Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Steven Madden, Ltd. (NASDAQ:SHOO)

Goldman Sachs Twentieth Annual Global Retailing Conference

September 10, 2013, 1:30 PM ET

Executives

Edward Rosenfeld - Chairman and Chief Executive Officer

Analysts

Taposh Bari - Goldman Sachs

Taposh Bari - Goldman Sachs

All right. We're going to get started here with Steve Madden, a leading footwear vendor, mainly in the U.S. through a portfolio of brands, largely through the Steve Madden namesake brand. And we're pleased to have Edward Rosenfeld, Chairman and CEO with us from the company. So we're going to do is -- and by the way, I'm Taposh Bari. I cover the consumer SMID names here at Goldman.

So what we're going to do is go right into the fireside chat I believe, so I'm going to start off from change of thoughts.

Edward Rosenfeld

Thanks for coming.

Question-and-Answer Session

Taposh Bari - Goldman Sachs

And we're going to start off with three questions that we're asking all the companies, and then we'll get into some Q&A. And if you have any questions, you can raise your hand and we'll pass the microphone over to you, circulating throughout the room.

So first is, expectations -- we're asking all the companies in the conference the same question. So the first one is, expectations on the environment, the way you see it into the second half of this year better or same versus the run rate that you've seen from your second quarter results? And how are you thinking preliminarily in terms of the at least the topline environment in 2014 vis-à-vis or 2Q run rate as well?

Edward Rosenfeld

Sure. 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. Traffic trend has been difficult for I think most soft goods retailers, frankly, throughout the year, and we're expecting that to continue in the back half year.

And then as we start our initial planning for 2014 and we're hopeful that it gets better, but we're not assuming any meaningful step up right now. As we plan our inventory and make our budgets for the first part of the year, we're assuming that it's still somewhat challenging.

Taposh Bari - Goldman Sachs

The next question we have is, do you expect, for operating margins -- are you expecting operating margins to decrease, increase, stay the same over the next 12 months? And what are some of the key put and takes to that line?

Edward Rosenfeld

Yes, we do think that operating margin can tick up over the next 12 months. We think that there is somewhere between 1,500 basis points operating margin expansion potential. And you're going to get some of that from the gross margin line, as we continue to shift product to the direct sourcing model, maybe 30 to 40 basis points over the next 12 months that we expect to be able to get from there. And then in addition, there's going to be some leverage from leveraging operating expenses on a growing sales base.

Taposh Bari - Goldman Sachs

And then I guess my favorite question here, capital allocation. How do you prioritize amongst buybacks that you started to do six months ago, potentially dividends, new capacity, I guess vis-à-vis retail, online investments, cash conservation and of course M&A?

Edward Rosenfeld

Sure. Well, we had a -- in terms of investments, we've been doing, I think by CapEx in a range by $20 million a year. It's pretty reasonable. And that enables us to make the systems investments that we need as well as to add to the store base. But as you've pointed out, it doesn't do a lot to put a dent into our cash balance. So the priority at this point I think is continuing to return capital to shareholders through the form of share repurchase. We did $11 million in Q1, as we got started we did about twice that, $22 million in Q2. We expect to do north of $30 million in Q3.

And I think that by anything unforeseen that's something that's going to continue going forward and potentially even accelerate. We'd also like to continue to look for M&A opportunities and we're kicking the tires on a few things right now. But obviously, nothing is imminent there and can't guarantee it that we'll be able to get anything done.

Taposh Bari - Goldman Sachs

And so just on the CapEx line, do you expect that run rate to [indiscernible]?

Edward Rosenfeld

Yes, I think about $20 million is a reasonable target for next couple of years.

Taposh Bari - Goldman Sachs

And where you're spending that on?

Edward Rosenfeld

Some on systems, and then also new store openings and remodels. So this year, for instance, we're going to open 12 new doors, about six full price stores and six outlets. And as we go forward, we expect that we may accelerate the outlet openings.

