Earnings Call Transcript
STEVEN MADDEN, LTD. (SHOO)
Earnings Call Transcript - SHOO Q3 2025
Danielle McCoy, VP of Corporate Development and Investor Relations
Thanks, Brittany, and good morning, everyone. Thank you for joining our third quarter 2025 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 until 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 on the call today are Ed Rosenfeld, Chairman and Chief Executive Officer; and Zine Mazouzi, Chief Financial Officer and Executive Vice President of Operations. With that, I'll turn the call over to Ed. Ed?
Edward Rosenfeld, Chairman and Chief Executive Officer
All right. Thanks, Danielle, and good morning, everyone, and thank you for joining us to review Steve Madden's third quarter 2025 results. As anticipated, the third quarter was challenging, driven largely by the impact of new tariffs on goods imported into the United States. During the period in April and May when new tariffs on Chinese imports reached 145%, wholesale customers cut back meaningfully on orders for the third quarter, and we shifted large amounts of production out of China midstream, which led to shipment delays. These factors, together with the negative impact to gross margin from the significant increase in our landed costs, resulted in substantial pressure on both revenue and earnings in Q3. Fortunately, while we will continue to see negative impacts from tariffs, we believe the worst is behind us. Order patterns from our wholesale customers are normalizing, and we are mitigating a larger percentage of the gross margin pressure through strategic pricing actions and sourcing initiatives. Most importantly, underlying consumer demand for our brands and products is strong. Despite the noise from tariffs, our team has stayed laser-focused on executing our strategy to deepen consumer connections through the combination of compelling products and effective marketing, and we are seeing those efforts pay off, particularly in our flagship Steve Madden brand. Steve and his design team have created an outstanding fall product assortment that is resonating with consumers and enabling us to outperform the competition. Boots have been the standout, led by our casual tall shaft styles, but we're also seeing strong performance in dress shoes across various heel heights as well as casuals like loafers, Mary Janes, and mules. Our marketing team is amplifying this great assortment with richer brand and product storytelling and increased investment across YouTube, TikTok, Snapchat, and Pinterest, which is driving measurable increases in awareness and conversion with our key Gen Z and Millennial consumers. As a result, both wholesale sell-through and DTC sales trends for Steve Madden have accelerated meaningfully in recent months. Our new brand, Kurt Geiger London, also had strong momentum as consumers continue to respond to its bold statement-making designs and eye-catching marketing, including the current campaign featuring Emily Ratajkowski. Comp sales for the brand were up mid-teens in the third quarter. Overall, the acquisition integration remains on track, and our teams continue to make progress on revenue synergies, including expanding Kurt Geiger in international markets through the Steve Madden network and growing Steve Madden in the U.K. through the Kurt Geiger platform as well as cost savings opportunities in areas like freight and logistics. We are also making meaningful progress in advancing our other owned brands. In Dolce Vita, we're building on the outstanding success we've had over the last several years in our U.S. footwear business by expanding international markets and extending the brand into other categories like handbags. In Betsey Johnson, we are driving renewed cultural relevance for the brand with elevated talent partnerships, authentic community engagement, high-impact activations, and differentiated merchandise assortments. Both Dolce Vita and Betsey Johnson are on track to deliver revenue gains for the full year 2025 despite the headwinds from tariffs. In sum, while the third quarter was undeniably challenging and our financial results were not up to our usual standards, our team's disciplined execution of our strategy is strengthening our brands and building relevance and demand with consumers. We are confident that we will begin to see improved financial performance in the fourth quarter and looking out further that we have the brands, business model, and strategy to drive sustainable revenue and earnings growth over the long term. Now I'll turn it over to Zine to review our third quarter 2025 financial results in more detail.
