Earnings Call Transcript - SHOO Q1 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to the Steven Madden First Quarter 2024 Results Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Danielle McCoy, VP of Corporate Development and Investor Relations. Please go ahead.

Danielle McCoy, VP of Corporate Development and Investor Relations

Thanks, Didi, and good morning, everyone. Thank you for joining our first quarter 2024 earnings call and webcast. Before we begin, I'd like to remind you that our remarks made 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.

Edward Rosenfeld, Chairman and CEO

All right. Thank you, Danielle, and good morning, everyone, and thank you for joining us to review Steve Madden's first quarter 2024 results. So we got off to a strong start to 2024 with first quarter revenue increasing 19% and diluted EPS rising 30% compared to the same period in 2023. And these results are the direct result of our team's disciplined execution of our strategy for long-term growth. The foundation of that strategy is creating deeper connections with our consumers through the combination of outstanding products and effective marketing, thereby enabling our success with our four key business drivers. Our first key driver is expanding our business in international markets. Revenue in international grew 15% in the first quarter compared to the same period in the prior year, including strong gains in each of our three international regions, EMEA, the Americas ex U.S. and APAC. The EMEA region remains the biggest driver of growth. We continue to buck the trend in Europe and deliver solid growth there despite the challenging operating environment. Our Middle East JV has strong momentum and is ramping quickly. And our JV in South Africa continues to see explosive growth, driven by the exceptional brand heat we have in that market. Our second key business driver is growing our business outside of footwear. In the first quarter, overall accessories and apparel revenue rose 73%, or 28% excluding the newly acquired Almost Famous business. Our Steve Madden handbag business continues to be outstanding. Revenue there increased more than 45% compared to the same period in the prior year for the third consecutive quarter. Steve Madden apparel also saw strong growth, increasing 23% in the quarter, driven by additional doors and expanded assortments within key wholesale accounts. And Almost Famous contributed $41 million in revenue in its first full quarter under our ownership. A critical part of our strategy with this acquisition is to utilize the Almost Famous platform to introduce and build a Madden Girl apparel business. We launched Madden Girl apparel at Macy's in the first quarter, and initial sell-through performance has been very strong. Our third key business driver is expanding our direct-to-consumer business, led by digital. DTC revenue grew 13% compared to the first quarter of 2023, including double-digit percentage gains in both digital and brick-and-mortar channels. We achieved these top-line results while also meaningfully expanding DTC gross margin as a combination of on-trend merchandise assortments and effective inventory management enabled us to increase full-price selling and reduce discounting. And finally, our fourth key business driver is strengthening our core U.S. wholesale footwear business. This business was under pressure in 2023 as many of our largest wholesale customers entered last year with too much inventory and reduced orders significantly in order to right size inventory levels. Fortunately, those wholesale customers have much healthier overall inventory levels this year. And as expected, we were able to return to year-over-year growth in the U.S. wholesale footwear business in the first quarter with revenue increasing 5% compared to Q1 of 2023. While our wholesale customers for branded products remain cautious overall, our private label business, which is primarily done in the mass channel, has improved significantly and experienced strong growth in the quarter. So overall, we delivered tangible results across each of these areas, which not only drove strong top-line performance but also enabled us to expand our consolidated operating margin for the quarter to 11%, up from 10.3% in the first quarter of 2023 despite a headwind from the inclusion of Almost Famous. Looking ahead, our first quarter performance and the success we are seeing across each of our key strategic initiatives gives us confidence that we are not only on track to meet our financial goals for 2024, but that we are well positioned to continue to drive sustainable top and bottom-line growth for years to come. And now I'll turn it over to Zine to review our first quarter financial results in more detail and provide our outlook for 2024.