Taposh Bari - Goldman Sachs

Any questions from the audience? All right, I'll just keep going then. I guess starting kind of higher level as a footwear company, a lot of business within U.S. department stores, specialty stores, et cetera. But how do you see this company like let's just say five years alignment? Where do you see this company, right? It's kind of an interview question, right. But I'm just trying to understand your kind of longer-term philosophy towards growth.

Edward Rosenfeld

Well, as I think about, 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., that's a little over $100 million. That is a part of the business that's been growing much faster than the overall. It's growing at north of 50% compounded annual growth rate since 2009.

And we're quite bullish about the prospects for continued growth there. I mean the brand has really resonated in a number of key markets, doing very well in the Middle East, very well in Latin America, we picked up in China and we're also seeing great sell-through in the U.K. These are all through distributors. So we'll be looking for that to potentially get to twice where it's today in terms of a percentage of sales, if we look five years out. So I think that's the most meaningful thing.

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.

Taposh Bari - Goldman Sachs

And then, as you approach the international growth -- just as you kind of think about the international growth opportunity, a lot of your competitors have gone fairly aggressive routes by opening up stores at a pretty aggressive pace in multiple different geographies. I mean it seems that you have a more inter-current state of more measured strategy in terms of managing your business, growing your business. How do you think about international growth in terms of direct versus wholesale versus using licensees or distributors?

Edward Rosenfeld

Absolutely. So we have about 180 stores outside the U.S., but the vast majority of those, all the 14 are operated by partners, because we own our business in Canada and the rest of our international business is done through partners in local country. And right now we really like that model.

Our partner has potentially taken the financial risk. They do all the pioneering in making the brand, creating the brand awareness in the local market. They have the inventory risk. They have the leases on their balance sheet, et cetera. So it's a nice capital-like model for us, where we can get the brand established in these markets.

Down the road, we may want to bring some of these businesses in-house, the Canadian transaction that we did a year ago has been tremendous for us. And at a certain point it may make sense for the [indiscernible] standpoint to bring somebody's businesses in-house.

Taposh Bari - Goldman Sachs

Any questions? Okay. You have brands across multiple different price products high-end, low-end. Talk about what you've seen so far year-to-date this year versus what you saw in 2012, as far as low, mid, high, any interesting observations you've seen amongst just in general for the consumer?

Edward Rosenfeld

Well, the first thing I would say is that we have heard the complaints about challenging traffic from virtually every tier of distribution, from luxury all the way down to value. And you're talking about soft goods, we've heard complaints about traffic. But 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 is probably well set, that a plain new markets that isn't at play certainly a target.

Taposh Bari - Goldman Sachs

Switching gears to the footwear environment, your sales line in general has been tough. We were coming off of people who recalled at one point a cycle clearly normalized. And how do you think about product cycle within footwear, and then also footwear as a category within that, within your core customers' wardrobe structurally?

Edward Rosenfeld

Yes, well, certainly footwear has been a nice category over the last couple of years and I think this is a more challenging year for everybody in our business. But I think that most of that has to do with the overall retail environment. I don't think that footwear has taken a material step-down relative to apparel or accessories. I think it's gotten tougher. For soft goods, then we talked about and I mentioned the traffic couple of times.

That being said, I do think there is an element of a little bit less newness in the footwear fashion this year. And so that makes it tougher road to hold for people like us. And so we are pretty pleased with how we've navigated through it and are hopeful that when that trend changes that we'll be able to -- we'll be in right position to move forward.

Taposh Bari - Goldman Sachs

A couple questions over here.

Unidentified Analyst

I have a question about sourcing and input cost inflation. Can you give us a sense of what trends you're seeing in terms of materials as well as labor, and any changes you're making in your sourcing strategy to adapt to that?