Zine Mazouzi, Chief Financial Officer and Executive Vice President of Operations
Thanks, Ed, and good morning, everyone. In the third quarter, our consolidated revenue was $667.9 million, a 6.9% increase compared to the third quarter of 2024. Excluding the newly acquired Kurt Geiger, consolidated revenue decreased 14.8%. Our wholesale revenue was $442.7 million, down 10.7% compared to Q3 2024. Excluding Kurt Geiger, our wholesale revenue decreased 19%. Wholesale footwear revenue was $266.5 million, a 10.9% decrease from the comparable period in 2024 or down 16.7%, excluding Kurt Geiger. Wholesale accessories and apparel revenue was $176.2 million, down 10.3% compared to the third quarter in the prior year or down 22.5%, excluding Kurt Geiger. The majority of the organic decline in wholesale revenue can be attributed to tariff-related order reductions, shipment delays, and other impacts related to the production disruption. In our direct-to-consumer segment, revenue increased 76.6% to $221.5 million. Excluding Kurt Geiger, our direct-to-consumer revenue increased 1.5%. We ended the quarter with 397 company-operated brick-and-mortar retail stores, including 99 outlets as well as 7 e-commerce websites and 133 company-operated concessions in international markets. Our license and royalty income was $3.7 million in the quarter compared to $3.5 million in the third quarter of 2024. Consolidated gross margin was 43.4% in the quarter, up from 41.6% in the comparable period of 2024 due to the impact of Kurt Geiger, which has a much higher mix of DTC than the legacy business and therefore has higher overall gross margin. Wholesale gross margin was 33.6% compared to 35.5% in the third quarter of 2024 due to pressure from tariffs, partially offset by our mitigation efforts. Direct-to-consumer gross margin was 61.9% compared to 64% in the comparable period in 2024 due to pressure from tariffs as well as the addition of Kurt Geiger, which had lower DTC margin in the quarter than the existing business, driven by the concessions business. Operating expenses were $243.4 million or 36.4% of revenue in the quarter compared to $174.2 million or 27.9% of revenue in the third quarter of 2024. Operating income for the quarter was $46.3 million or 6.9% of revenue compared to $85.4 million or 13.7% of revenue in the comparable period in the prior year. The effective tax rate for the quarter was 23.4% compared to 23.8% in the third quarter of 2024. Finally, net income attributable to Steve Madden Limited for the quarter was $30.4 million or $0.43 per diluted share compared to $64.8 million or $0.91 per diluted share in the third quarter of 2024. Moving to the balance sheet. Our financial foundation remains strong. As of September 30, 2025, we had $293.8 million of outstanding debt and $108.9 million of cash, cash equivalents, and short-term investments for a net debt of $185 million. Inventory at the end of the quarter was $476 million compared to $268.7 million in the third quarter of 2024. Excluding Kurt Geiger, inventory was $275.6 million, a 2.6% increase compared to the same period last year. Our CapEx in the third quarter was $11.6 million. During the third quarter, the company did not repurchase any shares of its common stock in the open market. The company's Board of Directors approved a quarterly cash dividend of $0.21 per share. The dividend will be payable on December 26, 2025, to stockholders of record as of the close of business on December 15, 2025. Turning to our fourth quarter '25 guidance. We expect revenue to increase 27% to 30% compared to the fourth quarter of 2024, and we expect earnings per share to be in the range of $0.41 to $0.46.
Operator, Operator
Our first question comes from the line of Paul Lejuez with Citi.
Kelly Crago, Analyst
This is Kelly on for Paul. Ed, you sounded pretty positive on what you're seeing on the fashion front. I'm just curious if you could talk more about how you're seeing the fashion develop this fall, how inventory levels in the wholesale channel are looking? If that makes you think differently about sort of the prospects for spring, particularly in the wholesale channel.
