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Collective Looks for Opportunity

Flagship Payless business expanding into new categories.

BOSTON — Collective Brands Inc. said last week that even if the economy’s fate is still uncertain, the company is well positioned for 2010.

“Unemployment is still one out of 10 [people] in this country. So for anybody who thinks [the economic malaise] is over, I really don’t believe it is. I [do] believe that people aren’t as afraid anymore,” Matthew Rubel, chairman, president and CEO of Collective Brands, said on the firm’s quarterly conference call. “We have got some brands and some business units that are able to walk their way through that because of what they are doing, and that will continue.”

Rubel declined to give a specific earnings or sales guidance for the year, but said that with a “leaner cost structure and tested hybrid business model,” his company can ride out the economy as it heals. Capital expenditures are seen at $100 million for the year.

Collective expects to add 25 stores to its Payless ShoeSource international business, while its performance lifestyle group, which includes Saucony, Sperry Top-Sider, Keds and Stride Rite, will open 20 new stores.

Like many footwear firms, Collective has turned to the toning category to help beef up sales this year. The firm recently launched six styles of Champion-branded fitness toning shoes in all its Payless units. Price points are less than $40, and more styles will be introduced in the second quarter, the company said.

“All the shoes are doing quite, quite well, and there’s no price resistance. We’re not even having to promote it because the demand is so high,” Rubel said.

The CEO also hinted that Collective’s brands could move beyond footwear. “There is an opportunity to extend powerful brands selectively into other related categories, including accessories and apparel,” he said. The firm already announced last week plans to launch a collection of beauty and body-care products in 1,500 Payless stores this fall.

Nevertheless, shares of Collective dropped 7 percent last Wednesday, following the firm’s earnings report and two downgrades of the stock by Wall Street analysts. Patrick McKeever of MKM Partners, for example, said in a report he is “becoming less confident in the top-line outlook” for Collective, citing competitors’ better growth than Collective’s 0.7 percent same-store sales rise during the fourth quarter. McKeever cut the stock’s rating to “neutral” from “buy.”

Collective’s shares ended at $22.27 last Wednesday, down $1.72.

But for his part, Christopher Svezia, an analyst at Susquehanna Financial Group, said in a report that he sees upside potential to his 2010 earnings per share estimate of $1.71. He cited “lower product sourcing, occupancy cost reductions, in addition to a return to growth in both [Collective’s] wholesale and Payless international businesses.”

Collective posted last Tuesday a fourth-quarter net loss that totaled $10.9 million, or 17 cents a diluted share, compared with a loss of $144 million, or $2.28, the prior year. Net sales rose to $741.7 million from $735.2 million, driven by solid sales from its Saucony and Sperry Top-Sider brands.

As for Keds, Rubel said the business “is stabilizing and generated higher profit in the fourth quarter, due primarily to more first-quality sales and a reduction in allowances and returns.”

At Payless, quarterly sales were driven by children’s footwear, accessories and boots. “Women and moms are still feeling economic pressure, but are indeed returning to the footwear marketplace,” said Rubel. “We saw broad success in children’s across product categories and genders.”

For the year, the firm earned $82.7 million, or $1.28, versus a net loss of $68.7 million, or $1.09, the prior year. Net sales slipped to $3.31 billion from $3.44 billion a year ago.

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