Friday's Most Suprising Stock?

One stock yesterday refused to be trodden down by investors running pell-mell from Wall Street. While most of the market slumped, the Brown Shoe Co. (BWS, $10.99) soared. It climbed 25% on surprising quarterly sales and upbeat guidance.

The St. Louis company is best known for selling moderately priced women’s shoes, mainly through its Famous Footwear stores. For the most part, the company features a number of lesser-known brands, but includes a smattering of big ones, from Dr. Scholl’s elderly orthopedics and to Vera Wang‘s tony handbags. (Did we mention that the product line ranged a bit?) It should not be confused, though, with the similarly named H.H. Brown Shoe Co., a Berkshire Hathaway subsidiary.

The Brown Shoe is midway through a turnaround. The overhaul began last year when CEO Diane Sullivan laid out plans to cut costs and stop a two-year slide in sales. Half the analysts covering the stock rate it as Hold; the others give it an Overweight or Buy rating. Some prudence seems sensible before lacing up and jumping into the stock.

To be sure, Brown Shoe made some progress with its turnaround this past quarter. Excluding one-time items, it earned 23 cents a share, climbing from 16 cents a year earlier. This beat analysts’ expectations of nine cents a share. It raised its full-year earnings forecast on Friday, from 83 cents to 95 cents a share, up from 78 cents to 92 cents.

Needing to trim, expenses in the March period dropped 6.5%. Meanwhile, same-store sales at Famous Footwear rose 2.5%, as the company shuttered poor performing stores; Brown Shoe now sees revenue between $2.57 billion and $2.59 billion, up from $2.55 bullion to $2.58 bullion. Looking ahead, the stock looks cheap, trading at 9.6 times forward earnings.

The stock sports an attractive dividend. An investor today would see a 2.6% yield. That beats the S&P 500′s 2.1% and the 10-year Treasury’s 1.72%. In five years, it more than doubled the cash on its balance sheet, going from $54 million in 2007 to $127 million in 2011. That cash hoard amounts to roughly $3 a share. Still, its free cash flow has been erratic and, at times, non-existent. It posted a loss of $57 million last year after a $68 million gain in 2010.

Like any retailer, its fortune depends on its fashion mix. Unfortunately, the scant amount of well-known brand names in its portfolio hurts. If customers face any reason to cut back, Brown Shoe would be the first to receive the boot from shopping plans.

“The firm has competed admirably with Wal-Mart and Kohl’s for more than a decade, but economic headwinds have driven consumers to the mass channel,” says Morningstar’s Jeremy Cohen. It also competes with other stores like J.C. Penney and Sears Holdings. Cohen likes Brown Shoe’s ability to attract repeat customers, pointing out that nearly half of Famous Footwear’s 2010 sales came from shoppers in the loyalty rewards program. “However, we caution that a tenuous state of spending and perceived weakness in the economy could drive even more of its patrons toward the discount big-box stores,” says Cohen. If the market tumbles too often now, Brown Shoe could trip up.