Sweating The Dip In Steve Madden? Why Analysts Are Not

Key Points

• Steve Madden has reported its first quarter 2023 earnings results; while financial highlights point to contractions, other indicators show pivoting trends. 
• Inventory level optimization may be the key to unlocking shareholder value; with retail showing the tail end of its challenges, wholesale segments offset gross margins impacted by the former. 
• Free cash flow improvements due to inventory optimization led management to expand dividend payouts and share repurchase programs.
• Analysts see a double-digit upside in the stock, and these fundamental indicators agree with bullish scenarios becoming a reality soon. 

Steve Madden NASDAQ: SHOO reported its first quarter 2023 earnings results on Tuesday, signaling what could be the final stages of a choppy retail industry environment. Shares of Steve Madden are shaking off a market-wide decline, dipping initially by as much as 3.66% and rallying back, looking to end the day flat.

The retail industry has been under pressure amid supply chain disruptions experienced in 2022, affecting inventory levels and pricing strategies. Companies like Adidas OTCMKTS: ADDYY and Under Armour NYSE: UA reported similar challenges in inventory, which directly affected free cash flows in each respective business. While Steve Madden is no exception to the norm lately, management decisions point to a possible bottoming, opening the way for a new rally.

Where the Sole Sticks

Steve Madden's financials would show a 17.1% decline in revenue for the first quarter of 2023 compared to the same period a year prior. These declines came from seasonal effects affecting the fashion industry and inflation concerns affecting the American consumer and discretionary spending. Declines in revenue were accompanied by declining operating margins, finishing the quarter at 10% compared to 17.5% a year prior; operations were affected by efforts to normalize inventory levels.

As a result of successfully ridding the company of nearly $49 million in inventory, operating expenses rose to $148.6 million. On a percentage of revenue basis, operating costs rose from 23.2% in 2022 to a near five-year high of 32% to kick off 2023.

Identifying the trends driving revenues and margins can allow investors to foresee what comes next; declining revenue and margins went from the retail segment for Steve Madden. As a result of challenging retail inventory dynamics, this segment saw the most significant revenue contractions, aiding further gross margin declines.

On the wholesale side of things, while revenues still declined significantly, gross margins increased from 35.2% in 2022 to 37.0% in 2023. Increasing gross margins in the wholesale segments are attributed to wholesale accessories/apparel improving pricing dynamics and demand.

Steve Madden's management achieved a five-year high inventory turnover ratio, a proxy for volumes and activity in the retailer. A 6.6x ratio stems from declining inventory levels alongside declining revenue, a dynamic also reflected in the company's capacity utilization.

Utilization rates were an excess of 165% to start the year 2023, signaling that there could be further revenue declines. Another way investors can look at these elevated rates is implying the company will rebuild its inventory levels more optimally, as they currently represent 15% of total assets compared to a normalized 19%.

Management is Hinting at Investors

Steve Madden analyst ratings suggest the stock may rally by as much as 22.5% from current prices. As inventory issues subside and supply chains normalize, management has nothing left to do but focus on product roll-outs and cost reductions. In addition, during the first quarter of 2023, the company's board of directors approved an increase in the share repurchase total pool.

Previously able to repurchase up to $189.9 million in stock, management now counts on $250 million of discretionary capital to repurchase shares, signaling that insiders may consider the stock to be cheap. 

A $250 million repurchase program would represent nearly 10% of the company's market capitalization, a typical threshold signaling utmost confidence and value upside expectations from management.

Fixing current inventory issues would allow free cash flow to return to its historical levels, representing a 25-30% equity yield for investors. Additionally, improving free cash flow environments would allow further share repurchases and dividend payout increments.

Speaking to improving internal situations within the retailer, Steve Madden's dividend currently yields 2.4%. Today's yield represents the highest in nearly a decade. Of course, elevated dividend yields are a superficial symptom of undervaluation in a stock price. In this case, it is just another evidence of an overdue rally in SHOO stock.

The stock trades at a compressed 9.6x multiple to last-twelve-months earnings to bring the case all around. Historically speaking, Steve Madden's stock has traded between 18-22x multiples of earnings. When free cash flow conditions inevitably improve due to inventory normalization, book value per share will increase for shareholders, which trades today at a mere 3.0x multiple; the price-to-book value multiple typical for SHOO stock would fall in the 3.5x to 4.0x range.