Edward Rosenfeld

So in terms materials, there is very modest inflation, and we're talking about low-single digit, it hasn't been super-impactful. 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. And really the vast majority of what we do in terms of boot and booties is coming from 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. That's really speed to market is in some point for us and it's great, because we can get back into products. We order 30 days to 45 days out of Mexico.

Unidentified Analyst

You've done a great job of increasing your business with Macy's and Nordstrom over the past few years. I mean I don't know how quickly you've been growing your market share there. But I mean does that hit kind of a ceiling at some point? Is that still accelerating and growing or it get too big that it slows?

Edward Rosenfeld

Yes, that's something we think about a lot. There is challenge. 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.

I think the ones you mentioned, in Nordstrom we have a very large share right now. And I think that there is probably going to be some resistance to go in much bigger. But fortunately they are growing and we're doing very well with them. And we think we can at least grow as they grow.

Macy's I think there is a bigger opportunity. We've talked about how we made this change last year. We move to the impulse department from the junior department. And I think that we're underpenetrated at Macy's relative to say Nordstrom. And so I think we've got some nice growth potential there.

Unidentified Analyst

Can I ask you just going back to the idea of product trends? So you mentioned the lack of -- on the marginal lack of or less units, right so, as a vendor you have control over that direction. So what kind of fashion bet are you guys making for the fall winter season? It seems on the apparel side skinny silhouettes, I mean this whole cigarette-jean thing, I think bodes well for footwear in general. So it seems like the fashion tool that has accommodated towards footwear is just a matter of what the trends are and whether they will catch on.

Edward Rosenfeld

I think the biggest thing is booties. And booties, of course, were very good for us last year. Laced up booties continue to be very good, whereas last year everything was flat. This year the black booties are working as well as the hill booties. And really laced ups and all heels heights are working. And there is also some specific styling with buckles and straps and interest around the ankle, that's performing very well.

We also feel good necessarily about tall shaft boots, that's something that wasn't great a year ago. But the early reads on tall shaft boots are quite strong. And of course, you're not really going to know until we get a little deeper into the season and the weather returns. And then the other thing for us, and this is a little more Steve Madden specific, we haven't heard a lot about the people calling this bad, it's that we're doing very well with dress shoes. Dress shoes is a category that was a little slow for the industry for about 18 months there. And we're really seeing that pickup very nicely. We're selling both the platforms that have been good for a while, but also some single sole dress shoes, which is something that hasn't been good for a number of years.

Unidentified Analyst

What you think that is, because I think a lot of your retailers actually called out dress being a weaker category?

Edward Rosenfeld

I think we've had a nice position with that dress customer. I think that the young girl is looking for something to go out to a club on Friday, Saturday night, I think that were the first place she comes in many cases.

Unidentified Analyst

So two for me. What have you buyback to the Canadian market distribution? And then of the distributors that you currently have over the countries that you currently have distributors. And which ones are at a level of maturity, where you think that in three, four years time, you could be thinking about that penny, right?

Edward Rosenfeld

Sure.

Unidentified Analyst

And then in footwear, is there anybody else that you're seeing out there, who is able to do what you're doing in terms of getting the footwear that's on the runway and bringing it in and testing it. And what you do really well or anybody who is in e-commerce who is doing that well and how you're using e-commerce for your shoes as well?

Edward Rosenfeld

And so I think the first question was about Canada, and essentially Canada was a market that we've been in for a long time and there were a couple of things -- few things that made it very attractive. Number one, it was just at a size and scale, where we thought the risk was -- the additional risk, and knowing it was worth the rewards. So this is a little over a $30 million business, but $20 million of wholesale and maybe $12 million of retail when we bought it.

We've grown that considerably since then. So that was -- number one that it was sort of worth the trouble and it was big enough. And it was making about $10 million of EBIT too, so it's a meaningful profit contribution. Number two, Canada is an easy market. It's just like other state eventually in operating it.

