Earnings Call Transcript - SHOO Q2 2023

Operator, Operator

Good morning, everyone, and welcome to Steve Madden Earnings Conference for 2023. I will now turn the call over to Danielle McCoy.

Danielle McCoy, Moderator

Thanks, Savannah, and good morning, everyone. Thank you for joining our second 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 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 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

Well, thanks, Danielle, and good morning, everyone, and thank you for joining us to review Steve Madden's second quarter 2023 results. As expected, we faced a challenging operating environment in the second quarter. In light of the difficult market conditions, in particular, the cautious approach to orders by many of our wholesale customers in the United States, we were pleased to deliver earnings results in line with expectations for the quarter. And while we are never satisfied with financial performance that falls short of what we achieved in the prior year, I'm proud of how our team controlled what we can control in the quarter, as we; one, drove strong gross margin performance despite the promotional retail landscape; two, managed our inventory with discipline, delivering a 32% reduction in inventory at the end of Q2 compared to the prior year; and three, controlled expenses and drove cost efficiencies even as we continue to invest in product innovation, consumer engagement and our long-term growth initiatives. As we move forward, we will remain focused on executing our strategy for long-term growth, the foundation of which is driving closer connections with consumers through the combination of consistently trend-right product assortments and effective consumer engagement, which in turn will enable success with our four key long-term business drivers: one, driving our direct-to-consumer business led by digital; two, expanding in categories outside of footwear like handbags and apparel; three, growing in international markets; and four, strengthening our core U.S. wholesale footwear business. Now turning to our performance by channel in Q2. In wholesale, revenue remained under pressure, declining 21% versus the second quarter of 2022. As expected, our private label business was again a significant drag on the top line as our mass merchant customers have reduced orders in an effort to right-size overall inventory levels in our categories. Our branded business was also down, though not as dramatically as private label as our branded customers also continue to take a conservative approach to orders. Despite strong sell-through in several key styles, our wholesale customers did not chase business in those styles the way they normally would, and reorders were significantly lower than we would see in a more typical retail environment. Looking ahead, while our wholesale customers remain cautious, we expect to see significant improvement in the balance of the year relative to the first half. Even if similar to spring, we see limited chase business from wholesale customers in fall, we still believe we can be flat or close to flat to last year's wholesale revenue in the back half. In our direct-to-consumer business, revenue in the second quarter declined 5% compared to the same period in the prior year, with decreases in both the brick-and-mortar and e-commerce channels. While consumer demand trends remain choppy, we have seen improvement in the year-over-year revenue performance over the last couple of months as comparisons have eased, and we expect to return to year-over-year growth in DTC in the back half. Overall, while we are planning for the operating environment to remain choppy in the near term, we are poised to see significant improvement in our financial performance beginning in Q3. We knew coming into the year that the first half would be tough, and I'm proud of how our team weathered the storm and excited about our prospects for the balance of the year. Looking out further, I'm confident that with our strong brands, proven business model and multiple significant growth opportunities, we are well positioned to drive top and bottom line gains for years to come. Now I'll turn it over to Zine to review our second-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 second quarter was $445.3 million, a 16.8% decrease compared to the second quarter of 2022. Our wholesale revenue was $314.6 million, down 20.8% compared to the same period in the prior year. As Ed discussed, private label was particularly soft. Wholesale revenue in the branded business declined 13% versus Q2 2022, while revenue in the private label business decreased 40% compared to the same period last year. Wholesale footwear revenue was $234.9 million, a 19.4% decrease from the second quarter of 2022. Wholesale accessories and apparel revenue was $79.7 million, down 24.6% to the same period last year. In our direct-to-consumer segment, revenue was $128.2 million, decreasing 5.4% compared to the same period last year. On a relative basis, e-commerce outperformed brick-and-mortar and international outperformed the United States. We ended the quarter with 242 brick-and-mortar retail stores, including 69 outlets as well as five e-commerce websites and 22 company-operated concessions in international markets. In our licensing segment, royalty income was $2.5 million in the quarter compared to $2.2 million in Q2 last year. Turning to gross margin. Consolidated gross margin was 42.6% in the quarter, expanding 190 basis points from the same period last year. Wholesale gross margin was 33.6%, a 200-basis-point improvement compared to the same period last year, driven by an improvement in gross margin in the wholesale accessories and apparel business. While wholesale gross margin benefited from a mix shift to the branded business, we also drove like-for-like gross margin improvement in both the branded and private label businesses. Direct-to-consumer gross margin was 63.7% versus 66.4% in the comparable period last year, driven by increased promotional activity. Operating expenses in the second quarter were $145.3 million, a 3.6% decrease compared to the second quarter of 2022, reflecting our ability to control costs while continuing to invest in marketing and other long-term growth initiatives. Operating income for the quarter was $44.5 million or 10% of revenue compared to $67 million or 12.5% of revenue in the same period last year. Our effective tax rate for the quarter was 23.8% compared to 23.5% in Q2 of 2022. Finally, net income attributable to Steve Madden Limited for the quarter was $34.9 million or $0.47 per diluted share versus $49.8 million or $0.63 per diluted share in the second quarter of 2022. Moving to the balance sheet. Our financial foundation remains very strong. And as of June 30, 2023, we had $274.4 million of cash, cash equivalents and short-term investments and no debt. Inventory totaled $207.8 million compared to $306.5 million at the end of the second quarter in 2022, a reduction of $98.7 million or 32.2%. Our CapEx in the quarter was $4 million. During the quarter, we spent $25.8 million on repurchases of the company's common stock, which includes shares acquired through the net settlement of employee stock awards, bringing the total spend on share repurchases to $64.2 million for the first half of 2023. Our Board of Directors approved a quarterly cash dividend of $0.21 per share. The dividend will be payable on September 25, 2023, to the stockholders of record as of the close of business on September 15, 2023. Turning to our outlook. We are reiterating our revenue and earnings per share guidance. We continue to expect revenue for 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.

