Steve Madden's (SHOO) stock price is up 25% since I first wrote about the company in June (Bullish On Steven Madden: Hot Pair Of Booties To Match A Compelling Valuation). Despite a challenging retail environment and weak numbers in the retail segment, Steve Madden is executing well. Although the valuation is not as attractive as it was then, I am still bullish on the shares because of its long term growth opportunities and underleveraged balance sheet. In this article I will provide an updated look at the bullish case for Steve Madden.
Same Store Sales
Retail sales comprise ~15% of Steve Madden's revenue. In Q3, retail comparable store sales were down -3.5%. This was a disappointment in otherwise positive Q3 results.
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On the conference call, management said:
"In our Retail Division net sales were 48.9 million, a 7.8% increase over the 45.3 million in net sales recorded in last year's third quarter. The increase was driven by an expanded store base as comparable store sales were down 3.5% in the quarter. No secret, the mall traffic across the industry was sluggish during Q3, and we were not immune to this as we saw a double-digit percentage decrease in traffic in our stores."
Although retail sales comprise only a small portion of revenue, comp store sales are an important metric. I will become worried if it continues to decline. It is too early to tell if this is a trend or just one bad quarter.
Financials
Despite the weakness in the retail division, Steve Madden's wholesale business performed well in Q3 and drove solid financial performance for the company:
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Growth Drivers
The two main long term drivers of sales growth are: international expansion and expanding the store base.
International Expansion
Steve Madden's international business is less than 10% of revenue (~$100 million run-rate) and has much room for expansion over the long term.
Expanding The Store Base
Steve Madden has 117 stores, which generate only ~15% of revenue. The company has been slowly expanding its store base and there is room for additional expansion, especially with outlets. Steve Madden has 11 outlets and management has said that it would like to grow to 50-60 outlets (and possibly 125-150 over a longer timeframe). The company expects the contribution margin from outlets to be 300-400 bps higher than regular stores. Please see my original article on Steve Madden for more details about this.
Guidance & Estimates
Management maintained the same guidance for FY 2013 as in previous quarters.
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Analysts project EPS at the midpoint of management's range:
Management's guidance and analyst estimates may be too conservative if the Christmas selling season is stronger than expected. Already, the cold weather, especially in the Northeast, is a positive for sales of Steve Madden's boots.
Valuation
Steve Madden is trading at 11.7x TEV / LTM EBITDA and 19.5x 2013 P/E. These are reasonable multiples for the company considering its growth potential. Going forward, I believe that most of the upside will come from earnings growth, not multiple expansion.
Importantly, the company has a clean balance sheet. It has no debt and $235 million of cash and equivalents. On an LTM basis, the company generated $118 million of free cash flow (as defined above), so there is no reason for such an underleveraged balance sheet.
Steve Madden's balance sheet could be used to create shareholder value. It can raise debt to finance a significant buyback and/or dividend. It has been buying back stock recently, but not in an aggressive way.
I expect that the company will use its balance sheet more aggressively to generate shareholder value going forward.
Historical Valuation
Steve Madden's valuation metrics are not high on an absolute basis, but they have risen to levels not seen since before the financial crisis. As a result, I don't expect much multiple expansion going forward.
SHOO EV to EBITDA (TTM) data by YCharts
SHOO PE Ratio (TTM) data by YCharts
SHOO PE Ratio (Forward) data by YCharts
Buyback
During Q3, the Company repurchased 1,042,644 shares of the Company's common stock for $36.7 million. The average purchase price was $35.20.
The company has potential to buy back a lot more stock considering its balance sheet strength.
Comps
Steve Madden is trading in-line with its comps:
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Comments From Key Customers
Recently, Macy's (M), Nordstrom (JWN) and Kohl's (KSS) gave some color on footwear trends. They are all customers for Steve Madden's wholesale division.
