Steven Madden, Ltd. (NASDAQ:SHOO) Q3 2023 Earnings Call Transcript

Steven Madden, Ltd. (NASDAQ:SHOO) Q3 2023 Earnings Call Transcript November 8, 2023

Steven Madden, Ltd. beats earnings expectations. Reported EPS is $0.88, expectations were $0.87.

Operator: Good day and welcome to the Steven Madden, Ltd. Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Danielle McCoy, VP of Corporate Development and Investor Relations. Please go ahead.

Danielle McCoy: Thanks, Abigail, and good morning, everyone. Thank you for joining our third quarter 2023 earnings call and webcast. Before we begin, I’d like to remind you that our remarks that follow including answers to your questions contain statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to materially differ from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our press release issued earlier today and filings we make with the SEC. We disclaim any obligation to update these forward-looking statements which may not be updated into our next quarterly earnings conference call, if at all.

The financial results discussed on today’s call are on an adjusted basis unless otherwise noted. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release. Joining me today on the call is Ed Rosenfeld, Chairman and Chief Executive Officer; and Zine Mazouzi, Chief Financial Officer. With that, I’ll turn the call over to Ed. Ed?

Edward Rosenfeld: Thanks, Danielle, and good morning, everyone, and thank you for joining us to review Steven Madden’s third quarter 2023 results. We were pleased to return to year-over-year earnings growth in the third quarter demonstrating the strength and durability of our business models in challenging operating environments. After a tough first half, where we saw significant year-over-year declines in revenue and earnings, we drove strong improvement in our financial performance in Q3. On a consolidated basis, revenue for the quarter declined 1% versus the prior year period, operating margin expanded 90 basis points to 15.1% and diluted EPS rebounded sharply to increase 11% over the comparable period in 2022. In a challenging and uncertain environment our team remains focussed on controlling what we can control and executing our strategy for long-term growth.

That strategy starts with utilizing our proven model, which combines talented design teams, a test-and-react strategy and an industry leading speed to market capability to create trend-right product assortments and get them to market ahead of the competition. We then support that great product with an always on full from a marketing and consumer engagement strategy by consistently combining our standing product and effective marketing we create deeper connections with our consumers, which inturn enables our success with our forward key business drivers. The first of those drivers is growing our business in international markets. In the third quarter, our international revenue increased 5% compared to the prior year period and accounted for just under 20% of consolidated revenue, anew quarterly high.

Our EMEA region was a standout. We continue to see strong momentum in Europe, where third quarter revenue rose 18% compared to the same period in 2022. Our success in the region was recently recognized by the leading U.K. industry trade publication Draper’s, which named Steve Madden the Women’s Footwear Brand of the Year for 2023. And in September, we opened a flagship store on Oxford Street in London with our local partner, allowing us to showcase the brand to customers from around the globe in one of the world’s most important shopping destinations. We also continued to develop our business in the Middle East through our new joint venture in the region. The JV opened five new stores in the quarter, drove strong performance in e-commerce, and made significant investments in marketing, both offline and online, to build brand awareness.

And while it’s a smaller market, I also want to call out our South Africa joint venture, where we experienced explosive growth, with revenue increasing 87% versus the prior year period, driven in large part by outstanding performance in sneakers, where we’ve seen multiple products go viral in the market. Closer to home, in our Americas region, our directly owned subsidiary in Mexico continued its strong momentum, growing revenue 31% compared to the prior year period, including a 23% gain in wholesale and a 46% increase in DTC. This was offset by a decline in Canada, where trends continue to be softer overall, and some large wholesale orders moved out of Q3 and into the beginning of Q4. Our second key business driver is expanding in categories outside of footwear, like accessories and apparel.

In the third quarter, our overall accessories and apparel revenue increased 27% versus the prior year period. Our Steve Madden handbag business was the primary growth driver. It had another outstanding quarter, increasing revenue 52% compared to the third quarter of 2022, including a 46% gain in wholesale and a 90% increase in DTC. We also continue to make meaningful progress in apparel. Our Steve Madden apparel business is having a strong fall season, with robust sell-through rates in our key accounts. And based on this performance, we see meaningful opportunity for both door growth and expanded assortments within existing doors in our most important accounts in 2024. And last month, we further enhanced our apparel platform with the acquisition of privately held Almost Famous, a designer and marketer of women’s apparel.

