Earnings Call Transcript - SHOO Q1 2023

Operator, Operator

Good morning, everyone, and welcome to the Q1 2023 Steven Madden, Ltd. Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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.

Danielle McCoy, VP of Corporate Development and Investor Relations

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?

Edward Rosenfeld, CEO

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. Now, I will turn it over to Zine to review our first quarter financial results in more detail and provide our outlook for 2023.

Zine Mazouzi, CFO

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 levels in our categories. Wholesale accessories and apparel revenue was $79.8 million, down 22% from last year. The branded business declined 14%. Steve Madden handbags were 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 in 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?

Operator, Operator

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

Aubrey Tianello, Analyst

Good morning. Thanks for taking the questions.

Edward Rosenfeld, CEO

Morning.

Aubrey Tianello, Analyst

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?

Edward Rosenfeld, CEO

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.

Aubrey Tianello, Analyst

Okay, got it. Thank you. And then just going back to your comments on the pull-forward in wholesale in Q1, 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 Q2 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?

Edward Rosenfeld, CEO

Yes. I mean 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 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.

Aubrey Tianello, Analyst

That makes sense. I have one last follow-up on that point. Can you quantify how much chase is included in the guidance, if at all? Do you factor that into your guidance, or is it considered incremental?

Edward Rosenfeld, CEO

We always operate under some assumptions regarding reorder and chase in our business. This is a consistent aspect each year, fluctuating with the environment and the strength of our product sales, but it remains a factor in our plans. Therefore, I would suggest that it aligns with our current observations. If conditions improve and we see wholesale customers begin to engage more, that could represent additional potential. However, we are basing our forecasts on the current outlook.

Aubrey Tianello, Analyst

Perfect. Thank you.

Edward Rosenfeld, CEO

Thanks.

Operator, Operator

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

Unidentified Analyst, Analyst

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 exceed expectations or any color you can provide there. I'll start with that.

Edward Rosenfeld, CEO

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 to get corrected and to get those inventory levels back up in the store, so we can do more business with the consumer.

Unidentified Analyst, Analyst

I understand. I'm curious about how the trends in the direct-to-consumer business evolved throughout the quarter. You mentioned experiencing some deceleration. What do you think caused that deceleration as the first quarter progressed, and as you look ahead to the second quarter, are you anticipating similar trends? Do you believe weather will begin to influence this situation? Any insights you could provide would be appreciated.

Edward Rosenfeld, CEO

Yes. March was notably the weakest month of the quarter for discretionary categories across the board, which was also evident in our results. We experienced a significant decline in March, leading us to fall short of our expectations for direct-to-consumer for the quarter overall. Weather likely contributed to this situation, but there may also be some broader consumer softening at play. In April, we have seen improvement compared to March; however, direct-to-consumer remains weak. For the quarter so far, our performance aligns with the eight percent decline we recorded for the entire first quarter. I'm optimistic that conditions will improve moving forward, especially since our comparisons become significantly easier starting in June. Last year, our direct-to-consumer comparisons versus pre-COVID levels will be approximately 1,500 basis points easier beginning in June.

Unidentified Analyst, Analyst

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.

Edward Rosenfeld, CEO

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 have 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.

Unidentified Analyst, Analyst

Got it. Thank you.

Edward Rosenfeld, CEO

Thanks, Kelly.

Operator, Operator

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

Jay Sole, Analyst

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.

Zine Mazouzi, CFO

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.

Jay Sole, Analyst

Operating expense, just the dollars.

Zine Mazouzi, CFO

On operating expenses, the first quarter had an unusually low base for comparison, which was somewhat unusual, but there were timing differences in expenses between quarters that resulted in a lighter first quarter last year. Looking ahead, we anticipate an increase of around 3% compared to the previous year, in contrast to what we observed in the first quarter. Therefore, we expect this to stabilize. We are tightening our budget and controlling expenses wherever possible across all segments and businesses, both domestically and internationally. This includes targeted job eliminations, as we have already streamlined significantly after the COVID-related cutbacks. We are carefully reviewing every expense to ensure we maintain strict control.

Jay Sole, Analyst

Okay, got it. Thank you so much.

Operator, Operator

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

Tom Nikic, Analyst

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?

Edward Rosenfeld, CEO

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, that is not the biggest driver; a bigger driver is freight, and better pricing with the factories and particularly on the wholesale accessories side.

Tom Nikic, Analyst

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?

Edward Rosenfeld, CEO

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%.

Tom Nikic, Analyst

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

Edward Rosenfeld, CEO

Thank you.

Operator, Operator

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

Laura Champine, Analyst

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?

Edward Rosenfeld, CEO

It's difficult to provide a straightforward answer to that question because we have various businesses, and combining them may not yield a clear response. The key factor is always the mix. However, if we focus on our Steve Madden direct-to-consumer business in the U.S., we anticipate a mid-single-digit decline in average unit retail in the second quarter.

Laura Champine, Analyst

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

Edward Rosenfeld, CEO

The private label business is declining more than the brand, which affects our overall company mix. However, I'm not certain of the specifics.

Laura Champine, Analyst

Got it. Got it.

Edward Rosenfeld, CEO

But, that is the answer.

Laura Champine, Analyst

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?

Edward Rosenfeld, CEO

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

Laura Champine, Analyst

Got it.

Edward Rosenfeld, CEO

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

Laura Champine, Analyst

Got it. Understood. Got it. Thank you.

Edward Rosenfeld, CEO

Thank you.

Operator, Operator

Our next question comes from Dana Telsey from Telsey Advisory Group. Please go ahead with your question.

Dana Telsey, Analyst

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.

Edward Rosenfeld, CEO

Thank you, Dana. At this moment, I don’t see any significant changes between Q3 and Q4, but we will need to keep an eye on it as there is still much uncertainty about the latter half of the year. Regarding the chase business, I wish I had more clarity. Our focus is on controlling what we can, which means ensuring we have excellent products, getting them to market quickly, and achieving strong consumer sales. This approach is vital for encouraging our wholesale customers to become more proactive. However, there is considerable uncertainty in the market right now, with many negative headlines about the economy and consumer sentiment. As a result, our wholesale customers are being quite cautious at this time.

Dana Telsey, Analyst

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?

Edward Rosenfeld, CEO

Well, the overall retail landscape is pretty promotional, obviously much more promotional than it was in the first half of last year 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.

Dana Telsey, Analyst

Thank you.

Edward Rosenfeld, CEO

Thanks Dana.

Operator, Operator

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.

Edward Rosenfeld, CEO

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.

Operator, Operator

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.