Edward Rosenfeld, Chairman and Chief Executive Officer
Yes, Kelly, we feel very optimistic about what we've observed this fall. We've noticed a significant acceleration in trends, especially in our core Steve Madden women's shoe segment. The main contributor has been boots, which have performed exceptionally well. The casual tall shaft styles are leading the way, but we have several other successful options in the boot and booty category. It's also important to note that we've seen a considerable improvement in the dress shoe category, where we believe we hold a strong competitive advantage, and our team has executed effectively. We are experiencing success across various styles within the dress category, including different heel heights. Casual styles have also been significant for us. While the fashion sneaker segment has slowed down, we are seeing an increase in demand for loafers, mules, and Mary Janes. Overall, we are feeling more positive about our fashion lineup at Steve Madden and its performance. This gives us confidence heading into spring, and we feel more optimistic about the upcoming season compared to a few months ago.
Kelly Crago, Analyst
Good to hear from you. Regarding the fourth quarter guidance, it is significantly higher than the consensus expectations. Can you break that down for us in terms of what you anticipate from the core business as opposed to the approximately 15% decline observed in the third quarter? Are there any changes contributing to this anticipated acceleration? What are your expectations for Kevin Garnett in the fourth quarter?
Edward Rosenfeld, Chairman and Chief Executive Officer
Sure. Yes. The core business, if you exclude KG, the revenue guide is essentially down 2% to down 4%. That includes increases in both wholesale footwear and DTC, but still a decline, offset by a decline in wholesale accessories and apparel. Then the KG contribution to revenue, I think at the low end, we're at $182 million and the high end $187 million.
Kelly Crago, Analyst
Any sense of the breakdown when we think about our models and how much of that KG revenue is coming from the DTC channel in the fourth quarter? What kind of impact that'll have on the grosses?
Edward Rosenfeld, Chairman and Chief Executive Officer
Yes, overall, KG is over 70% direct-to-consumer. I believe it will be around $135 million in the fourth quarter from DTC, which significantly affects the gross margin mix.
Operator, Operator
Our next question comes from the line of Anna Andreeva with Piper Sandler.
Anna Andreeva, Analyst
Congrats. Nice results. A couple of questions. Are you seeing stockouts in the core Madden business, just given everything that's going on with the supply chain? How quickly can you chase? Great to hear about DTC ex-KG bouncing back to positive. Ed, you mentioned a strong consumer response to a number of categories. Can you parse out how own e-com did versus brick-and-mortar? How does the 10% reduction in China affect your thinking about sourcing?
Edward Rosenfeld, Chairman and Chief Executive Officer
Sure. Yes. There have been some styles where we've experienced stockouts. Overall, we've managed to address some of the increased demand in the core Steve Madden business. However, due to supply chain disruptions, our ability to respond as quickly as we usually can has been affected. We did stock up on some merchandise because we had good insights on these products, allowing us to fulfill some reorders, especially in Steve Madden. Additionally, a significant portion of this product is sourced from Mexico, which allows us to quickly handle reorders within 30 days. I think that has been a reasonable outcome. In the second quarter, we noticed that e-commerce is outperforming brick-and-mortar sales in both Steve Madden and Kurt Geiger. We've indicated that Steve Madden has seen an acceleration in both online and store sales recently. Regarding the impact of the reduction in China tariffs on our sourcing, it's certainly a positive change. Given the current tariff framework, it seems we could shift a significant amount of our sourcing back to China. However, we will proceed cautiously. We aim to maintain a diverse sourcing strategy and avoid a scenario where over 70% of our sourcing is from a single country. That said, the reduction does provide us with more flexibility to return to China as needed for the right deliveries, quality, pricing, speed, and other factors.
Anna Andreeva, Analyst
Just as a follow-up, as we think about the KG rollout plans as we look into next year, just any color you could provide how we should think about the store growth versus wholesale?
Edward Rosenfeld, Chairman and Chief Executive Officer
Yes, we will not go into too much detail about 2026 overall because we will discuss that in the next call. I can share that we plan to open a few stores in the United States next year for Kurt Geiger, and we are currently working on those plans. The initial six stores in the United States are performing very well, and we are close to securing a few leases for next year to continue that rollout. There will also be some growth in wholesale, as we see opportunities in both channels.
