B Riley 2016 Conference Notes

This week we attended the B Riley conference in Los Angeles. These notes are from one on one meetings with management teams.

Steve Madden (SHOO) Director of Finance Derek Browe at B Riley Investment Conference 5.25.2016

Steve Madden (SHOO) Director of Finance Derek Browe said consumer shopping habits are changing   

“We feel like consumers are focusing on comfort and that trend will likely continue.  Also, millenials are less brand conscious, they don’t want to wear branded goods with logos on them, they want to think for themselves.”

Steve Madden (SHOO) Director of Finance Derek Browe talked about increased efficiency in the supply chain

“It now can take us about 6-8 weeks to bring a product to market whereas it used to take us about 3 months.  Also, about 65% of our products are shipped via boat.  However, when time is of the essence and we need to be on trend with our product, we can ship via airplane and get it here faster.”

Steve Madden (SHOO) Director of Finance Derek Browe talked about the profitability economics of different channels

“Amazon is currently the most profitable place to sell our goods because they’re taking care of all the logistics and sometimes we’re able to give them exclusive products.  Macy’s is our next most profitable channel but it is less profitable because they often push us on volume rebates and bulk pricing discounts.  Selling on our own website isn’t as profitable as the previous 2 channels because of the high shipping costs.”

Amazon is making a hard push into apparel

“Amazon definitely wants to be seen as a place where a customer can get fashion

Perry Ellis (PERY) CEO Oscar Feldenkreis at B Riley Investment Conference 5.25.2016

Perry Ellis (PERY) CEO Oscar Feldenkreis says no analysts are asking Amazon CEO Jeff Bezos the right questions

“E-commerce is not profitable, I don’t care what Bezos says.  Some of the biggest costs in the online channel are freight and credit card fraud protections.  No analysts are asking Jeff the right questions.  They need to be asking him what the liquidation value of his inventory is if he doesn’t sell it.”

Perry Ellis (PERY) CEO Oscar Feldenkreis says brand is important in retail

“Amazon doesn’t want to carry fashion product, in order for us to succeed I have to focus on brand differentiation and treating my product with respect.”

One must adapt to change

“The world is changing and you have to understand what’s around you, what you can and can’t control. If not you’re not long for this business or any business really”

Destination XL Group (DXLG) CEO David Levin at B Riley Investment Conference 5.25.2016

Destination XL Group (DXLG) CEO David Levin said the economics of e-commerce returns are atrocious

“In the online channel, it’s the return and refund costs that kill you because of the high cost of shipping versus the ultimate price of the order.  About 20% of overall apparel orders on e-commerce are returned whereas, because our customer segment is so unique, ours is around 8%.”

Digimarc (DMRC) CFO Charles Beck at B Riley Investment Conference

Digimarc (DMRC) CFO Charles Beck said a key ingredient is necessary in the innovation process

“Innovation only happens if trust is inherent in the organization.”

Digimarc CTO Tony Rodriguez noted that there has been interest in AI before that didn’t pan out

I was around for the first AI wave…AI became such a dirty word that grad students avoided the subject because you’d have your funding pulled right away

Camtek CFO Moshe Eisenberg

Camtek’s CFO said that the semiconductor industry has become less cyclical as it has matured

I think that as the industry has become more mature you see less cycles. The trend in the semi cycle is up.

Jetpay CFO Peter Davidson

Government regulations to protect low income borrows may have restricted their access to credit

“Government regulators have declared war on anything that serves underbanked consumers”

Earthlink Treasurer Trey Huffman

Legacy Earthlink still has 700,000 subscribers

“There are still 700,000 subscribers to legacy Earthlink. There are a lot of people who are tied to their email and don’t want to give it up.”

10-K Tuesdays: Steve Madden

We are taking a look at Steve Madden $SHOO this week, a name that popped up in Avondale’s proprietary quantitative value screen.  The screen looks at historical financial data to potentially identify high quality companies trading at low valuations.  The screen is an important part of Avondale’s investment process, but this post should not be taken as an investment recommendation.

