Q1 2023 Steven Madden Ltd Earnings Call
Good morning, everyone and welcome to the Q1 2023, Steve Madden Ltd earnings Conference call.
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At this time I'd like to turn the floor over to Danielle Mccoy VP of corporate development and Investor Relations. Please go ahead.
Thanks, Jamie and good morning, everyone. Thank you for joining our first quarter 2023 earnings call and webcast.
Before we begin I'd like to remind you that our remarks that follow including answers to your questions.
The statements that we believe to be forward looking statements within the meaning of the private Securities Litigation Reform Act.
These forward looking statements are subject to risks that could cause actual results to materially differ from those expressed or implied by such forward looking statements.
These risks include among others matters that we have described in our press release issued earlier today and in filings, we make with the SEC. We disclaim any obligation to update these forward looking statements, which may not be updated until our next quarterly earnings conference call if at all.
The financial results discussed on today's call are on an adjusted basis, unless otherwise noted a reconciliation to the most directly comparable GAAP financial measure and other associated disclosures, Argentina in our earnings release.
Joining me on the call today is Ed Rosenfeld, Chairman and Chief Executive Officer, and Zane, Mr Hussain Chief Financial Officer.
With that I'll turn the call over to Uh Huh.
Thanks, Danielle and good morning, everyone and thank you for joining us to review, Steve Madden first quarter 2023 results.
When we spoke to you on the last earnings call, we talked about the challenging setup, we faced in the first quarter, including a choppy retail environment as consumers were pulling back on discretionary spending.
Insert if order patterns from our wholesale customers as they were prioritizing inventory control and extremely tough comparisons with the prior year as we were lapping a quarter, where revenue was up 35% and diluted EPS was up 121% to pre Covid 2019.
In light of the difficult backdrop, we were pleased to deliver Q1 revenue and earnings slightly ahead of expectations. We also.
<unk> reduced our inventory levels, while driving strong gross margin performance. Despite the promotional promotional retail landscape demonstrating the benefits of our business model, including our industry, leading inventory turns in challenging operating environments.
As we move forward, we remain focused on executing our strategic initiatives.
Most importantly, we are leaning into our proven model, which combines our talented design team led by Steve test and react strategy and speed to market capability to create trend right products and bring them to market quickly.
This agile model enables us to run lean on inventory and chase goods in season when needed a critical advantage in periods of economic uncertainty and when wholesale customers are cautious about placing significant orders upfront.
We also continued to support our brands and products with targeted marketing investments in order to drive closer connections with our consumers and increased brand relevance across the globe.
These remain our foundational initiatives and the enablers of our four key long term business drivers.
Diving, our direct to consumer business led by digital expanding in categories outside of footwear, handbags, and apparel growing in international markets and strengthening our core U S wholesale footwear business.
So turning to our performance by business in Q1.
In wholesale revenue was under pressure due to the combination of conservative initial spring orders from our wholesale customers and very tough comparisons with the prior year.
In the first quarter of 2022, we had our largest ever quarter in wholesale shipping with revenue up 29% versus pre Covid two night 2019.
Against that record performance this year's first quarter wholesale revenues declined 19%.
On the positive side, we did see a number of wholesale customers pull forward orders on key items and trends from the second quarter into March which enabled us to come in ahead of our expectations for wholesale revenue for Q1.
Our direct to consumer business on the other hand came in below expectations for the quarter <unk>.
Consistent with what's been reported by others in the industry, we saw sales trends decelerate in the latter part of the quarter, particularly in March.
DTC revenue was down 8% in Q1, and so far in Q2, we have seen a similar year over year decline.
Across both wholesale and DTC, our international business was a bright spot.
International revenue increased 13% in the quarter and accounted for over 18% of consolidated revenue for the third consecutive quarter.
Looking ahead, we expect the operating environment to remain turbulent in the near term.
That said, we have a proven ability to navigate difficult market conditions and a track record of taking share during challenging economic periods.
And looking out further 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.
Now I will turn it over to Zane to review, our first quarter financial results in more detail and provide our outlook for 2023.
Thanks, Ed and good morning, everyone.
Consolidated revenue in the first quarter was $463 8 million, a 17, 1% decrease compared to 2022.
Our wholesale revenue was $362 1 million down 19, 3% compared to the prior year.
Wholesale footwear revenue was $282 3 million and 18, 6% decrease from 2022 the.
The branded business declined 16%, while private label, which is primarily done in the mass channel decreased 29% as our large private label customers continue to work to reduce overall inventory level in our categories.
Wholesale accessories, and apparel revenue was $79 8 million down 22% to last year.
Branded business declined 14%.
Steve Madden handbags was a bright spot with a modest year over year increase driven by strong growth in international markets.
Footwear private label was significantly softer decreasing 39%.
And our direct to consumer segment revenue was $99 6 million.