Zine Mazouzi, CFO

Thanks, Ed, and good morning, everyone. In the first quarter, our consolidated revenue was $552.4 million, a 19.1% increase compared to the first quarter of 2023. Excluding Almost Famous, consolidated revenue grew 10.3% compared to the same period in the prior year. Our wholesale revenue was $438.2 million, up 21% to the first quarter in the prior year, or 9.7% excluding Almost Famous. Wholesale footwear revenue was $295.7 million, a 4.7% increase from the comparable period in 2023, driven by strong growth in the private label business. Wholesale accessories and apparel revenue was $142.6 million, up 78.6% to the first quarter in the prior year, or 27.4% excluding Almost Famous. Our Steve Madden handbag business was the primary growth driver. And Steve Madden apparel also saw a strong gain. In our direct-to-consumer segment, revenue was $112.3 million, a 12.8% increase compared to the first quarter of 2023. Brick-and-mortar revenue grew 15% or 8% on a comp store basis. And owned and operated e-commerce revenue rose 11%. We ended the quarter with 253 company-operated brick-and-mortar retail stores, including 69 outlets as well as 5 e-commerce websites and 25 company-operated concessions in international markets. Turning to our licensing segment. Our licensing royalty income was $1.8 million in the quarter compared to $2.1 million in the first quarter of 2023. Consolidated gross margin was 40.7% in the quarter versus 42.1% in the comparable period in 2023. The inclusion of Almost Famous negatively impacted consolidated gross margin by approximately 120 basis points. Wholesale gross margin was 35.1% compared to 37% in the first quarter of 2023, driven primarily by the impact of Almost Famous and a mix shift in wholesale footwear to the private label business. Direct-to-consumer gross margin was 61.9%, up 270 basis points from the comparable period in 2023, driven by a reduction in promotional activity. Operating expenses as a percent of revenue were 29.7%, down from 31.8% in the first quarter of 2023. Operating income for the quarter was $61 million or 11% of revenue, up from $47.7 million or 10.3% of revenue in the comparable period in the prior year. The effective tax rate for the quarter was 23.5% compared to 24.2% in the first quarter of 2023. Finally, net income attributable to Steven Madden, Ltd. for the quarter was $47 million or $0.65 per diluted share compared to $37.6 million or $0.50 per diluted share in the first quarter of 2023. Moving to the balance sheet. Our financial foundation remains strong. As of March 31, 2024, we had $143.1 million of cash, cash equivalents and short-term investments and no debt. Inventory at the end of the quarter was $202 million, up 12.2% to the prior year or 7.2% excluding Almost Famous. Our CapEx in the first quarter was $4 million. During the first quarter, the company spent $37.3 million on repurchases of its common stock, including shares acquired through the net settlement of employee stock awards. At the end of the quarter, there was approximately $143 million remaining on the share repurchase authorization. The company's Board of Directors approved a quarterly cash dividend of $0.21 per share. The dividend will be payable on June 21, 2024, to stockholders of record as of the close of business on June 10, 2024. Turning to our outlook. We are maintaining our annual guidance. We continue to expect revenue for 2024 to increase 11% to 13% compared to 2023, and we continue to have diluted EPS to be in the range of $2.55 to $2.65.

Operator, Operator

And our first question comes from Paul Lejuez of Citi.

Paul Lejuez, Analyst

A couple of questions. Curious if you can talk about what was better than planned relative to your expectations during the quarter, if anything? And then also would love to hear about the comp drivers within the DTC business, from the traffic, there's ticket, AUR perspective, what you're seeing? And anything you could share about the start to 2Q relative to 1Q?

Edward Rosenfeld, Chairman and CEO

In the first quarter, we performed slightly better than our internal forecast. However, I believe the analysts had a different perspective for the year. While they aligned with our full-year expectations, their quarterly models varied. Our internal forecast for the first quarter was set higher than the analysts' forecasts. We surpassed our own expectations, but not by as much as we exceeded the analysts'. Overall, we were slightly ahead in revenue across wholesale footwear, wholesale accessories, and DTC, and we achieved a modest improvement in gross margin on a consolidated basis. Regarding the DTC comp drivers, traffic was still weak and negative, while conversion showed minor improvement. We saw positive results in average unit retail and units per transaction, leading to a rise in average transaction value. As for the performance in April to date within DTC, it has been softer compared to Q1, which was anticipated due to the shift in Easter. Nonetheless, we maintain confidence in our projections for DTC, expecting to achieve high single-digit revenue growth for the year. We initially planned for this slight slowdown after our 13% growth in Q1.

Operator, Operator

And our next question comes from Sam Poser of Williams Trading.

Samuel Poser, Analyst

First of all, Ed and Zine, you were one minute off the last time, 12 minutes instead of 11 on the prepared remarks, still very good, better than everybody else. Anyway, how was the branded wholesale business? Can you talk about the caution from those retailers and what's going on there? I might have a follow-up based on your response and one other thing to discuss.

Edward Rosenfeld, Chairman and CEO

Yes. The branded wholesale business remains, at least on the footwear side, a bit challenging. We continue to see a pretty cautious approach from the big retailers. As you know, many of our largest customers in the branded wholesale footwear business are still comping negatively and having some challenges in their own business. And I think that we're feeling the impact of that. Many of them, as we've been talking to them about their initial fall plans, I think it looks like the sentiment there is still pretty cautious. The fashion boot business was not great last year. I think people are planning that part of the business conservatively. So overall, while certainly better than last year, we're still seeing quite a bit of caution on that front.

