Steven Madden, Ltd.

A valuation on Steven Madden, Ltd

Steven Madden Ltd. is a footwear, fashion, and apparel designer and retailer based out of Long Island City, New York. Their products are distributed by department stores, mass merchants, off-price retailers, shoe chains, online retailers, national chains, specialty retailers and independent stores throughout the United States, Canada, Mexico, Europe, South Africa, Israel, and Taiwan. Today they employee approximately 2400 people worldwide and are recognized as a top fashion forward company is contemporary designs.

Steven Madden was founded in 1990 by none other than Steven Madden. Steven grew up as the son of a textile manufacturer and got a job in a shoe store at a young age where he quickly fell in love with fashion and selling. He eventually opened his own retail store and took his company public in 1993 with the help of Stratton Oakmont. The same Stratton Oakmont featured in The Wolf of Wallstreet with Jordan Belford and Danny Porush. In 2002, Steven would plead guilty to securities fraud and money laundering in connection to Stratton Oakmont and was sentenced to 41 months in prison. As a result of his incarceration, Steven stepped down from his position as chairman and chief executive officer but remains a part of the company as “creative and design chief,” where he sits to this day.

Steven Madden operates under three primary business segments. These segments include wholesale footwear, wholesale accessories/apparel, and direct-to-consumer. There are also two smaller segments that include first cost and licensing. Here is more on each segment:

·       Wholesale Footwear is Steven Madden’s largest segment in terms of revenue. It made up 54.8% of revenues in fiscal 2021. The segment includes the design, sourcing, marketing, and sale of products to department stores, mass merchants, off-price retailers, shoe chains, online retailers, national chains, specialty retailers and independent stores. Products include dress shoes, boots, booties, fashion sneakers, sandals and casual shoes for men, women, and children.

·       Wholesale Accessories/Apparel includes the design, sourcing, marketing, and sale of products to department stores, mass merchants, off-price retailers, online retailers, specialty retailers and independent stores. Product offerings primarily consists of handbags, apparel, small leather goods, belts, soft accessories, fashion scarves, wraps, gifting and other trend accessories for men, women, and children. The segment made up 18.4% of revenues in fiscal 2021. Handbags are the fastest growing apparel items in this segment (18% in 2021) and have been an increased focus for diversification.

·       Direct-to-Consumer consists of Steven Madden and Superga full price retail stores, Steve Madden outlet stores, Steve Madden shop-in-shops, and directly operated digital e-commerce websites. These retail operations serve an important role in the company in testing omnichannel strategy, serving as fulfillment and return locations for e-commerce sites, gathering customer data, and marketing their brands and licensed products. This segment made up 26.1% of revenues in fiscal 2021 and is a growing point of focus for the company.

·       First Cost is Steven Madden’s smallest segment coming in at .1% of total revenues in fiscal 2021. It consists of commission income generated by the company serving as a buying agent for footwear products under private labels for select national chains, specialty retailers and value-priced retailers. The company believes this segment is important in that it leverages sourcing and design capabilities, provides non-braded sales opportunities, and allows the partial recovery of design and product development costs.

·       Licensing is another small segment for Steven Madden coming in at .5% of total revenues. It includes the licensing of the Steven Madden, Madden Girl, and Betsey Johnson trademarks in connection with the manufacturing, marketing, and sales of select footwear, apparel, and accessories. The royalty agreements are generally based on net sales, however there is a provision for receiving a minimum royalty when sales targets are not met by the licensee. Selective licensing of brands is allowing Steven Madden to expand and grow their presence beyond footwear, accessories, and apparel.

Steven Madden operates over 15 brands, some being of their own creation and name while other were acquired. These brands include Steven Madden Women’s, Madden Girl, Steven Madden Men’s, Madden, Steven, Steven Madden Kids, Madden NYC, Mad Love, Betsy Johnson, Superga, Dolce Vita, Blondo, GREATS, Anne Klein, and BB Dakota Steve Madden.  Recent acquisitions include Dolce Vita Handbags, and various interests in international joint ventures related to the distribution on footwear, accessories, and apparel.

