Steve Madden (SHOO, Financial) is the latest "shoes and accessories" maker to show up in the Magic Formula� Investing screens (MFI), yet another victim of the general malaise in consumer retail and goods this year.
Retail and consumer goods can be a good sector to make a quick buck in, as these stocks are fairly volatile and tend to swing pretty dramatically quarter-to-quarter. With Steve Madden down towards the lower end of its 52-week range and the stock trading at a reasonably low 10.4% earnings yield, is it time to consider a buy?
Tao of Steve (Madden)
Steve Madden's primary sales channel is wholesale, which accounts for 84% of sales. The company sells its shoes (Steve Madden, Steven, Madden, l.e.i., Betsey Johnson, Olsenboye, etc.) and accessories (Big Buddah, Betseyville, Cejon, as well as many of the same brands as shoes) through large retail chains both upscale (Macy's, Nordstrom) and mainstream value (Ross, Walmart, Payless, Target, etc.).
The company also has a retail unit (16% of sales), which operates 124 stores under the Steve Madden, Steven, and Superga names, as well as direct-to-consumer e-commerce websites. There is also a nascent licensing business which puts the Madden name on sunglasses, bedding, watches, and other items.
The company has brand lines to cover a wide range of demographics, from professional women to teenage streetwear. Most of Madden's products are priced at a mainstream point - this is not really considered an "affordable luxury" brand like Coach (COH).
The Blueprint For Buying Retail
An investor has to be cautious when buying retail. While apparent bargains abound, the sector has a very long and undistinguished history of busts, too. Sustainable competitive advantages in this business are almost nil. Retail stocks should be treated opportunistically, not as buy-and-hold-forever investments.
I generally consider buying a retail stock when one of two situations are met, AND the company has solid financial health. On the latter there is no problem - Madden has no debt, carries $190 million in cash, and still generates good free cash flows. But for the other situations, does Steve Madden fit the bill?
Situation 1: Is the Stock REALLY Cheap?
Even for stagnant or slightly declining consumer stocks, I consider a buy when the stock's earnings yield has really gotten out of whack with its historical trends and the trends of its competitors. In cases like this, even a slight improvement in sales or margins can send the stock soaring.
Unfortunately, I don't see this with Steve Madden. Its earnings yield of 10.4%, while significantly higher than the market average 7%, is well below some other similar MFI stocks: consider Coach's 13.8% figure, orBuckle's (BKE) 17.5%.
Given this, I don't see a whole lot of opportunity for gains in the stock from a purely market multiple perspective. Steve Madden will have to deliver value operationally for the stock to be worth buying. Which brings us to the second situation.
Situation 2: Can the Company Grow or Improve Its Margins?
A mediocre earnings yield is fine, IF the company has a solid trajectory for growth OR plenty of room for operational improvement. These drive earnings growth, which almost always drives up the price of a stock.
Again, unfortunately, I'm not seeing a whole lot of potential here with Steve Madden. While the company grew rapidly from 2009 through 2012, revenue growth tailed off to just 7% last year and actually came in negative in the most recent quarter. With the brand already in most applicable mass retail chains, the company is targeting company-owned store openings, licensing, and new brand acquisition such as the recent purchase of Dolce Vita. This is a tough - and expensive - way to grow.
There does not appear to be a lot of margin upside, either. Steve Madden's operating margin has fluctuated in the 15-16% range over the past 5 years. Even despite some slippage over the last few quarters (ttm margin is 14.6%), it is still pretty good in the world of footwear (Nike's is 13.2%, Sketchers' is under 8%).
Stock Is Fully Valued
Assuming somewhere in the vicinity of 5-8% growth over the next few years, and assigning an below-average retail earnings yield of 9.5%, I see the stock worth just about $35. With the current share price just under $34, that makes this a fully valued stock, and not one we would want to buy at this juncture.