Samuel Poser, Analyst

Was that branded footwear business up in the quarter?

Edward Rosenfeld, Chairman and CEO

No, no, sorry, I should put that; it was down low singles in the quarter.

Samuel Poser, Analyst

Is there a difference between those retailers that place orders with you and those involved in your vendor-managed program?

Edward Rosenfeld, Chairman and CEO

Look, we always like to have as much input as possible with our wholesale customers about what they're bringing in. And we partner with everybody as closely as we can, and we'll continue to do that.

Samuel Poser, Analyst

Did your vendor-managed partner retailers outperform the others?

Edward Rosenfeld, Chairman and CEO

Sam, there's not a lot of them. I'm not going to start telling you about how we're dealing with individual customers.

Samuel Poser, Analyst

All right. How should we approach the outlook for Almost Famous? From my perspective, it seems the estimates have been off. Can you provide some insight into the size of this business and its trajectory? You generated $40 million this quarter. How should we interpret that performance on a quarterly basis? We want to ensure everyone is aligned moving forward.

Edward Rosenfeld, Chairman and CEO

Yes, I think this is approximately the quarterly revenue they should achieve throughout the quarter. It will fluctuate a bit, and we expect to exceed this amount in future quarters. However, there isn't significant seasonality to consider; it should remain in the low to mid-40s each quarter.

Zine Mazouzi, CFO

And Sam, that applies to pretty much the expenses as well. The flow is pretty similar by quarter.

Operator, Operator

And our next question comes from Jay Sole of UBS.

Jay Sole, Analyst

Ed, you mentioned one of the company's key strategies is to expand DTC, led by digital. I'm sort of curious about the stores aspect of DTC. How are you feeling about the stores that the company has added this year? And is there a plan to work in some of the Almost apparel for the Steve Madden brand into the stores? Can you just maybe talk about how you're thinking about that opportunity? That would be helpful.

Edward Rosenfeld, Chairman and CEO

We're happy with what we've seen from direct-to-consumer so far this year, showing significant growth compared to Q1 of 2023, with an overall DTC growth of 13%. Regarding our brick-and-mortar stores, we achieved an 8% increase in same-store sales in Q1, which we find encouraging. We're also expanding our store locations this year, mostly in international markets, where we're experiencing better returns on invested capital compared to our U.S. stores. As for apparel in our stores, it's currently quite limited since most aren't designed for it and lack dressing rooms. However, in certain international markets, we're starting to introduce more apparel and we have already seen some promising initial results.

Jay Sole, Analyst

Got it. And if I can just ask one more, just about Almost Famous on the margins. If we just think about big-picture trajectory over this year to next year, how much opportunity do you see today to improve the margins in the Almost Famous business?

Edward Rosenfeld, Chairman and CEO

Yes, that's a good question. When we acquired the business, it had approximately a 7% EBIT margin, and our objective is to increase that to the high single digits over time. I believe there is potential to reach the low double digits. We're already observing some improvements. This year, if we compare it to the 7% they were achieving before our acquisition, we're estimating about 8% now, which means we've gained around 100 basis points this year. However, in our reported financials, it still appears closer to 7% due to the amortization of intangibles related to the acquisition. But on an organic basis, we are indeed seeing a 100 basis point increase. I am optimistic that we could achieve about 100 basis points annually for the next three years.

Operator, Operator

And our next question comes from Janine Stichter of BTIG.

Janine Hoffman Stichter, Analyst

So I wanted to ask about the AUR increases. You mentioned that being a driver of the retail business. How much of that was price increases you took on certain items versus just consumers gravitating towards higher-priced items? And then maybe more broadly, if you could just comment on where we are in kind of the fashion cycle, how you feel about the trends that are out there right now and how well they play into your business?

Edward Rosenfeld, Chairman and CEO

In terms of the AUR, it's not primarily due to price increases on comparable items. There are two factors at play. First, we have a favorable mix based on the products customers are purchasing this year compared to last year. Second, our reduction in promotional activities in DTC channels is also contributing to the AUR increase. Regarding the fashion cycle and trend environment, it has certainly improved since last year, and there are new trends emerging that we're excited about. This spring, we've had significant success with sandals, particularly high footbeds or platforms, as well as slides, slingbacks, flats, and kitten heels. We are also seeing great results with materials and ornamentation such as raffia, pearls, buckle treatments, flowers, and mesh. There's a lot happening in this area that we can leverage, and our design team is executing effectively, which gives me confidence.

Janine Hoffman Stichter, Analyst

Great. And then maybe just one more, when we think about the 11% operating margin for the year, can you just remind us what's happening with marketing expense in there? How is it trending as a percent of sales?

