepted a position as an equity analyst covering consumer-related stocks for Morningstar. As part of our employment agreement, we will no longer be able to provide content for this site, but we hope you will continue to read our notes in the future. For those who took the time to write us over the past few months, we thank you for your support.

In the meantime, we are looking for new editors or writers to take over the site. If you have an interest in consumer-related equities and are looking for a platform to express your ideas, feel free to e-mail us.

Thank you again.

This week, we continue with our list of favorite consumer stocks. Given the significant number of headwinds facing consumers right now (record-high gas prices, declining home values and the corresponding "wealth effect," as well as lingering credit concerns), we concede that this space may not be appropriate for all investor classes in at the present time. That being said, we still believe there are a number of compelling investment ideas to be found in this sector.

Instead of a long-winded recap of the names, we've decided to release the names one-by-one and provide a brief summary. After we finish revealing our favorite stocks, we will pull together the list into an equal-weighted portfolio and compare our performance to a number of benchmarks over the next year. We may also adjust the list periodically, as there may be better investment opportunities that arise in the coming months.

Today, we add teen-oriented apparel retailer The Buckle (NYSE: BKE) to the list.


Investment Highlights

• Under the radar stock. In our opinion, The Buckle's stock doesn't garner the same attention that other mall-based competitors such as Aeropostale (NYSE: ARO), American Eagle (NYSE: AEO), Abercrombie & Fitch (NYSE: ANF), J. Crew Group (NYSE: JCG), and The Gap (NYSE: GPS) do. One reason for this is the company's relatively small market cap ($1.5B compared to the peer group average of about $3-$4B), but with virtually no stores in the Northeast US, it is easy for the Street to overlook the company (in fact, there are only a handful of analysts covering the stock). Buckle stores are often located in secondary and tertiary markets where there are only a limited number of apparel options for a fashion-starved audience - a key reason behind the company's excellent sales trends as of late. As awareness of Buckle increases, we expect institutional shareholders to gravitate toward the stock and move its price upward.
  
• Appropriate brand name/private label merchandising mix. The company employs a dual-merchandising strategy, where 70% of the assortment are brand names highly sought by the teen audience (Lucky Brand, Hurley, Affliction, Guess, Quiksilver/Roxy, among others) and the remaining 30% represents in-house private label brands. The brand name items drive customers to the stores, while the private labels represent a key margin driver. While we would prefer a bit higher proportion of the private label brands, similar merchandising strategies have worked for the top mall-based apparel retailers in the past.
• Costs well controlled. Instead of costly marketing programs, The Buckle keeps its advertising expense budget to about 1% of total sales (compared to 3%-4% for some other national retailers) and allows its reputation for quality rand-name merchandise to drive traffic. When a company can still generate sales growth in the low 30% range (as The Buckle did in 1Q08) with minimal marketing costs, it has a profound effect on the bottom line. Furthermore, the minimalist approach to advertising frees up capital to be used on other important matters, such as inventory management and distribution.
  

Investment Risks

• Rising production costs. Most apparel and footwear retailers are feeling the negative impact of rising Chinese labor costs as well as higher input prices. Thus far, The Buckle has been successful passing these costs to its customers, but considering the pressures facing the US consumer, there may be a time where this becomes more challenging. That said, The Buckle's target audience is more resilient (or more oblivious, perhaps) to price inflation than "head-of-household" consumers; given the high demand for its fashion brands (especially the denim segment, which represents just over 40% of sales), we believe the company has additional room to increase pricing, if necessary.
  
• Valuation. Like some of the other names on our Top Ideas List, valuation is a bit of a concern because the stock has rallied quite nicely since January lows around $31. However, for a high-growth, well-managed company and an under the radar stock, we believe a modest premium is warranted. The stock currently trades at just under 16x the consensus fiscal 2009 estimate of $3.07, roughly in-line with the peer group. With continued earnings outperformance, a somewhat resilient customer base, and increasing investor awareness, we could envision this stock in the mid-to-high $50 range, barring any additional "shock" type events in the economy.
  