Well, yes, in a good way that we don't have to worry about some of the political concerns that we have in other countries or crazy duties or things like -- things of that nature. So that was something we're excited about. We saw some nice trends in Canada as well and then we saw some opportunities to really roll out the retail store base.

I think our partner have been very conservative. He is obviously -- he is a smaller company, he is on hi s own capital to grow and we thought that with the little additional capital we could really supercharge this business and that's what we've been able to do since we owned it.

In terms of other territories I think the ones that were the most interested in right now are probably other territories rub in this hemisphere, so perhaps Mexico, perhaps a partner in South America or Central America and those are things that will be evaluated in overtime. And what was the next part of the question, I am sorry. Who else is doing what we do?

Unidentified Analyst

Yes.

Edward Rosenfeld

Yes.

Unidentified Analyst

And also like the online [indiscernible]?

Edward Rosenfeld

Sure. In terms of competitors we have a lot of really good ones. On a specialty retail side certainly Aldo's is doing a good job. They've got some very tough competitors in the wholesale channel as well. Some private companies like the Camuto Group and there's a company called Dolce Vita and there are bunch of them.

I don't think anybody has really tried to replicate our model exactly with the test-and-react and the speed-to-market and utilizing the stores to test for wholesale, but I know that's certainly impossible that somebody will try to do that. And so that's why we have to make sure we're continuing to innovate. And then online, the question is that who were looking at online or more specifically?

Unidentified Analyst

Is there somebody whose trying to usurp you or figure it out a way to get the shoes stopped to the customer?

Edward Rosenfeld

I don't think so, but there are a lot of new models online and the nice thing about you know having our brands and also our capability is that we can figure out how to align ourselves with these guys. So these continuity clubs for instance online have really grown dramatically. I am talking about people like ShoeMint, JustFab, ShoeDazzle, but the latter two just merged. And we're making shoes for all of them in some way. So there is all sorts of new models and we're trying to make sure that we go where it's worth.

Unidentified Analyst

[indiscernible].

Edward Rosenfeld

The question was about M&A and fill in color about what we've been looking for.

Unidentified Analyst

[indiscernible].

Edward Rosenfeld

Sure, yes, when we think about M&A targets, we don't have any specific holes that we feel compelled to fill. We're going to be opportunistic here. 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.

On the other hand there are some brands out there, whether its Heritage brand or something we've identified will niche, something that we can't necessarily just do in Steve Madden's that we think would fit very well with us. An example I'd said, we didn't buy it, we're not going to, but we took the license with this brand Superga, which is a fashion sneaker brand out of Italy over a 100 year heritage. We wanted to be in a fashion sneaker business and that was a way to do it with authenticity that we couldn't replicate in Steve Madden.

Unidentified Analyst

[indiscernible] You mentioned that your accessory business is going faster than your shoe business. How are the margins in accessory business and why do you think it's growing faster? Is it the current customer just adding an additional item or is it just different customers who are shopping throughout the country?

Edward Rosenfeld

Well, in terms of why it's growing faster, I think that's pretty simple, it's just that we're a lot early in our maturation, you know, our life cycle in accessories. We're just really getting going and so there is a big opportunity for instance to get into new outlets, new doors and whereas in Steve Madden's shoes, that's what we're already in. All the Nordstrom, just a year ago, we got Steve, it was about a year ago around now that we got Steve Madden into Nordstrom for the first time in handbags. So there has been a lot of opportunities. We really sort of gotten our feet under us in the handbag category and gotten into a bunch of new doors and also expanded this assortment within some of the doors that we were in.

In terms of the margins, the margins for our wholesale accessories business are a little bit higher than in our wholesale footwear business. However, that's primarily mixed and smaller private label component in accessories, been in shoes. At this point, the Steve Madden's shoes and the Steve Madden's handbags are pretty comparable in gross margin. And frankly that's over time, the accessory should be higher, but right now we just have so much more power in terms of sourcing and pricing in the shoe category.

