The Shoe Fits at Steve Madden

Shares of fashion-footwear retailer and marketer Steve Madden (Nasdaq: SHOO  ) have more than doubled over the past year, trading at a recent $33.74. After a brief lull in May, the shares are on the rise again, helped by a recent impressive earnings release.

For the quarter, sales grew 28.3% (an acquisition accounted for over 60% of that growth), while earnings more than doubled from the same quarter last year. The strong earnings were attributed to positive same-store sales of 3%, a sizeable jump in gross margins, and reduced operating expenses. Management expects full-year sales growth in excess of 20%, and diluted earnings of $1.90-$2, representing a forward P/E of about 17.

Steve Madden is interesting in that it owns a number of its own stores and brands, with the subsequent freedom to market and license them accordingly. This is in contrast to pure shoe retailers such as Payless Shoesource (NYSE: PSS  ) or Foot Locker (NYSE: FL  ) , which solely sell other firms' shoes. Brown Shoe (NYSE: BWS  ) is similar to Madden, in that it also operates stores and markets footwear.

Generally, product and marketing-based companies generate higher margins than pure retailers, though they carry more fashion risk, since retailers can easily start selling the hottest brand in town. A quick rundown on margins confirms that over the longer term, marketing is the way to go:

5-year Avg. Margin

Gross

Operating

Net

Nike

42.3

12.1

7.9

Steve Madden

38.6

8.5

5.2

Foot Locker

30.3

6.1

3.9

Payless Shoes

30.7

3.6

2

Brown Shoe

39.8

2.4

1.7

Source: Reuters

Footwear giant Nike (NYSE: NKE  ) possesses the highest margins -- thanks in part to its size and market clout -- but it is the premier designer and developer of shoes and accessory products. And while Brown Shoe bucks the trend, Madden has margins in between Nike and the pure retailers of Payless and Foot Locker. Clearly, the added responsibility of renting and operating stores is a less profitable endeavor from a margin standpoint.

The one concern I have with Madden is that its free cash flow generation has been erratic over the past couple of years. It was nearly non-existent in 2003, minimal in 2004, and largely driven in 2005 by a tax benefit caused by stock options and a reduction in a provision for doubtful accounts. Plus, I'm also a contrarian, so I expect its recent stellar results to eventually come back down to earth. Overall I'd prefer a longer track record of solid cash generation.

Nonetheless, Madden is performing well, as consumers appear to be embracing its products. I'm sticking with Nike due to its higher margins, lower earnings multiple, and stellar track record, but Madden is also worth considering for those interested in hopping on board the current fashion trends.

For related footwear Foolishness:

Fool contributor Ryan Fuhrmann is long shares of Nike, but has no financial interest in any other company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to further discuss any companies mentioned.


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