For our mock portfolio purposes, we will assume our entry price on The Buckle was $48.51 (the price at the time of this post).

Previously on The Best Ideas List:
GameStop (NYSE: GME)
Gymboree (NASDAQ: GYMB)

Disclosures
Analyst Ownership? No
Analyst's Family Ownership? No
Analyst's Firm Ownership? No
Investment Banking Conflict? No
Other Conflicts? No

This week, we continue with our list of favorite consumer stocks. Given the significant number of headwinds facing consumers (such as record-high gas prices, declining home values and the corresponding "wealth effect," and lingering credit concerns), we concede that this space may not be appropriate for all investor classes in at the present time. That being said, we still believe there are a number of compelling investment ideas to be found in this sector.

Instead of a long-winded recap of the names, we've decided to release the names one-by-one and provide a brief summary. After we finish revealing our favorite stocks, we will pull together the list into an equal-weighted portfolio and compare our performance to a number of benchmarks over the next year. We may also adjust the list periodically, as there may be better investment opportunities that arise in the coming months.

Today, we add children's apparel retailer Gymboree (NASDAQ: GYMB) to the list.


Investment Highlights

• Children's apparel has an inherent replacement cycle. By nature, children's apparel needs to be replenished several times a year, usually by a mature female demographic with a propensity to spend on their children. Yes, the Gymboree brand carries higher price points than its publicly-traded specialty competition - Carter's (NYSE: CRI) and Children's Place (NASDAQ: PLCE) - and the mass channel private labels. However, the average Gymboree customer represents a high-end audience with limited exposure to rising gas prices and other negative macroeconomic factors. We also expect a modest sales boost in coming years from baby boomer retirees who will likely have more time and resources to devote on their grandchildren. With the combination of established brands that resonate with mothers everywhere (Gymboree and Janie and Jack) and still-emerging brands (Crazy 8) , we anticipate robust sales growth (at least mid-teens) through the balance of the decade and likely beyond.
• Strong financial footing. When evaluating a consumer stock investment, the most important factors to evaluate are (1) top-line growth (including mature and new store growth), (2) the likelihood of sustained profitability and return on invested capital, (3) cash generation and flexibility, (4) debt requirements, and (5) inventory turnover. Gymboree generally passes the test on each of these considerations, with solid top-line growth, sector-leading operating margins and returns on invested capital (nearing 20%), ample cash on hand, a debt-free balance sheet, and inventory turnover over 4.0x (excellent for a mall-based apparel retailer).

Investment Risks

• Valuation. Admittedly, we are a bit concerned about Gymboree's valuation, given the stock's impressive run this year (the stock has climbed back from a low of $27 in January to a recent close of just under $44). However, at about 14x forward earnings (the consensus fiscal 2009 estimate is $3.16, according to Yahoo Finance), we still find this stock relatively cheap to its peer group (about 15x, aided by Children's Place inflated valuation) and anticipated earnings growth (mid-to-high teens). As such, we would comfortable with owning Gymboree's stock into the high-$50 range.
  

For our mock portfolio purposes, we will assume our entry price on Gymboree was $43.76 (the price at the time of this post).

Previously on The Best Ideas List:
GameStop (NYSE: GME)

Disclosures
Analyst Ownership? No
Analyst's Family Ownership? No
Analyst's Firm Ownership? No
Investment Banking Conflict? No
Other Conflicts? No

Since it is a relatively slow retail news week, we thought it might be worthwhile to publish a list of our favorite consumer stocks. Given the significant number of headwinds facing consumers (such as record high gas prices, declining home values and the corresponding "wealth effect," and lingering credit concerns), we concede that this space may not be appropriate for all investor classes in at the present time. That being said, we still believe there are a number of compelling investment ideas to be found in this sector.

