SRR: losing stride

The following review is in response to a question regarding Stride Rite Corporation (NYSE: SRR). For those of you not familiar with the company, SRR designs and markets a number of footwear brands, including Saucony, Keds, Stride Rite, and Tommy Hilfiger.

The company has made quite an effort as of late to turn around some of its brands (Keds being a primary focus). The stock suffered a major set back in March due to 1Q 07 earnings below analyst expectations. Management also lowered its 2007 earnings estimates, with renewed 2007 expectations of US$1.10 per share vs. previous expectations of US$1.15 and sales growth between 5% to 8%. One interesting part of the announcement was that sales of Keds decreased 9% in the quarter, with management anticipating declining to moderate sales growth for the remainder of the year. This bit of news was rather surprising to Wall Street analysts given the strong consumer demand for the type of products SRR offers.

Overall, the bearishness in the stock is due in large part to the expectation that Keds and Tommy Hilfiger brands will continue to under-perform. Margins also seem to be relatively weak compared to 1Q 06, and if the consumer spending environment weakens at any point, it could put greater pressure on margin improvement.

I believe that the stock has seen most of the selling for the time being, however, I do not see any positive catalysts in the near term and would hold off until 2Q is announced in order to better gauge the turnaround of its brands. Then again, at these prices, the stock, much like the shoes the company sells, is getting to be quite a bargain.