Steven Madden's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.25.14 | About: Steven Madden, (SHOO)

Steven Madden, Ltd. (NASDAQ:SHOO)

Q4 2013 Results Earnings Conference Call

February 25, 2014 8:30 AM ET

Executives

Jean Fontana - ICR, IR

Ed Rosenfeld - Chairman and CEO

Derek Browe - Director, Finance

Analysts

Camilo Lyon - Canaccord Genuity

Taposh Bari - Goldman Sachs

Erinn Murphy - Piper Jaffray

Scott Krasik - BB&T Capital Markets

Edward Yruma - KeyBanc

Jeff Van Sinderen - B. Riley

Sam Poser - Sterne Agee

Steve Marotta - CL King & Associates

Danielle McCoy - Brean Capital

Corinna Freedman - Wedbush Securities

Mike Richardson - Sidoti

Operator

Please standby, we are about to begin. Good day. And welcome to the Steven Madden Limited Fourth Quarter 2013 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jean Fontana of ICR. You may begin.

Jean Fontana

Thank you. Good morning, everyone. Thank you for joining us today for the discussion of the Steven Madden fourth quarter and full year 2013 earnings results. Before we begin, I would like to remind you that statements made in this conference call that are not statements of historical facts constitute forward-looking statements within the meaning of the Private Securities and Litigation Reform Act of 1995.

Such forward-looking statements involve risks and uncertainties and other unknown factors that could cause actual results of the company to differ materially from historical results or any future results expressed or implied by forward-looking statements.

These statements contained herein are also subject generally to other risks and uncertainties as described from time-to-time in the company’s report and registration statements filed with the SEC.

Also, please refer to the earnings release for information on risk factors that could cause actual results to differ. Finally, please note that any forward-looking statements used in today’s call cannot be relied upon as current after this date.

I would now like to turn the call over to Ed Rosenfeld, Chairman and CEO of Steven Madden.

Ed Rosenfeld

Thanks, Jean. Good morning, everyone, and thank you for joining us today. With me to discuss the business this morning is Derek Browe, Director of Finance. In fourth quarter 2013, we faced a number of challenges, including weak retail traffic across the industry, harsh winter weather and fewer significant new fashion footwear trends.

Nevertheless, we delivered solid financial results in the quarter, with net sales increasing 8.7% to $342.9 million and diluted EPS increasing 9.4% to $0.54 per diluted share. These results demonstrate strength of the business model we have built at Steven Madden.

In particular to highlight the benefits of our diversification by distribution channel, which enabled us to record solid overall financial performance, despite a disappointing quarter in our own Steven Madden retail stores.

These Q4 results captured strong year for the company in a tricky environment. For the full year 2013, net sales rose 7.1% to $1.3 billion and diluted EPS increased 9.4% to $1.98 per diluted share.

Before I turn the call over to Derek to take you through a more detailed review of the financial results for the quarter and provide our outlook for 2014, let me first highlight the drivers of this year's performance and our team’s achievements in 2013.

Our first priority every year is to -- just to sustain and build upon our fashion leadership position in our core Steve Madden Wholesale Footwear business. In 2013, we once again succeeded on that front. Thanks to our proven formula which combines the design talent of Steve and his team, with the test and react strategy and industry-leading speed to market capability.

Despite the challenging retail climate and relatively few new fashion trends to capitalize on. We grew our core Steve Madden Women's Wholesale Footwear business with all its largest customer, including Nordstrom, Macy's, DSW and Dillard's.

Madden Girl also delivered solid performance in 2013. Its fall product assortment was particularly strong and the division's net sales increased 9% in the second half of the year, providing the brand with nice momentum heading into 2014.

And our Men’s business also gathered Steve in the back half. One of our strategic priorities in 2013 was to better differentiate our higher priced Steven Madden Men’s line from our more moderately priced Madden line by elevating the Steven Madden collection and targeting the Madden line a younger more casual consumer.

The response to this new strategy has been outstanding and our Men's Wholesale Footwear net sales rose 15% in the second half of the year. The timing of our strategic changes could not have been better as overall trends in Men’s footwear are strong and we are in a great position to capitalize on them going into 2014.

Another highlight in 2013 was the strong double-digit percentage growth we saw in our private-label footwear business. On the strength of outstanding gains with customers like Target, JustFab and Wal-Mart, private-label footwear annual net sales surpassed $300 million for the first time in 2013.

We also made significant progress on one of our most important long-term initiatives, which is to expand our business outside the United States. In 2013, our international net sales increased 20% reaching $113 million or approximately 9% of consolidated net sales.

Our business in Canada, which we acquired from our former distributor in February 2012, it is currently our only owned international operation was up over 30% from the prior year.

Now our Distributor business also exhibited strong growth, based on robust gains with our partners in Europe, the Middle East and Asia. We will continue to expand outside the U.S. in 2014, including the addition of approximately 50 new free standing stores and 50 to, excuse me, 15 to 20 concessions by our international distributors.

Another important growth initiative for the company is the rollout of our outlet concept. In 2013, we opened six new outlet stores, bringing our total at the end of the year to 17 locations.

We continued to be pleased with the consumer response to our outlet concept. In the financial results we're seeing that division. Our consolidated comp store sales were down 2.1% for the year, our outlet stores come positively and our four wall profit margin in the outlet finish the year approximately 150 basis points better than net of our full price stores in the U.S.

As we look ahead, we plan to accelerate the unit growth in outlets, with 10 to 12 expected outlet openings in 2014 and plan to get to 50 to 60 outlet locations by the end of 2016. 2013 also saw continued growth in our handbag business.

We reported strong double-digit percentage gains in both Steve Madden and Betsey Johnson handbags, on top of the explosive growth in each of those divisions in 2012. We also introduced Madden Girl handbags, a line of trendy junior bags with an emphasis on fashion bag hunts.