Instead of a long-winded recap of the names, we've decided to release the names one-by-one and provide a brief summary. After we finish revealing our favorite stocks, we will pull together the list into an equal-weighted portfolio and compare our performance to a number of benchmarks over the next year. We may also adjust the list periodically, as there may be better investment opportunities that arise in the coming months.

We'll begin today with video game retailer GameStop (NYSE: GME).


Investment Highlights

• Opportune hardware/software cycle timing. Historically speaking, video game retailers are the most profitable during the second and third years following a major hardware platform release. Software presents much higher margin opportunities than the consoles they are played on because they are easier to mass produce and require fewer input costs. The latest round of consoles were released in late 2005 or early 2006, meaning that we are currently in this "software sweet spot". Coupled with an impressive line-up of already released and upcoming titles, we expect video game retailers to continue to post excellent profitability over the next 12 months.
• Economic stimulus check benefit. In our opinion, the Street is overlooking a key consideration of the economic stimulus payments - the age of potential recipients. Individual taxpayers with an adjusted gross income of less than $75,000 will receive the full $600 rebate (joint taxpayers with less than $150,000 will receive $1,200). Yes, The majority of economic stimulus checks will be sent to lower- and middle-income families who will likely spend excess funds on basic necessities or service personal debt requirements. However, there is also large number of stimulus check recipients between the key video-game playing ages of 18-35 that don't necessarily have to worry about housing payments or gas price inflation. Coupled with the recent and upcoming release of highly-sought titles, strong sales should persist for several quarters to come.
  
• Leisure activity substitute. Given the recent attention on soaring gas prices, we also expect discretionary spending on travel and other leisure activities to be down substantially this summer (and likely into the back half of the year). As a result, consumers will likely substitute lower-priced leisure activities and we believe video game retailers (especially those with family-friendly titles) could be a key beneficiary.
  

Investment Risks

• Valuation. Unlike most retailers and other consumer-related stocks, GameStop's stock has held up reasonably well over the past year. At 19x the consensus fiscal 2009 estimate of $2.38, the stock may be too expensive for some investors, even those willing to give the stock a premium valuation. However, the recent pull-back presents an opportune entry point and we believe there could be some upside to the full-year numbers due to the reasons we outlined above, meaning the stock would be more attractive using forward multiples.
  
• Longer-term competitive threats. A few years from now, we are concerned that, like movies and television shows, video game purchases and rentals will be a largely online experience. However, the average consumer does not have the in-home bandwidth or storage capabilities to download large video game files at this time, and we believe GameStop has at least a few years of protection before facing a serious online competition. That being said, we welcome increasing efforts by GameStop to expand its online game sales operations.
  

For our mock portfolio purposes, we will assume our entry price on GameStop was $44.63 (the closing price as of June 10th).

Disclosures
Employee of The Consumer Stock Network, LLC is a member of the Board of Directors or an advisor or officer of the Subject Company. No
Analyst or household of analyst is a member on Board of Directors or serves as an officer, director or advisory board member of the Subject Company. No
Analyst or household of analyst owns shares in Subject Company. Yes, we hold a small long position in GameStop
Analyst or household of analyst owns options warrants, or futures in Subject Company. No

We apologize for a lack of posts over the past week, but we've had our hands full working on a few side consulting projects. Even though it will probably be a slow week for retailer news - outside of new economic data, the most noteworthy event may be the Piper Jaffray Consumer Conference - we'll try to publish a few new posts this week, including a look at the best-positioned stocks for the next six months.

We were pleasantly surprised by the 1Q08 results that Shoe Carnival's (NASDAQ: SCVL) released yesterday. The company delivered sales of $162M (comparable store sales fell 4.9%) and EPS of $0.38, better than what we had anticipated in our preview post. The stock also fared much better than expected, rising almost 7% to $13.93.