Zine Mazouzi, CFO

Marketing expenses continue to increase as we invest in marketing both in the U.S. and globally, which is rising in the high single digits.

Operator, Operator

And our next question comes from Aubrey Tianello of BNP Paribas.

Aubrey Tianello, Analyst

Ed, I'd love to get your take on what you're seeing from the consumer right now. Last couple of quarters, you talked about the consumer being more price-conscious, more responsive to promos, outlets outperforming full-price stores. Just curious how you're seeing consumer behavior has evolved so far this year.

Edward Rosenfeld, Chairman and CEO

Yes, that's a good question. The situation is largely unchanged. Overall consumer demand for discretionary and fashion goods is not very strong. It seems to be reasonably measured when we speak with our key wholesale customers and other industry participants. We observe that consumers continue to be sensitive to prices. Our outlet business in the U.S. has significantly outperformed full-price stores in terms of comparable sales, showing a difference of about 1,000 basis points or more, which we have also noticed in the first quarter.

Aubrey Tianello, Analyst

Got it. And then if I could just follow up on the operating margin, 11% in 1Q is in line with your 2024 guidance. I know it's been a while since we've had a normal year. But historically, I think 1Q operating margins are usually a little bit lower than the full year. Just curious if there's anything abnormal to call out in terms of timing on SG&A investments or just how we should think about the phasing of EBIT margins this year.

Zine Mazouzi, CFO

Yes, I think if you recall last year, we had some timing of expenses on the SG&A side. And we think we're up about 10% versus 2022 in Q1. And that's kind of causing most of that shift.

Edward Rosenfeld, Chairman and CEO

Yes. And I think just to follow up on that, yes, I still think that, that 11% is the right way to think about the full year.

Operator, Operator

And our next question comes from Corey Tarlowe of Jefferies.

Corey Tarlowe, Analyst

I was just wondering if you could perhaps dimensionalize how much the Easter shift impacted your business in the quarter. And then you also made some pretty encouraging commentary about your private label business in mass. So I was wondering if you could provide a little bit more detail about what you're seeing there.

Edward Rosenfeld, Chairman and CEO

Sure. In terms of the Easter shift, it really wasn't that meaningful for us. We did also move a friends and family promotion back a couple of weeks, which offset part of that Easter shift for us. So it wasn't a big needle mover in the quarter. And then in terms of the private label footwear business, yes, we're pretty pleased about what we're seeing there. Again, that's almost all done in the mass channel. And as we've talked about on previous calls, that was the channel where the big customers identified they had too much inventory in discretionary categories earliest and pulled back the soonest. And so we felt the pain there first. But we're also feeling the recovery there first. And we've seen a nice bounce-back in that business. And our private label footwear business is up about well north of 30% in Q1. And we expect to see another very strong quarter in that business in Q2.

Corey Tarlowe, Analyst

That's great. And then just one quick follow-up to an earlier question, I think you mentioned that your Almost Famous margins have increased about 100 basis points. What's driving that? I'm curious to what the reasoning behind that is.

Edward Rosenfeld, Chairman and CEO

Yes. Most of that is coming in the form of gross margin. One of the strategies for this deal was to utilize Almost Famous as the platform for Madden Girl apparel and Madden NYC apparel. As we develop these businesses, which are linked to a brand exceeding $1 billion with pricing power, we see opportunities for margin improvement, and we are beginning to experience that.

Operator, Operator

And our next question comes from Laura Champine of Loop.

Laura Champine, Analyst

Your handbag business is just showing great growth. And I'm wondering if that growth is weighted significantly to any given channel or if it's more broad-based?

Edward Rosenfeld, Chairman and CEO

We are seeing strength across all channels for Steve Madden handbags, which we find quite encouraging. This is an area where we have invested significantly and focused our efforts over the past several years, and we are pleased to see those investments paying off. It all begins with our product. We have put a lot of effort into creating a product lineup for Steve Madden handbags that competes with our footwear range, consistently delivering trendy products with great style and quality at a strong price/value ratio that resonates with customers. This success is evident across channels. The U.S. wholesale channel is performing well, and we are also experiencing growth in direct-to-consumer, which has been a major driver of our international expansion. Over the last five years, our business has seen a compounded annual revenue growth rate in the high teens, indicating that our success here is part of a long-term growth journey rather than a recent development.

Laura Champine, Analyst

Are there any points of distribution where you really are underpenetrated in handbags, where you can use the success you've had in same doors to open new doors for handbags? Or do you think that you're fully penetrated at retail?