Madden Girl bags are off to a great start and further expansion of the Madden Girl bag line is important initiative for 2014. Another area where we made good progress in 2013 was expansion of our newer brands, our Mad Love brand, which we made exclusive to Target in Q4 of 2012 had outstanding sell-throughs at retail. And Target is expanding the business -- the brand significantly for 2014.

And in FREEBIRD by Steven, we reduced the average retail price points by $50 to $100 to approximately $300 and introduced more volume oriented styling, which elicited a great consumer reception and drove strong increases in the back half of the year at retail partners like Free People, Nordstrom and Bloomingdale's.

Reaction to FREEBIRD latest collection at the recent shoe show was outstanding. We're very optimistic about its growth prospects for 2014 and beyond.

And finally, I’d like to highlight some of the innovative marketing we've done recently in the form of collaboration with fashion bloggers and other influencers with significant social media reach. In recent years, bloggers have become increasingly important influences in the fashion community, particularly for our customer base.

To capitalize on that importance in the marketplace, we have collaborated with some of the best known bloggers to create capsule collections for our brand. These bloggers had a fashion credibility that gives the collaborations authenticity. And of course they also had sizable social media followings where they can promote the collections in our brands.

Our first collaboration was for Superga and was with Leandra Medine, Editor of The Man Repeller blog. The Man Repeller x Superga collection hits stores including, Bloomingdale's, Nordstrom and Shopbop in Q3 2013 and sold out to the pair. Based on this success, we’ve decided to do a second collection for spring summer 2014.

Next, we partnered with Italian blogger, Chiara Ferragni, better known as The Blonde Salad for collaboration with Steve Madden. Limited edition co-branded collection shipped last month to accounts including Nordstrom, Shopbop, LF and Nasty Gal and initial sell-throughs have been outstanding.

We hosted a launch of that with Chiara during fashion week and the event garnered 18 million social media impressions in just two hours. In our most recent collaboration, it’s not with the blogger but similar to our blogger collaboration. It harnesses the power of social media because it is with Kendall & Kylie genre, celebrities with more than 7 million Instagram followers each.

Kendall & Kylie for Madden Girl shoes and handbags are being distributed exclusively in Nordstrom, PacSun and our own Steve Madden stores. Importantly this co-branded collection provided Madden Girl with its entree on training to both Nordstrom and PacSun.

Products hit stores last week supported by social media blitz and a personal appearance by Kendall and Kylie at a Southern California Nordstrom and the reaction has been overwhelming. Kendall & Kylie’s Instagram post announcing the launch garnered over 1.2 million likes and comments in just a few hours.

So as you can see, despite the challenging climate, we accomplished a lot in Steve Madden in 2013, executing on a number of important growth initiatives and positioning ourselves for continued growth in 2014 and the years to come.

With that, I'll turn it over to Derek to walk you through the details of the financial results for the quarter.

Derek Browe

Thanks Ed, and good morning everyone. Consolidated net sales for the quarter increased 8.7% to $342.9 million, including a strong increase in wholesale footwear and more modest gains in wholesale accessories and retail.

Our wholesale net sales in the quarter were $273.4 million compared to $247.2 million in the prior year's fourth quarter, a 10.6% increase. Wholesale footwear net sales were $199.4 million, up 13.6% from $175.6 million in Q4 of 2012, with a 9% increase in branded wholesale footwear and 23% increase in private label footwear.

In the branded business, growth was driven by solid gains in Steve Madden Women's and Madden Girl and strong increases in FREEBIRD in Men’s. On the private label footwear site, we once again had big increases with Target and Justfab.

In wholesale accessories, we recorded net sales of $74 million in Q4, compared to $71.6 million in the prior year period, a 3.3% increase. Double digit percentage growth in our handbag business was partially offset by declines in belt and cold weather accessories.

It should be noted that while cold weather accessories shipping was slightly lower than the prior year, sell-throughs were outstanding. And so gross margin and gross profit dollars for the category were up substantially.

In our retail division, net sales were $69.5 million, a 1.7% increase over the $68.3 million in net sales recorded in last year's fourth quarter. The increase was driven by our expanded store base.

Comparable store sales declined 6.7% in the quarter as traffic was disappointing and we saw a sharp slowdown in business in December. During the quarter, we opened two full price stores, one outlet location and one e-commerce site, FREEBIRD by Steven.com, bringing us to a total of 121 company operated retail stores, including 17 outlets and 4 e-commerce stores.

Turning to other income, our commissions -- commission and licensing income net of expenses was $2.6 million in Q4 versus $2.8 million in last year's fourth quarter primarily to a decline in the First Cost business with Sears and Kmart. Consolidated gross margin in the quarter was 37.8% as compared to 39.3% in last year's fourth quarter.

Wholesale gross margin was 31.8% versus 32.6% in last year's fourth quarter. The decline was driven primarily by a sales mix shift towards the lower margin private label business. In fact, if we exclude our private label divisions, our wholesale gross margin was modestly higher than the prior year period.

Gross margin in the retail division was 61.4% compared to 63.7% in the fourth quarter of 2012 as we increased promotional activity, particularly in December due to the soft sales in our stores, as well as the highly promotional competitive environment. Operating expenses were $79.5 million in the fourth quarter or 23.2% of net sales compared to $78.2 million or 24.8% of net sales in the same period last year, 160-basis point improvement reflects strong cost control and operating expense leverage on an increase in sales.

Operating income in the quarter totaled $53.6 million or 15.6% of net sales. In last year's fourth quarter, operating income was $49.8 million or 15.8% of net sales. Our operating income in the fourth quarter of 2013 included a $1 million benefit related to recovery from prior year’s text message litigation settlement.

Operating income in the fourth quarter of 2012 also included $1 million benefit, this related to a greater than anticipated recovery in the bankruptcy process of a note receivable from our former licensee for Betsey Johnson retail apparel. Excluding these benefits, operating income for the fourth quarter of 2013 was $52.6 million or 15.4% of net sales, compared with operating income in the fourth quarter of 2012 of $48.7 million, or 15.4% in net sales.