With so much noise in the marketplace regarding consumer constraints (especially Shoe Carnival's moderate-income family audience), its easy to forget that there are smart, seasoned management teams that have weathered difficult economic climates before. Though it can be argued that retailers haven't seen an environment this challenging in over fifteen years, we believe Shoe Carnival's management has done an admirable job keeping margins at somewhat respectable levels. A few areas in particular stand out from the quarter, including expense controls (SG&A on a dollar basis came in flat to 1Q07 at $39M) and inventory management (flat on a per door basis).

While 1Q08 was encouraging, are there enough compelling reasons to initiate positions of Shoe Carnival at current levels? We don't expect the climate for value-conscious consumers to improve materially anytime soon and the company faces several headwinds in the coming months, including inflationary production cost pressures from Southern China factories (management estimates an average cost increase of between 5%-15%), operating expense deleverage stemming from negative comps, and additional marketing spending intended to improve the in-store environment and customer service. Additionally, women's non-athletic category trends remain sluggish industry-wide, and there are few reasons to expect a significant reversal in the back half.

That being said, Shoe Carnival also has a few things working in its favor. We expect the back-to-school season to be a positive catalyst, as it represents a time when footwear purchases are more of a necessity purchase for families rather than a discretionary buy. Furthermore, there is mounting evidence that athletic footwear may be returning to favor. With the merchant team's recent collaboration with key vendors like Nike, New Balance, Rockport to create a more compelling product for African-American and Hispanic customers and added exposure of the Olympic games, the athletic category could drive unexpectedly strong 3Q08 results. The balance sheet remains clean, allowing the company to open 20-25 new stores this year (including 10 or so in new markets) and potentially take market share form other struggling competitors in this channel.

Assuming comps remain in the negative low-to-mid single digits and there is only a modest drop-off in new store contribution due to the cautionary consumer environment, full-year sales should come in around $660M (roughly flat to a year ago). Gross margins will likely fall somewhere between 40-60 basis points due to increased promotional activity and occupancy/distribution expense deleverage. Despite aggressive cost cutting, there should also be SG&A expense deleverage due to the opening of additional stores and additional marketing investments. Based on these assumptions, we anticipate full-year EPS to come in somewhere between $0.82-$0.87 (We have not factored in additional share buy-backs into our assumptions).

Investment recommendation: Much like our investment recommendation for Brown Shoe (NYSE: BWS), we encourage investors to at least evaluate Shoe Carnival's stock at its current valuation. We would be inclined to wait for near-term pull-back as the marketplace factors in what will likely be lackluster 2Q08 results, but build positions in the high $13 range (representing about 16x forward earnings). Given the headwinds outlined above, we do not recommend this stock for momentum investors, but investors with long-term horizons could be rewarded by taking advantage of Shoe Carnival's relatively inexpensive valuation.

Disclosures
Employee of The Consumer Stock Network, LLC is a member of the Board of Directors or an advisor or officer of the Subject Company. No
Analyst or household of analyst is a member on Board of Directors or serves as an officer, director or advisory board member of the Subject Company. No
Analyst or household of analyst owns shares in Subject Company. No
Analyst or household of analyst owns options warrants, or futures in Subject Company. No

Earlier this morning, DSW (NYSE: DSW) reported 1Q08 results that were essentially in-line with expectations. The company generated $0.23 per share, missing the consensus estimate by a penny, and reiterated its full-year earnings guidance range of $0.75-$0.85.

At first glance, management's fiscal 2009 EPS guidance range (representing a 30%-38% decrease y/y) seems overly conservative. However, the company faces stiff headwinds from not only the deleveraging effect that negative single-digit comps will have on the occupancy expense line item, but also e-commerce channel development costs and IT improvements. Because of these incremental expenses, management expects operating expenses to increase by at least 200 basis points throughout the balance of the year (or more than 22.5% of sales), making it incredibly difficult to outperform earnings expectations. Disciplined inventory management should offset some of the impact, but we doubt it will be enough for the company to significantly exceed its outlook for the year.

