Steven Madden: Great Competitive Edge In Low Entry Barrier Industry (NASDAQ:SHOO)

Woman wearing stylish leather shoes on stairs outdoors, closeup

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Investment Thesis

Steven Madden, Ltd. (NASDAQ:SHOO) is an American footwear company headquartered in Long Island City, New York. In this thesis, I will primarily be analyzing the company’s move to shift 50% footwear sourcing from China and the competitive advantage that it has gained out of it. I will also be analyzing some additional catalysts like, the E-commerce growth plans of the firm and the outperformance of the Direct-to-Consumer (DTC) business and its impact on the company’s profit margins. I believe Steven Madden is among the best stocks in the footwear and accessories space, with excellent growth prospects. The company is currently undervalued, and after considering all the growth and risk factors, I assign a buy rating for the stock.

Company Overview

Steven Madden is known for its unique and creative shoes and accessories designs. The company own and operates more than ten different brands. Steve Madden, Dolce Vita, Betsey Johnson, and Blondo are some of the most popular brands owned by the company. Steven Madden designs and markets footwear, apparel and accessories for men, women, and children. The company has several channels of product distribution, namely department stores, shoe chains, online retailers, and E-commerce platforms. The company primarily focuses on providing good quality designer shoes and accessories at low cost, with the price of most of its products ranging between $29-$99.

The company primarily has three business segments; Wholesale Footwear, Wholesale Apparel and Accessories and the final one Direct-to-Consumer (DTC). Wholesale footwear takes up the biggest chunk of the revenue at 54.8%, followed by DTC at 26.8% and Wholesale Apparel and Accessories at 18.4%. Under the Wholesale segment, the company sells products through third-party department stores, off-price retailers, and national chains in more than 80 countries worldwide. In the Direct-to-consumer segment, the company sells its products through self-owned 214 brick-and-mortar stores and six E-commerce websites.

Sourcing shift from China to provide a great competitive edge

Steven Madden doesn’t own or operate any manufacturing units in the United States or outside. The company designs its products and, with the help of sourcing agents, gets the products manufactured at independently operated manufacturing units in Mexico, Brazil, Italy, China, India, and many other countries. This has helped the company during the Covid-19 pandemic, as it doesn’t have to rely on any particular country or region for production. In the second half of FY21, the company shifted more than 50% of its footwear and accessories production from China to Mexico and Brazil. This move helped the company maintain the availability of products at low-cost even during the strict lockdown in many parts of China in the first quarter of 2022. I believe this is one of the primary factors that has helped Steven Madden maintain a growth trajectory even during the economic slowdown while also maintaining profitability.

The sourcing shift from China to Mexico and Brazil has proved to be a game-changer for the firm and is expected to safeguard the firm against the severe supply chain issues caused due to strict Covid-19 lockdowns in China. This is a tremendous competitive advantage for the company against its competitors who highly rely on producing and sourcing products from Asia, especially from China. As per my analysis, this sourcing shift will not only ensure unrestricted product supply but also save transportation and labor costs for the firm. I believe we will see a positive impact of this move on the company’s revenues and profits for the rest of FY22.

Additional Catalysts

E-commerce growth plans: Steven Madden has seen strong momentum in its e-commerce business since the Covid-19 outbreak. The company currently owns and operates six websites under various brand names and the company’s products are available on e-commerce giants like Amazon and Macy’s. The company has made several changes to its digital sales strategy to boost sales growth. The company has increased its digital marketing budget significantly for FY22 and also rolled out new features like buying online and picking it up across all full-price retail outlets of the firm. These strategies will help increase the company’s digital sales, a segment where the company has the highest gross margins. The company has also invested heavily in transforming and developing its digital platforms and websites to make them more user-friendly. I believe the digital sale’s revenue share will witness a sizeable increase by the end of FY23.

Direct-to-Consumer Business Outperformance: Direct-to-Consumer (DTC) segment reported a stellar performance in Q1 2022. The company reported a 60.5% jump in revenue from the DTC segment compared to Q1 2021. The company has a gross margin of a significant 62.3% in the DTC segment. Currently, the DTC segment accounts for 26.8% of the total revenue for the company, which they are planning to take up to 35%-40% by the end of FY23. I believe the company is on a growth track by opening new retail stores at a great pace. The main impact of the increased share of DTC revenue will be on the firm’s profit margins; with the wholesale segment having gross margins of 35.2%, the difference is quite significant. Under the DTC route, the company currently operates 147 Steve Madden full-price stores and 66 Steve Madden outlet stores. The company also operates six E-commerce websites under different brand names. Even the wholesale segment performed really well, with a 54% increase from the last quarter. The company reported record earnings in Q1 2022, the highest revenue and profits in the company’s history. As per my analysis, the company is best placed in the industry with tremendous growth potential both in DTC and Wholesale business, and I believe the company will continue this growth for the rest of FY22.

