Why Steven Madden Can Get Better in the Long Run

Steven Madden's performance has been terrific so far, and the company could scale new heights due to its strategic moves.

May 9, 2014 at 11:00AM

The footwear industry's growth is fueled by increasing health concerns that are pushing consumers to embrace an active lifestyle. In addition, adoption of the latest fashion trends, the growing spending power of the middle class in the emerging economies, and the spread of the retail culture are also catalysts for the industry. According to Transparency Market Research, the global footwear industry was worth $185.2 billion in 2011. It is expected to grow to $211.5 billion in 2018 .

In the backdrop of these projections, let's take a look at Steven Madden's (NASDAQ:SHOO) underlying business and how it stacks up against the likes of Deckers Outdoor (NYSE:DECK) and Finish Line (NASDAQ:FINL).

Strong results
Steven Madden's fourth quarter of fiscal 2013 was affected by a harsh winter weather, weak retail traffic throughout the industry, and fewer new fashion footwear trends. Despite these headwinds, it delivered an 8.7% year-over-year growth in sales and 9.4%  growth in earnings per share. This illustrates the strength of its business model, which includes multiple brands, product categories, distribution channels, outlet stores, and geographic territories.

The strength of its business model is also reflected in the five-year revenue growth history as shown in the chart. In the fourth quarter, it was the diversification of the distribution channel that fueled solid overall financial performance, despite the disappointing performance of its retail stores.

SHOO Revenue (TTM) Chart

SHOO Revenue (TTM) data by YCharts

During the fiscal year, Madden's wholesale footwear business grew 13.6% year over year, with a 9% increase in branded wholesale footwear and a 23% jump in private label footwear.  The spectacular growth in the private label footwear business was on the back of gains with customers like Target, JustFab, and Wal-Mart.

The way ahead
The international business jumped 20% year over year to reach 9% of consolidated net sales . Going forward, it will continue to increase its international footprint in 2014, including the addition of approximately 50 new free standing stores and 15 to 20 additions by international distributors. It will also expand on its successful concept of outlet stores by opening 50 to 60 new locations by the end of 2016, with 12 of these opening in 2014.

Moreover, Steven Madden's innovative marketing moves that involve collaborations with fashion bloggers to create capsule collections for its brand have yielded good results. It has collaborated with the likes of Leandra Medine and Chiara Ferragni. Going forward, Madden would continue to expand on this and also harness the power of social media through the Kendall & Kylie brand in order to drive top-line growth.

Deckers going for a change
In contrast to Steven Madden's wholesale-centric business model, Deckers is gradually shifting from the wholesale to the omni-channel model. This includes e-commerce, direct-to-consumer, or DTC, and brick-and-mortar stores. For the fourth quarter of fiscal 2013, its e-commerce sales grew a whopping 33.9%  year-over-year on the back of strong demand for the UGG brand globally.

Direct-to-consumer efforts in China and Japan resulted in the Asia Pacific region posting robust growth . Asia Pacific will be an important growth driver going forward as it is expected to account for 30.1% of global footwear revenue in 2018, followed by Europe, as per Transparency Market Research . Going forward, Deckers will be focusing on the DTC channel under its DTC 360 program.

Finish Line on a roll
Finish Line capped of fiscal 2014 with record revenue of about $1.7 billion . This was on the back of comparable store sales, or comps, growth of 4.2% versus the prior fiscal year, and a pipeline of innovative products in running and basketball.

Three years ago, Finish Line set out to transform itself into a leading multi-division omni-channel retailer. Evidently, this initiative has started paying off. The company registered a 15% year over year growth in digital sales, which constituted 14% of consolidated sales during the fiscal year. On the heels of strong top-line growth, Finish Line posted strong earnings per share of $1.66 .

Like Deckers, the omni-channel model has helped Finish Line to deliver positive comps in its brick-and-mortar stores. This is because the notion that stores and digital are separate channels run independently of each other is a thing of the past. Omni-channel helps one drive the other. During the fourth quarter, digital sales grew by a whopping 27% versus the year-ago quarter; around 30% of this was from mobile traffic.

This is where Steven Madden is clearly found lacking, leading to a comps decline in its retail stores. It's no surprise that Mr. Market's response over the last year has favored retailers with a successful omni-channel model as shown in the chart below:

SHOO Chart

SHOO data by YCharts

Bottom line
Steven Madden's revenue has grown at a solid rate over the past five years, but the company needs to bring in an element of the omni-channel model to move to the next level. The company did well despite operating in a difficult environment, which is why it could prove to be a good investment. Moreover, initiatives such as product innovation and expansion in the international markets should help Madden continue its good performance. This makes it a good long-term pick.

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Prabhat Sandheliya has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Jun 12, 2015 at 5:01PM

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