Now, I'd like to briefly touch on our full year results. Consolidated net sales for the full-year increased 71.1% to $1.3 billion compared to $1.2 billion in 2012. Operating income from the year totaled $203.8 million, or 15.5% of net sales, compared to 2012 operating income of $179 million or 14.6% of net sales.

Operating income for 2013 included the benefit related to recovery from the prior year’s text messaging litigation settlement. Operating income in 2012 included a $2.5 million charge for settlement of a class action lawsuit related to the text messaging, and a $0.8 million net charge for impairment of a note receivable from the company's former licensee for Betsey Johnson retail and apparel.

In addition to a $5.1 million impairment charge and a $0.9 million impairment charge for bad debt, both related to the bankruptcy of Bakers Footwear Group. Excluding these items, operating income for 2013 increased to $202.9 million or 15.4% of net sales, compared with operating income of 2012 of $188.3 million or 15.3% of net sales.

Our net income for 2013 was $132 million or $1.98 per diluted share. This compared to net income of $119.6 million or $1.81 per diluted share in fiscal 2012. Net income for 2013 includes the million dollars benefit recognizing operating income, which on an after-tax basis impacted 2013 net income by approximately $0.6 million.

Net income in 2012 included the already mentioned impairment charges, which on an after-tax basis negatively impacted net income in 2012 by $5.7 million or $0.09 per diluted share. Additionally, net income in 2012 included a $6 million or $0.09 per diluted share tax benefit related to the reinvestment indefinitely of a portion of our earnings from the company's foreign operations in such foreign operations.

Excluding the above-mentioned items, net income increased 10% for fiscal 2013 to $131.4 million, or a $1.97 per diluted share, compared to net income for fiscal 2012 of $119.4 million, or a $1.98 per diluted share.

Turning to the balance sheet, as of December 31, 2013, we had $292.1 million cash and marketable securities and no debt. We ended the year with inventory of $73.7 million versus $63.7 million at the end of last year. Over 35% of this increase in inventory when completed relates to in transit inventories, which was higher at the end of year as we brought this in earlier in December of 2013 due to the earlier Chinese New Year.

Our inventory turns for the last 12 months was 10.3 times. CapEx in the quarter was $4.3 million and during the quarter we repurchased approximately 900,000 shares for $32.7 million, bringing our total repurchases for the year to over 3 million shares for $102.2 million.

Now turning to our guidance, for fiscal 2014, we expect net sales to increase 5% to 7% compared to fiscal 2013. We expect our diluted EPS to be in the range of $2.05 to $2.15.

And now, I'd like to turn the call back over to Ed for some closing remarks.

Ed Rosenfeld

Thanks, Derek. So in conclusion, 2013 was another strong year for Steve Madden. Despite a challenging retail environment and a relative lack of newness in terms of fashion footwear trends, we delivered solid sales and earnings growth and made significant progress on a number of key growth initiatives.

Going forward, we will manage our business carefully as we continue to navigate a challenging environment. We continue to see many opportunities to expand the business across our various brands, distribution channels, product categories and geographies. And we are confident that we can deliver top and bottom line growth in 2014 and beyond.

And now, I would like to turn over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we will take our first question with Camilo Lyon of Canaccord Genuity.

Camilo Lyon - Canaccord Genuity

Thanks. Good morning, guys.

Ed Rosenfeld

Good morning, Camilo.

Camilo Lyon - Canaccord Genuity

So coming out of the FFANY and platform trade shows, can you discuss the trend that the buyers were most excited about for ‘14 and also maybe related on to that, what’s been working well in your warmer weather climate stores?

Ed Rosenfeld

Sure. Yeah. One of the -- as you know, our retail business has been tough at the beginning of the year and we alluded to that in the press release. But we have seen some rays of light over the last couple weeks and in particular in the stores where we are getting some warm weather. We're really pleased with what we're seeing in terms of the new spring merchandise and how it’s selling. So some of the trends that are doing well there are going to, I think the first one that we should call out is dress. As you know, Camilo, D'Orsays have been tough. It’s been a tough category for the industry for the last let’s say 18 to 24 months.

And I think we actually were a bit of relative outperformer in 2013. We had some good selling D'Orsays but overall that’s been a tough category. And we are really seeing that category pick up now, both with platforms and with single-sole D'Orsays, so that’s something we are encouraged by. And we are also with some more specific trends, we are very pleased with what we're seeing with our slip-on sneakers, particularly the pony hair sneakers, I think I have mentioned that on the previous call, and the selling there is very strong. Gladiators are doing well, particularly the higher Gladiators and then really anything with a row bottom, particularly row bottom wedges but even really any high row bottom we are seeing some nice trends there. So we are optimistic about what we see for spring trends.

Camilo Lyon - Canaccord Genuity

So it sounds like you, would you classify this as kind of a bout of newness that’s been injected into marketplace where these are all trends that are for the most part new to her closet, if she doesn't really have or is this is just continuation of what hasn’t working in prior spring seasons?

Ed Rosenfeld

No, this is newness. So we feel optimistic about what we're seeing in terms of the newness in the market for spring. Of course, we need to get into the season and really have the customer vote. But at this point right now, I think we feel pretty good about the level of newness for spring as we talked about in the prepared remarks. That was the challenge in fall, there wasn't quite as much newness as in prior year. So we're looking forward to get into the spring where we will have some of these new trends that seems to be heading.

Camilo Lyon - Canaccord Genuity

Great. And then just moving on to the comment you had about the confidence you have in the wholesale business. Despite some of the retail struggles there, you continue to playing a lot of people. Can you just elucidate as to why you feel the confidence in the wholesale business? Is it share gains, is it other brands outperforming as well, where does that level of comfort really comes from?