In a somewhat curious move, the company also announced that President Peter Horvath left his position to become the Executive Vice President of Business Integration at Limited Brands (NYSE: LTD). We believe the company is still in good hands - Vice Chairman and Chief Merchandising Officer Debbie Ferrée is one of the best in the business, and Chief Financial Officer Doug Probst has done an exceptional job directing the company's financials - and there should be no shortage of qualified suitors to fill the open position. However, Mr. Horvath was partially behind the recent e-commerce, IT, and supply chain initiatives, and we wonder whether or not there will be any execution delays as a result of this management transition.

Investment recommendation: Is DSW right for your portfolio? It depends on your investment horizon. Considering the current state of the consumer and the 200 bps of SG&A deleverage that the company will likely incur this year, we really don't see management raising its EPS forecast anytime soon, especially when you factor in 2Q08's difficult comparisons. Although discretionary retailers have rebounded from their April lows, we believe the market is skittish enough about gas prices and other economic headwinds to keep valuation multiples in check for the foreseeable future. We expect the stock to remain range bound (up or down a few percentage points) over the next several months with very few catalysts - positive or negative - to drive compelling trading opportunities.

That being said, there are a number of reasons to like this company, and we find the stock appropriate for long-term growth and value investors alike. The company offers a wide assortment of popular footwear brands at discounted prices and a new aesthetically-pleasing shopping environment. There is increasing awareness of the DSW brand (just ask any female shopper between the ages of 24 and 45) and the company has sufficient room to grow its store base as smaller competitors falter in the current environment. Recent supply chain capabilities should keep inventory levels appropriately positioned, and the new e-commerce channel adds another way to satisfy customers. DSW's balance sheet is debt free and unit-level ROIC (return on invested capital) remains in the mid-to-high teen range. It may take some time - we don't see the stock returning to the $20 level until late this year or even early 2009 - but DSW presents an intriguing long-term investment case, especially if another footwear industry cycle emerges during the next 12-18 months.

Disclosures
Employee of The Consumer Stock Network, LLC is a member of the Board of Directors or an advisor or officer of the Subject Company. No
Analyst or household of analyst is a member on Board of Directors or serves as an officer, director or advisory board member of the Subject Company. No
Analyst or household of analyst owns shares in Subject Company. No
Analyst or household of analyst owns options warrants, or futures in Subject Company. No

It's a holiday-shortened trading week, but there are a number of retailers reporting 1Q08 results in the coming days. We're going to take a look at a few footwear retailers today, as this has been one of the most volatile sectors in retailing over the past month and seen a fair amount institutional shareholder turnover.

DSW (NYSE: DSW)
DSW will report full 1Q08 results Thursday morning before the market opens and host a conference call at 8:00 am EST (Dial-in: 800-706-7748, Pwd: 70368480). Management already reported 1Q08 sales of $366M and a same-store sales decline of 5.4%, and introduced full-year EPS guidance ($0.75-$0.85) that fell well short of analyst expectations. The stock has been subsequently penalized by the market, falling from $15 to its current price in the low $13 range (16x-17x the midpoint of the fiscal 2009 guidance).

Generally speaking, when a retailer adjusts its earnings forecast in a quarterly sales release, there will be few surprises on the conference call to act as a catalyst for the stock. However, expectations for retailers are so low right now, even a modest earnings surprise can trigger a meaningful stock price appreciation.

Is there a chance that DSW beats the $0.24 consensus estimate? Possibly - the company employs a low-cost operating model and has a history of outperforming earnings expectations, even after reporting tepid sales figures. Markdown activity was relatively prominent during the quarter, but DSW stores usually take heavier discounts during 2Q as a part of the company's semi-annual clearance sale. Television advertising remains a key part of the company's marketing campaign, but we believe management has increasingly used its loyalty program to communicate with customers in a cost-efficient manner.