Unidentified Analyst

Ed, can I ask you about just the suitability of footwear for online, so the other places like Zappos, Piperlime, even shop-up,some of the other more innovative channels that you just mentioned. And in there the traditional retailers like the department stores, the specialty stores et cetera, and there is the vendors, they are trying to go direct as well. So can you talk about for this category specifically, how you see that evolution playing out over the next several years?

Edward Rosenfeld

Yes. Well, first of all, 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. But frankly, it created this idea for customers that it was okay and cool to buy shoes online. And that's something that's translated to many retailers that don't provide free returns. So that business has grown dramatically. And I think it will continue to be a real important growth driver.

That's by far is the fastest growing part of our wholesale business, to selling it to online retailers, but 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.

Unidentified Analyst

And where does stevemadden.com fall into that dynamic?

Edward Rosenfeld

And 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. But we are actually implementing a new e-commerce platform really right now. That's hopefully going go up in about a month. And that's going to enable us to -- we think should give another shot in the arm to our online business.

It's going to really improve the -- it's going to really improve what we do for mobile and for tablets, which about 45% of our business right now. About 30% of our sales are going to allow us to operate today. Shifting is going to offer us to buy online, pickup in store. We're going to be able to -- the product symmetry is going to be much better with 360 degree views. We're getting a lot more integration with that social media. So there is a lot stuff that will help, that I think will really improve the experience.

Unidentified Analyst

[indiscernible].

Edward Rosenfeld

The question was about Omni-Channel, how we're doing with that and also as the wholesaler and the reseller and whether -- the consumer it clearly doesn't care where they buy. And frankly, we don't care where they buy, as long as they Steve Madden's, we're happy, we can't argue, where the margins are longest, but we want to make sure that the customer gets a great product at a great value that says Steve Madden in the label.

In terms of our Omni-Channel in our own business, one of things that we actually did quite a bit before a lot of people was that we started shipping and fulfilling a lot of our internet orders out of the stores back in 2006. And that was something that really enabled us to get a head start on the lot of our competitors. And because from a very early -- earlier on we were able to capture that long tail as they call it, because we had a very wide assortment online because instead of buying a group of shoes from online, any shoe that was in any of our 80 stores at the time was online. And that's -- the business grew very rapidly when we started doing that. And that's something we've been doing what they call, people call same-sell or same-store, or you know, you get it sent from another store for a long time as well.

And gradually, we've been sort of layering out additional Omni-Channel capabilities. Now, that you can buy it online and return it in the store, but you can't buy online and pickup in the stores and that's what we're trying to revenue in this new platform.

In terms of with our wholesale customers, the key to us to just make sure that we're delivering them great product. And that's the most important thing. Secondarily, we want to make sure that we're trying to tail our assortments to what these guys need for e-commerce. So you start thinking about having more extended sizes, potentially more colors, broader assortment et cetera for the e-commerce guys. Did I answer your question?

Unidentified Analyst

And then just going back to switching gears to your guidance that you have as of last quarter, it implies that EBIT growth acceleration in the back half of the year, in light of what you described as being kind of a difficult macro backdrop, no different from what you saw in the second quarter within your expectations. Can you just walk us through why there is an acceleration to that?

Edward Rosenfeld

Sure. I mean we think it's really driven by improved sales growth and in the first half the sales growth was up little shy of 4% and we're forecasting or build into our guidance is for that to improve to high-single digits for the back half. And there is a couple of things there; number one, we did have a couple of discontinued businesses that impacted us in the first quarter -- in first half. We did continue a small division called Big Buddha footwear and we also lost a couple of private label customers that we got into an acquisition.

So just that right there impacted the first quarter -- first half growth rate of about 300 basis points. So that will give us a nice leg up going in the second half if we main and then we've also got a couple of brands that are really gathering -- for a couple of visits that they are really gathering steam, so our men's business is really picking up.

