Earnings Call Transcript - SHOO Q2 2022

Operator, Operator

Good day and thank you for standing by. Welcome to the Q2 2022 Steven Madden Limited Earnings Conference Call. I would now like to hand the conference over to your speaker today, Ms. Danielle McCoy, VP of Corporate Development and Investor Relations. Ms. McCoy, please go ahead.

Danielle McCoy, VP of Corporate Development and Investor Relations

Thanks, Chris and good morning, everyone. Thank you for joining our second quarter 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 on the call today is Ed Rosenfeld, Chairman and Chief Executive Officer. Unfortunately, Zine Mazouzi, Chief Financial Officer, is under the weather, recovering from COVID and is unable to join. With that, I'll turn the call over to Ed.

Ed Rosenfeld, Chairman and Chief Executive Officer

Thanks, Danielle and good morning, everyone and thank you for joining us to review Steve Madden's second quarter 2022 results. We delivered strong results in the second quarter with revenue increasing 35% and diluted EPS increasing 31% compared to the prior year. While macro pressures intensified during the quarter, our team remains laser-focused on executing our strategy, combining outstanding product and effective marketing to create closer connections with our consumers, thereby enabling our four key 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. Our strong execution against these initiatives drove above-plan performance in the second quarter in each of our primary business segments. In wholesale footwear, revenue increased 47% compared to the prior year. Steve Madden was the largest contributor to growth, with strong gains across women's, men's and kids followed by Dolce Vita which continues to have exceptional momentum and grew more than 150% compared to the prior year. In our wholesale accessories and apparel segment, revenue grew 65% compared to the prior year, driven by robust gains in Steve Madden handbags, BB Dakota Steve Madden apparel and private label accessories. And in direct-to-consumer, revenue increased 2%, a strong result considering it came on top of the phenomenal growth from a year ago when our DTC business benefited from pent-up demand and stimulus checks and increased revenues 63% over pre-COVID second quarter 2019. Finally, across each of these segments, we delivered robust growth in international markets. International revenue increased 82% versus the second quarter of 2021, driven by particularly strong performance in our directly-owned subsidiary markets, Canada, Mexico and Europe. Overall, international represented 15% of our total revenue, up from 11% a year ago and a new quarterly high. So overall, we were very pleased with our performance in the second quarter. That said, macro conditions deteriorated during the quarter and we did see consumer demand and sales trends moderate beginning in June which has continued into July. Given these macro pressures, the near-term outlook has become more uncertain and we are taking a cautious approach to managing our business in the back half. Looking out further, however, 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'll turn it over to Danielle to review our second quarter financial results in more detail and provide our outlook for the remainder of the year.

