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  1. Home
  2. / Investing
  3. / Consumer Discretionary

Steve Madden Could Be a Star in a Cloudy Retail Sky

The company's results really stand out and strength could continue.
By BRIAN SOZZI Jun 20, 2016 | 11:00 AM EDT
Stocks quotes in this article: SHOO, TGT, WMT, M, VFC

A couple interesting things happened last week in the retail sector.

The first was that retail sales data for May came in OK, surprising in the sense that retailers from discounter Target (TGT) to department store Macy's (M) warned of challenging trends in April and early on in the second quarter. That retail sales number put me on high alert for upbeat commentary from several retailers that were going to present at the investment banks.

Then, two retailers didn't disappoint in their commentary on quarter-to-date sales. PVH (PVH) came out bullish on trends at department stores, raising the possibility the industry may be working off its inventory overhang from the first quarter quicker than planned due to the onset of warm weather. This is something I have been sensing during my store walks: inventory in the off-price channel seems picked over right now, especially at Marshall's (TJ Maxx) and Nordstrom Rack. J.C. Penney (JCP) dropped the hammer on retail bears, too, noting strong sales for Memorial Day weekend.

As a result, the retail sector snagged some buying interest last week. Note that I said some, as there remains serious disbelief in a sector that continues to be in a state of serious flux. Business models are being disrupted by digital, inconsistent consumer spending and election season nervousness. Oh, and interestingly, there has been a lack of takeover rumors in the sector despite much cheaper valuations after dismal first quarters. Can't remember when I heard a retail takeover rumor last. It's as if private equity is going to sit back and wait for the near failure of Gap (GPS) before stepping in with a bid.

Retail outperformed as positive comments on quarter-to-date sales emerged, suggesting the sector is on the oversold side.

Although I have mixed emotions on suggesting any retail stock (save for dollar stores) in this turbulent backdrop, one has recently caught my attention. The name is Steve Madden (SHOO), which came onto my radar screen from noticing all of the fashion sneakers and sandals young women are out in force wearing this season and a recent chat with the head of V.F. Corp's (VFC) Vans division, who said the fashion side of the business is outperforming thanks to female shoppers (they are loving fashion high-tops). Diving into the company's first quarter, I have to concede to being surprised by what I read. The results really stood out positively in a sector that was simply battered in the first three months of the year.

Take this, for example.

Same-store sales at Steve Madden retail stores surged 10.7% from the prior year. The gain came on top of an over 11% increase a year ago. The result was fueled by conversion. In other words, people are buying more often than not when they come into a Steve Madden store. It seems the company has nailed its latest offerings, most notably in fashion sneakers, sandals and open toe dress shoes. The company's offerings online are impressive. No other retailer I follow put up an almost-11% comp in the first quarter. So, with the weather driving people to the malls and Steve Madden's fashion being accepted, I have to believe the second quarter is moving in the right direction at the company's stores.

The company's wholesale footwear business, which reflects sales to department stores, didn't fall apart in the first quarter. In fact, sales rose slightly and gross margin increased from the prior year as the company benefited from lower closeout activity. That left a favorable impression on yours truly. Countless retailers that sell at department stores had horrible first quarters headlined by weak sales and margin pressure (see Polo Ralph Lauren (RL)). So, it's good to see that consumers are shopping Steve Madden at its retail stores and in department stores. It offers another example of the company nailing its fashion, which is the single most important thing when considering a fashion-driven retail investment.

Steve Madden sells private label shoes at Walmart (WMT). Call it a hunch, but I think higher paid Walmart workers, which helped lift sales in the first quarter, will be out spending on summer shoes for themselves and then for their family for back to school. I think Wall Street is overlooking this angle on Madden.

As an added bonus, fast fashion retailers such as H&M and Forever 21 are not big into footwear yet. And, what they do sell is horrible quality and, frankly, looks awful. I think this plays into Madden's wheelhouse as the company sells the generally affordable fashion footwear that goes with the $10 outfits people are buying at H&M.

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TAGS: Investing | U.S. Equity | Consumer Discretionary | Stocks

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