Financials

Steven Madden Income Statement

SEC:10Q Steven Madden

Recently, Steven Madden announced the magnificent results for the Q1 FY2022. The company has reported 55% revenue growth to $559.7 million compared to $361.0 million of Q1 FY2021. $449.0 million comes from a wholesale business which is a 54.1% growth as compared to the Q1 FY2021, while direct-to-consumer revenue was $108.3 million, a 60.5% increase compared to the first quarter of 2021. The gross profit margins have grown by 2.2% YoY, and Operating expenses as a percentage of revenue declined to 23.2% compared to 30.6% in the same period of 2021. The operating income for the Q1 FY2022 was $97.9 million, which is a 250% growth compared to the $28.0 million of the previous year. The company has reported a net income of $74.5 million, or $0.94 per diluted share, which is a 246% increase as compared to $21.2 million, or $0.26 per diluted share. The company has also announced a quarterly cash dividend of $0.21 per share, which is a 2.26% dividend yield as per the current share price.

Edward Rosenfeld, Chairman and Chief Executive Officer, stated,

We got off to an outstanding start to the year, delivering the highest quarterly earnings in our history in the first quarter. The trend-right product assortments created by Steve and our design teams drove robust consumer demand for our brands and strong performance across channels, product categories and geographies. These results reflect our team’s disciplined execution of our strategic initiatives, and we are confident that the strength of our team and strategy will enable us to drive sustainable growth for years to come.

Steven Madden Balance Sheet

SEC:10Q Steven Madden

The company has ended its quarter with $170.3 million as cash and cash equivalent and $9.9 million as Short-term investments, which is total liquidity of $180.2 million. The company doesn’t have any long-term liability on its balance sheet, which is one more positive thing.

After the solid Q1 results, the company has raised its outlook for FY2022. The company is estimating its revenue to be in the range of $2.09 billion to $2.15 billion, which is a 13% to 16% increase as compared to the revenue of FY2021. The company is expecting the diluted EPS will be in the range of $2.87 to $2.97. I believe these estimates will turn out as conservative as the company is experiencing robust demand and growth.

Key Risk

High Competition and Low Entry Barriers: The fashion apparel, accessory, and footwear market is extremely cutthroat, and entry barriers are low in this space. The market for fashion garments, accessories, and footwear has grown, attracting many new competitors, and raising the stakes for already-established businesses. Several of these rivals’ financial and other resources, such as Skechers U.S.A., Crocs, Aldo, NIKE, Sam Edelman, Rocky Brands, Lucky Brand, and Vince Camuto, may be much bigger than those of SHOO. These elements contribute to the company’s weak economic moat.

Changes in Economic Condition: The demand of the footwear products is sensitive to the changes in economic factors such as increases in inflation. Currently, the inflation of the USA has reached to the levels of 8.5%, which is a 40-year high. Both the company’s sales and its results of operations could suffer if the economy were to take a turn for the worse, as this would reduce consumers’ levels of confidence and their willingness to spend money on non-essential items. Even though, most of Steven Madden products are in the affordable price range of $29-$99, if the economic situations were to further deteriorate, we could see its negative impact on company’s results.

Quant Ratings

Steven Madden Ratings

Seeking Alpha

The quant ratings of the seeking alpha for the SHOO states the same result as my thesis and valuation. Even the Wall Street rating for the stock is buy, which strengthens my company thesis.

Steven Madden Peer Comparison

Seeking Alpha

I believe grade factors and quant ratings perfectly align with my investment thesis. The company is ranked at 1st position in the footwear industry. It has a B grade in momentum, which is the same as the competitor’s rating. The company has the edge over its competitors in EPS rev. and growth. Overall, the combination of C- in valuation, A- in growth, A- in profitability, B in momentum, and A- in EPS rev justifies its 1st rank among all industry players. The company also has the highest dividend yield among its competitors.

Valuation

Steven Madden PEG ratio analysis

PEG Ratio Model by Author

The company is currently trading at $31.82 and a PE multiple of 10.55x, which is higher than the PE multiples of Skechers USA (SKX) and Crocs (CROX) and lower than the PE multiples of the Wolverine World Wide (WWW), Rocky Brands (RCKY), NIKE (NKE) and Deckers Outdoor Corp (DECK). To better understand the company’s growth prospect, I have calculated the PEG ratio for FY2022. I believe the company’s current outlook for FY2022 is conservative, and actual EPS will be 11%-12% more than the estimate. I think the EPS for the FY2022 will be $3.16, which results in a growth of 37% as compared to the EPS FY2021 and the leading PE multiple of 10.1x. If we divide the Leading PE multiple by the growth rate, it will give us a PEG ratio of 0.21x, which indicates the company’s cheap valuation. I believe the stock will trade at a significantly higher PE multiple of 15x. The target price for the company is $47.4, which is a 49% upside from current price levels.

Conclusion

My final thoughts on Steven Madden are that it is a great investment opportunity based on substantial revenue and profit growth with a strong future outlook. The company is undervalued and has seen a steep correction in the stock price given the current market volatility. I think the value investors have a great entry point in this stock at the current price, with 49% upside potential from current levels. After analyzing all the growth factors and the company’s financial statements, I assign a buy rating for the stock.

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