Earnings Call Transcript - SHOO Q4 2022

Operator, Operator

Good morning, and welcome to the fourth quarter 2022 earnings conference call for Steve Madden Limited. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. This event is being recorded. I would now like to turn the conference over to Danielle McCoy, Vice President of Investor Relations and Corporate Development. Please go ahead.

Danielle McCoy, Vice President of Investor Relations and Corporate Development

Thanks, Debbie, and good morning, everyone. Thank you for joining our Fourth Quarter and Full Year 2022 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 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?

Ed Rosenfeld, Chairman and Chief Executive Officer

Well, thanks, Danielle, and good morning, everyone, and thank you for joining us to review Steve Madden's Fourth Quarter and Full Year 2022 Results. We are pleased to have delivered fourth quarter earnings results in line with our expectations despite an increasingly challenging backdrop. For the full year 2022, we achieved record financial performance, crossing the $2 billion mark in revenue for the first time with double-digit percentage growth on both the top and bottom lines. These results demonstrate the power of our brands and the strength of our business model, as well as the disciplined execution of our strategy. Let me briefly walk you through that strategy and the progress we made on our key initiatives in 2022. First and foremost, our top priority, as always, is winning with product. By utilizing our proven model, which combines talented design teams, a test and react strategy, and an industry-leading speed-to-market capability, we consistently create trend-right product assortments and get them to market ahead of the competition. We are then supporting this great product with an always-on full funnel marketing and consumer engagement strategy. By combining outstanding product and effective marketing, we are creating deeper connections with our consumers, which in turn is enabling our success with our four key business drivers. The first of which is driving our direct-to-consumer business led by digital. In 2022, our DTC revenue increased 7% over 2021 and exceeded $500 million for the first time. Compared to pre-COVID 2019, DTC revenue was up 62%, including a 192% increase in digital, and we have increased our overall DTC penetration by approximately 700 basis points over this time period. Our second key business driver is expanding our business outside of footwear. In 2022, our accessories and apparel business exceeded $400 million in revenue and increased 13% over 2021. Steve Madden handbags grew 19% for the year. In apparel, we successfully transitioned from the BB Dakota-Steve Madden co-brand to the Steve Madden brand for fall of 2022, and overall apparel revenue for the year increased 38%. Our third key business driver is growing our business in international markets. International has been the fastest-growing part of our business over the last few years, and we believe it represents our largest long-term growth opportunity going forward. In 2022, we grew international revenue 56% compared to 2021. For the year, international represented 16% of our total revenue, up approximately 500 basis points from pre-COVID 2019. We also continue to make investments to drive international growth going forward. Part of our strategy in this business is to transition from the distributor model to an ownership model in key markets. In the Middle East, we've had a distributor relationship for over a decade and in recent years, the brand has gained strong traction in the region. In order to capitalize on the significant growth opportunity we see in the GCC, in December, we converted that business to a joint venture model when we formed a new partnership with leading regional player Apparel Group. We own 50.1% of the JV and Apparel Group owns 49.9%. There are currently 21 Steve Madden stores in the territory, and we expect to end the year with between 25 and 30 locations. Finally, our fourth key business driver is continuing to strengthen the U.S. wholesale footwear business that remains the core of our business. In 2022, U.S. wholesale footwear revenue reached the $1 billion mark, increasing 13% over 2021, including more than 20% year-over-year growth in each of our four largest brands; Steve Madden, Dolce Vita, Anne Klein, and Betsey Johnson. So overall, 2022 was a strong year for Steve Madden as we delivered record financial performance and demonstrated tangible progress on each of our key strategic initiatives. That said, the operating environment became increasingly challenging as the year progressed. Consumers began to pull back on discretionary spending and more impactfully for us, our wholesale customers pulled back on orders as they prioritized inventory control. We also faced increasingly challenging comparisons with the prior year as the year went on, culminating in the fourth quarter when we were lapping a quarter where revenue was up 38% and diluted EPS was up 125% compared to pre-COVID in 2019. As we look ahead, we expect these challenges to persist in the near term. Our wholesale customers have taken a conservative approach to spring orders. The outlook for overall consumer spending is uncertain, and we face tough comparisons in the first half, particularly in the first quarter when the compares are very similar to what we faced in Q4. That said, we have a proven ability to navigate difficult market conditions and a track record of taking market share during challenging economic periods, due largely to our agile business model, which enables us to run lean on inventory and chase goods in season when needed. Looking out further, we remain confident that we can leverage our core strengths, our people, our brands, and our business model to continue to drive progress on our key strategic initiatives, which in turn will enable us to deliver sustainable growth and create value for our stakeholders over the long term. Now I'll turn it over to Zine to review our Fourth Quarter and Full Year 2022 Financial Results in more detail and provide our initial outlook for 2023.