And eight 1% decrease compared to 2022.
We experienced declines in both brick and mortar and e-commerce channels.
We ended the quarter with 235 brick and mortar retail stores, including 68 outlets as well as five ecommerce web sites and 21 company operated concessions in international markets.
Turning to our licensing segment, our licensing royalty income was $2 1 million in the quarter compared to $1 6 million last year.
As we discussed previously the company no longer operate under the buy an agency model and as a result, no longer reports under the first car segment.
In last year's first quarter, we generated approximately $800000 in revenue in the first car segment.
Consolidated gross margin was 42, 1% in the quarter expanded 140 basis points from the prior year.
Gross margin was 37% and.
180 basis points improvement compared to last year, driven by a strong increase in wholesale accessories and apparel.
Direct to consumer gross margin was 59, 2% compared to 62, 3% last year.
Driven by an increase in promotional activity.
Operating expenses in the first quarter were $147 4 million or 31, 8% of revenue compared to $133 5 million or 23, 8% of revenue in the prior year.
Looking ahead, we expect year over year operating expense growth for the balance of the year to moderate to roughly 3% as a result of easy comparisons combined with cost control initiatives.
Operating income for the quarter totaled $47 $7 million or 10, 3% of revenue down from $94 4 million or 16, 9% of revenue of last year.
Our effective tax rate for the quarter was 24, 2% compared to 22, 3% in 2022.
Finally, net income attributable to Steve Madden Ltd for the quarter was $37 6 million or <unk> 50 per diluted share down from $73 4 million or <unk> 92 cents per diluted share in 2022.
Moving to the balance sheet, our financial Foundation remains very strong as of March 31, 2023, we had $223 7 million of cash cash equivalents and short term investments and no debt.
Inventory ended at 170, $179 9 million compared to $233 4 million last year.
Two 9% decline.
Our capex in the quarter was $3 $8 million.
During the quarter, we repurchased $38 5 million of the company's common stock, which includes shares acquired through the net settlement of employee stock Awards.
Companys Board of directors approved an increase of $189 9 million and the share repurchase authorization.
And the total to $250 million.
The board also approved a quarterly cash dividend of 21 cents per share the.
The dividend will be payable on June 23, 2022, eight to stockholders of record as at the close of business on June 12 2023.
Turning to our outlook, we are reiterating our revenue and earnings per share guidance. We continue to expect revenue for 2023 to decrease six and a half two 8% compared to 2022.
And we continue to expect diluted EPS to be in the range of $2 40 to $2 50.
While our first half outlook is in line with our previous expectations overall, the pull forward of wholesale orders into Q1 resulted in a shift of revenue and earnings from Q2 to Q1.
As such we expect Q2 revenue and EPS to be modestly below Q1 amount.
Now I would like to turn the call over to the operator for questions Jamie.
Ladies and gentlemen, we will now begin the question and answer session.
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We will pause momentarily to assemble the roster.
Okay.
Our first question today comes from Aubrey.
Hello from BNP Paribas. Please go ahead with your question.
Good morning, Thanks for taking the questions.
Good morning.
Wanted to start on the the revenue guidance for 2043 I appreciate that you reiterated the overall guide.
But within that is there any change to what's embedded for wholesale and DTC revenue for 2023.
Yeah, Yeah, we have a we've taken the D T C expectation down a little bit and we've taken the wholesale expectation up a little bit.
That's how we've we've kept in the consolidated guidance.
I used to say the D. T C. We're now looking to be up low to mid singles and wholesale a download doubles.
Okay got it thank you and then.
I'm just going back to your comments on the pull forward in wholesale and <unk>.
Any more color you can provide in terms of.
Wanted by the size of that.
Then separately I think previously you'd mentioned that QQ was kind of the earliest you'd potentially could go back into chase mode. Just curious if youre seeing any of that play out at all so far in this quarter.
Yeah, I mean, the so the pull forward from Q2 to Q1, it was approximately $10 million or maybe even a little bit more of a wholesale orders that we pulled forward from Q2 into Q1.
In terms of the chase business at what we're still not seeing that materialize to the levels that we would that we'd like to see them here and there we've seen some some retailers react to strong selling items and and either move forward orders or a jump on some real.
Orders, but overall the dynamics in the wholesale channel, particularly in North America remain very challenging and we still continue to see a really high degree of conservatism.
And caution amongst those retailers.
That makes sense and then I guess, just one last follow up on that point.
I mean.
Can you.
How can you I guess could you quantify I guess like how much trade. It is embedded in guidance if any at all do you kind of baked that into guidance or is that incremental.
Well, we always we always have some some assumption for Reed reorder and chase in our business. That's a part of our business every year. It goes up and down based on the environment and obviously the strength of our of our Oh, the selling of our products, but but it's always in there so.
I would say that you know it's in there too that are in line with what we're seeing today if that.