Danielle McCoy, VP of Corporate Development and Investor Relations

Thanks, Ed. Our consolidated revenue in the second quarter was $535 million, a 34.5% increase compared to 2021. Our wholesale revenue was $397.1 million, up 51.5% compared to the prior year. Wholesale footwear revenue was $291.4 million, a 47.1% increase from 2021, driven by strong performance in our flagship brand, Steve Madden, as well as in Dolce Vita, Anne Klein, Betsey Johnson and private label. International wholesale footwear revenue grew more than 60% versus the prior year. Wholesale accessories and apparel revenue was $105.7 million, up 65.2% to last year. The growth was driven primarily by strong gains in Steve Madden and private label handbags as well as in our apparel business which recorded year-over-year growth of more than 100% for the third consecutive quarter. Q2 also benefited from a pull forward of deliveries from Q3, particularly in private label. In our direct-to-consumer segment, revenue was $135.5 million, a 2.2% increase compared to 2021. As Ed mentioned, we had an extremely tough comparison in Q2 2021 due to the benefit from stimulus and pent-up demand. And as such, we were pleased to exceed last year's direct-to-consumer revenue in the quarter. Compared to pre-COVID second quarter of 2019, direct-to-consumer revenue was up 66.4%. We ended the quarter with 213 brick and mortar retail stores, including 66 outlets as well as 6 e-commerce sites and 19 company-operated concessions in international markets. Turning to our Licensing and First Cost segments. Our Licensing royalty income was $2.2 million in the quarter compared to $2.8 million last year. First Cost commission income was $0.1 million in Q2 or $0.3 million last year. Consolidated gross margin was 40.7% in the quarter compared to 42.7% in the prior year. The decline was entirely due to a mix to wholesale from direct-to-consumer as we reported year-over-year increases in each of wholesale and direct-to-consumer. Wholesale gross margin was 31.6%, expanding 100 basis points compared to last year, driven by margin improvement in wholesale footwear. Direct-to-consumer gross margin was 66.4%, an increase of 100 basis points compared to the prior year, driven by margin improvement in international markets. Operating expenses were $150.8 million in the quarter compared to $119.1 million last year. As a percentage of revenue, operating expenses were 28.2% in the quarter, a 170 basis points improvement compared to 2021. Operating income for the quarter totaled $67 million or 12.5% of revenue compared to $51 million or 12.8% of revenue last year. Our effective tax rate for the quarter was 23.5% compared to 20.7% in 2021, primarily due to the decreased discrete benefit from the exercising and vesting of share-based awards. Finally, net income attributable to Steve Madden Limited for the quarter was $49.8 million or $0.63 per diluted share, up from $39.7 million or $0.48 per diluted share in 2021. Moving to the balance sheet. Our financial foundation remains very strong. As of June 30, 2022, we had $180.5 million of cash, cash equivalents and short-term investments and no debt. Inventory totaled $306.5 million compared to $125.5 million last year and $146.1 million in 2019. Inventory continues to be higher than historical levels as a result of our need to place production orders earlier due to supply chain disruption and longer transit times. We built an average of an additional 40 days of transit time into our production schedules and as a result, have approximately 40 days more supply of inventory than we did pre-COVID. We remain comfortable with the amount and composition of our inventory and our ability to meet our customers' ship windows. We began seeing improvement in the supply chain and a reduction in transit times in the second quarter. And as we return to a more normalized way of operating, we expect inventory levels to come down meaningfully beginning in Q4. Our CapEx in the quarter was $1.7 million. During the quarter, we repurchased $34.6 million of the company's common stock which includes 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 September 26, 2022, to stockholders of record as of the close of business on September 16, 2022. Turning to our outlook. We are reiterating our full-year guidance. We continue to expect revenue to increase 13% to 16% compared to 2021 and diluted EPS in the range of $2.90 to $3.

Operator, Operator

Our first question comes from Camilo Lyon of BTIG.

Camilo Lyon, Analyst

A nice job on the quarter in an increasingly challenging environment. Ed, you talked about it in your prepared remarks, starting to have seen a deceleration in your business in June, that's continued into July. I was wondering if you could give a little bit more color around that comment? Maybe talk about is there a disparate level of activity by your wholesale partners if we think about the higher income-exposed partners or the lower income-exposed partners, where you're seeing the pullback unfold? That's my first question.

Ed Rosenfeld, Chairman and Chief Executive Officer

Sure. The pullback that started in June has been evident across all channels, including our direct-to-consumer channels and to some extent in our wholesale sales. It's important to note that we were performing exceptionally well through May, and although there was a slowdown, I would still describe our performance as quite strong. Looking specifically at our DTC channel, through May, our comp sales were over 70% higher compared to 2019 for both Q1 and the first two months of Q2. However, in June and July, that figure decreased to around 57%. While that indicates a significant slowdown, a 57% comp to 2019 is still impressive, and many brands would aspire to achieve such numbers. Regarding the distinction between high-end and low-end, the slowdown appears to be broadly across the spectrum. Our wholesale customers are also becoming more cautious about their forward orders, especially for Q4. We have noticed a more pronounced pullback from those targeting low-income consumers, but nearly all customers are exhibiting increased caution.