Zine Mazouzi, Chief Financial Officer

Thanks, Ed, and good morning, everyone. 2022 marked a record year in terms of both revenue and earnings. Our consolidated revenue in 2022 was $2.1 billion, a 13.7% increase compared to 2021. Our wholesale revenue was $1.6 billion, up 16.4% compared to the prior year, including an increase of 16.9% in wholesale footwear revenue to $1.2 billion, and an increase of 14.8% in wholesale accessories vendor power revenue to $394.7 million. Now our direct-to-consumer segment, revenue was $521.7 million, a 6.9% increase compared to 2021, driven by growth in both the brick-and-mortar and e-commerce businesses. Consolidated gross margin was 41.2% in 2022, a 10-basis point increase compared to 2021. Operating expenses were $591.3 million in 2022 compared to $505.6 million in 2021. As a percentage of revenue, operating expenses were 27.9% in 2022 compared to 27.1% in 2021. Adjusted income for 2022 totaled $282.6 million or 15.3% of revenue compared to $261.9 million or 14% of revenue last year. Our effective tax rate for the year was 22.5% compared to 21.2% in 2021. Finally, net income attributable to Steve Madden Limited for the year was $218.3 million or $2.80 per diluted share, the highest in the company's history compared to $203.7 million or $2.50 per diluted share in 2021. Turning to the fourth quarter results. Our consolidated revenue in the fourth quarter was $470.6 million, an 18.6% decrease compared to the prior year. And as I've mentioned, we faced an extremely difficult comparison to the fourth quarter of 2021 when revenue was up 37.9% compared to pre-COVID in 2019. Our wholesale revenue was $308.8 million, down 24.8% compared to the prior year when wholesale revenue was up 30.8% compared to 2019. Wholesale Footwear revenue was $226 million, a 25.5% decrease from 2021 when wholesale footwear revenue was up 29.9% compared to 2019. Wholesale Accessories and Apparel revenue was $82.8 million, down 22.8% compared to last year when Wholesale Accessories and Apparel revenue was up 33.3% compared to 2019. In our direct-to-consumer segment, revenue was $159.3 million, a 3.2% decrease compared to 2021, driven by a decline in brick-and-mortar business, partially offset by a modest increase in e-commerce. We ended the year with 232 company-operated brick-and-mortar retail stores, including 66 outlets, as well as six e-commerce websites and 20 company-operated concessions in international markets. Turning to our licensing segment. Our license and royalty income was $2.5 million in the quarter compared to $2.9 million last year. As we discussed last quarter, we've completed the wind-down of our first cost business and transitioned those remaining private label customers from a buying agent model to a wholesale model. As such, we did not generate revenue in the first call segment in the fourth quarter versus approximately $400,000 in revenue in the fourth quarter of last year. Consolidated gross margin was 42.2% in the quarter, expanding 100 basis points from the prior year. Wholesale gross margin was 30.5% compared to 31.8% last year due to increased closeouts compared to the prior year when closeout activity was unusually low. Direct-to-consumer gross margin was 64% compared to 63.5% last year. The 60-basis point increase was driven by a reduction in rate expense. Operating expenses were $156.5 million in the quarter compared to $151.5 million last year. As a percentage of revenue, operating expenses were 33.2% in the quarter compared to 26.2% in 2021, reflecting an expense deleverage on a lower revenue base and a higher penetration of DTC. Operating income for the quarter totaled $42.2 million or 9% of revenue, down from $86.9 million or 15% of revenue last year. Our effective tax rate for the quarter was 20.9% compared to 18.3% in 2021. Finally, net income attributable to Steve Madden Limited for the quarter was $33.7 million or $0.44 per diluted share compared to $70.4 million or $0.87 per diluted share in 2021. Moving to the balance sheet. Our financial foundation remains strong. As of December 31, 2022, we had $289.8 million of cash, cash equivalents, and short-term investments, and no debt. Inventory was $228.8 million, down from $255.2 million in the prior year. Our CapEx in the quarter was $6.2 million. During the fourth quarter and full year 2022, our share repurchases totaled $36.8 million and $148.9 million, respectively, including shares acquired through the net settlement of employee stock awards. The company's Board of Directors approved a quarterly cash dividend of $0.21 per share. The dividend will be payable on March 24, 2023, to stockholders of record as of the close of business on March 10, 2023. Combining share repurchases and the dividend, we returned $214.9 million to shareholders in 2022. Turning to our outlook. We expect revenue for 2023 to decrease 6.5% to 8% compared to 2022, and we expect diluted EPS to be in the range of $2.40 to $2.50. As I mentioned, we faced extremely tough comparisons in the first quarter of 2023, very similar to those we faced in the fourth quarter of 2022. Therefore, we expect Q1 revenue and EPS to decline year-over-year at a percentage rate similar to what we just reported for Q4.

