SHOO - Steven Madden: Not Dropping A Shoe On This Yet

2023-10-25 11:38:05 ET

Summary

• Steven Madden shares have shown long-term value creation, rising from $1 to $50 over the last three decades before settling in the lower thirties.
• The company has seen strong share price performance which outpaced the fundamental performance, with revenues growing from $1.3 billion to just over $2 billion in the past decade.
• 2023 is expected to be a tougher year for Steven Madden, with sales projected to fall by 6.5-8.0% and earnings between $2.40 and $2.50 per share.

Shares of Steven Madden, Ltd. ( SHOO ) - with its famous symbol ticker - have proven to be a solid long-term value creator for investors. A $1 stock in the early 1990s rose to the $8 mark around 2010, as shares traded in their forties pre-pandemic.

After some big volatility surrounding the outbreak of the pandemic, shares rallied to the $50 mark in 2021, after which momentum reversed again and shares have been settling in the lower thirties. In fact, 2023 is a year of consolidation (which is a kind word for small declines) in operations.

Amidst a strong track record and conservative capital practices, I like the long-term potential here, recognizing that investing in apparel is a dangerous endeavor.

Some Perspective

Steve Madden designs, sources, and markets a range of footwear, accessories, and apparel brands which include brands like its namesake brand, Dolce Vita, Betsey Johnson, GREATS, and Blondo.

This strong collection of brands has seen a very strong share price performance in the 2010s, not entirely backed up by the fundamental performance. From a $1.3 billion revenue base a decade ago, revenues have grown and just topped the $2 billion mark in 2022, marking about 60% revenue growth over the past decade.

Despite the actual growth in sales, it was operating profits which were quite stable in dollar terms (indicating thinner operating margins), although the company has been able to buy back a quarter of its share base over the same period of time. This has driven some earnings per share growth, but arguably much less than the share price performance.

In the year 2022, as released in February of this year, Steve Madden posted a 14% increase in full-year sales to $2.12 billion, with operating profits of $282 million being equal to 13% and change in relation to sales. The company posted net earnings of $216 million, equal to $2.77 per share, with adjusted earnings in line with the reported GAAP results.

With a diluted share count of 76 million shares trading around the $35 mark around the time of the release of the results, equity of the business was valued at $2.66 billion. With a $290 million net cash position, the enterprise valuation came in at $2.37 billion. Trading at $35, the company operated with nearly $4 per share in net cash, with shares trading at just 11-12 times earnings.

2023 - Mixed

Shares of Steven Madden have largely traded in a $30-$37 range so far this year, as 2023 was set to become a tougher year. After fourth quarter sales were down more than 18% already, the company guided for 2023 sales to fall by 6.5-8.0%, with earnings seen between $2.40 and $2.50 per share.

After the business reported a 17% fall in first quarter sales to $464 million, the company maintained the outlook, as first quarter adjusted earnings were cut nearly in half.

In August, the company posted a similar 17% decline in second quarter sales to $445 million, as adjusted earnings fell, but much less pronounced than the first quarter. Despite the softer results so far, the company continues to maintain the full-year guidance on both the sales and earnings front.

This is comforting, as it suggests that there are risks to the full-year guidance (after GAAP earnings fell sixty cents to $0.95 per share in the first half of this year). If the company can deliver on this the company clearly will see better year-over-year performance in the second half of this year. Net cash is stable at around $275 million, as continued buybacks made that the share count has fallen to less than 75 million shares.

In October, Steven Madden announced that it closed on the acquisition of Almost Famous, a designer and marketer of women's apparel. Given a $163 million revenue contribution in 2022, a $52 million acquisition price looks quite cheap at 0.3 times sales, while Steven Madden trades just over 1 times sales here.

No other financial details on the purchase have been announced, but we can logically deduct that the company will preserve a big net cash position while pro forma revenues will increase by about 8-9%, a substantial amount, but likely these activities do not carry the same margin profile as Steven Madden itself, as hopefully more color will be provided alongside the next earnings release.

And Now?

A brand name like Steven Madden trading at a low double-digit earnings multiple looks compelling, but apparel names are notoriously difficult to invest in, unless you are really operating in the premium luxury segment. With earnings power seen at $2.40 per share (at the lower end of the range), the company trades around 13 times earnings here if we factor in net cash holdings.

Amidst all this, I think that Steven Madden is doing a lot of things right, by focusing on brands rather than stores, operating with a net cash position, and even paying substantial dividends (with a current yield around of 2.5%). This results in disciplined capital allocation in that way, accompanied by continued solid share buybacks.

Given all this, I like what I see, but I fear risks to the guidance this year, as I am not sure if now is the right point in time to acquire the shares here. I am awaiting a potential setback to the full-year guidance to potentially initiate a position in the low thirties.

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