Operator, Operator

Our first question comes from Aubrey Tianello from BNP.

Aubrey Tianello, Analyst

Wanted to start off first with the revenue guidance. Within the updated guide for revenues to be down 6.5% to 8% that you reiterated, just curious what you're embedding there for wholesale and DTC for the year, whether that's changed versus last quarter?

Zine Mazouzi, CFO

Yes. For wholesale, where we have embedded down low double digits, and for DTC up low single digits.

Aubrey Tianello, Analyst

Great. Got it. Okay. And then if I could just follow up on the DTC side. I think in the last call, you mentioned that the DTC was down about 8% in March, and then it was kind of trending similar through April and into May. Just curious how that kind of progressed month-to-month through 2Q and then so far, what you're seeing into 3Q on DTC?

Edward Rosenfeld, CEO

We observed improvements in direct-to-consumer revenue trends compared to last year as we progressed through the quarter. However, the improvement was not as significant as we had expected, which is why we made a slight adjustment to our revenue guidance from what we predicted last quarter. We are seeing progress, but for the current quarter, we are approximately at flat revenue.

Operator, Operator

Our next question comes from Samuel Poser from Williams Trading Company.

Samuel Poser, Analyst

I think that was a record of prepared remarks at 11 minutes, so thank you. I have a couple of details and then a broader question. Ed, could you provide us with the international revenue growth figures as well as the domestic revenue growth or any decreases?

Edward Rosenfeld, CEO

Yes. International grew 4% in the quarter. I don't have the domestic off the top of my head, but a little bit worse than the overall. Go ahead...

Samuel Poser, Analyst

You mentioned the retailers' appetite. As we think about whether conditions will improve or worsen as the year progresses, can you provide some insight into whether you anticipate changes more significantly from department stores compared to private label versus branded products? Additionally, what was the variance between the two in the second quarter?

