Collective Brands, Inc. (PSS)

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Jason Mercer

Avinash Gandhi

Collective Brands (NYSE: PSS) [formerly Payless Shoesource] is an international shoe company with three business segments: Payless ShoeSource is the largest women's shoe retailer in the western hemisphere, Stride Rite is the largest children's footwear company in the United States, and Collective Licensing owns and licenses youth-oriented skate-and-snowboard brands, including the ubiquitous Airwalk image.^[1] As a discount shoe retailer focusing on consumers that make less than $75,000 a year, Collective is vulnerable to consumers' fears of economic recession; when low-income people fear for their jobs, they tend to spend less on non-necessity goods, like shoes. Collective already has low margins, thanks to the fact that discount shoe vendors compete pretty much solely on the basis of price, so the company is especially susceptible to increases in production costs. Collective is expanding in Latin America, opening twelve new stores between 2007 and 2008 in the hope that the economic growth of countries like Colombia will bolster spending through a rising standard of living; economic downturns in Ecuador and Puerto Rico, however, threaten to aggravate the troubles the company is having domestically. The company competes with other footware retailers, like Brown Shoe Company (BWS), Genesco (GCO), and Shoe Carnival (SCVL).

Business and Financials

Collective Brands can be divided into three major components:

• Payless Shoesource is one of the biggest footwear retailers in the Western Hemisphere, selling 170 million pairs of footwear and 40 million accessories during fiscal year 2007. Payless offers a wide variety of footwear ranging from athletic sneakers, sandals, and dress shoes to slippers, boots, and accessories such as hosiery. It offers private label as well as branded footwear from American Eagle, Dexter, Airwalk, and Champion. Payless markets primarily to women between the ages of 18 and 44 who make less than $75,000 a year; it estimates this group makes the majority of footwear decisions. Approximately 1/3 of this group has purchased footwear from Payless in the past year.^[2]

• Stride Rite is the leading marketer of children's footwear in the United States, focusing on consumers between the ages of 6 months and 10 years. Stride Rite is primarily a wholesaler, selling its products in North America through shoe stores and department stores. It also sells its products directly to consumers through the 340 Stride Rite stores it operates. In addition to children's footwear, Stride Rite also designs and markets casual and athletic footwear for adults under the brand names Saucony, Sperry Top-Sider, Sperry, Keds, and Grasshoppers.^[3]

• Collective Licensing International owns Vision Street Wear, Sims, Lamar, LTD, World Snowboarding Championships, Sugarboards, Carve, genetic, Dukes, Rage, Ultra-Wheels and Skate Attack. It focuses on the sport lifestyle market, specifically young consumers who follow skate-and-snowboard inspired trends. Payless has been a licensee of the Airwalk brand since 2003.^[4]

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Collective Brands made higher profits from 2003-2006, before seeing income decrease in 2007 due in part to a poor economy and increased competition. Adidas sued Collective in 2001 for violating the company's three-stripe trademark, and a federal court handed down a verdict in May 2008 declaring that Collective Brands pay $305 million. Collective finds the verdict unfair and may try to overturn the decision.^[7] In addition to its legal issues, the company is still trying to fully integrate Stride Rite, which it acquired in 2007, while continuing to develop and improve Payless, which has increased competition from other mass-market affordable footwear retailers.

Number of Stores Operated by Collective's Brands

The last two fiscal years were marked with a net decrease in the number of domestic Payless stores, while the number of Payless International Stores has increased. The acquisition of Stride Rite increased Payless' already considerable presence within the United States. The acquisition also expanded the number of markets Collective is actively involved in, which is a double-edged sword: it leads to greater revenues but also fiercer competition from a greater number of rival firms.

Key Trends and Forces

Fears of Recession Can Lead to Decreased Spending

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The economy is currently in bad shape, and fears of recession have led to concerns about job losses and pay cuts; thanks to economic insecurity, middle-to-low income consumers are likely to curb their spending on unnecessary items. Shoes can last for a long time, so consumers worried about their future income are likely to forgo spending on footwear, instead spending on necessities and saving for a rainy day. This is an especially important issue for Payless because, as a discount footwear retailer, its main consumer base tends to be less affluent--most of its customers make less than $75,000 a year^[10], meaning the company is especially susceptible to decreased spending.

The Commoditization of Footware has Led to Low Margins for the Industry

At a basic level, all footwear perform very similar functions and are produced with similar materials.In addition, production costs for the discount and luxury footwear markets are very similar. Due to the fact that discount footwear companies are marketed towards a lower-income population, their prices must be lower than those for a luxury company, so many companies throughout the discount shoe market have very small profit margins. Thus, they are much more vulnerable to changes in the market, such as decreases in consumer spending spurred by recessionary fears.

International Expansion is a Double-Edged Sword

Payless has been operating an increasing number of international stores since 2006, causing sales in 2007 to rise 6% from the previous year. Latin America has been integral to Payless International's expansion, and the company is actively pursuing opportunities to expand there; it will be opening its first store in Columbia in 2008.^[14] 2007 was one of the best economic years in recent Colombian history, and growth is expected to continue, making the company's entry potentially lucrative. However; Puerto Rico and Ecuador, each of which has large numbers of Payless stores, have seen a decline in economic growth rates in the past year^[15]; even outside the U.S., recessionary fears have the potential to put a damper on Collective's growth.

Competition

Collective Brands is ahead of its competitors by a considerable margin. Part of the discrepancy is due to size; Shoe Carnival and Genesco are considerably smaller than Collective Brands and Brown Shoe, meaning their sales would be proportionately smaller. Payless and Stride Rite stores tend to be smaller than those of its other main competitors. There are some advantages and disadvantages to the smaller stores: one advantage is that smaller stores leads to a greater number of venues where a store can be located. On the downside, however, smaller stores also means that there are fewer footwear styles to choose from, making it more difficult to appeal to as much of a wide, varied demographic as possible.

Shoe Carnival(NYSE: SCVL) is a family-oriented retailer that sells branded footwear for men, women and children. It also offers athletic gear and accessories such as backpacks. It operates about 250 stores located primarily along the Mid-Atlantic Coast, the southeast and midwest United States.^[17]

Genesco Inc.(NYSE: GCO) is a retailer and wholesaler of branded footwear and headwear. It operates over 2,000 stores in the United States, Puerto Rico and Canada, mainly under names such as Hatworld, Johnston & Murphy and Journeys.^[18]

Brown Shoe Company (NYSE: BWS) is a marketer and wholesaler of brand name, licensed and private label footwear to mass-merchandisers, department and independent stores. It owns brands such as Buster Brown, Naturalizer and Via Spiga. It also sells merchandise to consumers directly through its 300 retail locations in the United States and its website, Shoes.com.^[19]