If if if those dynamics improve and we start to see our wholesale customers start to step up that's potential upside, but basically we forecasted based on what it looks like right now.
Perfect. Thank you.
Thanks.
And our next question comes from Paul <unk> from Citi. Please go ahead with your question.
Hi, This is Kelly on for Paul Thanks for taking my question I'm, just a follow up on the last question in terms of the dynamics happening in the wholesale channel I think over the last couple of quarters. He is he's been pretty frustrated with the lack of as.
You know orders placed despite that the strong sell throughs that you were saying.
Curious if if you did see you know are.
Your wholesale sell through rate.
You know exceed expectations or any color you can provide there I'll start with that.
Yeah I think.
What remains is that.
Our sell through of percentage, it's fine, but we're pleased with the percentage of because they were selling through but the stock levels are too low and therefore, the tells that the retail sales to the consumer are too low and they're just we just don't have enough of our goods on the floor.
For these retailers and so that's what where we're attempting to to get corrected and to get those inventory levels back up in the stores. So we can do more business to the consumer.
Got it and then on the on the D. T C business I'm just curious how how trends played out through the quarter. I think you mentioned that you saw some deceleration. So just curious what you think drove the deceleration and try and give you got through.
You proceeded through the first quarter.
Quarter in and.
And as you look at Q2, I think are you guiding to sort of similar trend do you expect sort of whether to kind of start to play in.
You know our role here and any color there would be great.
Yeah, I mean, I think it's been pretty widely reported that that that March was the weakest month of the quarter for discretionary categories pretty much across the board and that's certainly what we saw as well we saw that.
A pretty significant step down in March which caused us to come in below our expectation for DTC for the for the quarter overall.
I'm sure weather.
You know whether it was not cooperative so I think weather played a part of that but I think there's also a good case to be made that there may be some overall consumer.
Softening.
That's layered onto that as well April ER or this quarter to date.
Improved compared to where we were in March but the D. T. C. Overall its still soft you know, we said that for the quarter to date, where we are in line with.
The down eight that we did for the full quarter in Q1.
You know keep in mind for that.
I'm hopeful that that's going to get better as we as we move forward if only because remember our comparisons do get substantially easier starting in June .
If you look at our comparisons in D. T C last year versus pre Covid levels, we got about somewhere in the neighborhood of 500 basis points easier.
Starting on or around June .
Got it and just last question for me I mean any update on the on the fashion piece of the business I would guess the fashion. Yeah. I think if you were speaking more optimistically about what you were seeing in terms of fashion trends that we spoke to you last quarter. So just curious any update there I think.
In terms of what's what's been working this spring.
Yeah.
I'd call out I would make is material interest has been has been very important.
So you know those.
Things like Rafi pearls.
Gold and metal has been important for us. So a lot of that stuff has worked across a cross category. The other thing I would.
A couple of areas I would call out sandals are well that's been I think.
A relatively tough category for the industry overall, and we talked about inventory Oh, excuse me, we talked about whether or not being particularly cooperative for sandals a promote.
The season I don't see.
That is an area, where I think we've been a relative outperformer. We've had we've had a lot of success with our with flat sandals.
And put beds in it.
Stretching.
There are things in that category.
So that's something we feel good about a the one challenge there as it has been a lower AUR items that have been the biggest ones are so that has that has mix us down in terms of the average unit retail.
Other category that that is bigger this spring.
Then last spring or has a higher penetration is a is really a closed up casuals you know low fares are capped chose et cetera.
Alright, thank you.
Thanks Kelly.
Our next question comes from Jay sole from UBS. Please go ahead with your question.
Great. Thank you. So much my question is for Zane Zane I think you mentioned that Q2 sales.
E P S would be a little bit below Q1 levels can you give us an idea about gross margin and SG&A dollars.
Do you feel about those two stats in Q2 versus Q1. Thank you yeah.
Yeah for the gross margin, we expect to still see that.
Gross margin improvement from the benefits of freight.
And our mix of retail into the tunnel, but remember there's always that offset that comes from the.
The reinvestment that we mentioned and price that we're doing and also if we have some additional promos as well that will offset against that so we shouldn't expect.
Similar growth, if not maybe a little bit better than Q1.
Compared to last year, and and what was the second part of your question I'm sorry.
Operating expenses are just the dollar so yeah on the operating expenses Q1 was an unusually low base to compare against a little bit funky actually but.
There was a lot of timing of expenses between quarters, where Q1 was light last year as we move forward, we expect to be somewhere in the neighborhood of 3% over L y.
There to what we've seen in Q1, so we should see it moderate we do have a we're tightening the belt. We're controlling expenses are everywhere, we can and that applies to all segments all businesses domestic and international.
And even doing some job eliminations are in certain targeted areas, we're not carrying a lot of our kind of fat as we did do a significant cut back around Covid times, but we are definitely looking at every single expense and making sure that we're.