Edward Rosenfeld, CEO

Sure. Yes. So I think Zine provided the branded versus private label and wholesale. So branded was down 13% in the quarter and private label was down 40% in the quarter on a wholesale basis. So clearly, much bigger drag from private label. As we go into the back half, I want to be clear. We're really not assuming any significant improvement in the overall approach from the wholesale customers. We still assume that they are cautious. We haven't built in a big chase business in Q4, for instance. But really, what you're seeing here is that we're expecting an improvement compared to the first half just because of the easing comparisons. And the big place where we get much easier comparisons is in private label because that was, if you'll recall, where we felt the pullback first. And so once we get into Q3, we really anniversary some big declines in that business.

Samuel Poser, Analyst

And then I just want to verify, you mentioned the operating margin and the gross margin earlier in the year at around 43.5% for gross margin and just over 12% or a little higher for operating margin. Do those numbers still hold?

Zine Mazouzi, CFO

Yes. Sam, for the gross margin, we revised that down just a little bit to 43%, so down about 50 bps, and just reflecting a lower mix of DTC and also some potential pressure and promo pressure in fall that were reflected in our forecast in retail.

Edward Rosenfeld, CEO

And then for op margin, I would say, close to 12% is what we're looking at now.

Samuel Poser, Analyst

And is that because with the DTC business being slightly less, the requirement for sort of that support of SG&A there just won't be there to keep it in that range kind of thing?

Zine Mazouzi, CFO

Yes. For the SG&A, the assumption that we have is that we'll be at 3% growth dollar against dollars from last year for Q3 and Q4.

Edward Rosenfeld, CEO

But to your point, Sam, yes, we have, given what we've seen on the top line and particularly in DTC, tightened our belt a little bit. We've looked for savings wherever we can find them while obviously not pulling back on marketing or our other long-term growth initiatives.

Samuel Poser, Analyst

Your inventory levels are in good shape moving forward. How quickly could you respond if someone approached you after back-to-school? There's going to be a lot of activity through September 15, which could significantly change expectations. If customers come to you with orders by mid-October, could you still handle holiday demands even if that isn't currently anticipated? Is that reasonable?

Edward Rosenfeld, CEO

Mid-October would be late for that. However, the good news is that our transit times are essentially back to normal, and our overall lead times have also returned to normal. We have the capacity in Mexico, which we utilize more in the fall. So yes, if we receive orders and have customers ready to commit, we can still pursue goods for the fourth quarter. I wouldn't say we can go all the way to mid-October, but certainly over the next month or two.

Samuel Poser, Analyst

And then, nobody has mentioned the Nordstrom anniversary sale. I think we're either currently in it or just passed it. What have you observed from that?

Edward Rosenfeld, CEO

Yes. I think we were pleased with what we saw in the event. Our sell-through percentage was essentially right in line with what it was a year ago, which I think in this environment is a win. And just as importantly, I think we got some good reads on early fall product, particularly in the REBOOTED category, which is encouraging and gives us confidence going into fall.

Operator, Operator

Our next question comes from Laura Champine from Loop Capital.

Laura Champine, Analyst

It's really also about the back half revenue trend where you expect to see improvement. I hear you on easier comps. But how much visibility do you have in that? Meaning, is this an improved prebooking story? Or is it more about replenishment? And maybe talk about how that mix works in private label versus branded since that's driving most of the decline.

Edward Rosenfeld, CEO

So in terms of our wholesale business, look, we've got Q3 97% or 98% booked. We have essentially almost all of Q3 booked. In Q4, that's probably sitting at just a little bit less than half of Q4 is already booked. And as I mentioned, we have not built in an aggressive reorder or chase business into Q4 given the behavior of our wholesale customers so far this year. So I think, all in all, we know quite a lot about where wholesale will fall. There's obviously still work to do, but we're tracking towards the numbers that we've guided to. And to your question about branded versus private label, private label obviously books much further out. So we know a lot about what the private label business is going to look like in the back half. Branded is where there's more variance from here based on what Reorders and Chase does end up looking like.

Operator, Operator

Our next question comes from Tom Nikic from Wedbush Securities.

Unidentified Analyst, Analyst

I just want to get a quick idea about gross margins for the quarter. How much of the improvement in Q2 gross margin was driven by channel mix compared to other factors such as freight and product mix? Can you also elaborate on your comment regarding promotional activity and its impact on the full year gross margin guidance for the second half?