Operator, Operator
Our next question comes from the line of Jay Sole with UBS.
Jay Sole, Analyst
Ed, I think I heard you say that legacy Steve Madden should be down by 2% to 4% with wholesale footwear and DTC positive. Can you just talk about how you're thinking about 4Q for the entire wholesale footwear segment and then wholesale accessories, that would be helpful.
Edward Rosenfeld, Chairman and Chief Executive Officer
Yes. Wholesale, including Kurt Geiger or excluding Kurt Geiger?
Jay Sole, Analyst
I guess, excluding Kurt Geiger.
Edward Rosenfeld, Chairman and Chief Executive Officer
Excluding Kurt Geiger, wholesale footwear, we're looking at up 2% to up 4.5%. Wholesale accessories and apparel, excluding Kurt Geiger, still down mid- to high teens.
Jay Sole, Analyst
Then I guess if you think about Kurt Geiger retail versus wholesale, I mean, how are you thinking about that?
Edward Rosenfeld, Chairman and Chief Executive Officer
Well, we've provided the DTC revenue for Kurt Geiger, which I said I think is going to be around $135 million. Then the overall number for Kurt Geiger, $182 million to $187 million is the range.
Jay Sole, Analyst
Then I guess you asked this a couple of times, but regarding your visibility, have you taken orders earlier for Kurt Geiger compared to the Steve Madden business? Do you have visibility into Q1 and Q2 for Kurt Geiger, or will it follow the same quick-turn supply chain as Steve Madden?
Edward Rosenfeld, Chairman and Chief Executive Officer
No, we do take orders earlier there, so we'll have more visibility over time there.
Jay Sole, Analyst
I guess any comment on the order book and how that's shaping up right now?
Edward Rosenfeld, Chairman and Chief Executive Officer
I think we're going to postpone all discussion of '26 until the next call. Look, the Kurt Geiger brand continues to perform very well, and we're going to see growth next year.
Operator, Operator
Our next question comes from the line of Abigail Zvejnieks with BNP Paribas.
Abigail Zvejnieks, Analyst
I wanted to ask on Kurt Geiger as well. I appreciate the comment on comp sales up mid-teens. Any color you can share on how Kurt Geiger performed by region in the quarter?
Edward Rosenfeld, Chairman and Chief Executive Officer
Yes. It's growing in all the core regions. They performed well in their home market of the U.K. and continue to grow in the U.S., and we're also growing in Europe.
Abigail Zvejnieks, Analyst
You've mentioned the revenue synergy potential, particularly regarding integrating Kurt Geiger into your existing international markets. While it's still early, do you have any updates on how that integration is progressing or when we might start to see some benefits?
Edward Rosenfeld, Chairman and Chief Executive Officer
Yes. We've been actively working on that. Kurt Geiger, our CEO, recently completed a world tour, visiting four continents over three weeks to meet with our international teams and partners. This effort is underway, and we anticipate seeing some positive outcomes in 2026, with substantial contributions to our numbers likely occurring towards the end of that year.
Operator, Operator
Our next question comes from the line of Marni Shapiro with The Retail Tracker.
Marni Shapiro, Analyst
Your stores have really looked beautiful. Could we just focus a little bit on some of your smaller but growing areas? It sounds like the handbag business was a little bit disrupted. I'm guessing some late deliveries. I'm curious if you could just talk a little bit about what's going on there. Then can we get an update on the apparel business, both at stores like Macy's, Bloomingdale's, and REVOLVE as well as Madden NYC at Walmart?