Camilo Lyon, Analyst

I think you mentioned that there is a notable pullback in the order patterns for the fourth quarter. I'm interested in how that is impacting the trends you're observing. Can you share any early insights on demand as we move into the latter half of the year? Also, with the improvements in supply chain lead times, does your current inventory situation enable you to better respond to or meet demand in case the fourth quarter pullback turns out to be an overshoot?

Ed Rosenfeld, Chairman and Chief Executive Officer

In terms of fashion trends, we prefer not to discuss what we are observing too early in the season due to competitive reasons. However, one notable trend is that we are seeing positive early signals for boots and booties, which are performing better now than they did last year. The penetration in our direct-to-consumer channels is significantly higher compared to the same time last year, and we remain optimistic about this category. Regarding your second question, we have seen a significant improvement in transit times recently. For instance, transit times from China, which were around 70 days earlier this year, are now closer to 45 days. While we are not yet at the pre-COVID levels of approximately 30 days, this is still a meaningful improvement. This will enhance our ability to manage demand moving forward. Additionally, during the fall, we source a lot from Mexico, which further supports our capacity to respond to market needs. However, we are still not operating at our usual speed-to-market, and it will likely be into 2023 before we can react in the way we are used to.

Camilo Lyon, Analyst

Did those improvement times in transit reflect or will they be reflected in terms of the cost improvement this year or is that more of a '23 story? And how do we contextualize some of the margin opportunity from the improvement in the supply chain, assuming that it stays at this level or continues to improve from here?

Ed Rosenfeld, Chairman and Chief Executive Officer

If you're inquiring about the freight pressure we've experienced, let me break it down into air and ocean. Air freight rates have decreased compared to a year ago. While they’ve dropped somewhat, they remain significantly higher than pre-COVID levels. On the other hand, ocean freight is up from last year. Although spot rates have declined from their peak, it's still a challenge for us this year, especially since last year we benefited from a contract with rates significantly lower than the current spot rates. Overall, freight appears to be fairly neutral this year after the substantial challenges we faced last year, with potentially a slight challenge again this year. Looking forward, if trends continue, we hope it will turn into a positive factor in 2023.

Operator, Operator

And our next question comes from Jay Sole of UBS.

Jay Sole, Analyst

And I just want to follow-up on the last point. What's your view on how much improvement you will see in the freight cost that you're talking about over time? Hopefully, it will be a tailwind next year but there's going to be a little tailwind. I mean, what's your visibility into freight rates getting back to maybe where they were pre-COVID? That's the first question.

Ed Rosenfeld, Chairman and Chief Executive Officer

I don't think anyone has a definitive answer to that, including myself. If current rates persist, we could see some positive impact next year. However, we are currently facing a headwind of around 250 basis points compared to pre-COVID levels, and rates remain significantly elevated from where they were before the pandemic. If rates stabilize, we might recover a small portion of what we've lost, but it won't be substantial. Naturally, we hope that in the long run, rates will return to their previous levels, but I don’t have any specific insight on if or when that might occur.

Jay Sole, Analyst

And maybe just on the inventory. Is it possible to sort of break down a little bit further your comments on inventory? What kind of inventory you're carrying and sort of like how it's going to play out to the point in 4Q where inventory levels a bit more in line with the sales trend?

Ed Rosenfeld, Chairman and Chief Executive Officer

I believe, as Danielle mentioned in her prepared remarks, that comparing our inventory to Q2 of 2019 is the most appropriate benchmark since last year in Q2, we were significantly understocked and had to expedite a lot of products. When comparing to Q2 of 2019, we currently have nearly 40 days more supply. This increase makes sense as we have added an extra 40 days of transit time into our production schedules. Previously, our assumption for transit from China was 30 days, but we shifted it to 70 days earlier this year. Currently, we are receiving products in about 45 days. As transit times decrease, we will be able to hold less inventory. I expect to see this inventory reduction begin in Q4, provided that supply chain disruptions do not worsen and we continue on this course.

Operator, Operator

Our next question comes from Samuel Poser of WTCO.

Samuel Poser, Analyst

You mentioned that retailers are being a bit more cautious. How does your performance compare to others? Are they being cautious with you because of the volume you ship or potentially because of goods that are not available yet, regardless of how they are performing compared to other categories?

