Description

Steve Madden (Madden/Shoo) is a good business with a solid management team at an attractive price.  There is a reasonable path to 40% upside by 2025 with minimal downside. Shoe stocks have had a rough year as excess inventory, a slow-down in the North America wholesale channel, and looming concerns about the health of the consumer weighted on the sector. This has created a good risk/reward in Shoo given the quality of the balance sheet, a history of good capital allocation, and a reasonable valuation on an absolute basis, relative to peers, and relative to Shoo’s historical valuation. As a pure-play branded shoe company, Shoo is also an attractive acquisition target, particularly for a strategic buyer; the company is profitable, has enough scale to move the needle/create diversification for a buyer, operates in good categories, and has a widely known brand. Steve Madden / CEO Ed Rosenfeld are rational owners who would sell if the deal was good. At a 15x multiple on $3/share in estimated 2025 earnings, Shoo could trade at $45/share versus $32 today, ~40% upside.  

            Shoo designs, markets, and sells footwear. Shoo is predominantly a wholesale business that sells relatively affordable on-trend shoes across many categories. In 2022, total revenue was $2.1B; $1.5B (74%) was from the wholesale footwear segment. Shoo’s model is to take moderate inventory risk, adapt quickly to what products are working, and chase trends rather than make large bets in advance on what the trend will be. Among Shoo’s largest wholesale customers are Nordstrom, Macy’s, Walmart, Target, and TJX.

Shoo has a long history of profitability. Since 2019, Shoo has improved gross margin from 38.4% to 42%. Operating margins have expanded from 10% in 2019 to 12% this year. Other than 2022, Shoo has generated consistent earnings ((2019: $1.69; 2020: (.23); 2021: $2.34; 2022: $2.77). The wholesale-oriented model, combined with chasing/responding to the market, makes the business less capital intensive—cap-ex has run at <1% of sales and working capital has not been a use of cash. With Shoo, an investor is reducing some of the EPS volatility than comes from a retail-focused model (high operating leverage), and fashion-markdown risk that comes from large inventory buys in advance of selling. Additionally, as discussed below, the debt-free balance sheet reduces the financial leverage. Shoo is steadier, more predictable business than one generally finds across retail where some combination of the fixed cost with stores, fashion-trend risk, and/or financial leverage create a more volatile business performance and stock price. Shoo’s business and stock have historically been less volatile.

One of the challenges in any fashion-trend oriented business is durability given that it is hard to forecast the ways in which consumer preference may change. Another challenge is distinguishing between a hot brand that has made good inroads in a good category versus the very rare business that can be a category-defining form factor.

Shoo does not fit either mold, which probably takes out some of the upside that an investor may get from identifying a Hoka early, or being directionally rights on On Cloud as a durable category winner in running. But it also may reduce some of the downside. Price accessible, on trend-footwear in stable categories should have an inherently durability to it; Shoo does not need to be at forefront of fashion and it does not need to redefine or disrupt a category. It needs to make good products, priced right for its customer, that it can support with good marketing and healthy distribution. The Steve Madden brand stands for certain intangibles around edge and style----and the namesake is one of those rare founders who imbues the brand story with the halo of a design genius. Shoo’s provenance cannot be manufactured or recreated, therefore I think there is real intangible value in the brand.

Shoo has a reasonable change of good upside with downside protection in the form of a durable brand and model, a history of profitability, strong balance sheet, and the potential for a takeout. Shoo has a $2.4B market capitalization, net cash of $140m, and dividend yield of 2.6%. From 2018-2022, Madden consistently generated free cash flow; $130m in 2018; $215m in 2019; $34m in 2020; $153m in 2021; $250m in 2022 (including growth cap-ex). Madden has also consistently returned capital in the form of dividends and buybacks-in the last three years; Madden has repurchased ~$320m. The diluted share count has decreased from 81.7m in 2018 to 75m. I believe an investor can underwrite consistent steady free cash flow combined with repurchases.

On 2025 estimates of ~$3.00/share, Shoo trades at ~10.3x P/E. There have been periods where Madden traded close to 17x earnings. I believe 15x is reasonable for this business given the scarcity, brand value, history of consistent free cash flow, and comp transactions. 15x 2025 of around $3/share = $45/share in 2025, 40% upside. On 2024 estimates, Madden trades 11x P/E; Decker’s trades 19x; Birk trades ~30x; SKX trades 12x. The expectations for Madden are low.

            It worth making a broader observation; the market seems very concerned that there will be an economic slow-down and/or the consumer is going to be under pressure. The time horizons on consumer discretionary have collapsed and the multiples are near some of the lowest that I can remember. This effect is pronounced in small-cap. If any of the above turns about less-bad than expected, time horizons expand, some of these names are going to look very cheap on 2025 numbers; Shoo among them.

Crucially, unlike many retail names where predicting earnings in the out-years is tricky given the variables that are inherently unknowable coupled with the operating and/or financial leverage in the businesses, Madden runs the business much more conservatively, with less leverage, and less capital intensity.

Another way that this investment could work well from here is if Shoo is acquired. The company is a good acquisition target.  Shoo has many of the qualities that public market strategic companies like: a proven profitable business with real earnings and cash flow, opportunities for cost and operational synergy that does not require complex integration, duplicative overhead, a brand/product that is good (this seems like an obvious one but I think it is wrong to underestimate how much easier it is to sell a deal in the consumer space if the brand is well-known and reflexively generates good associations).

Steve Madden is 65 years old and owns 2.3m shares. It seems reasonable that at some point, the board may begin to consider how to set the business up for continuity, which may be easier to accomplish under the umbrella of a large corporate parent rather than as a small public company. With $2B in sales and a globally recognized brand, Madden would seem to be an attractive target for a variety of companies, including VF Corp, Decker’s, Tapestry, Sketchers, or one of the European conglomerates. Madden could also be attractive to private equity, though I view that as less desirable and likely.

There are a few recent transactions of note in apparel/footwear (source Capstone Partners)

1-Tapestry Acquired Capri (9x EV/EBITDA)

2-Kering Acquire 30% stake in Valentino (16.2X EV/EBITDA)

3-Richemont controlling stake in Gianvito Rossi

Other deals:

1-Capri acquire Jimmy Choo in November 2017 for reported 16.5x EV/EBITDA

Catalyst

higher earnings and higher multiple on 2025; improving sentiment around connsumer