Ed Rosenfeld

I think we have been a strong performer in wholesale. We’ve been an outperformer in terms of sell through, and we’ve been taking share with a number of our key retail partners and we've also got a backlog and an order file that supports our projections essentially for 2014. One of the things that we also should remind people that our wholesale business as opposed to our retail businesses, that it is very well diversified by tier distribution.

And so one of the benefits there is that trends don't hit every tier distribution at the exact same moment. So, if you look at Q4 for instance, if you look at our -- in our retail business that combat, those lace up booties that have been so successful for us over the last couple of years, that particular style slowed up in our retail business in Q4 and that customer is very fashionable and perhaps she brought that already in the prior year. But if you look at what that -- those types of styles did in places like the shoe chains or the mass merchants, it was bigger than ever in Q4. And so, that’s one of the benefits of having this diversified business in Wholesale.

Camilo Lyon - Canaccord Genuity

And are there other brands that are maybe not performing as well that maybe you are taking their open-to-buy dollars, creating that cushion in your wholesale business?

Ed Rosenfeld

Yeah, I think that there are -- I think there are a couple well-known brands that have slowed up a little bit and that creates an opportunity for us, some of our key accounts.

Camilo Lyon - Canaccord Genuity

Okay. My final question if I could squeeze one more in. We noticed that in your -- kind of in the initial view of the product assortment, looking towards the back half of ’14. That it included a bigger shift or a higher mix towards tall shafted boots versus booties. If that’s still the case, how would you look at that impact on your business from an ASP perspective?

Ed Rosenfeld

Yeah, certainly, if there is a mix shift towards boots versus booties, that would be a positive in terms of ASP or AUR in our own retail stores. I mean, similarly, if some of the boot and bootie product moves from flat to struck your heels or having heels that also tends to command a little bit of a higher price point.

Camilo Lyon - Canaccord Genuity

And would you agree that that still part of the -- that makes it’s still heading in that direction towards that jumper heel and towards that taller shafted boot?

Ed Rosenfeld

It would, yes.

Camilo Lyon - Canaccord Genuity

Okay. Great. Good luck with the year. Thanks, Ed.

Ed Rosenfeld

Thanks, Camilo.

Operator

We will take our next question from Kate McShane with Citi.

Unidentified Analyst

Hi. This is [Corey Hannigan] on behalf of the Kate.

Ed Rosenfeld

Hi.

Unidentified Analyst

I was just hoping if you could talk a little bit -- I was hoping you could talk a little bit more about the inventory at year end in light of your topline guidance going into 2014? I know that Derek mentioned the in-transit inventories, but do you expect inventory levels to normalize by the end of this first quarter and maybe how you are feeling about the quality of inventories at retail right now?

Ed Rosenfeld

Sure. Yeah, we were up a 15.7% at the end of the year, now it’s about $10 million. But just to give you a little detail. So, about $3.6 million of the increase was the increase in in-transit inventory. And again with the earlier Chinese New Year, we had more stuff on the boat coming in a little bit earlier at the end of the year.

And then another $1.4 million or so was for [true boat] which is now on replenishment, it was not on replenishment a year ago. So between -- that’s essentially $5 million of the $10 million increase right there. If you back that out, we are only up 7.9% or so. So we did feel pretty comfortable about the inventory level and we do expect that to normalize in terms of or far more in line with the increase in sales by the end of first quarter.

Unidentified Analyst

Okay, great. And then maybe you could talk about your expectations for gross margin cadence throughout the year?

Ed Rosenfeld

Sure. Overall, I think that people should be expecting gross margin for the year to be essentially in line with where it was in 2013. I do expect it to be down in Q1 2014, particularly because we have had heavily promotional in Q1 in our own retail stores, but we can have modest gains in the back nine months to get us to flat for the year.

Unidentified Analyst

Okay. And if I could just sneak in one more quick question, when do you think we could start to see the delta between wholesale and retail start to narrow?

Ed Rosenfeld

I am hoping by second quarter. We are hopeful given what we’ve seen with the early spring selling in our own retail stores when we have gotten some warm weather in places like California that we’re going to see retail rebound in second quarter, but I don’t expect it to be really before that, because we don’t -- are expecting spring to break at least across the country, fairly late this year. We are forecaster that weather is going to continue to be challenging for the next month or so and of course we have late Easter this year. So I think we have to expect spring to start full for us somewhat late this year.

Unidentified Analyst

Okay. Thanks so much, and good luck.

Ed Rosenfeld

Thank you.

Operator

We will take our next question from Taposh Bari with Goldman Sachs.

Taposh Bari - Goldman Sachs

Good morning, guys. Ed, you mentioned 50 new freestanding stores internationally and 50 to 20 new concessions. Just remind us how many non-owned stores you currently have within the portfolio and where they located?

Ed Rosenfeld

Sure. About a 167 freestanding stores and they are all around 50 countries around the world. The biggest territory would be in Asia. Our partner in China, GRI has about 50 freestanding stores.

Taposh Bari - Goldman Sachs

Okay. That’s great. And then just moving onto, I guess this disparity between retail and wholesale and you mentioned the diverse location. The retail, clearly, it’s a cutting edge of the fashion curve if you will, I guess the mid-tier following that and then private label behind. I guess the question we have is, how far apart are they in terms of duration, meaning if there is call it another year of lackluster fashion, at what point does the wholesale business start to follow the retail business?

Ed Rosenfeld

Sure. I mean, it’s a little bit of a tough question to answer, because there are some trends that hit every tier almost simultaneously and then some that when the lag could be a year or even longer. But I think general idea behind your question is correct that, look if we went another year without identifying anything that really or any new list that really took hold in our Steven Madden retail stores, eventually you would see that trickle down into the wholesale channel and it’s some of the mid-tier, the mass merchants, etcetera. We believe that’s fairly unlikely that would be a pretty unusual scenario if we went that long without identifying a new trend. And as we said, we already believe that we have identified strong spring trends, but sure that would happen if there is nothing new for another year or so.