Ed Rosenfeld, Chairman and Chief Executive Officer

We still believe that our performance is on the high end of what they're seeing. And we still think, relative to the competition, we're outperforming. But I think that this slowdown that we talked about in June and July, I think that that's something that's certainly not just us that's seeing that. And I think a lot of retailers are experiencing that and they're taking action as a result to try to make sure their inventories are in line.

Samuel Poser, Analyst

I have two follow-up questions. First, how do June and July compare to this time period in the larger context? Is this typically a busy time, or is it more of an in-between period as we approach back-to-school? Do you think people's attitudes could shift quickly once back-to-school arrives, potentially leading to increased shopping activity?

Ed Rosenfeld, Chairman and Chief Executive Officer

These months are not particularly significant. Yes, if things improve significantly, people will respond accordingly. But for now, we are essentially expecting that conditions will remain the same as they are today.

Samuel Poser, Analyst

And then lastly on Nordstrom Anniversary Sale. How does that look for you?

Ed Rosenfeld, Chairman and Chief Executive Officer

That's good. Yes, we were very pleased with it. We had a very strong increase compared to last year, which was quite good as well. So that was great. What we were particularly pleased about was the strong performance across our various businesses. We did well in Steve Madden, Dolce Vita, Blondo, apparel, and kids. It was really broad-based strength, and that was exciting.

Operator, Operator

And we have a question from Laura Champine of Loop Capital.

Laura Champine, Analyst

Can you talk about growth of your private label versus your branded sales and maybe give a little more color on the growth of the Steve Madden brand specifically?

Ed Rosenfeld, Chairman and Chief Executive Officer

Yes, I'm sorry. I think that you were cutting out a little bit. You asked first about private label versus branded. Is that right?

Laura Champine, Analyst

That's correct.

Ed Rosenfeld, Chairman and Chief Executive Officer

Branded sales are growing at a faster pace than private label, and we anticipate this trend will continue in the second half of the year. Our largest private label customers are mass merchants, and they have publicly indicated their intention to adjust inventory levels, which will impact our private label segment. Meanwhile, Steve Madden has been a significant contributor to our growth, continuing strongly. For instance, in the wholesale segment this quarter, Steve Madden's sales in the U.S. increased by over 40% compared to last year, with even faster growth seen in the international market, particularly in wholesale footwear.

Operator, Operator

And our next question comes from Ms. Susan Anderson of B. Riley Securities.

Susan Anderson, Analyst

Nice job on the quarter. I was wondering if you could talk about ASPs versus units in the quarter. I guess, how much have each driven the sales growth? And also, what you're seeing from an AUC perspective in the back half?

Ed Rosenfeld, Chairman and Chief Executive Officer

ASPs were up meaningfully in wholesale versus last year. In DTC, our AUR was actually down a little bit versus last year. Keep in mind, we had the huge improvement in AUR last year. So we're still well above pre-COVID levels but we did have some pullback.

Susan Anderson, Analyst

And then what about units, I guess, in both channels and then AUC in the back half too?

Ed Rosenfeld, Chairman and Chief Executive Officer

So units were up in both, yes. And going into the back half, I still think there will be a little bit of AUR pressure in DTC.

Susan Anderson, Analyst

And is that, I guess, just maybe kind of want to get your thoughts to a follow-on on just the promotional environment, like how you're feeling in terms of having to promote more or not promote more in the back half?

Ed Rosenfeld, Chairman and Chief Executive Officer

We are seeing promotional activity increase across the industry. Obviously, it was unusually low last year. So we did build that into our plans coming into the year. But certainly, that has come to pass. I think there will be more promotional activity and you'll see some of that from us as well. We think that we can keep it controlled but it will be more than we did in 2021.

Susan Anderson, Analyst

And then just to follow-up on the inventory comments, I was curious, the extra 40 days that you talked about that you have right now, I guess what's the composition of that? Is that for the fall or is that similar product or how should we think about that given historically you've always obviously been more real-time?

