Is Steve Madden Worth the Premium?

Despite a sluggish retail segment, the shoe giant continues to grow sales with a robust wholesale footwear segment. Steve Madden trades at a premium to peers, but maybe that's OK.

Mar 4, 2014 at 2:02PM

Branded and private-label shoemaker Steve Madden (NASDAQ:SHOO) is walking tall on the back of strong recent earnings. Many retailers struggled to move product amid a heavily promotional environment this past holiday season, and the company's retail stores followed suit, but the trend apparently did not trickle back to the manufacturing end. Sales grew comfortably this past quarter, with bottom-line earnings climbing in line. The company's wide array of Madden-related brand shoes, in addition to private-label shoes and accessories, make for one of the industry's larger businesses, and the market values the stock as a premium pick. Should investors take a walk with Steve Madden?

For Steve Madden and its investors, the wholesale footwear segment is keeping the ship afloat while retail sales lag along with the industry. Same-store sales for the company's roughly 120 locations were down nearly 7% due to decreased traffic and a heavily promotional environment.

During the holidays, many retailers took to aggressive marketing and promotion tactics to juice weak sales figures. At this point, it appears that strategy yielded little fruit.

Steve Madden was still able to pull off an 8.7% jump in net sales, entirely due to the company's wholesale footwear. The segment saw a double-digit gain in sales, driven by a strong private-label business and continued attractive growth in one of the company's core brands -- Steve Madden Women. Retail net sales did grow slightly, but the gains were only due to new store openings and largely erased by falling sales at stores open more than one year.

On the bottom line, adjusted EPS rose 8.4% to $0.53 per share, capping off a surprisingly good quarter in a very difficult shopping environment.

Running ahead?
At more than 15 times expected forward earnings, Steve Madden is one of the richest valued shoe stocks, but only slightly. Still, the company only forecasts about 5% to 7% net sales growth and low double-digit growth in adjusted earnings for the full-year 2014.

For comparison, Wolverine World Wide (NYSE:WWW), which is near identical to Steven Madden in terms of market cap but offers a wider range of shoes and brands, trades at under the 15 times forward earnings mark. Wolverine is growing much faster due to its acquisition of hot-selling brands such as Sperry Top Sider and Saucony.

On an EV/EBITDA basis, Wolverine is more expensive at 12.07 times. This highlights the company's substantial debt obligations compared to Steve Madden's relatively pristine balance sheet. Madden's current assets handily cover its total liabilities and its near-$300 million cash and short-term investments pile leaves room for a variety of capital deployment options, including new brand acquisitions.

It appears that investors are paying up for a more risk-averse business with Steve Madden. Growth will continue at a steady pace as the wholesale business thrives and the company adds on more retail locations. It may not match the growth of some M&A-loving competitors, but Steve Madden's well-oiled business could be a stable, buy-and-look-away stock due to its substantial brand power and conservative management team. Risk-averse investors should take note.

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