Fundamental Data:

Price: $38.22
Market Cap: $2.59 B

Income statement

Revenue: $1.23 B
EBIT: $179 M
Gross Margin: 37%
Operating Margin: 14.6%

Balance Sheet

Cash: $168 m

Notes from 10-K

design, source, market and sell fashion-forward name brand and private label footwear for women, men and children and name brand and private label fashion handbags and accessories and license our trademarks for use in connection with the manufacture, marketing and sale of various products of our licensees.

Our business is comprised of five distinct segments: Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing.

Segment Revs

Domestic Int'l Split

Wholesale Footwear Segment(64% of Revs, 31% GM, 13% OM):

Our Wholesale Footwear segment includes the following brands: Steve Madden Women’s, Madden Girl, Steve Madden Men’s, Steven, Betsey Johnson shoes, Olsenboye (under license), Stevies, Superga (under license), Elizabeth and James (under license), Madden, Report, l.e.i. (under license), and includes our private label and International businesses.

We currently sell to over 4,400 doors of 15 department stores throughout the United States and Canada. Our major accounts include Macy’s, Nordstrom, Bloomingdale’s, Dillard’s and Lord & Taylor.

We currently sell to specialty store locations throughout the United States. Our major specialty store accounts include DSW, Famous Footwear and Journeys.

Wholesale Accessory segment (20% of revs, 36% GM, 17% OM):

Our Wholesale Accessories segment includes Steve Madden, Steven by Steve Madden, Big Buddha, Betseyville, Betsey Johnson, Cejon and, through license agreements, Daisy Fuentes® and Olsenboye® accessories brands and includes our private label business.

Retail Segment (16% of Revs, 62% GM, 14% OM):

109 retail stores including 91 Steve Madden full price stores, eleven Steve Madden outlet stores, two Steven stores, one Report store, one Superga store and three e-commerce websites

In 2012, our retail stores generated annual sales in excess of $890 per square foot

A typical Steve Madden store is approximately 1,400 to 1,600 square feet and is located in a mall or street location that we expect will attract the highest concentration of our core demographic, style-conscious customer base.

$188 m lease obligations

Our stores are also a marketing tool that allows us to strengthen brand recognition and to showcase selected items from our full line of branded and licensed products.

We operate three Internet website stores

First Cost Segment (7.8m op income):

The First Cost segment represents activities of a wholly owned subsidiary of the Company that earns commissions for serving as a buying agent for footwear products under private labels and licensed brands (such as Candie’s®) for many of the large mass-market merchandisers, shoe chains and other mid-tier retailers. As a buying agent, we utilize our expertise and our relationships with shoe manufacturers to facilitate the production of private label shoes to our customers’ specifications

our First Cost segment serves as a buying agent for the procurement of women’s, men’s and children’s footwear for large retailers, including Kohl’s, K-Mart, Sears and Bakers.

Licensing (7.6m op income):

We license our Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery and women’s fashion apparel, jewelry and luggage.


We believe that our future success will substantially depend on our ability to continue to anticipate and react to changing consumer demands in a timely manner. To meet this objective, we have developed what we believe is an unparalleled design process that allows us to recognize and respond quickly to changing consumer demands. Our design team strives to create designs which it believes fit our image, reflect current or future trends and can be manufactured in a timely and cost-effective manner. Most new Steve Madden products are tested in select Steve Madden retail stores. Based on these tests, among other things, management selects the Steve Madden products that are then offered for wholesale and retail distribution nationwide

We believe that our design and testing process and flexible sourcing models provide the Steve Madden brand with a significant competitive advantage allowing us to mitigate the risk of incurring costs associated with the production and distribution of less desirable designs.

We do not own or operate manufacturing facilities; rather, we use agents and our own sourcing office to source our products from independently owned manufacturers in China, Mexico, Brazil, Taiwan, Italy and India.

Our products are available in many countries and territories worldwide via several retail selling and distribution agreements.

We compete with specialty shoe and accessory companies as well as companies with diversified footwear product lines, such as Nine West, Jessica Simpson, Guess, Ugg and Aldo.

We believe effective advertising and marketing, favorable brand image, fashionable styling, high quality, value and fast manufacturing turnaround are the most important competitive factors and intend to continue to employ these elements as we develop our products.