Our Betsey Johnson business is picking up and our Madden Girl business is really gaining momentum, and so all of those things will enable to us to grow. There is topline faster in the back half, which will result in the EBIT acceleration or EBIT growth or EBIT margin growth that you're talking about.

Unidentified Analyst

And moving back to capital allocation, you kind of presumed repurchase of our stock back in the first quarter, you self accelerated in the second quarter and now it seems it like into the third quarter. Talk us through the evolution of the capital allocation strategy at this company. Why now, because I think you've always had a pretty strong net cash position, so why now and why is it accelerating? And how do you even approach share buyback, is it opportunistic or you just going to dipping your toes in the water and feeling comfortable?

Edward Rosenfeld

In terms of the first part of your question, I think that we had a few years there, where we were doing a number of these bolt-on acquisitions. They were small in nature, but we were essentially utilizing all of our free cash flow and then some on these smaller acquisition and those were very successful for us. And knock on wood, all of them had worked out so far and we were able to buy them at attractive multiples and grow them.

And so their ROI has been tremendous, but over the last 18 months it's been more challenging to find those kinds of opportunities and that's why we sort of pivoted towards returning capital to shareholders to do the share purchase and as we have talked about I think we can do both. We can buyback shares and continue to look for M&A opportunities and I don't think that we'll do anything that would preclude us from making acquisition if we found something good.

What was the second part of the question?

Unidentified Analyst

What's the company's philosophy towards buying back stock?

Edward Rosenfeld

Yes, we want to give ourselves the opportunity to be -- the flexibility to be opportunistic if the stock were to drop precipitously and we felt it's very good with the long terms prospects, we can get more aggressive, but for the most part our philosophy is that we are not attempting to be market timers. And right now, for instance we've been buying essentially between $550,000 to $600,000 worth of stock per day and that's just a consistent process. So the lower we had to pay, we buy a little bit more, and when the stocks move higher, we buy a little less. And that's how we're proceeding at this time.

Taposh Bari - Goldman Sachs

Any questions from the audience? Can you walk us through just so or remind us where you are in your direct -- I know you mentioned that as being an opportunity, direct sourcing, obviously a lot of compliant issues coming out of Asia lately. Walk us through where you are in that process, I guess, what you were in nationally?

Edward Rosenfeld

So we did an acquisition back in May 2011, which provided us with a company -- we bought a company that a premier direct sourcing operation in Asia, and prior that we were doing all of our sourcing or essentially all of our sourcing of footwear through agent. This enabled us to go direct with some of our products direct to the factories. And so we started gradually transitioning some of our products to this direct process. We've done about 10% a year, spend about two years, we're up to a little over 20% now. And there has been a nice gross margin benefit to that.

We think there is a probably another 100 gross -- 40 basis points of gross margin over the next, let's say, three years that we can get from going direct. But I think you actually just highlighted something that's even more important than the gross margin benefits it's that, is the level of control that it gives us over what's happening at the factories, so that we can make sure that social compliant, environment compliant is happening as it needs to and that's obviously a fair amount of course.

Taposh Bari - Goldman Sachs

I was hoping you could just -- if we can go back to the first half of this year, a lot of retailers ran into a lot of trouble especially with the second quarter results and you were able to actually expand gross margins and your operating margins, so walk us through that exercise. The environment literally either didn't materialize to maybe some of our expectations or however you want to look at it at maybe at worse, but you seem to manage it pretty well, especially in the context of footwear, so walk us through -- help us understand how kind of the degree of flexibility that you have within either SG&A or fixed expense leverage et cetera?

Edward Rosenfeld

Yeah, I think the most important thing is that we have this quick turn model where we're turning our inventory about once a month in wholesale and about once a quarter in retail, and we're every week turning those dials up or down a little bit based on what we're seeing and we're constantly canceling this one and increasing that one and reducing the quantities on these other products and we were really able to being ambulant to manage the inventory into adjusting season and we were able to protect the gross margin.

