Jones Apparel Group's

(JNY)

bid for

Nine West

(NIN)

is stepping on

Maxwell Shoe's

(MAXS)

toes.

Maxwell, which is licensed to make shoes under the

Jones New York

label, saw its stock cut in half earlier this month after Jones' said it would buy Nine West. Maxwell shares have since climbed back, closing Thurday at 7 3/4 a share, off 3/4. But investors are still concerned that in owning Nine West, one of the largest U.S. shoe companies, Jones will no longer need Maxwell to make its namesake footwear.

They have good reason to fret. Maxwell stands to lose roughly one-fourth of its revenue and a similar chunk of its operating profit should Jones bring its shoe business in-house. For the year ended Oct. 31, Jones accounted for $43 million, or 26%, of Maxwell's $166 million in revenue and $5.5 million, or 28%, of the company's $19.7 million in operating profit. Neither Maxwell nor Jones Apparel Group returned phone calls seeking comment for this story.

The uncertainty about the future of the Jones business comes at a time when Maxwell, along with other shoe companies, is struggling amid excess industry capacity. Maxwell's earnings for its recently completed first quarter ended Jan. 31 stalled due to a sluggish market for women's shoes. Net income was flat at $2.2 million, but earnings per share declined by 3 cents to 23 cents per share, thanks to a secondary offering last April. Sales dipped to $35.9 million, compared with $36.3 million a year earlier. And the

First Call

consensus estimate for the current fiscal year has been reduced by a dime to $1.44 per share.

"People are trying to figure out how to look at the future of this company," says Steven Richter, an analyst with

Tucker Anthony

, who rates Maxwell outperform. (His firm has performed underwriting for the company.)

Questions around Maxwell include the fate of the Jones license, the company's ability to slug it out in the current competitive environment and its ultimate place in an industry where consolidation is afoot.

A number of value investors have flocked to the stock recently, citing its cheap valuation -- it trades at just 5.5 times forward earnings -- but these questions make Maxwell's true worth harder to pinpoint.

Mark Cooper, a portfolio manager with

Benson Associates

, which owns 200,000 Maxwell shares, says excluding the Jones business, Maxwell is trading around 4.5 times trailing cash flow, which makes it the cheapest stock in the footwear group. He figures with $14 million of cash, several strong brands and some of the highest operating margins in the shoe business, Maxwell is worth more than its current value.

Keeping Up With the Jones'

Jones may appear to have one foot out the door, but in reality, dissolving the deal -- which gives Maxwell the license through 2017 including renewal options -- is more complicated. David Turner, an analyst with

Ferris Baker Watts

, notes that there are two factors that would nullify the license and neither has happened. Maxwell Chief Executive Mark Cocozza would have to leave the company, or an outside entity would have to acquire a 15% stake in the company. (Turner rates Maxwell a hold, because of general softness in the women's shoe business. His firm hasn't performed underwriting for the company.)

"Right now it seems the license will stay in place," Turner says.

But others are more skeptical. "It's like

Hasbro

(HAS) - Get Report

making

Barbie

dolls for

Mattel

(MAT) - Get Report

," says a hedge fund manager, who asked not to be named and is waiting for more information on the Jones business before he buys the stock. "If Jones is going to be in the shoe business, why would they give their own label to someone else to produce?"

Since Maxwell's contract with Jones makes it difficult for the apparel company to walk away free and clear, two outcomes are likely, analysts say. Jones can pay Maxwell a lump sum to cancel the deal. Or it could buy Maxwell and tap the company's managers to help run Nine West. It remains uncertain what roles Nine West's co-founders will play in the combined company. Jerome Fisher, Nine West's chairman, is expected to become a consultant to the new company, while CEO Vincent Camuto will be involved in an unspecified manner.

While a payoff would provide a cash boon in the short term, Maxwell would still be faced with finding a new license and building that brand. It took Maxwell four years to grow the Jones business to its present size of $43 million from just $7 million in 1994, the line's first full year of production.

Buyer Beware

That leaves certain shareholders favoring a takeover, which would provide an instant premium to the stock's depressed value. But this plan has road blocks as well -- most immediately, Jones' newly levered balance sheet and slumping stock price. Last fall, Jones assumed $232 million in debt when it bought

Sun Apparel

. And with its acquisition of Nine West, Jones is adding another $550 million in long-term obligations.

"JNY's new balance sheet is unlikely to make anybody's best-dressed list," wrote Carol Levenson, an analyst with

Gimme Credit

, in a research note.

Jones shares have headed south since its intention to buy Nine West was made public, and as investors wonder why an apparel company would want to diversify into the more-difficult-to-manage shoe business. Tuesday Jones shares closed at 22 7/8, or 39% off their 52-week high.

These conditions may inhibit Jones from making near-term acquisitions, even one as relatively small as Maxwell, which has a market value of $70 million and zero long-term debt.

If Jones passes on Maxwell, it's possible another acquirer would turn an eye toward the Hyde Park, Mass., company. Maxwell Blum, who founded the company in 1949, sold a good portion of his holdings last year, which would help clear the way for a potential merger.

But with the Jones business hanging in the balance and excess inventory weighing down the company's near-term earnings potential, it's unclear what Maxwell could bring to a growth-hungry partner.

Many of these questions are expected to be answered in the next several months, or before Jones closes the Nine West deal. Investors should be able to get a better handle on Maxwell's other brands in the second half of this year as inventories slim down and "some of that pressure eases," says Richter at Tucker Anthony.

Until then, lingering questions may prevent Maxwell from getting the valuation bargain hunters say the company deserves.