That being said, even if quarterly earnings were to surprise to the upside, we doubt that management will make any changes to its full-year earnings guidance (issued just a few weeks ago). Accordingly, we expect the stock will likely be range bound (up or down a few percentage points) following the conference call, barring any other significant company announcements

Investment recommendation: Using its historical trading range of 18x-23x forward earnings, DSW's stock appears relatively cheap at its current valuation. However, past multiples are less applicable in this environment, and we believe the current stock price reflects more realistic growth expectations. There are a number of reasons to like this company: a compelling "fashion at a value" consumer proposition; increasing brand awareness; a shift away from the "big white box" format to an aesthetically-pleasing layout that invokes similarities to Urban Outfitter's (NASDAQ: URBN) Anthropologie concept; exceptional merchandising personnel; and improved supply chain capabilities. But considering the challenges facing the footwear industry, including a lack of dominant fashion trends to drive customers into stores and rising Far East production costs, expect lackluster sales and earnings trends throughout 2008 and likely into 2009.

Unfortunately, there really isn't a clear-cut investment strategy for DSW. We remain upbeat on the company's overall business model and growth opportunities, but prospective investors need to have a longer investment horizon before considering a position in DSW. Short sellers may also want to look elsewhere, as the stock is already trading close to its trough valuation and may not offer enough downside risk.

Shoe Carnival (NASDAQ: SCVL)
Shoe Carnival is also set to release 1Q08 results on Thursday morning, with a conference call scheduled for 2:00 pm EST (Dial-in: 877-879-6209, Pwd: 2850426). Analysts forecast sales of $164.8M and earnings of $0.37 per share, according to Yahoo Finance.

In our opinion, the consensus estimates seem a bit aggressive. Based on 1Q08 sales results from Collective Brands (NYSE: PSS), Brown Shoe Company (NYSE: BWS), and DSW (NYSE: DSW), comparable store sales will likely be in the negative mid-single digit range. Assuming new store contribution rates remain relatively stable, we expect total 1Q08 sales will likely decline 3%-5% ($157-$161M). Merchandise margins should benefit from new urban-themed products from Nike, New Balance, and Rockport, increasing penetration of the skate category, and an expanding women's non-athletic portfolio. However, merchandise margin improvement should be more than offset by heavy promotional activity, rising Far East production costs, and the deleveraging effect of negative comps on buying, distribution and occupancy expenses. As such, we anticipate that 1Q08 EPS will also come in below the $0.37 Street estimate.

In February, management decided that it would discontinue quarterly and yearly earnings guidance, citing "difficulties in the economic environment and the uncertainty of the effect on consumer spending." Accordingly, there is a wide range of published estimates - the current FY09 consensus earnings estimate is $0.89 per share, but analysts project anywhere between $0.75 and $1.05. Management will likely provide some color regarding forward expectations on Thursday's conference call, but it is unlikely that they provide an official guidance range. If the company's earnings miss (even by a modest amount), we believe the revised estimates will gravitate toward the low-end of Street range. Using the current forward earnings multiple of approximately 14x, this would imply a new stock value in the mid $10 range - a sharp discount to the present stock price.

Investment recommendation: Longer-term, we view Shoe Carnival as an attractive investment vehicle. Though it is known largely for its child-friendly shopping environment, the company has taken great strides in recent years to refine its assortment, including a greater emphasis on higher-margin women's footwear. The company has also added new merchandising talent to bolster other categories, and inventory management practices remain a strong suit. With just under 300 stores, we believe there is also ample room for new store growth (including entry into several high growth western U.S. markets). We attribute much of the current sluggishness to macroeconomic and cyclical footwear industry issues - not company-specific factors - and we believe investors with a three-to-five year horizon will be rewarded.

However, we would wait to initiate or add to positions until after Thursday's results. In fact, given the potential downside risk that we outlined above, the stock could be an intriguing short opportunity for those investors willing to take on a bit more risk. The stock has already retreated from a recent high of $15 in early May, but could fall further after a lackluster earnings report later this week.