Almost Famous markets products in the wholesale channel under its own brands, primarily Almost Famous, as well as private label brands for various retailers. It has also been the exclusive licensee for Madden NYC Apparel since its launch in 2022, and has had outstanding success with that brand so far. Almost Famous’ core expertise is in the junior apparel category and in value price distribution channels, making it a strong complement to our existing Steve Madden apparel business, which is focused on contemporary styling and is primarily distributed in department stores and e-commerce retailers. Our top priorities will be to use the Almost Famous platform to introduce Madden Girl apparel and to grow Madden NYC apparel. This will enable us to implement in apparel the strategy that has been so successful for us in footwear and accessories, which is to utilize the Steve Madden brand portfolio, including Steve Madden, Madden Girl, and Madden NYC, to reach customers in all tiers of distribution from premium channels down through mass.

Almost Famous had revenue in the 12 months ended September 30th, 2023 of approximately $163 million, and acquisition was completed for $52 million in cash, subject to a working capital adjustment, plus an earn out provision based on future financial performance. We’re extremely excited about the addition of Almost Famous, the capabilities it brings, and the opportunities it creates to continue the expansion of our business outside of footwear. Our third key business driver is driving our direct-to-consumer business led by Digital. In the third quarter, DTC revenue declined 2% versus the prior year period, a sequential improvement from the 5% decline we experienced in the second quarter. We also delivered a 250 basis point improvement in gross margin in DTC, enabling us to expand operating margins and drive higher EBIT than in the prior year period despite the revenue decline.

And despite the pullback we’ve seen this year, it’s important to note that our DTC business continues to be over 50% bigger than it was pre-COVID. On a trailing 12-month basis, DTC accounted for 26% of consolidated revenue, up from 18% in pre-COVID 2019. And our fourth and final key driver is strengthening our core U.S. wholesale footwear business. As we have discussed on prior earnings calls, this business has been under significant pressure this year as our wholesale customers pulled back on orders across the board as they prioritized inventory control. But while we are still not all the way back to where we’d like to be, we saw significant improvement in the third quarter. U.S. wholesale footwear revenue decreased 6% in the quarter, a 1,500 basis point improvement compared to the first half trend.

And we expect to see sequential improvement again in the fourth quarter. So putting that all together, we are pleased with the progress we are making on our key strategic initiatives. And as we execute against our plan and focus on the long-term, we are also cognizant of the challenging operating environment and disciplined in how we manage the business in the near term. In the third quarter, we, one, expanded gross margin for the fourth consecutive quarter with gross margin increases in both wholesale and DTC channels, despite an increasingly promotional retail landscape. Two, managed our inventory with discipline, reducing inventory by 16% at the end of Q3 compared to the prior year. And three, controlled expenses and drove cost efficiencies with operating expense dollars declining year-over-year for the second consecutive quarter, even as we continue to invest in product innovation, consumer engagement, and our long-term growth initiatives.

As we look ahead, this operating discipline will remain important because we continue to face a challenging macro environment. Trends across our industry softened beginning in September, which combined with the impact of the crisis in the Middle East on our Israel and Middle East joint ventures leaves us incrementally more cautious on the near term outlook. Looking out further, we remain confident that our core strengths, our people, brands, and business model will enable us to deliver sustainable revenue and earnings growth over the long-term. And finally, as we navigate these challenges and execute our strategic initiatives, we also continue to embrace the opportunity and the responsibility we have to create positive change for our people, planet, and communities.

And we seek to embed corporate social responsibility and sustainability in everything we do. In the third quarter, we published our 2022 Sustainability Report, which outlines the progress we have made on our Let’s Get Real sustainability strategy and our goals going forward. You can find the report on the sustainability section of stevemadden.com, and I encourage you all to check it out. And now I will turn it over to Zine to review our third quarter financial results in more detail and provide our updated outlook for the year.

Zine Mazouzi: Thanks, Ed, and good morning, everyone. Our consolidated revenue in the third quarter was $552.7 million, a 0.7% decrease compared to the third quarter of 2022. Our wholesale revenue was $433.5 million, down 0.3% compared to the same period in the prior year, a strong improvement compared to the 20% year-over-year decline we experienced in the first half. Wholesale footwear revenue was $306.1 million, a 7.5% decrease from the third quarter of 2022. While wholesale customers remain cautious in their approach to orders, we are encouraged by the sequential improvement we are seeing in this business and expect to return to year-over-year revenue growth in the fourth quarter. Wholesale accessories and apparel revenue was $127.4 million, an increase of 22.7% compared to the same period last year, driven by the outstanding growth of Steve Madden handbags in both domestic and international markets.

