Steven Madden, Ltd. (SHOO) Q1 2023 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the Q1 2023 Steven Madden, Ltd. Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note today's event is being recorded. At this time, I'd like to turn the floor over to Danielle McCoy, VP of Corporate Development and Investor Relations. Please go ahead.

Thanks, Jamie, and good morning, everyone. Thank you for joining our first quarter 2023 earnings call and webcast. Before we begin, I'd like to remind you that our remarks that follow including answers to your questions contain statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to materially differ from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our press release issued earlier today and filings we make with the SEC. We disclaim any obligation to update these forward-looking statements which may not be updated into our next quarterly earnings conference call, if at all. The financial results discussed on today's call are on an adjusted basis unless otherwise noted. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release. Joining me today on the call is Ed Rosenfeld, Chairman and Chief Executive Officer; and Zine Mazouzi, Chief Financial Officer. With that, I'll turn the call over to Ed. Ed?

Thanks, Danielle, and good morning, everyone, and thank you for joining us to review Steven Madden's first quarter 2023 results. When we spoke to you on the last earnings call, we talked about the challenging setup we faced in the first quarter, including a choppy retail environment as consumers were pulling back on discretionary spending, conservative order patterns from our wholesale customers as they were prioritizing inventory control, and extremely tough comparisons with the prior year, as we were lapping a quarter where revenue was up 35% and diluted EPS was up 121% to pre-COVID 2019. In light of the difficult backdrop, we were pleased to deliver Q1 revenue and earnings slightly ahead of expectations. We also significantly reduced our inventory levels, while driving strong gross margin performance despite a promotional retail landscape, demonstrating the benefits of our business model including our industry leading inventory turns in challenging operating environments. As we move forward, we remain focused on executing our strategic initiatives. Most importantly, we are leaning into our proven model, which combines our talented design teams led by Steve, test-and-react strategy and speed to market capability, to create trend-right products and bring them to market quickly. This agile model enables us to run lean on inventory and chase goods in season when needed, a critical advantage in periods of economic uncertainty, and when wholesale customers are cautious about placing significant orders upfront. We also continue to support our brands and products with targeted marketing investment, in order to drive closer connections with our consumers, and increased brand relevance across the globe. These remain our foundational initiatives and the enablers of our four key long-term business drivers. Driving our direct-to-consumer business led by digital expanding in categories outside of footwear like handbags and apparel, growing in international markets and strengthening our core U.S. wholesale footwear business. So, turning to our performance by business in Q1. In wholesale, revenue was under pressure due to the combination of conservative initial spring orders from our wholesale customers and very tough comparisons with the prior year. In the first quarter of 2022, we had our largest ever quarter in wholesale shipping, with revenue up 29% versus pre-COVID 2019. Against that record performance, this year's first quarter wholesale revenue declined 19%. On the positive side, we did see a number of wholesale customers pull forward orders on key items and trends from the second quarter into March, which enabled us to come in ahead of our expectations for wholesale revenue for Q1. Our direct-to-consumer business on the other hand, came in below expectations for the quarter. Consistent with what's been reported by others in the industry, we saw sales trends decelerate in the latter part of the quarter, particularly in March. DTC revenue was down 8% in Q1, and so far in Q2, we have seen a similar year-over-year decline. Across both wholesale and DTC, our international business was a bright spot in Q1. International revenue increased 13% in the quarter, and accounted for over 18% of consolidated revenue for the third consecutive quarter. Looking ahead, we expect the operating environment to remain turbulent in the near-term. That said, we have a proven ability to navigate difficult market conditions, and a track record of taking share during challenging economic periods. And looking out further, we remain as confident as ever that by leveraging our core strengths, our people, brands and business model and executing on our strategy, we can drive growth and create significant value for our stakeholders over the long-term. And now, I will turn it over to Zine, to review our first quarter financial results in more detail and provide our outlook for 2023.