In 2021, Steven Madden, acquired the rights for Dolce Vita Handbags for the total purchase price of $2,000. This included trademarks and internet domain name registration. Earlier in the year they completed acquisitions of 49.9% non-controlling interests in two different joint ventures; a European and a South African one. These Joint Ventures allowed for the distribution of Steven Madden branded footwear, apparel, and accessories in their respective regions. In 2022, Steven Madden sold a 49.9% interest in Steven Madden South Africa Proprietary Limited to a third party to form a joint venture for $1017. Since the acquisition of the European interest, Steven Madden has reported accelerated growth in the region. In fact, many of the international markets have experienced strong growth. Unfortunately, some of this success had been diminished by tariffs. It is hard to find consistently reported data on international activities and I’ve had to piece most of it together through the earnings calls. I believe that international growth as well as growth in direct-to-consumer ecommerce will be key to Steven Madden’s growth in the coming years. 

As of their latest quarterly filing, Steven Madden operated 213 brick-and-mortar retail stores and six e-commerce sites. The company also operates 19 concessions in international markets. Steven Madden will open new stores and close others based on the performance and conditions of the market they are in.  The company has slowly been increasing their overall store count over the years.  Due to the pandemic and supply chain issues, Steven Madden has not reported on comparable store sales in the last few annual filing. Considering the incredible amount of supply chain issues the company faced, I would agree that this would not be a useful metric at this time, but it is something I will be looking at as conditions stabilize. In the years leading up to the pandemic the company was seeing improved comparable store sales. Much of this was attributed to their ecommerce channel. Steven Madden’s distribution channels consist of department stores, mass merchants, off-price retailers, shoe chains, online retailers, national chains and specialty retailers, and independent stores across the world. Their products are currently in over 4500 department stores with major retail accounts/customers at Nordstrom, Macy’s and Dillard’s. Other major retailers/customers include TJX Companies, Ross Stores, Burlington, Walmart, Target, Kohls, DSW, Famous Footwear, Shoe Carnival, and various international stores. Major online retailers include Amazon, ASOS, and Zalando SE. Their two top customers represent approximately 14% of total revenues for fiscal 2021.

Steven Madden sources the vast majority of its inventory from foreign manufacturers and shipped via ocean freight. They do not own these manufacturers but use agents to source products from manufacturers in China, Cambodia, Mexico, Brazil, Vietnam, India and others. The dependence on foreign manufacturing, especially those in China, is a concern of mine. Steven Madden believes there are a sufficient number of alternative manufacturers and does not enter into long-term manufacturing or supply contracts. In the 2020 fiscal year the company faced unprecedented supply chain issues where they simply were not able to get products to shelve due to labor and material shortages in manufacturing as well as bottlenecks at in freight and ports. This resulted in a significant blow to revenues and additional costs to that lowered margin. Steven Madden has since recovered and resumed its growth trajectory. The company is working to improve these processes and is using some air freight to move inventory, although this unfortunately comes at a higher cost. As of the most recent annual filing, the company had approximately $839k of unfilled customer orders in its backlog. I expect that some of these orders have been canceled due to some retailers experiencing inventory gluts, however that level of backlog is more than twice what the company usually has according to the last five years of filings.

In 2021, Steven Madden achieved record revenue of $1866 million due in part to high demand for products over the previous year. Net sales have continued to grow on a quarter over quarter basis into 2022. Over the past ten years Steven Madden has grown revenues and average of 8% annually. Earnings per share have also grown over the last decade although the company did experience a loss in 2021. In 2018, Steven Madden began paying a quarterly dividend that it has since grown. During the 2020 fiscal year the board of directors suspended the dividend as well as share repurchases in order to preserve capital. They have since reinstated their quarterly dividend and resumed share repurchases. Margins have been steady over the past ten years with the company experiencing an improvement in gross margins while slight decreases in operating and net. Return on assets and return on equity have experienced slight net decreases over the past decade. Although there is not a one-to-one comparison with regard to competitors, Steven Madden consistently matches if not slightly beats the industry in profitability and efficiency. Return on invested capital has averaged around 18%. My own calculations of ROIC were slightly higher averaging 20%.