Macy's
Steve Madden is undergoing two important changes in its relationship with Macy's. First, earlier this year, Macy's shifted much of the Steve Madden selection from the junior's section to the Impulse section, which targets older teens. Second, Steve Madden has been increasing its penetration of Macy's stores. It is only in 260 Macy's stores and has room for expansion.
Here are some quotes from Macy's recent earnings call about Impulse business and footwear trends (emphasis mine):
And our Impulse business, which is aimed at the older millennial customer, had a great quarter, including a terrific launch of a new private brand, Maison Jules. And while sales in juniors continued weak in absolute terms, the trend did improve versus that in the first half of the year...
Sales in the Center Core categories continued their very strong performance, driven by handbags, cosmetics, fine jewelry, intimate apparel and boots. The trend in watches did, however, slow somewhat in the quarter...
Looking at the third quarter, we are particularly encouraged by 3 trends that bode well for the fourth quarter... The second encouraging trend is that the cold-weather businesses were all strong: coats, boots, sweaters, et cetera. If we have anywhere close to a normal weather pattern this year, this could add significant volume.
Nordstrom
On its call, Nordstrom commented on its sales trends (emphasis mine):
Merchandise category performance also showed consistency in terms of relative trends throughout the year. Top performing categories included Cosmetics, Women's Apparel and Women's Shoes. We've been encouraged with the strategic changes in Women's Apparel, which outperformed the Nordstrom average on a year-to-date basis.
In the Q&A there was a question about UGGs and boot sales (emphasis again mine):
Michael Binetti - UBS Investment Bank, Research Division - And if I could just ask one follow-up. Could we talk a little bit about the merchandise plan in the cold weather categories for the next few months? You guys stand out as really having done a great job in the past making brands like UGGs and others in boots really, really big in the winter when weather was even close to normal. So that's been a struggle for everybody for a couple of years. How do you think about setting the inventories for this year and how much you'll be able to chase sales if weather is normal?
Peter E. Nordstrom - Executive Vice President, President of Merchandising and Director - This is Pete. I think we give our teams a lot of credit for partnering with vendors because we're all dealing with the same issues. And I think any way that we can collaborate together to make most efficient use of inventory is the way to go. And UGG as an example, it's a big business for us, but we've been doing business together for a while and I think that every year it gets a little bit better in terms of the predictive modeling and how to flow inventory in the most efficient way. So we're doing well there. I think we fully expect that in the seasonal categories that it's going to be good for us. All indications are right now is from coats to boots or what have you that's all going well.
Kohl's
Kohl's gave a mixed reading on footwear on its most recent conference call. Footwear in general was weak, but it called out the strength in fashion boots (which is a good sign for Steve Madden):
Children's and footwear were below the company. Within children's, infant and toddlers was the strongest category and outperformed the company. Athletic shoes reported a positive comp, making them the strongest footwear category. Fashion boots are also off to a good start for the fall season...
In the product, I mean, first of all, don't forget that we had a negative comp, so all of the relative performance is off of that negative comp. So when we tell you that the business is better or worse, it's off of that number. The categories that did not perform to the company and underperformed to the company included children's. Children's was way well under, I think, the company average. And footwear, in total, was well under the company average. The athletic footwear business, actually, I think, was better than the company. In fact, it had a positive comp. But the non-athletic to casual footwear category was very, very weak. So I would probably call out children's and footwear as by far the weakest performing business relative to the company having a slightly negative comp. In terms of strength, we talked about a couple of the categories that you mentioned.
Conclusions
The biggest change since I first started writing about the company is a slightly higher valuation. In terms of the financial results, Q3 earnings were good, but Steve Madden's retail division was notably weak.
I am still bullish on Steve Madden. Going forward, it has good growth potential. The wholesale business is executing well and the company still has room to expand its store base. Additionally, the international opportunity is still in the early innings.
Steven Madden's balance sheet is a hidden gem that could create significant shareholder value. The company could easily raise debt to finance a large buyback and/or dividend.
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Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SHOO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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