Ed Rosenfeld, Chairman and Chief Executive Officer

Yes, it's fall.

Susan Anderson, Analyst

So just fall. And then on the top-line, just to reiterate the guide there, just curious, it sounds like things have pulled in a little bit. There's some macro uncertainty. So just curious, maybe if you can elaborate a little bit more on what's driving the confidence there? I guess, was there a big cushion to begin with there? And so you feel comfortable still with where you're at for the rest of the year?

Ed Rosenfeld, Chairman and Chief Executive Officer

Well, I'll tell you, on May 31, we were trending to be ahead of the top end or above the top end of our annual guidance on the top-line and the bottom line. And so we have made I think sort of a meaningful adjustment based on what we've seen in June and July. But as of today, that still keeps us within our range.

Operator, Operator

And our next question comes from Paul Lejuez of Citi.

Paul Lejuez, Analyst

You mentioned that 2Q came in above your expectations. I was curious if you could share where you saw the biggest upside relative to your plan? And I think you had mentioned that there was a pull forward. Curious about the size of that? And just, obviously, it didn't flow through the beat, makes sense. But I'm curious if you've just taken a more conservative approach on the top-line for the second half? Is there also an aspect of increased promotional assumptions that are built in? And just high level, what are your wholesale retail partners? How are they thinking about accepting price increases now at this point relative to how they were willing to accept those in the beginning of the year?

Ed Rosenfeld, Chairman and Chief Executive Officer

Okay, there were a few questions there. I hope I can remember them. The first question was about the strong performance in Q2 and where the top-line growth came from. Most of that growth was in wholesale, largely due to pulling forward orders that we had originally planned for early Q3 into Q2. We mentioned the improvement in transit times, which allowed us to receive some products earlier and got our accounts to accept some goods in advance. We had anticipated wholesale growth to be in the high-30s, around 39% compared to last year, but we ended up achieving 51.5% growth, with most of that attributed to the pulled forward orders. In terms of DTC, we also surpassed our expectations, which we had forecasted to be around flat, but we actually came in at about 2.2% growth, again driven by strong performance in April and May. What was the next question?

Paul Lejuez, Analyst

Just the assumptions for the back half. I think you'd mentioned as part of an earlier response that you were taking a little bit more of a conservative approach on top-line. But curious if you adjusted your assumptions on promotions and pricing as well and tie that into how willing your retail partners are to accept price increases that you were hoping to pass-through?

Ed Rosenfeld, Chairman and Chief Executive Officer

We have increased our assumptions for promotional activity slightly, although we had already factored in an expectation of increased promotional activity based on previous discussions. We have adjusted that assumption a bit further. I don't believe we are receiving much resistance from our wholesale customers regarding price increases; they appear to be accepting those changes. We will need to carefully watch how the end consumer responds, but so far, I wouldn't say there has been significant pushback from the wholesale customers.

Operator, Operator

And it looks like our next question is coming from Tom Nikic of Wedbush.

Tom Nikic, Analyst

I just want to ask as we kind of work through our models for the back half, can you help us sort of understand kind of the shape in the back half, like how we should think about Q3 versus Q4? Obviously, you have pretty challenging compares in Q4, especially in the wholesale channel. And I think on the last call, you kind of gave some guidance around like wholesale versus DTC for the full year. I was just wondering if anything has changed from a channel-by-channel perspective?

Ed Rosenfeld, Chairman and Chief Executive Officer

Look, we don't give quarterly guidance. I'm not going to get too detailed about Q3 versus Q4. But I think that what I will tell you is on an EPS basis, obviously our guidance implies back half earnings down to last year and the vast majority of that decline we expect to come in Q4. So Q3, I think that we can get close to where we were a year ago but Q4 we expect to be down. In terms of the expectations for revenue growth by channel, that's not too different from where we were before. We've made slight tweaks there but we're still really in wholesale, looking at mid-to-high-teens for the year and DTC mid-to-high-singles.