Zine Mazouzi, CFO

Yes. So as far as gross margin is concerned, I think it's the best to look at it wholesale versus retail. So in wholesale, we had a 200-basis-point improvement in margin and a little bit more than half of that was mix related.

Edward Rosenfeld, CEO

In terms of promotional activity, we have included a bit more into our plans for the second half in direct-to-consumer, which is a modest change from our previous expectations.

Operator, Operator

Our next question comes from Jay Sole with UBS.

Jay Sole, Analyst

Great, I'm just curious about the sneakers business. So there's a lot of talk about excess sneaker inventory in the channel. Is that something that's impacting your sneaker business? And how much do you expect sneakers to be a big percentage of the business this year in back-to-school and holiday?

Edward Rosenfeld, CEO

Look, it's hard to say how much we're feeling some of that excess sneaker inventory from the big sneaker players. The sneaker category has been down for us overall over the last few quarters, but we're actually quite optimistic about sneakers going forward. We've got some new sneakers that we're delivering that we feel very good about, some very good early reads in that category, and we think that we're actually going to be on the upswing in the fashion sneaker category moving forward.

Jay Sole, Analyst

Got it. And then if you could just talk more broadly about trends. Are you seeing obviously return to sort of events in '21 and return to work in '22. This year, it seems like the trends, for the first half of the year, are a little bit low. Are you seeing new fashion trends emerge in the dress side of the business?

Edward Rosenfeld, CEO

Yes, we have received some positive early insights for the fall. I feel optimistic about the new sneakers we are introducing, as well as the interest in the boot and booties category. While I don't want to get too detailed about specific trends, we are noticing some new developments that we are excited about.

Jay Sole, Analyst

Got it. And maybe just the last one for me. At the beginning of the call, you mentioned some growth initiatives that you're excited about. It seems like you’re continuing to invest in those. Could you perhaps list some of the top growth opportunities you see, whether it’s international or direct-to-consumer or anything else, specifically for apparel? Just to remind everyone what you're focused on and what you believe will drive growth beyond 2023?

Edward Rosenfeld, CEO

Yes, first on the list is international growth, which has been the fastest-growing segment of our business in recent years and we expect it will continue to lead in growth moving forward. We are excited about the momentum we see in various global markets, particularly in EMEA, which has been our fastest-growing region and is likely to drive significant growth in the coming years, but we're also optimistic about developments in the Americas and APAC. Second, we have experienced substantial growth in direct-to-consumer, especially in digital channels over the last few years. Although there was a slight pullback in the first couple of quarters, we still view this as a crucial growth driver going forward. This growth ties into international expansion as that segment is further ahead in direct-to-consumer, with around 40% penetration internationally and expected to increase in the coming years. Lastly, accessories and apparel are areas of focus as well. We've seen strong momentum in our Steve Madden handbags, which performed well across all channels, including wholesale, direct-to-consumer, and especially in international markets during Q2. While it's still early for our apparel line, we're optimistic about its initial performance and the opportunities ahead. That's how I would rank the top three growth drivers.

Operator, Operator

Our next question comes from Samuel Poser from Williams Trading Company.

Samuel Poser, Analyst

Just a quick one, sorry. Are you have any early reads on back-to-school?

Edward Rosenfeld, CEO

It's pretty early, Sam. I mean nothing that I think would be worth calling out at this moment.

Operator, Operator

Our next question comes from Corey Tarlowe with Jefferies.

Corey Tarlowe, Analyst

I just wanted to double-click on the handbag commentary that you made. Would be curious to get a little bit more color as to what's really driving the growth in that segment specifically?

Edward Rosenfeld, CEO

Yes. I think we've been on a multiyear growth journey here in Steve Madden Handbags. We've invested a lot in upgrading the product there. And I think we've just made a lot of progress. And feel really good about what the design team is delivering in that category. And I think the customer is responding. And as I said, what's nice about it is that we're seeing really perform across all the different channels and businesses in which we operate, both wholesale and DTC, both domestic and international. So it's really Steve Madden handbags that's driving that.