We also were fortunate because well there was a very -- sandals is obviously an important category in second quarter and while there was a very late start to sandals to spring selling this year because of the cold weather early on. Once we got into the season, our sandals sold through very, very well. So I think we actually -- frankly we thought that gross margin could be a little bit lower than it came out, because we were anticipating having it to be a little bit more aggressive, but once the weather turned those sandals really moved.

Taposh Bari - Goldman Sachs

And just coming back to your test-and-react strategy, that's great for footwear in the U.S. because you have the stores, but as you -- first question I asked was Steve Madden five years from talking about accessory in international, accessories I don't think that were in retail in a big way, if at all. The international -- I thought at Canada you don't have stores, so those growth verticals depended on a complementary retail presents as well, how do you think about that?

Edward Rosenfeld

Yes, I think -- they are depended on it, but I feel for one that accessory, for instance, I think we really have a goal to make that a meaningful category in our retail stores, not only because it will be a sales and profit driver, but because we can then do the testing, and that's the challenge with testing in a retail stores right now is that the volume just isn't great enough in our retail stores.

You only have a couple of percent of sales and so there is opportunity, for example there, for instance, if you're trying to do test in that smaller business. But I think as we grow that then we can replicate that test and react to modern accessories. And similarly international, we want to continue to -- we want do, what we're doing. And hat we think that's how, why we're differentiated, so we want to try to replicate the model.

Taposh Bari - Goldman Sachs

Any other questions. Okay, I have a couple more. We're almost out of time, but you know retail profitability, I've heard you said multiple times in the past that the rest of industry, many which are private retailers aren't as profitable as you are. Help us understand why? Help us understand why that's sustainable for Steve Madden?

Edward Rosenfeld

Yes. Well, I think that what I tried to communicate, you're making this sound arrogant, but what I'm trying to communicate, just that 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.

And that's why you don't hear me at these conferences pounding the table about opening 25 full-price retail stores a year. We're going to be very opportunistic about it. We might only open 20 more full-price stores for the U.S. And that's over the next fiver years that maybe it. And we'll have to see, and we see a lot of business moving to the outer channel, we see a lot of business moving online. And we don't necessarily think that there needs to be Steve Madden or they're needs to be 300 or 400 Steve Madden full-price stores around the country.

Taposh Bari - Goldman Sachs

It's a last one for you. So Steve Madden is roughly about half -- Steve Madden brand is roughly half?

Edward Rosenfeld

With the [indiscernible].

Taposh Bari - Goldman Sachs

So a portfolio of other brands, just quickly highlight what brands within the [indiscernible] Madden part of your portfolio, you're most excited about over the next 12 months and maybe it gives us a couple of reasons why?

Edward Rosenfeld

The one that I am the most excited about in shoes is a new brand called Freebird, actually the full name is actually Freebird by Steven but it's a higher price boot line out of Mexico. And this is something what we feel like, it was almost a more of a fun project for Steve Madden and some of his designers. We were doing some real expensive boots out of Mexico, at one point they were $500, $600.

But they got a real nice reaction. And so we took the price down. Now they are mostly around $250, $300 and Nordstrom and Bloomingdales and three people and number of retailers have gotten really excited about it and the sell-through are off the charts right now, so that's going to be sort of nice incremental business that we were not counting on.

And it's a real differentiated price and real focused its all boots out of Mexico. And it looks great. So we're pretty excited about that. I'm also excited about Betsey Johnson, as the overall brand. It's really -- the license categories are doing really well. Our handbags are doing well. Our shoes have gotten better. So overall that's really starting to move the needle.

Taposh Bari - Goldman Sachs

All right, we're out of time. Thanks a lot and thank you very much.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Steven Madden's CEO Presents at Goldman Sachs Twentieth Annual Global Retailing Conference (Transcript)
This Transcript
All Transcripts