Taposh Bari - Goldman Sachs

Okay. That’s helpful. And then the last question I have is on capital allocation share buyback, little bit less in the fourth quarter than the third quarter. Now you have been kind of ramping that pay sop all year. How do we think about share buyback in your guidance? Generally speaking it seems like you’ve got $300 million-ish in cash, you’re going to generate close to $150 million next year if you do nothing. I was just trying to get an update on where you stand in terms of share buyback.

Ed Rosenfeld

Sure. I mean, I think that we -- all other things being equal, we are still committed to the share repurchase program. We dial it back a little bit in Q4 frankly because we are going to leave ourselves some flexibility to be optionistic and to tack with sort of market conditions. And when the retail business took the sharp downturn in December, we hit the brakes a little bit on the share repurchase, but we have resumed the share repurchase program in Q1. And I think that the run rate that we were at in the back half of roughly $70 million I believe that we spent in the back half, I think that’s still a good run rate for now, all other things being equal.

Taposh Bari - Goldman Sachs

Would you say run rate, I mean, on a quarterly basis, so 70 for two quarters, is that some of your commentary?

Ed Rosenfeld

Yeah, $35 million a quarter or thereabouts.

Taposh Bari - Goldman Sachs

Okay, got it. One last one actually...

Ed Rosenfeld

I just said we are going to continue to be patient and methodical about it, but we will also be opportunistic. As market conditions change we can either tick that up or down.

Taposh Bari - Goldman Sachs

Got you. I just want to squeeze in one, last one on just the seasonal flow of your guidance. They noted there are a lot of kind of variable this year, later Easter shift. I guess the question there is does that matter to your business in terms of -- because it’s on our calendar year end and Easter shift out of 1Q into 2Q. And then the second question related to that is last year you had a lot of businesses that you exited -- there are couple of businesses that you exited in the first half. I am just trying to get better handle on how the wholesale business flows. Is there any outliers in terms of revenue growth throughout the year? Thank you.

Ed Rosenfeld

Sure. In terms of the overall result, I really don’t think the seasonality will be significantly different than it was a year ago. I will say from a comparison standpoint, I think frankly fourth quarter will be the easiest just because of some of the challenge that we had in retail this year. But I don’t really see any meaningful changes in terms of the flow of earnings from the year ago.

Operator

We will take our next question from Erinn Murphy with Piper Jaffray.

Erinn Murphy - Piper Jaffray

Great. Thank you. Good morning. And I called because I missed this. I got disconnected earlier but can you just reflect a little bit more on the current retail environment. I know you talked about the cadence of comp starting in December really being down pretty sharply. Is that kind of a run rate we should expect as we are still in this kind of toughest retail environment in the first quarter? And then can you just speak about kind of the effectiveness with some of the promotional activity that you have been able to execute to try to stimulate traffic? That is my first question, thanks.

Ed Rosenfeld

We are not going to get into the specifics of the quarter-to-date comp but we have said that it has been tough in our own retail store. It’s continued to be challenging in both traffic and sales. We’ve seen some nice improvement over the last couple of weeks which has been encouraging particularly in some places where we have gotten some normal weather like California but overall it has continued to be challenging for the retail segment.

And in terms of the promotions, we have gotten more aggressive you saw in December. We were quite aggressive towards the tail-end of December and in January and February, I think that our promotions have been more in line with what we did last year although we had to -- we have been a little bit -- gone a little bit deeper with the clearance.

We have done a good job of moving through merchandise. So we are in a good position with inventory in our own retail stores but as I said there will be a gross margin impact in Q1 as there was in Q4.

Erinn Murphy - Piper Jaffray

That’s really helpful, thanks Ed. And then just if you could reflect a little bit more on the accessory portfolio, just speak to some of that brands that have trending well and what are some of the opportunities from margin perspective within accessories as we progress throughout ‘14.

Ed Rosenfeld

Sure. I think the most important, there has been Steven Madden and Betsey Johnson, both those handbag division had strong double digit percentage gains in 2013 after very strong gain in 2012. I mean we do expect that to moderate somewhat in 2014 because we’ve had -- we just got a little bit mature and they’ve already had this exclusive growth over the last couple of years. And there is some, I would say some, increased competition in the category with some of the designer leather brand bringing their prices down that something that we have to deal with.

But we are excited about what we are doing in Madden Girls bags. I mentioned that in the prepared remark that sort of trendy bag line and we have come up with $50 to $60, lot of fashion bag pack which has been a strong trend and we are getting good reception there. And then we are also encouraged about our cold weather accessories business. The sell through is, for obvious reasons, have been very strong in that business. And we had real nice gross margin improvement in Q4 due to strong sales growth and I think it should set us up -- hopefully it’s a nice growth for the back half of the 2014.

Erinn Murphy - Piper Jaffray

That’s helpful. And then just a last question for me, if could you reflect a little bit more on the environment for just acquisitions at this point and then if there is nothing that compelling out there, has that change the timeline in which you may bring in some of the international markets that you are currently going with the partnering? Thank you.

Ed Rosenfeld

Yes, I mean we continue to look for acquisition opportunities. There were some smaller opportunities that are of interest, not anything -- we are not very far long on anything of great size in terms of acquisition. And we are -- and in terms of the international distributor that continues to be something that we evaluate as well. And I would hope that we will be able to get something in that front over the next 12 months or so.

Erinn Murphy - Piper Jaffray

Thanks, Ed.

Ed Rosenfeld

Thank you, Erinn.

Operator

Our next question comes from the Scott Krasik with BB&T Capital Markets.

Scott Krasik - BB&T Capital Markets

Good morning.

Ed Rosenfeld

Morning.