Operator, Operator

We will now begin the question-and-answer session. The first question is from Aubrey Tianello with BNP Paribas.

Aubrey Tianello, Analyst

First, wanted to see if you could possibly provide any more color on what's embedded in the 2023 revenue guide for a wholesale and DTC revenues for the year and if possible, also for the first quarter as well?

Ed Rosenfeld, Chairman and Chief Executive Officer

So for the full year, we're looking for wholesale to be down roughly 12% to 13% and for DTC to be up high single digits versus 2022. In terms of I think you should expect revenue declines year-over-year in line with what we just reported for Q4.

Aubrey Tianello, Analyst

And then maybe on the wholesale side, on the wholesale footwear side, in particular, if you could provide any color on what you're seeing from your different customer groupings in terms of sell-through and how that's kind of evolved in the first quarter compared to the fourth quarter. Any particular pockets of weakness or strength to call out or maybe it's similar kind of across the board.

Ed Rosenfeld, Chairman and Chief Executive Officer

Obviously, some are better than others but generally speaking, we're seeing pretty consistent trends across channels. So, I don't think there's anything to really call out there. The challenge for us is particularly in our core brands, Steve Madden, the inventory levels in the channel, we think they're too low. We think our wholesale customers need to take some more goods in. Our inventory levels are down considerably over where they were a year ago. And you asked about sell-through. So, with much lower inventory levels, our sales out to the consumer are also lower. The good news is, if you look at the most important customers, the decline in sales is less than the decline in the stock level, which means the goods are selling through at a higher percentage rate. Hopefully, that will encourage our wholesale customers to step up and increase those inventory levels.

Aubrey Tianello, Analyst

And if I could just follow on that one more. Curious where lead times are at now if those have fully normalized and where you're at in terms of your ability to chase? And then also, as you maybe kind of alluded to, like when your wholesale partners may be ready for that as well.

Ed Rosenfeld, Chairman and Chief Executive Officer

Yes, that's something we're excited about. The lead times are essentially back to normal, back to pre-COVID levels, which means we're back to being able to run the model that is what we think really differentiates us, being able to test and react, utilize our speed to market capability, to react close to and in season. And so, we are prepared to chase and we're looking forward to doing that this year.

Operator, Operator

Next question is from Laura Champine with Loop Capital.

Laura Champine, Analyst

I get that the Q1 order pattern from wholesale is weak, but to have sales down that much for the full year, why would sales be down that much at full year at wholesale if your direct business actually grows? Have you seen a pattern like that historically?

Ed Rosenfeld, Chairman and Chief Executive Officer

What we're currently observing is a significant disconnect between consumer demand and the orders from wholesale customers. Most of our wholesale customers ended up with more inventory than they intended in our categories, prompting them to reduce their orders significantly. This impact was evident in Q4, as reflected in our numbers, and we're experiencing it in spring 2023 as well. While there has been a slight decrease in consumer demand, the reduction in orders from wholesale customers has been much greater than any decline in consumer demand. Consequently, we're starting the year down, particularly by double digits in wholesale for the first half. We remain optimistic about seeing improvements in the second half of the year, but that's how we're beginning.

Laura Champine, Analyst

And historically, have you seen that kind of a spread between wholesale and DTC where I understand DTC often does better, but where DTC is up for the full year, but wholesale is down double digits.

Ed Rosenfeld, Chairman and Chief Executive Officer

I'd have to look back. I can't remember. This is a pretty wide divergence. The good news about this is usually these things converge over time. And so, I don't expect it to sustain like this for a long period.

Operator, Operator

The next question is from Sam Poser with Williams Trading.

Sam Poser, Analyst

A couple of questions. Number one, within the guidance within the guidance, when you think about wholesale, I would assume you're thinking about wholesale data around, what, 20% in the first half of the year and then less and up fractionally in the back half? Is that a good way to think about it?

Ed Rosenfeld, Chairman and Chief Executive Officer

You're in the ballpark. Yes.