Edward Rosenfeld, Chairman and Chief Executive Officer
In regards to handbags, we anticipated a decline in that category, specifically with Steve Madden handbags, due to excess inventory and market pressures. We expected a double-digit decrease coming into the year, and that situation has worsened because of tariff disruptions and supply chain issues. We are feeling continued pressure in this area, which will likely carry into the fourth quarter. On a positive note, underlying demand seems to be improving, and we've seen better sell-throughs this fall compared to spring. Our online offerings, including Hobos, shoulder bags, East West bags, and products in brown suede, are performing well. I expect the handbag business to stabilize as we approach spring 2026. Turning to apparel, Steve Madden apparel has been a strong growth area for us. We've experienced good sell-throughs and steady growth in key accounts like Nordstrom, Dillard's, Bloomingdale's, Topdoors, Macy's, and REVOLVE. Additionally, our business with Walmart under Madden NYC is also significant, although we've felt some pressure from tariffs in the mass channel. We anticipate improvements in that area as we move into 2026.
Marni Shapiro, Analyst
Can you provide an update on the shoe side and department stores? Are you noticing a significant difference between the higher-end stores, such as more fashion-forward ones like REVOLVE, and stores that are less fashion-oriented? Or is the sell-through consistent across the board, with minimal price resistance to the Madden brand when the product is good?
Edward Rosenfeld, Chairman and Chief Executive Officer
Yes. We've been really pleased so far with the lack of price resistance that we've seen, particularly in the Madden brand. I think as we've said, we have a lot of very strong fashion right now. I think overall, if you look at the overall company, the real takeaway on the price increases is that when you have real fashion-forward products or new fashion, the consumer is willing to pay. Where you have to be much more careful with price increases is on the core and more basic product. The good news is that's how we did it, and that's how we planned it. As you know, we were very surgical about it. We didn't take a peanut butter approach where we spread the price increases evenly everywhere. We went style by style. I think that so far, we've been pleased with how the price increases have been received by the consumer.
Marni Shapiro, Analyst
The product really looks outstanding, some of the best product out there in the market.
Operator, Operator
Our next question comes from the line of Corey Tarlowe with Jefferies.
Corey Tarlowe, Analyst
Ed, I was just wondering if you could talk to the AUR lift in the business. You're selling $200 boots today versus sneakers that were more like $70 previously. How is that affecting the business? What's the impact on sales and comp? How do you measure that? How do these fashion trends speak to what AUR could be next year?
Edward Rosenfeld, Chairman and Chief Executive Officer
Yes, we are seeing a significant increase in average unit retail, which is due to two main factors. First, the price increases we've implemented in response to tariffs. Second, there is a mix benefit from selling more boots and higher-priced categories. In the third quarter, our direct-to-consumer channel saw an increase in average unit retail in the high single digits, and now in the fourth quarter, we are experiencing mid-teens increases in average unit retail.
Corey Tarlowe, Analyst
Then it does feel as if there's a bit of a tone shift in your commentary around wholesale, where kind of the first half of the year, I talked about order cancellations and now you're talking about orders ramping back up. I'm curious if this is the fact that the channels are doing better? Or is it that you see Steve Madden gaining more market share in these channels? How do you think about that?
Edward Rosenfeld, Chairman and Chief Executive Officer
I believe it's both factors at play. If my tone hadn't improved from the period when we were facing 145% tariffs and clients were canceling every order, that would be quite discouraging. Fortunately, some of the external noise has decreased. I think we are beginning to see a return to normalcy following all the tariff-related disruptions. Additionally, we are observing stronger underlying demand and better sell-through, which is encouraging our wholesale customers to return to us with more ambitious plans.
Corey Tarlowe, Analyst
Then if I could just squeeze one more in. It seems like the product is resonating really nicely. Intuitively, what do you think that means for promotions? What's embedded in your outlook for that?
Edward Rosenfeld, Chairman and Chief Executive Officer
Yes, the good news is we have been able to significantly reduce promotional days in our direct-to-consumer channels in Q4 compared to last year. We can afford to be less promotional due to the strength of our product and the overall trend. Of course, we need to stay competitive as we approach the fall and the holiday season when promotions peak, but we will strive to remain less promotional where possible.