Over the past ten years, Steven Madden has repurchased approximately 20% of its shares outstanding adjusted for stock dividends. In November of 2021, the board of directors authorized a total of $250k to be used for share repurchases. As of June 30, 2022 there was approximately $151k remaining under the repurchase program. Steven Madden does issue stock-based awards and options to employees that from time to time increases total share count, such as occurred in the 2021 fiscal year. Free cash flow is reasonable and should allow for continued return of capital to shareholders in the form of share repurchases, dividends, and strategic acquisitions.

Using a discounted cash flow model, I estimated Steven Madden’s fair value to be approximately $39. This is assuming a ROIC of 20%, WACC of 8.5%, operating margins of 9.75% and a variable growth rate of 7%. At Steven Madden’s current price of $28.78, my estimated fair value would give it a margin of safety of 26%. I believe my inputs are conservative but prefer it this way considering the economic uncertainty in the world especially Europe. Steven Madden does seem to be undervalued especially when considering international growth. With regard to valuation ratios, Steven Madden currently trades well below its historic price to earnings. Price to sales and price to book are also coming in at their historical low ends.

Like any company, Steven Madden faces numerous risks that are important to take into consideration. The company continues to face supply chain bottlenecks and increased costs associated with freight. In order to accomadate for increased transit times and slow downs in the supply chain Steven Madden is making inventory orders earlier. My concern with this is that the company has decreased time to react to economic changes and consumer preferences and this may result in an inventory glut. In order to move the inventory the company may have to implement inventory write-downs, resulting in reduced revenues and margins. Steven Madden is a fashion forward company with a relativley strong brand immage. Damage to the brand or failures of the company to accuratley predict customer preferences could negativley effect results. A significant portion of Steven Madden’s revenues are derived from wholesale segments where other retailers purchase and resell their merchandise.  Loss of one of those distibution channels, deteriation of a retailer’s credit standing, and or the inability of a retailer to move merchandise could negativley effect Steven Madden. The company continues to grow their ecommerce and direct to consumer offerings and this will reduce dependance on third party distribution channels over time. Because Steven Madden sources much of their inventory from foreign operations there are certain international risks including foreign laws and regulations, foreign currency risks, and chnges in trade policy or tariffs. Tariffs have a negative effect on gross margins and have been impactful to results especially among China and the United States in recent years. Increased raw material costs, inflation, and decreases in consumer spending will have a material impact on Steven Madden’s results.  Competition is fierce among the footwear and apparel industry and copmetitors could steal market share or offer more appealing products. Some competitors to monitor include Sketchers, Crocs, Wolverine World Wide, Deckers Corporation, and Rocky Brands. The last risk that I will mention is the loss of Steven Madden himself, who has been a significant source of creativity and drive for the company for years. Steven Madden is 64 and in good health. He has not expressed any interest in retirement and I expect there are plenty of years left in him to positivley contribute to the company. The loss of Steven Madden or other key members of the creative team would likley have a negativle effect on the company. I would like to see Steven Madden, the company, have plans in place to address such a situation in the future. Until then, lets just hope there is one hell of a life insurance policy.

Steven Madden is a solid brand and growing company. Their international expansions as well as efforts in the ecommerce and direct to consumer spaces are promising  to the company. Steven Madden boasts a strong balance sheet with no debt and is competitive in terms of their profitability and efficiency in the industry. The company has a history of returning capital to shareholders through share repurchases, stock dividends, and cash dividends. Personally, I am not a fan of the stock dividend because there is a dilution factor. The company interests me to the point that it reaches its fair value and then I would move on to something else. Unless I were to get in at an exceptional value, it is not something I intend to hold long term. Nonetheless, it has an semi appealing margin of safety at 26% and is something I intend to keep an eye on. I would like to see some improvement in general econoomic consumer confidence before opening a position. In future reports, I intend to keep a take note of margins, comparable store sales, and growth rates in direct to consumer as well as international markets.