Sam Poser, Analyst

If everything were equal and you were operating at the same volume as a year ago, how much more inventory would you need due to the change in DTC penetration? Previously, you maintained about eight weeks of supply, but now you're at around ten weeks. Is the slower turnaround necessary to support the direct-to-consumer business more than what you needed in 2019?

Ed Rosenfeld, Chairman and Chief Executive Officer

Yes, that's right. Wholesale turns about close to 3 times as fast as DTC. So as we've increased this DTC penetration by about 700 basis points compared to pre-COVID, that is going to slow down the overall turn.

Sam Poser, Analyst

And then lastly, are you taking into account that the wholesalers will improve their app web business with you? Or are you sort of taking it? Is the guidance reflecting what you're seeing today?

Ed Rosenfeld, Chairman and Chief Executive Officer

The guidance mostly reflects what we're seeing today. If we get into chase mode and the wholesale customers identify some trends and really want to chase business, then that would be potential upside here.

Operator, Operator

Next question is from Tom Nikic with Wedbush Securities.

Tom Nikic, Analyst

I guess, how should we think about margins for this year? Is there any way we should think about gross margin versus SG&A, both for the full year and for Q1?

Ed Rosenfeld, Chairman and Chief Executive Officer

In terms of gross margin, we think we can see a nice improvement overall. We're targeting around a 43.5% gross margin for the year. That's up about 230 basis points. A little over half of that is just the mix of DTC increasing in penetration. And then there's some number of puts and takes and a number of factors, but most of the biggest factor in the remainder of the increase is the freight benefit that we'll get from the lower ocean rates. In terms of SG&A, obviously, with the sales decline that we're having and this mix shift towards DTC, there's going to be deleverage there. Overall, if you're looking at operating margins, the guidance implies sort of 12, 12, and change.

Tom Nikic, Analyst

And if I could follow up earlier on the DTC versus wholesale growth. So I think you said DTC up high singles for this year. Does that include a contribution from the conversion of the Middle East distributor to a subsidiary? I think you said you've got 20-ish stores in the region. Does that contribute to the high single-digit growth that you're seeing in DTC?

Ed Rosenfeld, Chairman and Chief Executive Officer

Yes, it does. It does. There's comp growth as well, but that is included there.

Operator, Operator

The next question is from Jay Sole with UBS.

Mauricio Serna, Analyst

This is Mauricio Serna on behalf of Jay Sole. I wanted to ask, when you're talking about the first quarter guidance and you're expecting a similar decline as in the 4Q, does that imply also DTC will be down, or what are you seeing there in terms of the DTC business? And then when we're thinking about the gross margin for the year, does that expansion over 200 basis points, does that include any negative impact from higher promotions? Or how are you thinking about promotions? And how is that baked into the gross margin guidance? Thank you so much.

Ed Rosenfeld, Chairman and Chief Executive Officer

In terms of DTC in Q1, yes, I think it should be pretty similar to what you saw in the back half of 2022. Q3, we were down 4%. Q4, down 3%, should be in that range in Q1. In terms of the promotions, we've built in more promotional activity in the first half. Remember, last year, we still had an unusually low level of promo activity. But we actually think that we can have less promotional activity in the back half or at least particularly in Q4. So for the year, probably pretty similar overall.

Operator, Operator

Next question is from Paul Lejuez with Citigroup.

Tracy Kogan, Analyst

It's Tracy Kogan filling in for Paul. I first wanted to ask a follow-up on the wholesale business. I was wondering if you've seen any change or acceleration in point-of-sale trends at your partners' year-to-date, so in 2023? And then my second question is on your international opportunities. I was wondering what you're expecting for the international business this year in terms of growth? And what regions you feel longer term, you have the biggest opportunities in? And also where you might have opportunities to convert like you did in the Middle East?

Ed Rosenfeld, Chairman and Chief Executive Officer

Yes, it's still early in terms of point-of-sale trends this year. We have some exciting items for spring, and early sales on those items are looking promising. We're particularly thrilled about some excellent flat sandals with strong early performance compared to the last few years. Loafers are also performing well, along with novelty items like feathers, butterflies, and flowers. However, we're only just beginning to get insights from the wholesale channel. One challenge this year is that wholesale customers were hesitant to accept spring goods as early as in previous years. Typically, we would be in a position to react to sales data for the second quarter by now, but because the wholesale customers received their goods later, we're only now starting to see those sales insights. Overall, we are seeing good sell-through on spring items in our direct-to-consumer channels and early indications look positive. Regarding international growth, as mentioned earlier, this area has been the fastest-growing part of our business in recent years. We're pleased with the momentum there, despite facing headwinds this year. We believe that this segment can achieve double-digit growth in 2023, although it will not match the over 50 percent growth seen last year. The EMEA region remains our biggest focus and growth driver. We see significant potential there in the coming years, and while we're aware of macroeconomic challenges, our business continues to progress positively. We anticipate growth in that region again this year, including our new Middle East joint venture, which we are excited about. Additionally, we have smaller markets where we are experiencing strong momentum in places like Israel and South Africa. We are considering a couple of other regions for potential development in 2023, but we're not ready to disclose specific details yet, as those discussions are still ongoing.