We're very controlled.
Okay got it thank you so much.
Our next question comes from.
Nick from Wedbush. Please go ahead with your question.
Oh, Hey, guys. Thanks for taking my question.
The gross margin in wholesale was pretty solid but.
Based on the difference between the branded business and the private label business I would assume that there was a big.
Mixed benefit there is there any way you can kind of sort of.
Uh huh.
Normalized fad or contextualize that you'll kind of absent the big decline in the private label business like you know how would.
Our wholesale gross margin I'm trying to do.
Yeah. There was there was a benefit.
From the mix shift from private label to branded we could get that number to you after the call, but I will tell you actually what is a that is not the biggest driver a bigger driver is freight and and a better price.
<unk> with the factories are at particularly on the AR and the wholesale accessories side.
Got it thanks Ed.
Quick follow up there also on the DTC business on the last call you had talked about bringing I think was about 20 middle East franchise stores.
In house, which meant that they would have been a contributor too.
You can see this quarter.
Yes.
Was there like kind of a meaningful impact to the D. T C from that conversion and if so what was the like to like like for like.
Growth and decreasing year over year.
Yeah that contributed about 200 basis points, so where we were down 8% in Q1, if you excluded the the middle East conversion, we would've been downturn.
Got it thanks, Ed and best of luck the rest of the year.
Thank you.
Our next question comes from Laura Champine from Loop capital. Please go with your question.
Thanks for taking my question just given all the shifting dynamics of the business can you comment on where overall price per pair is this year versus last year. So far in Q2, just knowing that you've been taking some price increases, but the promotions are back kind of where do we net out.
Out in terms of pricing so far in Q2.
It's you know it's always.
Hard to answer that question, because we've got so many different businesses and I honestly don't know theyre, putting them all together it gives a particularly meaningful right now.
Answer because it's always only about the mix, but if you look for instance at like our Steve Madden D. T. C business are in the U S. We're looking at.
We expect to be down mid singles in AUR in Q2.
Got it and if we look at sort of mix overall, what's the pattern right now is that also down.
Well I mean, because the private label business is down more than the brand did that actually mixes us back up.
Is that for a total company but.
Yeah, and I'm not sure the.
I forgot it [laughter], but but that is the answer yes. It does it does it makes sense to say that that the sales declines that you're experiencing right now are driven more by pairs them by price mix.
If youre looking at the overall company yes.
Yes, but I business line no I don't think so.
God Youre looking at.
Within the individual businesses. The AUR pressure is significant but again, if you're asking about the total company because of the decline in private label that that's a big driver of units.
Understood got it thank you.
Yeah.
Once again, if you would like to ask a question. Please press star and one.
Our next question comes from Dana Telsey from Telsey Advisory Group. Please go ahead with your question.
Good morning, everyone and as you think about the wholesale business and the shifts that are occurring with second quarter into the first quarter do you expect additional shifts in third quarter or fourth quarter from the way, they're ordering and at what point do you see chase begins to resume in a more meaningful manner. That's beneficial for you. Thank you.
Thanks Dana.
Yeah at this point I don't see any meaningful shifts between Q3 and Q4, but that's something we'll obviously have to monitor it going forward because theres still a lot we don't know about the back half.
In terms of the chase business.
I wish I knew the answer to that you know I think we're trying to focus on doing controlling what we can control, which is having great product and and getting it into the market quickly and having it sell through to the consumer because that's ultimately that's how we can encourage our wholesale customers to step up and and get more aggressive.
But you know obviously, there's a lot of uncertainty in the market right now a lot of negative headlines are about the direction of the economy and in the consumer and so.
You know we are dealing with wholesale customers that are that are pretty conservative right now.
Got it and then just in your own D. T C e-commerce and your own stores.
What are you seeing about the level of promotion in that channel versus the level of promotion in the wholesale channel.
Well the overall the retail landscape is is pretty promotional obviously much more promotional than it was in the first half last year. When we were unusually when we had unusually light levels of promotion.
I think we're keeping it pretty well controlled and our own direct to consumer channels, but we are a we are participating where where it makes sense.
And we are seeing a you know a certain segment of the of our consumer population that does seem to be much more price sensitive and are much more.
Driven by promotional activity right now and so we're we're trying to keep the appropriate balance while making sure that we still get through to get.
Get through the product.
Thank you.
Thanks Dana.
And ladies and gentlemen, with that we will be concluding today's question and answer session I'd like to turn the floor back over to Ed Rosenfeld for any closing remarks.
Great well, thanks, everybody for joining us for today's call have a wonderful day and we look forward to speaking with you on the next on the next call Bye Bye.
And ladies and gentlemen, with that we'll conclude today's conference call and presentation. We thank you for joining you may now disconnect your lines.
Yeah.