Deteriorating macro conditions and moderating sales in June and July have Steve Madden taking a more cautious approach moving forward.
In a Nutshell: The company began to see consumer demand and sales “pull back” starting in June, chairman and CEO Edward Rosenfeld said on a call with investors Wednesday to discuss second-quarter results. “We were starting with essentially through May phenomenal performance, and there was a slowdown, which… took us to a level that I would still characterize as pretty darn good,” Rosenfeld added. In direct-to-consumer, for example, he said the company was up 70 percent compared to 2019 in May. In June and July, however, that comp fell to 57 percent.
“So, again, meaningful slowdown, but, 57 percent comp to ’19, nothing to be ashamed of,” Rosenfeld said. “There’s a lot of brands that would probably like to be seeing those kind of numbers.”
After an unusually low level of promotions last year, Steve Madden has seen such activity increase across the industry. Though the company had already built an “uptick” in promotions into its plans, Rosenfeld said it has since “taken that up a little bit.”
“I think there will be more promotional activity and you’ll see some of that from us as well,” he added. “We think that we can keep it controlled, but it will be more than we did in 2021.”
Steve Madden has also seen wholesale customers “pull back” and become “incrementally more cautious” about how they’re approaching forward orders, “particularly for Q4,” Rosenfeld said. Though the company has experienced more of a pullback from those that target low-income consumers, “we have seen virtually all the customers get more cautious,” he noted.
Rosenfeld also reported a “pretty meaningful improvement” in transit time. Whereas the company has been experiencing 70-day transit times from China earlier this year, they are now around 45 days. Though well above the 30 days it would plan for pre-Covid, Rosenfeld said it will still “give us a better ability to chase going forward.”
“We’re still not back to our normal speed to market,” he added. “I think it’ll really be into 2023 before we can change to the way that we’re accustomed to.”
Steve Madden ended the quarter with $306.5 million in inventory, up from $125.5 million at the same time a year ago and $146.1 million in 2020. McCoy attributed the high inventory levels to the company’s need to place production orders earlier due to supply chain disruption and longer transit times. With the supply chain improving and transit times decreasing, McCoy said Steve Madden anticipates inventory levels will come down “meaningfully” starting in the fourth quarter.
“We built an average of an additional 40 days of transit time into our production schedule and as a result have approximately 40 days more supply of inventory than we did pre-Covid,” McCoy said.
Rosenfeld reported mixed developments in transportation costs. In air freight, rates are down from where they were a year ago, but remain “dramatically” higher compared with pre-Covid levels. Ocean freight fees, meanwhile, are higher year over year.
“Spot rates have come down off their peak, but it’s still a headwind for us this year because last year, we were benefiting from a contract where we had locked-in rates well below the spot,” Rosenfeld said. “So, all in all, when you put that together, freight’s pretty neutral this year after the big headwind that we had last year, maybe a slight headwind again this year, and then hopefully, if things continue, it’ll become a tailwind in 2023.”
Though Steve Madden made a “meaningful adjustment” in its full-year expectations based on what it has seen in June and July, Rosenfeld said, the company, which was trending ahead through May, ultimately reiterated the guidance it provided three months ago— revenue growth of 13 percent to 16 percent and adjusted diluted earnings per share of between $2.90 and $3.00. The move stands in contrast to companies like Adidas and Walmart, which have preemptively lowered their outlooks in recent days ahead of their upcoming earnings reports.
Net Sales: Company-wide, revenue increased 34.5 percent in the second quarter from $397.9 million a year ago to $535 million.
Wholesale revenue grew 51.5 percent year over year to $397.1 million amid a 47.1 percent increase in wholesale footwear and a 65.2 percent bump in wholesale accessories/apparel. Steve Madden was the largest contributor to footwear growth, Rosenfeld said, with “strong gains” across men’s, women’s and kids, followed by Dolce Vita, which grew more than 150 percent year over year.
In April, Rosenfeld had predicted that wholesale growth would decelerate in the second quarter to the “high 30s” after wholesale customers chose to pull forward deliveries into the first quarter. McCoy noted that Steve Madden again benefitted from deliveries pulling forward—in this case from the third to the second quarter.
Gross profit as a percentage of wholesale revenue increased to 31.6 percent from 30.6 percent in the second quarter of last year.
Direct-to-consumer revenue inched up 2.2 percent to $135.5 million. Three months ago, Rosenfeld had said “we would be happy to get to flat” versus last year’s revenue totals. Gross profit as a percentage of DTC revenue increased to 66.4 percent, compared to 65.4 percent a year ago.
International revenue increased 82 percent versus the second quarter of last year, driven by “particularly strong” performance in Canada, Mexico and Europe, Rosenfeld said. Overall international represented 15 of Steve Madden’s revenue, up from 11 percent a year ago and a new quarterly high.
Net Earnings: Gross profit as a percentage of revenue fell from 42.7 percent in the second quarter of 2021 to 40.7 percent this year. Steve Madden attributed the decline to a shift in revenue mix from its higher-margin DTC business to its lower-margin wholesale business. Operating expenses as a percentage of business dropped to 28.5 percent, or 28.2 percent on an adjusted basis, compared to 30.6 percent, or 29.9 percent on an adjusted basis, last year.
Income from operations totaled $65.2 million, or 12.2 percent of revenue, versus $47.7 million, or 12 percent of revenue, in Q2 2021. Adjusted income from operations was $67 million, or 12.5 percent of revenue, compared to $51 million, or 12.8 percent of revenue.
Net income attributable to Steve Madden was $48.5 million, or 62 cents per diluted share, up from $36.9 million, or 45 cents per diluted share, in the year-ago period. Adjusted net income totaled $49.8 million, or 63 cents per diluted share, versus $39.7 million or 48 cents per diluted share, a year ago.
CEO’s Take: “Overall, we were very pleased with our performance in the second quarter,” Rosenfeld said. “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.”