Operator, Operator
Our next question comes from the line of Tom Nikic with Needham.
Tom Nikic, Analyst
I wanted to ask about the margin structure of the business. Obviously, 2025 between tariffs and the acquisition and maybe some tough first half of the year at the core brand or a tough first nine months. There was quite a bit of margin erosion this year. How do we think about how much of that is recoverable and how much may be structural?
Edward Rosenfeld, Chairman and Chief Executive Officer
I'd like to think all of it is recoverable over time. I think it's going to take a little bit of time. I don't expect us to get it all back in 2026. Certainly, the over time, I do believe that the tariffs are going to find their way into the retail prices, and we'll be able to get back to our pre-tariff margins in the core business. Then the Kurt Geiger business is obviously lower margin than the legacy business. We think that business has a path to getting to where the Steve Madden levels or potentially even higher over time, so that's the goal.
Operator, Operator
Our next question comes from the line of James Ross with Williams Trading.
Unknown Analyst, Analyst
Two questions, actually. The first being, how will the mix of business with the addition of Kurt Geiger impact gross margins in Q4? I know we kind of touched on it in the first question, but I was hoping you could sort of dig into that a little deeper maybe. The second being, can you provide some color on brand growth and opportunities internationally and what that looks like going into next year?
Edward Rosenfeld, Chairman and Chief Executive Officer
Yes, go ahead.
Zine Mazouzi, Chief Financial Officer and Executive Vice President of Operations
As far as your first question related to Kurt Geiger impacting gross margin in Q4, I think it would be similar to what we've seen in Q3, somewhere around 300 basis points.
Edward Rosenfeld, Chairman and Chief Executive Officer
Okay. Is this about the legacy business or Kurt Geiger? You asking about Kurt Geiger or the legacy Steve Madden?
Unknown Analyst, Analyst
Yes. Steve Madden and then also Kurt Geiger as well.
Edward Rosenfeld, Chairman and Chief Executive Officer
We continue to see strong momentum in international markets. For 2025, we are anticipating high single-digit revenue growth, which is consistent across our three primary regions: EMEA, APAC, and the Americas, excluding the U.S. This positive trend is evident throughout, and we expect continued growth into 2026. Regarding Kurt Geiger, they are in the early stages of expansion outside the U.K. and the U.S., and we anticipate strong double-digit growth internationally from them for several years.
Operator, Operator
Our next question comes from the line of Janine Stichter with BTIG.
Janine Hoffman Stichter, Analyst
I just want to follow up on the margin recapture. If you could help us out. I think the tariffs you had that hit gross margin a little over 200 basis points in Q2. How much was it in Q3? Then how to think about Q4? Maybe help us unpack that Kurt Geiger between that and the core business. I think Kurt Geiger had been hit a bit more in the front of the year just because you hadn't been able to move as quickly there.
Zine Mazouzi, Chief Financial Officer and Executive Vice President of Operations
Yes. As far as the tariff impact in Q3, given all the moving parts with the price increases, factory discounts, our renegotiated cost in as well as FOB differential between all the countries, I think it's best to look at it from a growth and mitigated perspective, and Q3 was about 100 basis points more than what Q2 was. I think you're asking about Q4 as well. I think it would be a little bit worse than that in Q4.
Janine Hoffman Stichter, Analyst
The impact in Q4 is going to be worse compared to Q3.
Edward Rosenfeld, Chairman and Chief Executive Officer
Q3 was about 100 basis points worse than Q2, and we expect Q4 to be a little bit worse than Q3, but those are unmitigated, so the mitigation gets bigger over time. The net impact to gross margin will be considerably less in Q4 than it's been.
Janine Hoffman Stichter, Analyst
Then just maybe on the mitigation. I just want to clarify on pricing. I think you took 10% increases earlier this year. Have you taken more? Or do you plan to take more?
