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Analysts Lower Guidance on Steve Madden Stock Due to Rumored Payless Bankruptcy

Analysts at Canaccord Genuity, an investment banking and financial services firm, have lowered their guidance for Steve Madden stock (SHOO) due to the possibility the brand will lose sales as a result of a rumored bankruptcy at Payless.

Reports of another Payless bankruptcy began to appear last week, and it would be the second time the retailer has filed for bankruptcy protection since April 2017. At that time, Payless was saddled with debt from a previous buyout and ended up coming out of bankruptcy with fewer stores.

Canaccord Genuity analysts believe that, given Steve Madden’s exposure with the retailer, another bankruptcy and more store closings could put future earnings at risk for the footwear brand.

“Many news reports have been circulating about Payless’ impending second trip into bankruptcy court and whether it will survive in a smaller form, if at all,” Canaccord Genuity analyst Camilo Lyon said in a statement emailed to Sourcing Journal. “Regardless of the outcome and given its exposure, we believe it is prudent to lower our 2019 estimates for SHOO, as the probability of that business going away entirely or shrinking materially has increased in recent weeks…as such, we are lowering our 2019 EPS estimate to $1.85 from $1.99.”

Lyon acknowledged it was likely Steve Madden has already started limiting its exposure to the possible Payless bankruptcy. Still, he pointed to the timing of the rumors as particularly damaging, saying the brand was well-positioned to come out of the trade war saga with less headwind and more momentum.

“The timing of this new headwind is unfortunate as it appears like old headwinds (i.e. trade tensions) are close to dissipating,” Lyon continued. “That said, we do believe SHOO will recapture a portion (if not most) of the Payless lost sales over time.”

The “lion’s share” of those sales are likely to come from Walmart, Target and Amazon, according to Canaccord Genuity, and the firm said its 2020 EPS guidance of $2.09 assumes that Steve Madden is able to recapture about half of lost commission fee income if the brand’s budget situation remains roughly the same. The firm’s price guidance for SHOO in 2020 has therefore only been lowered from $41 to $39.

Consequently, Canaccord Genuity is keeping Steve Madden’s stock firmly in the “buy” category, predicting net sales of $1.65 billion for the brand at year-end, compared to $1.55 billion in 2017. The firm remains confident the brand will be able to weather the storm, citing SHOO’s record for bouncing back from negative impact in the past. Steve Madden is expected to release its financial report on Feb. 25.

“We expect the stock to be choppy in the near term, but continue to view SHOO’s longer-term prospects as robust considering its market share gaining position that is boosted by its quick turn on-trend fashion,” Lyon said.

Part of the reason for this optimism is the pending inclusion of Anne Klein business into Steve Madden’s revenue line, a value of around $80 to $90 million. Canaccord Genuity estimates that the loss of Payless business is likely to account for around $100 million in revenue.