Stock Mart: Stride Rite

After a rocky summer, Stride Rite (SRR) is finding its stride again.

The Lexington, Mass.-based shoemaker is streamlining its divisions, expanding its product lines and scouting for acquisitions.

"The thing we've always liked about it is they've got terrific brands," says Dennis Scannell, senior vice president and portfolio manager at Boston's David L. Babson, which owned 3.2 million Stride Rite shares on June 30, according to First Call ShareWatch.

"They've got a great brand name and a pristine balance sheet," adds Mariko Gordon, president of New York's Daruma Asset Management, which owned 589,000 Stride Rite shares at June 30.

Indeed, Stride Rite is best known for brands like Sperry, as in Sperry Top-Siders; Keds, the sneaker staple; and Stride Rite, the kids' line. It also makes shoes for Tommy Hilfiger (TOM).

For bargain hunters, the stock, which closed up 1/16 Friday at 8, looks cheap. Analysts expect it will earn 60 cents a share this year, according to First Call/Thomson Financial, giving it a price-to-earnings ratio based on the 1999 consensus of about 13. That's less than the expected 25% earnings growth when compared with last year's 45 cents a share. In 2000, analysts expect it to earn 81 cents, giving it a P/E based on that estimate of less than 10. But the expected earnings growth rate is 35%.

Meanwhile, it trades at just above its book value of $5.52 a share, and its price-to-sales ratio is about 0.6. Value investors look for price-to-sales ratios below one.

Stride Rite isn't a newcomer to Wall Street. It was founded in 1918 under the name Green Shoe Manufacturing and changed its name to Stride Rite in 1972. When it went public in 1960, it was the first company for which a brokerage firm exercised the overallotment option, giving rise to the Wall Street term "green shoe" for the clause in an underwriting agreement that allows the issuer to authorize additional shares.

But the stock has been beaten down after a management shakeup and a slowdown in sales of Keds.

This summer, Joanna Jacobson, who was responsible for revitalizing the Keds line with Keds Stretch and Ready to Wear lines, decided to step down to spend more time with her children. She remains in an advisory position. Then CEO Jim Eskridge resigned after a mere seven months with the company.

"It just wasn't a good fit between him and the company," says John Kelliher, Stride Rite's chief financial officer. Eskridge, who came from Mattel (MAT), had made big promises to acquire new brands and expand the company.

"When [Eskridge] was here, a lot of attention was directed at doing an acquisition," says Kelliher. "Once we get a new CEO in place, that'll be something the company will restart. We'll finish the year with $60 million in cash, and we have no debt at all. It's a balance sheet that really has to be put to work."

Diane Sullivan, who worked at Stride Rite in the '80s and came back in 1995 to turn around the Stride Rite children's division and Tommy Hilfiger men's line and launch the Tommy Hilfiger women's line, stepped in as president and chief operating officer.

Morgan Stanley Dean Witter, which rates Stride Rite a strong buy, praises Sullivan's strategy for revitalizing the Keds line by developing a broader collection around the basic product line -- a strategy that proved successful for Stride Rite and Tommy Hilfiger lines.

"The CEO search doesn't concern me," says Josephine Esquivel, an analyst at Morgan Stanley, which hasn't performed underwriting for Stride Rite. Morgan Stanley has a 12-month price target of 17.

Portfolio managers seem willing to wait. "We still think it's cheap, and they have a helluva franchise," says Scott Abernethy, portfolio manager for Glenmede Trust, a private investment firm in Philadelphia. Glenmede had 234,000 Stride Rite shares at June 30.

Scannell of David L. Babson agrees, saying, "It's certainly not without its risks, but we've added to the position, so we're definitely sticking there."

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