Principal marketing activities include product placements in lifestyle and fashion magazines, personal appearances by our founder and Creative and Design Chief, Steve Madden, and in-store promotions.

Noteworthy Risks: Constantly Changing Fashion Trends and Consumer Demands. Consolidation Among Retailers. The trend-focused nature of the fashion industry and the rapid changes in customer preferences leave us vulnerable to an increased risk of inventory obsolescence.

On January 3, 2012, the Company and its Creative and Design Chief, Steven Madden, entered into an amendment, dated as of December 31, 2011, to Mr. Madden’s then existing employment agreement with the Company. The amended agreement, which extends the term of Mr. Madden’s employment through December 31, 2023, provides for a base salary of approximately $5,416,000 in 2012, approximately $7,417,000 in 2013, approximately $9,667,000 in 2014, approximately $11,917,000 in 2015 and approximately $10,698,000 per annum for the period between January 1, 2016 through the expiration of the term of employment…

Back of the Envelope Math

Retail Segment Math

$191 m in sales from 109 locations => implies $1.75 m per location

$92 m in operating expense => implies $844 k op-ex per store

$890 sales per square foot =>  $554 gross profit per sqft => $122 operating profit per sqft

$890 sales per square foot => implies 214 k square feet total retail space

Wholesale Segment math

$1,035 m total revs in 4,400 doors (at department stores) => less than $235 k in sales per location (variable based on number of specialty locations) => if you assume 80% of wholesale revs were generated at department stores then 188k per location.

If SHOO generates the same sales/sqft at a wholesale location as it does in one of its retail stores, that implies that SHOO has 1.1 m sqft of selling space at wholesale, and is allocated somewhere less than 264 sqft of selling space per department store.

Valuation based on estimated sqft

EV = $2.4 B

Estimated Sqft of selling space ~  1.3 m sqft

=> Currently valued at $1,846 EV per square foot (take with grain of salt–very, very rough estimate)

=> if SHOO continues to generate $122 in op inc per sqft, and you assume that it trades at a LT EBIT multiple of 9x, then $2.4 B EV implies 2.2 m sqft of selling space.

Steve Madden at Goldman Sachs Retail Conference Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“We’re essentially expecting the back half to be similar to what we saw in the first half. And frankly that’s a somewhat challenged environment.”

“I think that the very first thing is that I do expect the international portion of the business to become much more meaningful part of the mix. Right now we’re only at about 8% of sales done outside the U.S.”

“Second to that, we have been growing our accessories business faster than the shoes. That’s sort of high-teens as a percentage of sales right now, and I think you could see that tick up over the next couple of years, particularly as we grow the handbag business, where we have very nice momentum. And then, third, I think the direct-to-consumer piece will become a little bit bigger part of the mix, both as we go to the outlet stores, we talked about and also our online business”

“within that we do believe that the higher-end is holding up a little better than the lower-end. We think that the traffic it seems to get better as you go up to the value chain or the price chain. I mean I think that frankly makes sense, when you look at what’s happening with the stock market with housing”

“We have seen labor cost going up in China of course. However, our overall cost of goods out of China, that inflation has been fairly benign as well. And I think that, frankly, the global demand environment still remains somewhat weak and these factories are hunger for business that we’ve been able to keep the prices in check.”

“In terms of sourcing, I think the big thing that we’re doing is we are moving a lot more to Mexico, about half of our Steve Madden branded production for fall will be coming out of Mexico.”

“Not only has Mexico gotten more competitive with China in terms of price, they have real expertise with the boots and the booties, particularly the more rug and distressed looks. And perhaps more importantly there is a real speed advantage. And that’s so crucial for us. ”

“You certainly recognized that these retailers probably don’t want one vendor to have half their department. And we have certain event, we have certain retailers rather where we do already makeup about a third of their department.”

“We’re looking for additional brands to add in the portfolio and it would be things that we think fit i.e., live well with Steve Madden and aren’t cannibalistic to Steve Madden. There are certain brands that we see out there for instance that our direct competitors at Steve Madden that we believe if we bought them, we think one plus one would be 1.6, because Nordstrom or Macy’s, et cetera, wouldn’t want to have all their eggs in one basket.”