Disclosures
Employee of The Consumer Stock Network, LLC is a member of the Board of directors or an advisor or officer of the Subject Companies. No
Analyst or household of analyst is a member on Board of Directors or serves as an officer, director or advisory board member of the Subject Companies. No
Analyst or household of analyst owns shares in Subject Companies. No
Analyst or household of analyst owns options warrants, or futures in Subject Companies. No

Amid persistent consumer headwinds, Brown Shoe (NYSE: BWS) posted weaker-than-expected 1Q08 results earlier this morning. Sales of $554M (a decrease of 2.1% y/y) fell short of expectations, and EPS of $0.05 (after adjusting for office relocation costs and insurance recoveries) missed the low-end of guidance by a few pennies. The stock is down a few percentage points midway through today's trading session.

Management painted a cautious picture for the rest of the year as well, citing a lack of catalysts to drive customer traffic, fewer wholesale reorders, and increased promotional activity. Full-year sales are now forecast to be in the range of $2.43-$2.48B (an increase of 3%-5% versus a year ago) with a comparable-store sales decline between -1% and -3%. The revised earnings per share outlook is $1.29-$1.53, but included $0.11 of office relocation costs and a $0.15 one-time benefit from insurance recoveries (suggesting an adjusted earnings range between $1.25-$1.49). In the Q&A segment of this morning's conference call, CFO Mark Hood indicated that the low-end of the revised guidance assumes that the consumer environment will remain as difficult as it has been, while the high-end implies a rebound in the consumer environment.

The wholesale segment represented a mixed bag. Higher-end brands like Franco Sarto, Etienne Aigner, and Carlos have held up well in the department store channel, and Dr. Scholl's continues to be a top seller at Wal-Mart (NYSE: WMT). On the other hand, sales of Brown Shoe's moderately-priced footwear brands remain sluggish with little evidence of an immediate turnaround. We are encouraged by recent brand additions and extensions (including last week's partnership with Fergie and this morning's announcement about the Gretta Footwear Brand), but gross margins will likely be pressured by increased vendor allowances over the next few quarters.

Despite weak store traffic and conversion rates, there are actually a few reasons to be optimistic about the retail segment in the back half. Although families continue to cut back on discretionary spending, the back-to-school season (beginning in late July) traditionally represents a time when footwear purchases are more of a necessity. Based on recent sales patterns, there are also some early indications that athletic footwear is slowly returning to favor. Coupled with exposure from the Olympic games, the athletic category could be an unexpected positive catalyst for the Famous Footwear chain later this year. Inventories remain relatively clean (down 4.7% on a per store basis), mitigating markdown risk to an extent, and initial Naturalizer retail stores opened in China have been well received.

Investment recommendation: Though near-term prospects look bleak, we encourage investors to take a closer look at Brown Shoe's stock as the volatility dies down today. At just over 10x the mid-point of the revised earnings guidance range, we believe much of the negative news has been priced in and the stock represents a bargain to its historical trading range of 13x-18x. Brown Shoe may lack the momentum that the fast money crowd desires, but long-term investors may be rewarded by gradually building positions over the coming months. The stock seems to have found support in the mid-$14 range, and barring a complete economic collapse or an unforeseen "shock" event, we do not see the stock falling below its January lows around $12.

Though we did not anticipate a reduction in full-year estimates this early in the fiscal year, we generally believe that Brown Shoe possesses better visibility than pure-play footwear retailers because of orders coming through its wholesale business. Management has set the bar relatively low for the remainder of the year, and we believe that the current guidance ranges are achievable. Although there are a number of challenges facing the company in upcoming periods, Brown Shoe has an established retail/wholesale/e-commerce platform that greatly reduces operating results volatility.

