Will This Specialty Retailer Outperform the Market?

William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

For the past 15 years or so, I have been buying my shoes from a store called Shoe Carnival (NASDAQ: SCVL). I also liked the size of the store and the impression of a variety of choices. However, as I have said many times before, looks can be deceiving. Over time the performance of a company’s stock is correlated to cash flow generating capability, good overall fundamentals and price paid for the stock and not just necessarily the clean appearance and the choices that the store had to offer.

I decided to take a look at Shoe Carnival and two of its peers DSW, Inc. (NYSE: DSW) and Footlocker (NYSE: FL). As I began my research I noticed that Shoe Carnival takes the lead over the past five years in revenue growth (see Chart Below). Shoe Carnival, DSW, and Footlocker’s growth are 9%, 8% and 7% rounded to the nearest whole number respectively. However, this is where Shoe Carnival’s lead in fundamental metrics ends.

<img src="http://media.ycharts.com/charts/acb63e0e0ded20cd5c8bdc1642305f96.png" />

SCVL Revenue Growth data by YCharts

Shoe Carnival is at the bottom of the barrel when it comes to operating margins which is 6% (see chart below). The winner of the operating margin contest is DSW, Inc. at 11% almost double that of Shoe Carnival. Footlocker is in 2nd place with a 9% operating margin. DSW also takes the lead with net profit margins (2nd chart below). While Shoe Carnival may lead by revenue growth, DSW leads in keeping most of its revenue.

<img src="http://media.ycharts.com/charts/d76c9bd83e393c757ae0c9dc7daf60ec.png" />

SCVL Operating Margin TTM data by YCharts


<img src="http://media.ycharts.com/charts/58045374755c4b0cbc21d3a93a6018d4.png" />

SCVL Profit Margin data by YCharts

Cash is king. A company that can generate a great deal of cash flow is a company I want to invest in. Footlocker takes the lead in free cash flow in absolute terms. DSW leads in free cash flow growth. However, it is worth noting that Footlocker and Shoe Carnival were free cash flow positive during the recession. I like companies that generate positive free cash flow during hard economic times.

<img src="http://media.ycharts.com/charts/9181bca04f93ad2a604d4ce09a39bb5a.png" />

SCVL Free Cash Flow TTM data by YCharts


<img src="http://media.ycharts.com/charts/0142ced31490218717ba59399d6c9290.png" />

SCVL Free Cash Flow TTM data by YCharts

Shoe Carnival is at the bottom of the list for capital efficiency (see chart below) with 10% return on equity. DSW leads again with a return on equity of 18%. Footlocker is in 2nd place at 16%.

<img src="http://media.ycharts.com/charts/2ce78ec11e4b3446b3335adea26a8bc5.png" />

SCVL Return on Equity data by YCharts


<table> <tbody> <tr> <td> <p><strong>Name of Company (Ticker)</strong></p> </td> <td> <p><strong>2012 Year to Date Comparable Sales Percentages*</strong></p> </td> <td> <p><strong>2011 Average Sales per Gross Square Feet*</strong></p> </td> </tr> <tr> <td> <p><strong>Shoe Carnival</strong></p> </td> <td> <p>+5.4 Percent</p> </td> <td> <p>$221</p> </td> </tr> <tr> <td> <p><strong>DSW</strong></p> </td> <td> <p>+6.0 Percent</p> </td> <td> <p>$243</p> </td> </tr> <tr> <td> <p><strong>Footlocker</strong></p> </td> <td> <p><strong>+9.8 Percent</strong></p> </td> <td> <p><strong>$406</strong></p> </td> </tr> </tbody> </table>

 *Source: SEC Filings

Looking at the store sales comparison and average sales per gross square feet one could see that Footlocker clearly leads with a 9.8% increase in comparable store sales for 2012 year to date (see table above).

Footlocker has 2011 average sales per gross square feet of $406. Shoe Carnival is at the bottom of the list once again. This is a reminder to me of the importance of doing investment research.

Shoe Carnival has the highest valuation from a free cash flow yield standpoint which stands at 1% (see graph below). Footlocker’s free cash flow yield stands at 6% which means this company yields more cash as a percentage of share price than the other two companies discussed. As a value investor knowing this is important to me.

<img src="http://media.ycharts.com/charts/dd1332e6eb4715bbd37cda2e7c25bdcb.png" />

SCVL Free Cash Flow Yield data by YCharts

Since Footlocker and DSW lead in metrics such as free cash flow and free cash flow growth and Footlocker was the only company free cash flow positive among the companies discussed I am forced to conclude that Footlocker and maybe DSW are a better fish than Shoe Carnival. Also the older stores are faring better for DSW and Footlocker. Footlocker is clearly making the best use of floor space. Shoe Carnival probably won’t be a carnival in your portfolio.

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