Corey Tarlowe, Analyst

Great. And then just also double-click on apparel. It sounds like that's an area where you see opportunity. What do you anticipate? Or how do you expect to continue to execute upon expanding that segment and more profitably growing it ahead?

Edward Rosenfeld, CEO

Yes, we are just getting started, but we have made a very good beginning. The spring performance has exceeded my expectations in terms of sell-through. We are very pleased with the results from key customers such as Bloomingdale's, Dillard's, and Macy's. We are even more optimistic about the fall products, which we believe represent a significant improvement over our spring offerings and truly embody what we envision for Steve Madden apparel. We are in the process of launching those products, and we are excited about their potential. However, our primary focus is always on the products themselves. The most crucial initiative at this time is to continue developing even better products that accurately reflect the Steve Madden brand DNA. If we accomplish that, we have the distribution channels in place to bring those products to market and drive substantial growth.

Operator, Operator

Our next question comes from Paul from Citi.

Kelly Crago, Analyst

This is Kelly on for Paul. I just wanted to drill down on the back half sales guidance. Could you talk about 3Q versus 4Q in terms of total sales growth? And then maybe elaborate on how that should look by wholesale versus DTC in 3Q versus 4Q? That's my first question.

Edward Rosenfeld, CEO

Yes, I believe that overall, the fourth quarter should grow slightly faster than the third quarter on a consolidated basis. This is mainly due to improved performance in wholesale, which is expected to see better growth in Q4 compared to Q3, along with a higher proportion of direct-to-consumer sales in Q4, which we anticipate will grow more quickly than wholesale in the latter half of the year.

Kelly Crago, Analyst

So just to clarify that, in the wholesale side of the business, your comparison eased significantly in the fourth quarter, but I guess you're saying that you're not going to see that much of a step-up in growth in 3Q versus 4Q, it's a little bit more consistent than what we're looking at on a one-year comparison basis?

Edward Rosenfeld, CEO

Yes. That's because the fourth quarter is more about reordering and fulfilling demand, while the third quarter focuses more on sell-in. We have a cautious forecast due to the way our wholesale customers have been approaching it.

Kelly Crago, Analyst

You noticed that your branded wholesale partners have started to ease up on reorders after the consumer slowdown we experienced in March. How are discussions proceeding with your retail partners? Are they feeling more optimistic about business? Is there potential for pursuing new product opportunities in the latter half of the year? Additionally, what does your inventory situation look like in the retail channel?

Edward Rosenfeld, CEO

Yes, I think there is an opportunity for improvement that they could pursue. However, the overall sentiment and approach in discussions remain very cautious. That's how we've shaped our forecast. Regarding our inventory levels in the channel, they are currently low, which we believe is insufficient. Therefore, we are encouraging them to increase their inventory levels to where they should be.

Kelly Crago, Analyst

Got it. Lastly, regarding the private label, it seems reasonable to expect that the private label business will improve in the second half of the year. However, the brand may continue to decline, similar to the first half of the year.

Edward Rosenfeld, CEO

No. I think both of them will be relatively similar to what we've said about the overall wholesale, which is flat or close to flat.

Operator, Operator

And we are back with Tom Nikic from Wedbush.

Tom Nikic, Analyst

Just wanted to confirm, you guys are seeing in the back half, like the split between Q3 and Q4, similar to how you're seeing revenue for those periods, correct, based on the wholesale dynamics in the back half?

Edward Rosenfeld, CEO

I'm not sure I understand the question. Could you...

Tom Nikic, Analyst

I guess what you're not seeing is any significant SG&A deleverage in Q3 compared to Q4, correct?

Edward Rosenfeld, CEO

The SG&A growth is around 3%, which applies to both Q3 and Q4.

Operator, Operator

If there are no further questions, I will turn the call back over to Ed Rosenfeld.

Edward Rosenfeld, CEO

Great. Well, thank you very much for joining us for today's call. Enjoy the rest of your summer. We look forward to speaking with you on the next call.

Operator, Operator

This concludes the meeting. You may now disconnect.