Scott Krasik - BB&T Capital Markets

So really interesting to hear about the Madden Girl opportunity at Nordstrom just because of the price point that sort of they have been still low versus what they were. I mean is that really speaking to Kendall & Kylie, is that an opportunity for you or are you going to try and push Madden Girl into other distribution and then just bigger picture, what do you expect your branded footwear business to grow as in 2014?

Ed Rosenfeld

Sure, yes I mean I certainly hope that this can -- this initial entrée into Nordstrom with Madden Girl, Kendall & Kylie, I certainly -- you asked me about that Kendall and Kylie, that was certainly a big factor and that helped us to get our foot in the door.

But if our product can perform and it’s a world where we can but so far it’s performing very well. And we would hope that that could set us up for Madden Girl business with that account down the road with or without an attachment with Kendall and Kylie. And then in terms of the branded wholesale footwear, was that the second part of the question?

Scott Krasik - BB&T Capital Markets

Just yeah, sort of how does that grow versus the private-label business there?

Ed Rosenfeld

Branded was up 9% in the quarter and private-label was up 23%.

Scott Krasik - BB&T Capital Markets

And do you view those becoming more in parity in 2014, or how do you look?

Ed Rosenfeld

Yeah. I mean, I think both of them are going to slow a little bit. Our consolidated guidance is for 5% to 7%, I think that’s really a reasonable target to look at for all the segment sort of footwear, accessories and retail, should all be in and around that number.

Scott Krasik - BB&T Capital Markets

Okay. And so in terms of how that impact wholesale gross margin, should we see start to see the negative mix issues go down?

Ed Rosenfeld

Yes. I mean, in Q1, you are still going to see private-label grow faster than branded. But after that I think that those would be more in line and so the impact on gross margin will be smaller.

Scott Krasik - BB&T Capital Markets

Okay. And then just from a sort of a dollar perspective, which would be bigger, Madden Men and Steven Madden Men or Madden Girl?

Ed Rosenfeld

Madden Girl is bigger.

Scott Krasik - BB&T Capital Markets

Okay. All right. Thanks.

Ed Rosenfeld

Thank you, Scott.

Operator

Our next question comes from Edward Yruma with KeyBanc.

Edward Yruma - KeyBanc

Hi. Thanks so much for taking my question. Just wanted to ask about the impact and promotions in the wholesale channel, obviously it was a very promotional holiday. Did you see any negative margin impact to get the support your retailers in anyway? Thanks.

Ed Rosenfeld

Thanks, Ed. Yeah, sure. I mean, of course we have to support our retailers. It was a very promotional environment. That being said, I think that we had strong sell-through relative to most of the other vendors out there and we are an important brand to these guys. So there is a negotiation at the end of the season and I think we felt pretty good about where we came out. Our returns and allowance as a percentage of sales were actually a little bit lower in Q4 2013 than they were in 2012, so we were pleased with that.

Edward Yruma - KeyBanc

Got it. And one another follow-up, I think you cited in your script that outlet had a slightly higher margin than source and obviously you had some adverse weather and the environment is very promotional. But is that a structural difference or over time did those margin profiles converge? Thanks.

Ed Rosenfeld

Thanks, Ed. We actually do believe that it’s structural. In fact, it was about a 150 basis points. The outlets -- the amount by which outlet four wall profit margin exceeded that in fall price in 2013. And we think that there is a potential for that to even expand. Over time, it could be 300 basis points or even maybe low.

Edward Yruma - KeyBanc

Great. Thanks so much.

Ed Rosenfeld

Thank you.

Operator

We’ll take our next question from Jeff Van Sinderen with B. Riley.

Jeff Van Sinderen - B. Riley

Hi, good morning. Ed, I wonder if you can just clarify a little bit more on how you are thinking about newness, as that seems to be a real key subject in everyone’s mind as you look at the second half of this year?

Ed Rosenfeld

In second half, yeah, look, we never talk about-- we like to talk about trends in the stores. Now, we don’t really ever talk about prospective trends for the obvious competitive reasons. We have talked a little bit about what we think, what Camilo identified in terms of the boots and booties that there is going to be somewhat of a shift towards taller shaft boots and heavier heels. All I can say is that we’ve got a lot of test in the stores. One of the things about the cold weather is that’s given us a chance to test a lot of fall items, and we’ve got some good reads on that and we feel good about the level of boots.

Jeff Van Sinderen - B. Riley

Okay. Good to hear. And then can you give us a little bit more on international in terms of what you see driving growth in that business this year? I know, you mentioned some other distributors that’s you’re working with, but anything else that we should look out there?

Ed Rosenfeld

Yeah, sure, I mean, first of all in our owned operation, Canada, the trends continued to be good there. We think that we’re going to have another double-digit percentage gain in Canada, hoping that there would be probably two to three stores there, potentially four. We’ve already opened what will be our biggest store earlier this year in Yorkdale Shopping Centre, we’re very excited about.

And then in terms of the distributors, I think most important is our partner in Asia, GRI. They opened 17 stores last year to get to about 50. They are scheduled to open another 10 this year, and we’re seeing real nice trends in China. Dubai, our partner DubaiLandmark is doing well, they are scheduled to open another five stores this year and they’re going to be making a big marketing push in Dubai, starting in March.

I mean, we’re also excited with how we are trending in Mexico. About couple, I would say, two to four stores opening there. We also got real nice trends with the two most important department store customers there, Liverpool and El Palacio. We've also started telling the catalog companies there which are very important.

And then I guess the last one I would point to is our partner in the UK, Dune, I think opened their first Steven Madden store back half of 2013, that’s doing well and they’re also expanding their wholesale distribution. We talked on previous calls about House of Fraser, John Lewis, Debenhams and Topshop. They've also added Next, ASOS, [Sole Trader] and Littlewoods recently, so that nice to mention there.

Jeff Van Sinderen - B. Riley

So if you would kind of summarize what inning do you think we are in, in terms of international growth for you?