Operator, Operator

The next question is from Dana Telsey with Telsey Group.

Dana Telsey, Analyst

As you think about the wholesale business and parsing it apart, whether it's between discounters or department stores, whatever it may be, as you see the year progress, who would recover first? Is there any particular channel or category that typically places orders first? And what are you looking for to see the improvement in wholesale?

Ed Rosenfeld, Chairman and Chief Executive Officer

It's really our first tier customers that we would look to recover first. By that, I mean the department stores, the peer-to-peer e-commerce players, et cetera. Those are the folks that typically when we get strong selling, we can chase goods for. Some of the other businesses are planned out further. If you think about our mass merchants, for instance, we don't really chase in the same way in that tier of distribution. But that first tier is where we'll be looking to chase into hot-selling items.

Dana Telsey, Analyst

And then just through the fourth quarter, what's your view of the health of the consumer? Was there any difference by region? It seemed like one of the changes was e-commerce had a modest increase and brick-and-mortar slowed down a little bit. Anything to note in terms of the health of the consumer from what you saw?

Ed Rosenfeld, Chairman and Chief Executive Officer

Certainly, consumer demand is not as strong as it was a year ago. We've noticed a slight slowdown in consumer demand and discretionary spending in our categories, but this is not our main concern at the moment. The decline has been quite modest. Our direct-to-consumer sales have decreased by approximately 3%. The more significant issue is the pullback from our wholesale customers, which has been much more pronounced as they work to manage their own inventory levels. Regarding regional performance, our strongest comparable store sales have been in New York City, primarily because it was one of the last areas to recover from COVID, making comparisons there easier. There's not much else to highlight beyond that.

Operator, Operator

Next, I have a follow-up question from Sam Poser.

Sam Poser, Analyst

Just a follow-up on the direct-to-consumer business. In the quarter compared to pre-COVID, can you tell us how your store and your digital revenue performed in the quarter versus Q4 '19?

Ed Rosenfeld, Chairman and Chief Executive Officer

Yes. I can tell you we saw a 12% increase in our brick-and-mortar stores. While I don't have the exact digital number in front of me, it's increased significantly more than that. For the year, I believe the increase was 192%. I’m not sure if Q4 performed that strongly, but it was certainly much higher than in Q4 2019.

Sam Poser, Analyst

Is this a situation where, during 2021, the stimulus and everything around it generated a lot of direct-to-consumer business, especially e-commerce for you? You've managed to retain a good portion of that, and you have more customers than you did before in 2019. So when discussing the weakening consumer, it seems that, for you, the consumer is currently significantly stronger than they were before COVID, but 2021 was affected by various factors. Is that fair? Because I find it difficult to understand how consumers can be considered weak. I notice that many retailers specifically overestimated the momentum coming out of 2021, which led to significant disruptions in 2022.

Ed Rosenfeld, Chairman and Chief Executive Officer

My comments about the softening in consumer demand were in comparison to last year. That year was quite unique due to significant pent-up demand. Consumers had extra money from stimulus payments, and there were many positive developments. We faced some supply chain issues, resulting in a shortage of goods and minimal discounting, making our previous year even more remarkable. Currently, we are experiencing a slight decline compared to that period. However, overall, our direct-to-consumer business is significantly larger and stronger than it was before COVID.

Sam Poser, Analyst

And then just lastly, back to where the previous one for with the question, and you mentioned it, your wholesale sell-through rates are strong. Most of these big retailers are overstocked in our overstocked footwear vendors and that are other than yourself as well as in other categories other than yourself, which is precluding the fill-in orders as they work to liquidate those goods. I mean that seems to be what's going on. Is that what's going on here?

Ed Rosenfeld, Chairman and Chief Executive Officer

Yes, I think you've summed it up. Yes.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Ed Rosenfeld for any closing remarks.

Ed Rosenfeld, Chairman and Chief Executive Officer

Great. Well, thanks, everybody, for joining us this morning, and have a great day. We look forward to speaking with you on the next call.

Operator, Operator

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.