“I think that’s one of the things that we’ve al been — I mean maybe somebody wasn’t surprised about it, but people are surprised about it, how strong of the category shoes is online. I think that there was maybe a decade ago, you would have thought no, shoes won’t be great, you want to try them on, you want to walk around, so you tell in the end, but that was certainly proved that wrong.

And I think the lot of that has to do with their free shipping, free return model.”

“it’s not just the sheer play guys like Zappos and Amazon. It’s also the online, the e-commerce side of the traditional retailers. So Nordstrom back on, Macy’s back on, those guys are growing very, very rapidly for us. And we think that’s going to continue.”

“stevemadden.com is a real important part of our strategy as well. It’s become increasingly competitive though. I will say it’s become a challenge as everybody has gotten so aggressive including Nordstrom and Macy’s and everybody else.”

“it’s a challenge — it’s been a challenging model that single-branded, small footprint shoes store I think and we’ll name all the names, if they’re listening, but we can probably think of them. And a lot of guys had to close a lot of stores. And it hasn’t been successful — it has been more successful in outlets, but it’s challenging and it’s very challenging for us too.”

Steve Madden at Citi Consumer Conference Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

$SHOO at Citi Consumer Conference Notes

“in a recent survey upper income teens, when asked their favorite footwear brand, girls named Steve Madden number two, behind only Nike.”

“Our success in all of these brands, channels and business models is predicated on our unique ability to create trend-right footwear and accessories and get them to market in a timely fashion.”

“how we’ve been able to do that so consistently, season after season? Number one, it is a testament to our design team. We believe we’ve assembled the best design team in our industry, led of course by our founder, Steve Madden. But in addition to that, there are a couple things about our business model that helps to differentiate us from our competitors and help us to mitigate fashion risk.”

“The first is our test and react model; where we test products in our retail stores and leverage selected winners into the wholesale channel. That has been absolutely critical to our ability to hit the trends over the years, and then we have married that up with an industry leading speed to market capability. We have managed to shorten leadtimes, to short at six to eight weeks, versus the industry standard of three to four months, which has been another primary competitive advantage in the fast moving trend business in which we operate.”

“We do focus primarily on the younger fashion forward woman customer, that’s our primary customer.”

“we turn our inventory about once a month in wholesale…we managed to shorten our lead times to about six to eight weeks, we make a lot of progress out of Mexico, for instance, which enables us to work faster than if we are working out of China, and enable us to be a little bit more nimble; and when we do see changes happening in season, we are able to adjust our inventory levels, and we have been able to do that, and we feel pretty comfortable about where we are, in terms of inventory.”

“I would say on the direct to consumer side, our biggest competitor is probably Aldo. Within the wholesale channel, they are obviously not as big a player. There are a number of big competitors there, one of them would be the Camuto Group, which is a private company that does brands for people like Jessica Simpson, BCBG, Tory Burch, their Vince Camuto brand, etcetera”

“overall, I think it is a fairly promotional environment right now, that’s one of the challenges that we are all facing, and that’s something that we talked about on our last earnings call, that we were expecting the promotional’s second quarter due to the late start to spring selling, because of the challenging weather.”

“If it’s a real fashion forward item, in that very first few months… the real fashion forward customer…will pay virtually whatever the price is, so we can typically 200, 150, in that range for newness. When you then go into the second season…then typically $99 for an item like that is going to be a magic price point…In terms of the gross margin, I think it’s important to understand that we build the product differently…so there is not a big gross margin deterioration, when we take prospects back to $99…we have made adjustment to the materials…etcetera such that we can price it out.”

“One of the interesting things that we can do now in terms of testing is to utilize the internet, and we have always utilized our stores for testing”

“we think that over time, there is going to be an opportunity to have significantly better profitability or profit margins in the outlets, than in our full price stores.”

“That single brand in small footprint shoe store is a challenging model, in the B and C mall. I think it works quite well in the A malls, but I think you also have a lot of customers who like to go to the multi-branded environments for shoes, like in Nordstrom or DSW or Zappos online. So we want to be careful about that. But you’re right, that it may create an opportunity at some of the other guys, reduce their footprint.”