Disclosures
Employee of The Consumer Stock Network, LLC is a member of the Board of directors or an advisor or officer of the Subject Companies. No
Analyst or household of analyst is a member on Board of Directors or serves as an officer, director or advisory board member of the Subject Companies. No
Analyst or household of analyst owns shares in Subject Companies. No
Analyst or household of analyst owns options warrants, or futures in Subject Companies. No

Brown Shoe Company (NYSE: BWS) will report full 1Q08 results next Wednesday before the market opens. Management will host a conference call later that morning at 9:00 am EST (Dial-in: 866-308-5110, Pwd: 46813068). The Street anticipates sales of $574M and earnings of $0.07 per share, according to Yahoo Finance.

Is there a trade to be made in advance of next week's announcement? There isn't a clear-cut answer, but let's walk through the relevant issues.

Based on consensus estimates, it looks like the Street is assuming that 1Q08 results will come in toward the low-end of guidance, which calls for sales of $575-$585M, comps between -3% and -5%, and an EPS range of $0.07-$0.11. Considering that rivals Collective Brands (NYSE: PSS) and DSW (NYSE: DSW) both reported comps in the negative mid single-digit range, we believe that the sales estimates are probably reasonable, if not a bit aggressive. Management's previous earnings forecasts have also been generally reliable, aided by a resilient multi-channel approach (retail/wholesale/e-commerce operations spanning a wide range of price points), a shift away for lower margin private label wholesale products, and superior inventory management practices. If earnings were to miss, we do no believe they would come in below the low-end of the guidance range by more than a penny or two.

A quarterly earnings miss would probably trigger a modest pull-back in the stock price, but the impact would be much more severe if the company made any downward revisions to its annual guidance range. However, management set relatively conservative full-year targets (sales of $2.50-$2.55B (y/y growth of 6%-8%) , comps of 0% to -2%, and EPS of $1.52-$1.62) that took the challenging consumer environment into consideration. Besides, 1Q is typically one of the softest earnings quarters for a footwear retailer, and given the relatively wide ranges, it is probably too early in the year to make material changes to the full-year the guidance.

A less likely (but still possible) scenario that investors should be aware of is a short squeeze. Footwear has been one of the most beleaguered sectors in retailing over the past year, as shown by the one-year charts of Brown Shoe and its competitors, Collective Brands, Shoe Carnival (NASDAQ: SCVL), and DSW. With a still tumultuous economy, a lack of strong fashion trends to drive customers to the stores, and higher overseas production costs, institutional short interest remains exceptionally high (13.5% of the float at the end of April). However, with extremely low expectations for quarterly results, retailers only need a modestly positive earnings surprise to trigger short squeezes (such as Collective Brands earlier this week). While we believe that this is a less likely scenario when Brown Shoe reports, investors should at least be aware of the possibility.

Investment recommendation: In our opinion, Brown Shoe represents an excellent long-term investment. The company has a strong presence across multiple channels and price points, making operations more consistent than its peers. There are ample sales growth opportunities through new brand extensions and joint ventures in China and Japan. Despite increased production costs, the company should bolster margins over the coming years through more efficient operations, higher-margin wholesale sales, and continued inventory practices. At just 10x times the mid-point of management's fiscal 2009 earnings outlook ($1.57), we believe the stock is a relative bargain to an expected low-teen earnings growth rate.

That being said, we would be inclined to wait until after Wednesday's release before building or adding to positions. While retailers have come back into favor a bit recently, we believe the likelihood of a lackluster quarterly report outweighs the chances of a positive earnings surprise. Shorting is an option, but we are concerned about the heavy short interest that is already out there. Sit tight for now, and more attractive buying opportunities should present themselves in the coming weeks.

Disclosures
Employee of The Consumer Stock Network, LLC is a member of the Board of directors or an advisor or officer of the Subject Companies. No
Analyst or household of analyst is a member on Board of Directors or serves as an officer, director or advisory board member of the Subject Companies. No
Analyst or household of analyst owns shares in Subject Companies. No
Analyst or household of analyst owns options warrants, or futures in Subject Companies. No