In our direct-to-consumer segment, revenue was $116.4 million, a decrease in 1.8% compared to the same period last year. Our brick-and-mortar business outperformed our e-commerce business, and international outperformed the United States. We opened 13 new stores and closed four stores during the third quarter, all in international markets, ending the quarter with 251 brick-and-mortar retail stores, including 71 outlets, as well as five e-commerce websites and 22 company-operated concessions in international markets. In our licensing segment, royalty income was $2.9 million in the quarter, compared to $3.5 million in Q3 last year. Turning to gross margin, consolidated gross margin was 42.1% in the quarter, expanding 90 basis points from the third quarter of 2022, with margin improvement in both wholesale and DTC.

Wholesale gross margin rose 60 basis points year-over-year to 35.9%, driven by improvement in the wholesale accessories and apparel business. Direct-to-consumer gross margin was 63.7%, a 250 basis point improvement compared to the same period last year, driven by lower freight expense, driven by lower freight expense and reduction in promotional activity. Operating expenses in the third quarter were $149.3 million, a 0.8% decrease compared to the third quarter of 2022, reflecting our ability to control costs while continuing to invest in marketing and our long-term growth initiatives. Operating income for the quarter totaled $83.4 million, or 15.1% of revenue, up from $79 million, or 14.2% of revenue in the same period last year. We drove operating margin improvement in both wholesale and DTC channels.

Our effective tax rate for the quarter was 22.8%, compared to 22.9% in Q3 2022. Finally, net income attributable to Steve Madden Limited for the quarter was $65.1 million, or $0.88 per diluted share, up from $61.5 million, or $0.79 per diluted share, in the third quarter of 2022. Moving to the balance sheet, our financial foundation remains very strong, and as of September 30, 2023, we had $206.4 million of cash, cash equivalents, and short-term investments, and no debt. Inventory at the end of the quarter was $205.7 million, compared to $244.3 million at the end of the third quarter in 2022, a reduction of 15.8%. Our CapEx in the quarter was $6.1 million. During the quarter, we spent $40 million on repurchases of the company’s common stock, which includes shares acquired through the net settlement of employee stock awards, bringing the 2023 year-to-date spend to $104.2 million.

Our board of directors approved a quarterly cash dividend of $0.21 per share. The dividend will be payable on December 29, 2023 to stockholders of record as of the close of business on December 15, 2023. Turning to our full-year outlook, we are updating our revenue and earnings per share guidance. We now expect revenue for 2023 will decrease approximately 7% compared to 2022, and now we expect diluted EPS will be approximately $2.40. This updated guidance includes a contribution from the almost famous acquisition of approximately $30 million to $35 million in revenue and $0.01 to $0.02 in EPS. It also includes a negative impact related to the effect of the crisis in the Middle East on our Israel and Middle East joint ventures of approximately $8 million to $9 million in revenue and $0.03 in EPS.

Now I would like to turn the call over to the operator for questions. Abigail?

See also 30 Most Corrupt Countries in the World Heading into 2024 and World’s 20 richest countries by GDP (PPP) per Capita.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Paul Lejuez with Citi. Your line is open.

Unidentified Analyst: Hi, everyone. This is Kelly [Ph] on for Paul. Thanks for taking your question. I guess, can we just dig into 4Q guidance a little further now? It looks like you’re more in the core business. Some of that is due to the Middle East and Israel JVs, but outside of that, can you just talk about where you’re kind of lowering the core business outlook? Seems like wholesale is going to sequentially improve versus the fourth quarter. So just trying to figure out where we’re seeing that. We’ll start there and I have another follow-up. Thanks.

Edward Rosenfeld: Yes, good morning, Kelly. So essentially we’re taking, if you back out the impact of Almost Famous as well as the impact from the crisis in the Middle East, we’re basically going to the low end of both the revenue and the earnings guidance, the previous revenue and earnings guidance. So revenue would be down about eight if you exclude those two impacts. And what’s moving us towards that low end is a reduction in our forecast for DTC. Wholesale is pretty down close to where it was before, but we have taken the DTC down based on this softening trend that you’ve probably heard about from others that’s really happened across the industry since September.