Edward Rosenfeld, Chairman and Chief Executive Officer
That's where we are right now. We'll have to look at it as we go forward. That obviously is still not enough to offset the full amount of the tariffs. Over time, we'd like to see if we can take more, but we want to be prudent about it.
Operator, Operator
Our next question comes from the line of Dana Telsey with Telsey Advisory Group.
Dana Telsey, Analyst
As we think about the wholesale business, what differed by type? Were there off-price department stores mass? What did you see? What do you think of the outlook going forward? Then on the DTC side, was there a difference between full price and outlet performance?
Edward Rosenfeld, Chairman and Chief Executive Officer
Yes. In wholesale, I would say we're seeing the strongest performance in the regular price channels, where we have had more pressure is in the value price channels like the off-price and the mass. In terms of DTC, we're seeing much better performance in full-price channels. Outlet remains a drag. I think we're being hurt by a couple of things there. One is, five of our biggest eight outlet stores are on the border with Mexico. Those stores are running down about 40%, and so that's been a big headwind there. Then the other thing is that I think we were impacted more acutely there by some of the disruption from the supply chain in the wake of tariffs. Outlet has still been trending negative, and full price stores have been much better.
Dana Telsey, Analyst
Then just on the value side of the wholesale channel, are they just not taking orders? Are they waiting for newness? Are they waiting for more goods, not accepting the price increase? Any way to articulate it?
Edward Rosenfeld, Chairman and Chief Executive Officer
Well, they were the ones that pulled back most significantly. Again, it was during the period in April and May when China tariffs were 145%. They are coming back now, and we're seeing those businesses normalize, but that was where we felt a big part of the pullback in the last couple of quarters.
Dana Telsey, Analyst
Just lastly, on marketing, as you think about Q4, anything we should be watching on the marketing side given your improved social that you've had in terms of marketing as we head into the holiday season?
Edward Rosenfeld, Chairman and Chief Executive Officer
No, we're just going to continue to keep doing the storytelling. I think that we see it's working. I think our marketing teams are hitting the bull's eye, and we're just going to keep investing and keep engaging with consumers.
Operator, Operator
Our next question comes from the line of Paul Lejuez with Citi.
Kelly Crago, Analyst
Kelly again. I just wanted to follow up on an earlier question around the KG margin structure. In your disclosure, you said KG was about 9% EBIT margin business in F '24. Curious where that's going to shake out this year with the tariffs. Then as we look to '26, how much can you recover? Can you get back to the 9% next year? Just longer term, I mean, you spoke pretty positively about KG margins. Where ultimately do you think this business can land? How do you get there? Is it through SG&A synergies, anything in the gross margin to speak about? Just any color on sort of how we should think about the KG margins as we look forward?
Edward Rosenfeld, Chairman and Chief Executive Officer
Yes. For this year, considering the partial period from May onwards, I think we're looking at around a 6% margin. We'll discuss next year in more detail on the next call. We expect to see improvements from where we were this year, but we'll hold off on further discussion until that call. Regarding the longer-term drivers, I see potential for both gross margin and SG&A improvements, but the larger opportunity lies in SG&A. We have some cost-saving opportunities from our combination, and that work is already in progress. Additionally, we believe there is a significant chance to optimize operating expenses over time as the business expands.
Kelly Crago, Analyst
Just curious where you maybe think that those margins could go longer term?
Edward Rosenfeld, Chairman and Chief Executive Officer
Yes. I think what we said earlier was that certainly the intermediate target would be to get to where Steve Madden, the legacy business was historically, but we think there's opportunity beyond that.
Operator, Operator
I'm showing no further questions at this time. I would now like to turn it back to Ed Rosenfeld for closing remarks.
Edward Rosenfeld, Chairman and Chief Executive Officer
Great. Well, thanks so much for joining us today. We hope you have a wonderful day, and we look forward to speaking with you on the next call.
Operator, Operator
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.