Operator, Operator

Our next question comes from Steve Marotta of C.L. King & Associates.

Steve Marotta, Analyst

Ed, you talked about June, July comps up 57%. Was there a material differential between June and July? And I also would stipulate of course that they are relatively light volume months. But was the percentage materially different from the two months?

Ed Rosenfeld, Chairman and Chief Executive Officer

Almost exactly the same.

Steve Marotta, Analyst

And also from an AUC standpoint, we're seeing roll-offs in commodities, hearing about factory capacity actually being a little bit more beneficial. Can you talk a little bit about AUC? Have you realized any of the benefits of that? And I know that you've already commented on freight but have you realized any benefits of that expectations in the second half of this year and maybe into '23 as well?

Ed Rosenfeld, Chairman and Chief Executive Officer

We have started to see some, I guess, improvement or as we negotiate with our factories, we think that perhaps some of this softening demand has made them a little hungrier for business and it has made those negotiations go a little bit better. So we think we're going to do a little bit better than we were trending in terms of our factory prices, particularly out of China.

Operator, Operator

Our next question comes from Dana Telsey of the Telsey Advisory Group.

Dana Telsey, Analyst

As you think about DTC with e-comm and stores, what did you see on each? How are they doing either relative to last year or relative to your plan? And then I always know that buy now pay later was impactful for you. Any changes that you're seeing there? And just lastly, the urban stores versus suburban versus outlet stores, any difference in performance on what you're seeing?

Ed Rosenfeld, Chairman and Chief Executive Officer

Yes, like many others, we've noticed a return to physical stores this year, which has affected digital sales. Year-over-year, brick-and-mortar performance exceeded that of digital, which actually declined this quarter. This improvement was responsible for our overall 2% growth. However, when comparing to pre-COVID levels, digital remains significantly higher and continues to be a major growth contributor. Regarding the buy now pay later option, it has become increasingly important for us, and we've observed a slight increase in its usage, possibly due to inflation and consumer sentiments. As for the performance of urban versus suburban locations, in the U.S., New York City performed the best year-over-year, but this is mainly because it was the weakest performer last year. In comparison to pre-COVID figures, New York City still lagged behind 2019 results, being the only region with a negative comparison to that year this quarter, although we were close to breaking even and expect to see positive results soon. Additionally, full-price sales outperformed outlet stores in this quarter.

Dana Telsey, Analyst

And then are you taking price increases in the fall also? Where are you on the cadence of price increases?

Ed Rosenfeld, Chairman and Chief Executive Officer

No, we really pushed that through in spring. So there's nothing incremental in fall in terms of percentage. I mean, they are up obviously over last fall but so is spring.

Operator, Operator

And our next question is a follow-up from Samuel Poser of WTCO.

Samuel Poser, Analyst

I just want to follow-up to the other questions that are just being asked. Ed, could you talk about last year as a non-promotional environment versus historicals? And what kind of difference that was from, let's say, the last 10 years?

Ed Rosenfeld, Chairman and Chief Executive Officer

It was clearly the lowest level of promotional activity for us and for the industry overall that I've seen in my career, which spans more than the last 10 years. So it was meaningful. I can't say exactly how many hundreds of basis points of gross margin it impacted, but it was significant, and we are seeing some normalization.

Samuel Poser, Analyst

So a return to previous levels isn't happening like it was in 2019 or earlier, but it's improving, and your margins are still likely to be better than that.

Ed Rosenfeld, Chairman and Chief Executive Officer

For us, yes. I would say the industry overall though we are seeing a pretty meaningful uptick relative to last year. Will we get back to '19 levels? I'm not sure but I wouldn't rule it out the way things are going.

Operator, Operator

And I see no further questions in the queue. I would now like to turn the conference back over to Ed Rosenfeld for closing remarks.

Ed Rosenfeld, Chairman and Chief Executive Officer

Great. Well, thanks so much for joining us this morning. I hope everybody enjoys the rest of their summer. And we look forward to speaking to you on the third quarter call. Have a great day.

Operator, Operator

This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.