Unidentified Analyst: And I know you’ve talked a lot about the customer kind of showing up when there’s reasons to shop. So I guess, taking all that into account, the health of the consumer, some of maybe the fashion trends you’re seeing out there, are you feeling optimistic that those trends could improve or is there just, not enough happening on the newness fashion side to make you more optimistic?

Edward Rosenfeld: Well, I think that the point you raise is a good one that we have continued to see customers, the shopping pattern is becoming more and more event driven and customers showing up on those holiday weekends, those promotional times, but then in between, the valleys have been a little deeper. So, certainly we’re hopeful that as we move into this holiday period and Black Friday, Cyber Monday, etcetera, which is clearly the biggest event of the year that the customers will really show up. And so, is it possible that we could do a little bit better than this? Yes, but essentially what we’ve done to build this forecast is rule the recent trend forward through the end of the year.

Unidentified Analyst: Just one more for me on the wholesale side. Wholesale came in a little bit better than expected. Did you see retailers to place orders? How are they kind of feeling about, taking any need back? Is there fashion out there that they’re excited about and how does that outlook look when we look to spring 2024? Just how the wholesale partners are behaving.

Edward Rosenfeld: Yes, I think, there is some new fashion. I do feel good about our product assortments. We’re getting very good feedback from our wholesale customers about, yes, about spring. We’ve been getting very good feedback about our spring assortments. But overall, the sentiment amongst the big wholesale customers remains quite cautious. And we still see a pretty conservative approach to order patterns.

Unidentified Analyst: Got it. Thank you.

Edward Rosenfeld: Thanks, Kelly.

Operator: One moment for our next question. Our next question comes from Aubrey Tianello with BNP Paribas. Your line is open.

Aubrey Tianello: Hey, good morning. Thanks for taking the questions. I wanted to touch on the Almost Famous acquisition and why now was kind of the right time to do the deal. And then going forward, how did you see the landscape for M&A opportunities from here? Do we see kind of a pickup in activity? Are you more focused on these type of platform acquisitions? Or could brands be in the cards too?

Edward Rosenfeld: Okay. Well, good morning, Aubrey. Thanks for the questions. So in terms of Why Now, look, we just feel pretty excited about the path that we’re on in apparel. And we were excited about expanding our business in that category, expanding our platform and our capability in that category. We bought BB Dakota in 2019, which was our entree into apparel. We have since converted that to Steve Madden apparel as of fall of 2022. We feel very good about the path we’re on there. And we felt it was time to expand the platform to add this, this capability that Almost Famous brings, which, as a reminder, their expertise is in the trend-driven junior part of the market and in value-price distribution channels, which, again, a very strong complement to what we do in Steve Madden apparel, which is contemporary styling and is primarily distributed in the premium channels like department stores, better department stores and pure-play e-commerce retailers.

So with this transaction, we now have a capability similar to what we have in shoes and accessories where we will be able to sell into all tiers of distribution from premium down through mass. So we feel quite good about that strategy and are very excited about what we can do with this new capability. In terms of the overall landscape for M&A, I don’t think there’s any big update there. We’re going to — we obviously have the wherewithal to continue to do more. If we find the right transaction, we’ll continue to keep our eyes and ears open. There’s nothing else imminent, but, we’ll continue to look for the right transactions. And then as far as what they would be, yes, additional brands to add to the portfolio would be interesting. So, on occasion, we like to buy capabilities and platforms the way we did with Almost Famous, but if we found the right brand that we thought was complementary, we would continue to look at that we could grow under our umbrella, then we would be interested in that as well.

In the meantime, while we integrate Almost Famous, we’ll continue, as always, to look at our international opportunities and international joint ventures in addition to what we normally do.

Aubrey Tianello: Got it, thank you. And just as a follow up, I think earlier this year, you called out some strength in your outlet business. Wondering if you’re starting to see any trade down effect happening as the consumer environment softens a bit, and just how we should think about how you’re positioned if the customer does start migrating down toward lower price points.

Edward Rosenfeld: Yes, well, with respect to our own brick and mortar retail business in the United States, we are seeing outlets significantly outperform full price stores. Q3 and so far in Q4, we’re looking at like more than 1,000 basis points better comp in outlet than in full price stores. So I think that’s definitely reflective of a customer that is focused on value. And look, we obviously operate, one of the things we like about our business is we’re very well diversified by channel and we operate in regular price channels. We also operate in the more value price channels. And so we should be able to go where the customer goes.

Operator: One moment for our next question. Our next question comes from Tom Nikic with Wedbush. Your line is open.