Shares of fashion-footwear retailer and marketer Steve Madden
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
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 |
Footwear giant Nike
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.
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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.