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Steve Madden Beats Street Expectations Ahead of Incoming Payless Bankruptcy Headwinds

Steve Madden released its latest full-year and Q4 financial report Wednesday, revealing higher-than-expected sales and earnings in Fiscal Year 2018 despite incoming headwinds caused by a higher tax burden and the bankruptcy of Payless ShoeSource.

In a nutshell: Steve Madden stock (SHOO) was up nearly 5 percent in early trading Wednesday after it released the report and prior to the opening bell. Its stock is currently sitting at $34.34 at publication time.

During the fourth quarter, Steve Madden repurchased a total of 1.8 million shares of common stock for roughly $55 million—a total of 3.4 million shares were purchased throughout FY18, at a net cost of $105.9 million. The organization was able to do so thanks to carrying cash and cash equivalents of $267 million into the end of the fiscal year.

However, the company warned investors that FY19 would likely include some challenging short-term headwinds as it battles the loss of income and lower tax rate it received from its business with Payless.

Overall, Steve Madden credited its strong performance relative to expectations in FY18 to its healthy flagship business, growth in secondary brands like Anne Klein and Blondo, momentum in accessories and its growing international and e-commerce channels.

Sales: In Q4, sales for the brand were up 12.6 percent to $410.4 million compared to $364.4 in 2017—beating analyst expectations by nearly $10 million. This growth was driven by a 14.1 percent increase in its wholesale business at $317.4 million, and a 7.9 percent increase in retail business at $93 million. Same-store sales for Steve Madden retail locations were up 4 percent in the quarter, spurred on by an uptick in its e-commerce business.

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Steve Madden ended the quarter with 229 company-operated retail locations, seven e-commerce sites and 42 company-operated concessions, internationally.

For FY18, net sales increased 7 percent to $1.65 billion from $1.55 billion in FY17. This was on the high end of analysts’ expectations, and the company expects net sales to increase by another 4 percent to 6 percent in FY19.

Earnings: Steve Madden registered earnings of 42 cents per share on adjusted net income of $35.7 million in Q4 when accounting for expenses related to higher taxes and the Payless bankruptcy. That’s compared to 32 cents EPS and $27.5 million in net income in Q4 of 2017. Without adjustments, the brand’s net income falls to $12.5 million and 15 cents earnings per diluted shares.

Analysts expected the brand to earn about 38 cents per share in Q4.

For the full-year, Steve Madden announced adjusted earnings of $1.83 per share on net income of $157.7 million, compared with $1.49 EPS and $129.3 million in FY17. FY18 earnings also surpassed the average analyst’s expectation of $1.80 EPS.

Adjustments for FY18 include a $7.9 million after-tax bad debt expense and the write-off of an unamortized buying agency agreement support payment related to the Payless bankruptcy, along with an $11.1 million tax expense caused by the Tax Cuts and Jobs Act transition tax and prepaid tax adjustments. The company expects an additional $1.9 million after-tax expense associated with Payless in 2019.

For FY19, Steve Madden has set earnings expectations in the range of $1.70 to $1.83, below the mark of $1.85 expected by Canaccord Genuity when it announced it was lowering its guidance for Steve Madden based on Payless’ looming bankruptcy.

In its conference call, Steve Madden revealed that the loss of its wholesale income stream from Payless would also impact its overall tax burden due to a lower tax rate when doing business with the company. Steve Madden expects the full influence of both of those factors to lessen FY19 earnings by an estimated 21 cents per share.

CEO’s Take: Edward Rosenfeld, chairman and CEO of Steve Madden, said the brand’s growth was cause to believe it could weather the short-term storm.

“We are pleased to have delivered a strong fourth quarter, with net sales growing 13 percent and Adjusted diluted EPS increasing 31% compared to the prior year period.  The trend-right product assortments created by Steve and his design team drove robust gains in our flagship Steve Madden brand in both footwear and handbags,” Rosenfeld said.  “We also saw outstanding growth in Blondo and in our private label accessories business. As we look ahead, we are encouraged by the strong momentum in our core business and the progress we are making on our key strategic initiatives. While we face a near-term headwind due to the bankruptcy of Payless ShoeSource, a significant private label customer for the Company, we are confident that our diversified business model positions us for long-term growth and value creation going forward.”