STEVEN MADDEN, LTD.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

A global designer, source, and marketer of fashion-forward branded and private label footwear, handbags, and accessories.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Steven Madden, Ltd. (SHOO) operates a fashion business specializing in the design, sourcing, and marketing of a variety of footwear, handbags, and accessories for women, men, and children. Their products are sold under several company-owned brands, as well as through private label arrangements.

Revenue Distribution:

  • Wholesale Footwear: Generates the most revenue through sales to department stores, national chains, specialty retailers, and mass merchandisers, including both domestic and international accounts.
  • Wholesale Accessories/Apparel: Provides sales of handbags, and apparel.
  • Direct-to-Consumer: Sells products through the company’s own e-commerce sites and retail stores. These products are offered under various labels, such as Steve Madden, Betsey Johnson, and Dolce Vita.
  • Licensing: Generates revenues through licensing agreements.
  • E-commerce Growth: The ongoing shift towards online shopping continues to drive significant revenue opportunities. To succeed, companies must leverage digital tools and social media to reach customers effectively.
  • Focus on Style & Comfort: Consumers are not only interested in style, but they also want comfort in their footwear. This has led to innovations in athletic-inspired footwear and the focus on fit and comfort.
  • Fast Fashion: Consumers expect new styles and trends to be available constantly, leading to the rise of fast-fashion models, where products are produced quickly to meet changing demands.
  • Global Expansion: Many footwear and accessory companies are growing their market share by expanding their business globally through strategic partnerships and other methods.

Margins

  • Gross Margins: Overall, Steven Madden generates excellent gross margins, averaging around 40%, which is similar to many competitors. However, gross margins in the Direct-to-Consumer segment are substantially higher, averaging around 60% due to the lack of third-party fees.
  • Operating Margin: On the operating level the company is able to consistently create decent margins in a competitive environment, hovering above 10%. However, this number has faced compression in some years due to supply chain pressures or promotional discounts.

Competitive Landscape

  • Intense Competition: The footwear and accessories industry is highly competitive, characterized by numerous global brands as well as smaller, regional companies. Fashion trends change quickly, requiring companies to adapt.
  • Brand and Price Sensitivity: Competition exists in both pricing and branding. Companies need to leverage both to maintain and grow their consumer base.
  • Changing Preferences: In footwear, trends change very quickly, and the tastes of the consumer can vary substantially, making this industry somewhat cyclical.

What Makes Steven Madden Different?

  • Brand Portfolio: A diverse portfolio of brands that allows them to capture different market segments.
  • Agile Supply Chain: Ability to respond quickly to the ever-changing fashion trends and to restock their inventory with speed and efficiency.
  • Omnichannel Presence: A strong mix of retail stores as well as a very competent e-commerce website. This helps them balance profits and keep their customer base engaged across different channels.

Financial Analysis

Revenue

The company generates revenues from many segments and different products across the world. Revenue growth in the last few years has been slightly erratic.

  • 2021: $1.87 billion in revenues.
  • 2022: $2.12 billion in revenues.
  • 2023: $1.87 billion in revenues. The company has been experiencing difficulties maintaining its growth since 2022 due to the various macroeconomic circumstances and lower consumer spending.

Profitability

The company enjoys great profit margins that have been generally consistent in the past years:

  • 2021: gross profit margin of 39.3%. Operating margin of 11.7%
  • 2022: gross profit margin of 40.7%. Operating margin of 12.3%
  • 2023: gross profit margin of 41.4%. Operating margin of 11.8%

While a consistent gross margin suggests good pricing power, it seems that operating expenses have increased over the years, therefore limiting any increase in operating profit margins.

Balance Sheet Health: 4 / 5

  • Liquidity: Steven Madden has a decent amount of cash and short-term investments on hand, with current assets comfortably exceeding current liabilities, indicating good short-term financial health.
  • Solvency: The company maintains a fairly healthy debt-to-equity ratio. Their financial stability is bolstered by the absence of a substantial long-term debt burden.

Overall the company maintains a strong balance sheet, but could further reduce its short-term debt obligations if they intend to generate a higher ROIC.

Moat: 2/5

  • Brand Recognition (Intangible Assets): Steven Madden has a recognizable brand, especially in its core footwear segment. While the brand carries some loyalty, this isn’t strong enough to form a very wide moat. There is strong competition with newer, upcoming brands that could threaten Steven Madden’s brand recognition.
  • Customer Switching Costs: Though a great brand name may foster some repeat business, the switching costs for the consumer are fairly minimal. Consumers can very easily transition from Steve Madden to other brands without substantial friction.
  • Cost Advantages: The company sources some products from different third-party manufacturers and has an extensive global supply chain. However, these costs are fairly easy to replicate as many other firms use similar tactics.
  • Scale: While their global distribution network helps them manage costs, it isn’t unique. Other firms have a global scale too, making it a very moderate moat source.

Risks to the Moat and Business Resilience

  • Changing Fashion Trends: Rapid shifts in fashion trends, can make inventory obsolete, lowering profitability. A company like Steven Madden that needs to keep up with the changing times will be especially vulnerable to this factor.
  • Increased Competition: A highly competitive landscape can lead to price wars, as other brands or new entrants start competing more directly with the company.
  • Supply Chain Disruptions: Reliance on a global supply chain makes the firm vulnerable to disruptions like geopolitical issues, pandemics, logistical issues, and other factors. A slowdown in manufacturing and production will lead to large losses, and even a complete inability to produce goods.
  • Changing Consumer Preferences: An increasing consumer demand for eco-friendly or sustainable products may further complicate operations, and companies that do not adopt eco-friendly procedures may see a dip in revenue as well.
  • Economic Downturns: A recession or reduction in consumer spending would hurt sales, given the non-essential nature of fashion purchases. A reduction in consumer spending directly leads to lower sales volumes and a hit to the bottom line.

The business shows moderate resilience due to its recognizable brand. As such, temporary or short-term headwinds may have some effect on the firm. But the company has to put extra efforts into its brands, and manage costs and operations efficiently, in order to withstand long term headwinds or any major permanent shift in consumer behaviour.

Understandability: 3/5

The business model, while straightforward, involves various complexities in analyzing operations, a multi-channel distribution network, and global operations. Moreover, having many different brands makes it difficult for most investors to fully grasp the inner workings of the business. This, plus the highly volatile and competitive nature of the industry, leads to an average ranking in terms of understandability.

Recent Concerns / Controversies & Management Perspective

  • Global Shipping Costs: The pandemic-induced supply chain disruption has caused a large increase in shipping costs for the company. Management has taken measures to combat this, like cutting costs and using air shipments only when very necessary. However, they do see the effects continuing throughout 2023.
  • Changing Consumer Behaviour: As people become more concerned with sustainability and their environmental impact, their buying habits are also changing, making this an important factor to consider.
  • Inflation: Higher inflation rates may lead to reduced consumer spending in the near future.

Conclusion

Steven Madden, Ltd. presents itself as a fairly good investment prospect. While the business doesn’t have a very wide moat, its brand recognition, and diversified operations put it in a stronger position than many other competitors. Management appears to be competent, but some caution is necessary with volatile earnings and a competitive landscape. As of right now the company has an average moat, is fairly easy to understand, and has a solid balance sheet.