Edward Rosenfeld, Chairman and CEO

I believe there is a significant opportunity for growth internationally, and we are experiencing strong momentum in that area. There are numerous possibilities for new distribution points. In the U.S., we are already present in most of the channels we aim to be in, but we can still expand within those channels. However, our primary focus in the U.S. will be on enhancing our direct-to-consumer channels.

Operator, Operator

And our next question comes from Dana Telsey of Telsey Advisory Group.

Dana Telsey, Analyst

As you think about the wholesale channel returning to growth, how did off-price do? And are we continuing to see the strength in the off-price retailers? Any change there in that particular channel? And then on the stores, you had mentioned last time beginning a remodel process. Where are you on that? Is it beginning? And lastly, Ed, do you see acquisitions out there? What would you be looking for? What would be attractive?

Edward Rosenfeld, Chairman and CEO

Great. Thanks, Dana. All right. So in terms of the off-price, yes, that remains, obviously, at least in the U.S., maybe the healthiest channel. Certainly, if you look at the comp store sales from those big retailers, they're exceeding what you're seeing from a lot of the other channels. And yes, the demand there for our products remains and our brands remains very strong. So that is definitely an area where we are seeing growth. Obviously, I just want to always remind you that we also make sure that we keep the distribution balance and don't get overweighted in that channel as well. In terms of remodels, yes, that is in progress. And we're going to be continuing to remodel stores throughout the year and pretty excited for you all to see what we've got coming, especially in some of our flagship locations in places like New York City. And then in terms of acquisitions, look, we're always going to keep our eyes and ears open and we'll be opportunistic. I don't know that there's a lot of color I can tell you exactly what we would do. But if we find another brand to add to the portfolio that's complementary to what we do and where we can add value and make a difference, that's certainly something we would look at.

Dana Telsey, Analyst

Got it. And then just one follow-up on international. Where are you seeing the strength there? Do you see the type of increase you had, the 40s, increasing going forward? Is it wholesale? Is it DTC? And any particular reasons that you'd call out with accelerated growth?

Edward Rosenfeld, Chairman and CEO

Yes. In the first quarter, we experienced balanced growth across our major international markets, specifically EMEA, the Americas excluding the U.S., and APAC. EMEA has been the largest contributor to this growth. Despite the challenging business conditions in Europe, we are still seeing growth in that region. We are enthusiastic about our new joint venture in the Middle East and are gaining good traction there, along with exciting growth plans for that market. We also highlight South Africa, which, while not a large market, is experiencing remarkable growth. This adds positively to our overall performance. Regarding wholesale and direct-to-consumer (DTC) channels, we are expanding in both, but we are more penetrated in DTC internationally compared to the U.S. We anticipate that a significant portion of our growth will come from DTC channels in the years ahead.

Operator, Operator

And for our next question, we have a follow-up from Sam Poser of Williams Trading.

Samuel Poser, Analyst

I want to follow up on your questions regarding international operations and private label competition in wholesale and DTC. It seems that your DTC business is demonstrating the strength of the Steve Madden footwear brand. I assume your outlet business isn't simply discounting, given the margins. However, on the wholesale side, retailers don't seem to be investing at the same level as your DTC business in terms of product sales. So my question is, how do you plan to increase international and DTC penetration enough to compensate for the major wholesale customers not meeting expectations?

Edward Rosenfeld, Chairman and CEO

We are making significant progress in expanding the importance and size of our various businesses. In 2019, international sales represented about 11% of our total business, and it has now grown to around 19% or 20%. Similarly, direct-to-consumer sales were about 18% in 2019, and they now account for approximately a quarter of our business, or possibly a bit more. We are working on increasing our market share, which requires time and a step-by-step approach. We believe that both of these sectors will continue to grow in importance and penetration over time.

Samuel Poser, Analyst

Does it require more marketing? Does it mean possibly launching a larger campaign to attract people to the brand and enhancing some fresh and appealing advertising, which you've successfully done in the past?

Edward Rosenfeld, Chairman and CEO

We have significantly increased our marketing investment over the last several years. A few years ago, we were spending less than 2% of our revenue on marketing, and that percentage has steadily risen to around 4.5% of revenue now. We believe this trend will continue upward. Whether that means launching larger, more impactful marketing campaigns or reallocating our resources is something we are continually evaluating. However, we are dedicated to investing in our brands and enhancing our marketing efforts.

Operator, Operator

I'm showing no further questions at this time. I'd like to turn it back to Ed Rosenfeld for closing remarks.

Edward Rosenfeld, Chairman and CEO

Great. Well, thanks so much for joining us today. Have a great day, and we look forward to speaking with you on the second quarter call.

Operator, Operator

This concludes today's conference call. Thank you for participating, and you may now disconnect.