Fashion footwear icon Steve Madden saw third-quarter net revenues decline as much as 30.9 percent to $346.9 million, while net losses attributable to the brand was $6.9 million. Yet with declines in both the company’s wholesale and retail segments beating its previous estimates and gross margin continuing to improve, Steve Madden continues to have an upbeat outlook for 2021.
In a Nutshell: The fashion-forward footwear company also anticipates it will start to move more sourcing out of China again come spring 2021. While the company started shifting production out of China as the trade war with the U.S. escalated, the Covid-19 pandemic suspended those plans.
“Since the beginning when obviously there was some disruption in China, China has been the most reliable place to be,” Edward Rosenfeld, chairman and CEO of Steve Madden, said in a company earnings call. “And that was the place where we were the most confident that we’d be able to get the goods for fall given what was going on in a lot of the countries we were sourcing from. So for fall, most of the stuff is still coming from China. But I think for spring, you’re going to see us…continue to diversify out of China again and that will include countries like Mexico, Cambodia, Brazil, Vietnam, etc.”
Rosenfeld noted that Steve Madden sources approximately in the “low 60s” percentage range in China, well below the approximately 90 percent he said was sourced from the country a few years ago.
Like many other fashion companies during the pandemic, Steve Madden’s e-commerce presence has gained significant traction, jumping from approximately 20 percent of the company’s wholesale and retail businesses in 2019 to “close to double that” by the end of 2020, said Rosenfeld, who expects that at some point, this number will climb to 50 percent.
Outlet stores continue to be the top performers on the brick-and-mortar side, performing approximately 1,200 basis points (12 percentage points) better than the company’s full-line stores, which Rosenfeld largely attributes to shoppers’ safety-focused preference right now for open-air, outdoor centers instead of enclosed shopping malls. On the wholesale front, shipments to full-price partner retailers did “considerably better” in the quarter than shipments into the off-price sector.
Total inventories at Steve Madden were $109.7 million in the quarter, dipping 25.9 percent from the $148 million last year as the company continued to clear through inventory unsold during the Covid-19 pandemic. Rosenfeld noted in the earnings call that the company did better than anticipated in clearing out excess wholesale footwear, in particular.
Gross margin increased 130 basis points (1.3 percentage points) to 40.3 percent of sales compared to 39 percent of sales in the same period of 2019.
Gross margin in the wholesale business increased 70 basis points (0.7 percentage points) to 34.6 percent of sales compared to 33.9 percent in the third quarter of 2019. Retail gross margin rose 50 basis points (0.5 percentage points) to 63.8 percent of sales compared to 63.3 percent.
Overall, Rosenfeld expects gross margin numbers to improve in the fourth quarter.
As of Sept. 30, cash, cash equivalents and short-term investments totaled $257.2 million, with the company having no outstanding borrowings. Given the continued disruption and uncertainty related to the Covid-19 pandemic, Steve Madden did not provide full-year guidance.
Net Revenue: Total revenue, which Steve Madden calculates by combining both net sales and the income from commission and licensing fees, decreased 30.9 percent to $346.9 million compared to $502.1 million in the same period of 2019.
Wholesale was the bigger culprit for Steve Madden, with revenue from this channel declining 32.7 percent to $283.8 million, including a 32.5 percent decline in wholesale footwear and a 33.3 percent decline in wholesale accessories/apparel. Prior to the quarter, the company anticipated losses in between 35 percent and 40 percent.
Retail revenue through its own stores and websites dipped 22.1 percent to $59 million in the third quarter of 2020, with much of the decline coming from its brick-and-mortar business, partially offset by strong growth in e-commerce. This dip also beat Steve Madden’s expected retail decline of approximately 25 percent.
Net Earnings: Net loss in the third quarter was $6.9 million, or 9 cents per diluted share, compared to net income attributable to Steven Madden, Ltd. of $52.5 million, or 63 cents per diluted share, in the same period of 2019.
Adjusted net income attributable to the company. was $31.8 million, or 39 cents per diluted share, compared to the prior year quarter’s adjusted net income attributable of $56 million, or 67 cents per diluted share.
The adjusted net income excludes various pre-tax expenses and benefits, which were instead included in the company’s operating expenses. This includes an $8.7 million pre-tax expense in connection with payments and a provision for early lease termination charges, a $4.6 million pre-tax expense associated with the impairment of store fixed assets, a $2.3 million pre-tax expense related to the impairment of lease right-of-use assets, a $1 million pre-tax expense for restructuring and related charges and a $400,000 pre-tax benefit in connection with the change in valuation of contingent considerations.
Steve Madden also was charged with a $33 million pre-tax expense associated with the impairment of certain trademarks.
Operating losses totaled $3 million, or 0.9 percent of revenue, compared to operating income of $68 million, or 13.6 percent of revenue, in the same period of 2019. Adjusted income from operations was $46.2 million, or 13.3 percent of revenue, compared to adjusted income from operations of $72.3 million, or 14.4 percent of revenue in last year’s third quarter.
CEO’s Take: When asked about the future of the company’s merchandising mix and whether it will make a stronger move back into fashion, particularly in late 2021, Rosenfeld asserted that Steve Madden will continue to do what it always does: test and react when delivering new product.
“Well, we’re going to let the customer dictate what…the category mix looks like. We adjust our merchandise mix based on consumer preferences,” Rosenfeld said. “And the last thing I’ll just say is: I just wanted to be clear that casual is fashion. So there’s casual shoes and there’s dress shoes, but our customers still want fashion.”
In the end, Rosenfeld says Steve Madden customers still want casual products that are fashionable: “A lot of these styles that we’re selling—one of the…big trends that we’re seeing right now across our business is how strong we’re doing with novelty products, and sort of wild-type styles that maybe used to be more fringy kind of styles, but now they’re really becoming your biggest sellers. Even if they’re buying a slipper or a slide or a sneaker they’re gravitating towards exaggerated embellishment, ornamentation, etc. Customers really want that emotional product.”