Thanks Ed, and good morning, everyone. Our consolidated revenue in the first quarter was $463.8 million, a 17. 1% decrease compared to 2022. Our wholesale revenue was $362.1 million, down 19.3% compared to the prior year. Wholesale footwear revenue was $282.3 million, an 18.6% decrease from 2022. The branded business declined 16%, while private label, which is primarily done in the mass channel, decreased 29%, as our large private label customers continue to work to reduce overall inventory level in our categories. Wholesale accessories and apparel revenue was $79.8 million, down 22% to last year. The branded business declined 14%. Steve Madden handbags was a bright spot, with a modest year-over-year increase driven by strong growth in international markets. As in footwear, private label was significantly softer, decreasing 39%. In our direct-to-consumer segment, revenue was $99.6 million, an 8.1% decrease compared to 2022. We experienced declines in both brick and mortar and e-commerce channels. We ended the quarter with 235 brick and mortar retail stores, including 68 outlets, as well as five e-commerce websites and 21 Company operated concessions in international markets. Turning to our licensing segment, our licensing royalty income was $2.1 million in the quarter, compared to $1.6 million last year. As we discussed previously, the Company no longer operates under the buying agency model and as a result no longer reports under the First Cost segment. In last year's first quarter, we generated approximately $800,000 in revenue in the First Cost segment. Consolidated gross margin was 42.1% in the quarter, expanding 140 basis points from the prior year. Wholesale gross margin was 37%, a 180 basis points improvement compared to last year, driven by a strong increase in wholesale accessories and apparel. Direct-to-consumer gross margin was 59.2% compared to 62.3% last year, driven by an increase in promotional activity. Operating expenses in the first quarter were $147.4 million or 31.8% of revenue compared to $133.5 million or 23.8% of revenue in the prior year. Looking ahead, we expect year-over-year operating expense growth for the balance of the year to moderate to roughly 3% as a result of easing comparisons combined with cost control initiatives. Operating income for the quarter totaled $47.7 million or 10.3% of revenue, down from $94.4 million or 16.9% of revenue last year. Our effective tax rate for the quarter was 24.2% compared to 22.3% in 2022. Finally, net income attributable to Steven Madden, Ltd. for the quarter was $37.6 million or $0.50 per diluted share, down from $73.4 million, or $0.92 per diluted share in 2022. Moving to the balance sheet. Our financial foundation remains very strong. As of March 31, 2023, we had $223.7 million of cash, cash equivalents and short-term investments and no debt. Inventory ended at $179.9 million compared to $233.4 million last year, a 22.9% decline. Our CapEx in the quarter was $3.8 million. During the quarter, we repurchased $38.5 million of the Company's common stock, which includes shares acquired through the net settlement of employees’ stock awards. The Company's Board of Directors approved an increase of $189.9 million in the share repurchase authorization bringing the total to $250 million. The Board also approved a quarterly cash dividend of $0.21 per share. The dividend will be payable on June 23, 2023 to stockholders of record as of the close of business on June 12, 2023. Turning to our outlook, we are reiterating our revenue and earnings per share guidance. We continue to expect revenue 2023 to decrease 6.5% to 8% compared to 2022, and we continue to expect diluted EPS to be in the range of $2.40 to $2.50. While our first half outlook is in-line with our previous expectations overall, the pull-forward of wholesale orders into Q1 resulted in a shift of revenue and earnings from Q2 to Q1. As such, we expect Q2 revenue and EPS to be modestly below Q1 amounts. Now, I would like to turn the call over to the operator for questions. Jamie?

Ladies and gentlemen, we’ll now begin the question-and-answer session. [Operator Instructions]. Our first question today comes from Aubrey Tianello from BNP Paribas. Please go ahead with your question.

Good morning. Thanks for taking the questions.

Morning.

Morning. I wanted to start on the revenue guidance for 2023. Appreciate that you reiterated the overall guidance. But within that, is there any change to what's embedded for wholesaling DTC revenue for 2023?

Yes, we have taken the DTC expectation down a little bit, and we've taken the wholesale expectation up a little bit. And that's how we've kept the consolidated guidance the same. But DTC, we're now looking to be up-low-to-mid-singles and wholesale down-low-doubles.

Okay, got it. Thank you. And then just going back to your comments on the pull-forward in wholesale in 1Q, any more color you can provide in terms of just quantifying the size of that? And then separately, I think previously you'd mentioned that 2Q was kind of the earliest you potentially could go back into chase mode. Just curious if you're seeing any of that play out at all so far in this quarter?

Yes. I mean the -- so the pull-forward from Q2 to Q1, it was approximately $10 million or maybe even a little bit more of wholesale orders that we pulled forward from Q2 into Q1. In terms of the chase business, we're still not seeing that materialize to the levels that we would -- that we'd like to see. Here and there, we've seen some retailers react to strong selling items and either move forward orders or jump on some reorders. But overall, the dynamics in the wholesale channel, particularly in North America remained very challenging. And we still continue to see a really high degree of conservatism and caution amongst those retailers.

That makes sense. And then I guess just one last follow-up on that point. I mean, can you -- how can you -- I guess, could you quantify I guess like how much chase is embedded in guidance or if any at all? Do you kind of take that into guidance or is that incremental?