Ed Rosenfeld

I don’t know, second or third inning.

Jeff Van Sinderen - B. Riley

Okay. Good to hear. And then I know you mentioned Freebird and it sounds like that is doing extremely well. I am just wondering what you're thinking is in terms of the outlet for some of the other secondary, I guess so called secondary brands like Betsey Johnson, Olson, etcetera.

Ed Rosenfeld

Yeah, Betsey Johnson, we feel really good about. We’re talking about shoes. We had a real nice. Business has actually doubled in Q4 than what it was in the prior year. And we've got an order file that supports a real nice increase for the first half of 2014 as well. This is the wedding shoes but this special occasion collection come up, well is doing great. And frankly as the dress shoe category gets better, that should be good for Betsey Johnson as well.

So we’re excited about where we are there. Superga continues to be good. That’s another business that seen real strong sell-throughs and we’re going to continue to grow that, although grow responsibly because we do want to keep the distribution pretty clean there. The other new brand is Mad Love, the Target is doing great and that business dramatically above expectations in 2013 and the Target given us a nice expansion there in 2014.

The last one, I think you asked about was Olsenboye, we had a nice increase in Olsenboye in the quarter, but we’re playing that one in pretty conservatively. As you know, that’s an exclusive brand JCPenney. Just given the uncertainty there, we’ve got that, we’re assuming playing that pretty conservatively for 2014.

Jeff Van Sinderen - B. Riley

Got it, okay. Thanks very much and good luck for the rest of the quarter.

Ed Rosenfeld

Thanks, Jeff.

Operator

We’ll take our next question from Sam Poser with Sterne Agee.

Sam Poser - Sterne Agee

Hi, thanks for taking my question. I have a couple. I guess back to Camilo’s question at the beginning with the various trend that you’re seeing currently. Is this something -- do you have any of these that you really feel like you own, I mean, we saw a lot of us drove lot of slip on sneakers, a lot of other things around with other people to show. I mean, you really own the trooper boot and you’ve own some of these other categories over the past few years. How does that sort of involve in the outlook that you have?

Ed Rosenfeld

Yeah, I mean, a couple of them, I do think we have a very nice position. Certainly the slip on sneakers that we’re doing in pony, I think we’re pretty much the clear leader there. But in terms of bigger trends going forward, with the dress shoes coming back that’s something that we feel very good about. As you know we’ve been outperforming that category. And that's frankly just a category where we have a really nice position with our core customer. We have the girl who really turns to us when she’s looking for her going out shoes, her dress shoes. If you look at the NPD data, for instance we have far away the number one share in that category in our price script. So we feel good about that category coming back.

Sam Poser - Sterne Agee

Okay. And then within your guidance, you said it was sort of five to seven across the board. But a couple of the things, the comp in your guidance and how it plays out, could you sort of give us some idea, I would assume it’s going to be negative in the first quarter? And then also on the gross margin, are we going to be looking another 150 basis point dip in Q1 or is it not going to be quite that that bad, I mean just help us out there if you could?

Ed Rosenfeld

Yeah, sure. The comp for the year in the guidance is modestly negative. And the first quarter is the lowest number we have in. And then in terms of gross margin, your question was, will it be a 150 basis? I hope that it is less than a 150 basis, but maybe a 100 to 150 is the good target, first quarter, flat to the year.

Sam Poser - Sterne Agee

Okay. And then, I mean, are you seeing within on the shows and with the product you have, do you have anything, do you see things with the kind of legs that trooper boot had coming into fold or is that still or is the hunt still on for that, I mean not to that degree, but something…

Ed Rosenfeld

Decade kind of boot, so we’ve got some things that could be big items, that's for sure, but that's the kind of thing. We didn’t know the trooper is going to be the troop until it was. So that’s what we do there, we’re out there looking.

Sam Poser - Sterne Agee

And lastly on the share count, I mean, basically 35 million a quarter on whatever price we put up and that would be the share count or is there share count figure using for the year that we should think about?

Ed Rosenfeld

Well, the guidance assumes, implied in the guidance is only that we can continue to share repurchases in the first half until we exhausted the current authorization. There is probably a little bit of conservatism there, because clearly if that happens we can, we will go back to the Board and get an increase authorization that won’t be a problem.

But right now there is only like $70 million or so in the guidance in the first half. Now keep in mind, any share repurchases that we do in the back half are going to have a meaningful impact to the EPS in this year anyway.

Sam Poser - Sterne Agee

Right. Right. Okay. All right. Well, thanks very much. Good luck.

Ed Rosenfeld

Thank you, Sam.

Operator

We will take our next question from Steve Marotta with CL King & Associates.

Steve Marotta - CL King & Associates

Good morning, Ed. Given everything that you’ve talked about, including that your comps in the first quarter, gross margin is down in the first quarter, weak environment, you are going up against the difficult first quarter last year with the throughput sold in and weather pattern next year, and also sensitivity of course that you don’t guide from a quarterly standpoint? Is it possible that the first quarter is a negative EPS comparison on the year-over-year basis?

Ed Rosenfeld

Anything is possible but that is not what we have in our current forecast.

Steve Marotta - CL King & Associates

That’s great. That’s my only question. Thank you.

Ed Rosenfeld

Yeah.

Operator

We will take our next question from Danielle McCoy with Brean Capital.

Danielle McCoy - Brean Capital

Hi. Good morning, guys.

Ed Rosenfeld

Good morning.

Danielle McCoy - Brean Capital

I was just wondering if you can give us an update on the percent of direct sourcing and expectation for 2014 and then an update on the changes that you guys need to report and some of the responses to that?

Ed Rosenfeld

Sure. In terms of direct sourcing, I think, we are up to about 30% or there about that the legacy business, Wholesale Footwear business, you recall where our business going direct. And we expect to continue to increase that maybe in another 10% over the next 12 months or so.