Well, we always have some assumption for reorder and chase in our business. That's a part of our business every year. It goes up and down based on environment and obviously the strength of our -- the selling of our products, but it's always in there. So, I would say that it's in there to in-line with what we're seeing today. If those dynamics improve and we start to see wholesale customers start to step up, that's potential upside. But, we forecast it based on what it looks like right now.

Perfect. Thank you.

Thanks.

And our next question comes from Paul Lejuez from Citi. Please go ahead with your question.

Hi. This is Kelly on for Paul. Thanks for taking our question. Just to follow-up on the last question in terms of the dynamics happening in the wholesale channel, I think over the last couple of quarters, you've been pretty frustrated with the lack of orders placed despite the strong sell-through that you were seeing. So, just curious if you did see -- your wholesale sell-through rates to exceed expectations or any color you can provide there. I'll start with that.

Yes. I think, what remains is that our sell-through percentage is fine. We're pleased with the percentage of the goods that we're selling through. But the stock levels are too low and therefore the retail sales or the consumer are too low. We just don't have enough of our goods on the floor for these retailers. And so that's what we're attempting get corrected and to get those inventory levels back up in the store, so we can do more business with the consumer.

Got it. And then on the DTC business, I'm just curious how trends played out through the quarter. I think you mentioned that you saw some deceleration. So, just curious what you think drove the deceleration in trends as you got through -- as you proceed through the first quarter and as you look to 2Q, I think are you guiding to sort of similar trends? Do you expect sort of weather to kind of start to play a role here? Any color there would be great.

Yes. I mean, I think it's been pretty widely reported that March was the weakest month of the quarter for discretionary categories pretty much across the board. And that's certainly what we saw as well. We saw a pretty significant step down in March, which caused us to come in below our expectation for DTC for the quarter overall. I'm sure weather was not cooperative. So, I think weather played a part of that, but I think there's also a good case to be made that there may be some overall consumer softening, that's layered on to that as well. April or this quarter to-date, we've improved compared to where we were in March, but the DTC overall is still soft. We said that for the quarter to-date, we're in-line with the down eight that we did for the full quarter in Q1. Keep in mind for the -- I'm hopeful that that's going to get better as we move forward, if only because remember our comparisons do get substantially easier starting in June. If you look at our comparisons, in DTC last year versus pre-COVID levels, we got about somewhere in the neighborhood of 1,500 basis points easier starting around June.

Got it. And just last question for me. Any update on the fashion piece of the business, just the fashion, I think you were speaking more optimistically about what you were seeing in terms of fashion trends when we spoke to you last quarter. So, just curious any update there. Thanks.

Yes. In terms of what's been working this spring, I think the big callout I would make is material interest has been very important. So there's things like Raffia, Pearls, Denim, Gold and Metal has been important for us. So a lot of that stuff has worked across category. The other thing I would -- couple of areas I would call out, sandals, while that's been, I think a relatively tough category for the industry overall and we talked about, excuse me, we talked about weather not being particularly cooperative for sandals for much of the season. That is an area where I think we've been a relative outperformer. We've had a lot of success with flat sandals and foot beds and stretch and a number of things in that category. So, that's something we feel good about. The one challenge there is it has been lower AUR items that have been the biggest ones. So, that has mixed us down in terms of the average unit retail. The other category that is bigger this spring and last spring or has a higher penetration is really closed up casuals, loafers, cap toes, etcetera.

Got it. Thank you.

Thanks, Kelly.

Our next question comes from Jay Sole from UBS. Please go ahead with your question.

Great. Thank you so much. My question is for Zine. Zine, I think you mentioned that Q2 sales in EPS would be a little bit below Q1 levels. Can you give us an idea about gross margin and SG&A dollars? How you feel about those two stats in Q2 versus Q1? Thank you.

Yes. For the gross margin, we expect to still see that gross margin improvement from the benefits of freight and mix of retail into the total. But remember there's always an offset that comes from the reinvestment that we mentioned in price that we're doing, and also if we had some additional promos as well that will offset against that. So, we should expect similar growth, if not maybe a little bit better than Q1 compared to last year. And, what was the second part of your question? I'm sorry.

Operating expense, just the dollars --

Yes. On the operating expenses, Q1 was unusually low base to compare against, a little bit funky actually, but there was a lot of timing of expenses between quarters where Q1 was light last year. As we move forward, we expect to be somewhere in the neighborhood of 3% over LY, compared to what we've seen in Q1. So, we should see it moderate. We do have -- we're tightening the belt. We're controlling expenses everywhere we can and that applies to all segments, all businesses, domestic and international. And even doing some job eliminations in certain targeted areas, we're not carrying a lot of or a ton of fat, as we did do a significant cut back around COVID times. But we are definitely looking at every single expense and making sure that we're very controlled.

Okay, got it. Thank you so much.

Our next question comes from Tom Nikic from Wedbush. Please go ahead with your question.

Hey, guys. Thanks for taking my question. The gross margin in wholesale was pretty solid, but based on the difference between the branded business and the private label business, I would assume that there was a big mix benefit there. Is there any way you could kind of normalize that or contextualize that kind of absent the big declines in the private label business like how would wholesale gross margin have trended in the quarter?

Yes, there was a benefit from the mix shift from private label to branded, we could get that number to you after the call. But I will tell you actually what is -- that is not the biggest driver, a bigger driver is freight, and better pricing with the factories and particularly on the wholesale accessories side.

Got it. Thanks, Ed. And a quick follow-up there, also on the DTC business, on the last call you had talked about bringing I think it was about 20 Middle East franchise stores in-house, which meant that they would have been a contributor to DTC this quarter. But, was there like kind of a meaningful impact to DTC from that conversion? And if so, what was the like-to-like, like-for-like growth in DTC year-over-year?

Yes. That contributed about 200 basis points. So, we were down 8% in Q1, if you excluded the Middle East conversion we would have been down 10%.

Got it. Thanks, Ed and best of luck for the rest of the year.

Thank you.

Our next question comes from Laura Champine from Loop Capital. Please go ahead with your question.

Thanks for taking my question. Just given all the shifting dynamics of the business, can you comment on where overall price per pair is this year versus last year so far in Q2, just knowing that you've been taking some price increases, but the promotions are back, kind of where do we net-out in terms of pricing so far in Q2?

It's always hard to answer that question, because we've got so many different businesses and I honestly don't know that putting them all together gives a particularly meaningful answer because it's always only about the mix. But if you look for instance at like our Steve Madden DTC business, in the U.S. We're looking at -- we expect to be down mid singles in AUR in Q2.

Got it. And if we look at sort of mix overall, what's the pattern right now? Is that also down?

Well, I mean because the private label business is down more than the brand and that actually mixes us back up for a total company. But I'm not sure the --

Got it. Got it.

But, that is the answer.

Yes. Does it make sense to say that the sales declines that you're experiencing right now are driven more by pairs than by price mix?

If you're looking at the overall company, yes.

Got it.

Yes, but by business line, no, I don't think so.

Got it. Okay.

If you're looking at within the individual businesses, the AUR pressure is significant. But again, if you're asking about the total company, because of the decline in private label, that's a big driver of units.

Understood. Got it. Thank you.

Thank you.

[Operator Instructions]. Our next question comes from Dana Telsey from Telsey Advisory Group. Please go ahead with your question.

Good morning, everyone. Ed, as you think about the wholesale business and the shifts that are occurring with second quarter into the first quarter, do you expect additional shifts in third quarter or fourth quarter from the way they're ordering? And at what point do you see chase begins to resume in a more meaningful manner that's beneficial for you? Thank you.

Thanks, Dana. Yes, at this point, I don't see any meaningful shifts between Q3 and Q4, but that's something we'll obviously have to monitor going forward, because there's still a lot we don't know about the back half. In terms of the chase business, I wish I knew the answer to that. I think we're trying to focus on doing -- controlling what we can control, which is having great products, and getting it into the market quickly and having it sell through to the consumer, because ultimately that's how we can encourage our wholesale customers to step up and get more aggressive. But obviously there's a lot of uncertainty in the market right now. There's a lot of negative headlines about the direction of the economy and the consumer. And so, we are dealing with wholesale customers that are pretty conservative right now.

Got it. And then just on your own DTC, both e-commerce and your own stores, what are you seeing about the level of promotion in that channel versus the level of promotion in the wholesale channel?

Well, the overall the retail landscape is pretty promotional, obviously much more promotional than it was in the first half last year, when we were unusually, when we had unusually light levels of promotion. I think we're keeping it pretty well controlled in our own direct-to-consumer channels, but we are participating where it makes sense. And we are seeing a certain segment of our consumer population that does seem to be much more price-sensitive and much more driven by promotional activity right now. And so, we're trying to keep the appropriate balance, while making sure that we still get through the product.

Thank you.

Thanks Dana.

And ladies and gentlemen with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to, Ed Rosenfeld for any closing remarks.

Great. Well, thanks everybody for joining us for today's call. Have a wonderful day. We look forward to speaking with you on the next call. Bye-bye.

And ladies and gentlemen, with that will conclude today's conference call and presentation. We thank you for joining. You may now disconnect your line.