What, the second part of your question was about report and that’s a division, we have made a lot of progress, we feel really good about the changes that we made there. There is really two pieces, their report signature and report -- report signature is the leather line little bit smaller but doing very well, the sales has improved dramatically there in places like Macy’s.

And then report we have really seen some nice improvement there too, that’s sold into places like DSW, Nordstrom, et cetera. So the net effect of what we've done there has been really dramatic improvement in profitability, the gross margins for 2013 versus 2012 were up something like 900 basis points in report and we think they can be even higher in 2014. So we are really pleased with the progress we have made there.

Danielle McCoy - Brean Capital

Great. And then just lastly, what tax rate should we assume for 2014?

Ed Rosenfeld

So the guidance is based on a tax rate of about 37.5%, but we are still sharpening our pencil there and we think that there could be some upside, by upside, I mean, a lower tax rate as much as 100 basis point. Now we are still analyzing our forecast for how much we are going to reinvestment and definitely overseas which obviously impact the tax rate.

Danielle McCoy - Brean Capital

All right. Great. Thanks guys. Good luck.

Ed Rosenfeld

Thank you.

Operator

We will take our next question from Corinna Freedman with Wedbush Securities.

Corinna Freedman - Wedbush Securities

Hey. Most of my questions have been asked and answered, just a quick if you can give us a quick run through on your expectations for Kylie & Kendall in the retail stores?

Ed Rosenfeld

Yeah. All in retail stores.

Corinna Freedman - Wedbush Securities

Okay.

Ed Rosenfeld

Yeah. I mean, we are going to carry the product in select stores and of course, online, Madden Girl is not a huge -- we don’t have a huge assortment of Madden Girl product typically in the retail stores. We are much more focused on Steve Madden. But we will have that product.

I think it's not going to be a needle mover in terms of dollars but we think it's a nice marketing thing for Madden Girl. And again, as we said, we are very pleased with how it got us into Nordstrom and it giving us also some great social media and earned media.

Corinna Freedman - Wedbush Securities

Great. And if can you just give us an update on the mid-tier channel, and when you think that business is going to drop in your outlook for next year. That’s it. Thank you.

Ed Rosenfeld

Sure. So mid-tier, which customers are you referring too, people call that business?

Corinna Freedman - Wedbush Securities

The Kmart, Sears, just to mid-tier…

Ed Rosenfeld

Yeah. Penney, Sears, those guys, well, some -- a couple of those guys have I think sort of company specific challenges and so we expect couple of those businesses to be tough. We have seen a really nice improvement in our business with cold stuff, our sell-through are up pretty substantially there and we are really pleased with the performance that we have in can, not only candies with some of the other private labels that we do there. So that’s one we feel good about.

Corinna Freedman - Wedbush Securities

Great. Thank you.

Ed Rosenfeld

Yeah.

Operator

We will take our next question from Mike Richardson with Sidoti

Mike Richardson - Sidoti

Yeah. Good morning. Thanks for taking my call. Just the two real quick ones for you, obviously, you have exposure to multi-tier distribution, just wondering if you are seeing any differences in sales sort of across the various tiers and then just wondering how we should be thinking about net store growth for this year? Thanks.

Ed Rosenfeld

Sure. I mean, there are some variations but I don’t think there is anything to really call out in terms of differences between tiers and distribution. I would say, as I said, some of the mid-tier and the mass, particularly in fourth quarter were a little bit stronger, given that those customers maybe perhaps some of the trends we are still newer to them, they had done a little bit longer the two for customers saying our Steven Madden retail stores.

In terms of the store growth, I think, we are looking at net up to 10 to 13 for 2014, where we get there is about three to four full price openings, most of those in Canada, like 10 to 12 outlets and then roughly three closings.

Mike Richardson - Sidoti

Great. Thank you. That’s very helpful. Good luck.

Ed Rosenfeld

Thanks Mike.

Operator

And we’ll take our next question from Taposh Bari with Goldman Sachs.

Taposh Bari - Goldman Sachs

Hey, I just have a quickly follow-up. So I think we’ve hit all of your -- most of your guidance lines with the exception of SG&A that I guess, implied in your guidance. I think there’s flat leverage in ‘14 or about 5% to 7% dollar growth. Yeah, I’m looking at the last three quarters of SG&A dollar growth, up 3, up 4, up 2, all leveraging and all growing below that pays. So trying to get a better idea as to why SG&A would grow at that rate in ‘14?

Derek Browe

Sure. In terms of the leverage question, I think we did expect a little bit leverage in wholesale but because of the down comps that we are forecasting in retail, there is a little bit of de-leverage in retail. And in terms of the dollar growth, the reason it’s up a little bit from 2013, I think we’re up little over 4% for the year. And we’re forecasting a little bit higher than that. We have made some investments in systems. This could be some increased depreciation associated with the CapEx there, some investments in people and then we’ll spend a little bit more on marketing this year as well.

Taposh Bari - Goldman Sachs

Okay. So I guess, the question I’m trying to ask is for having this conversation a year from now and you actually beat on SG&A worth of 5% to 7% revenue growth rate, I guess, a, is that actually possible given what you just said and b, what would that be driven by because I guess, SG&A leverage has historically been a Steve Madden hallmark and I’m just curious to see if that’s still an option into ‘14?

Ed Rosenfeld

Yeah, it’s still an option but I think that the way I’d like to get there is beating on sales.

Taposh Bari - Goldman Sachs

Got you. Okay. Thanks. Good luck.

Ed Rosenfeld

Thanks Taposh.

Operator

I would now like to turn the conference back over to Mr. Ed Rosenfeld for any additional or closing remarks.

Ed Rosenfeld

Great. Well, thanks everybody for joining us this morning and we look forward to speaking to you on the next call. Good day.

Operator

And it does conclude today’s conference call. Thank you all for your participation.

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