Steve Madden Ltd. said in its fourth-quarter earnings release that the Payless ShoeSource bankruptcy, which is culminating in the largest liquidation event in U.S. retail history, is a near-term challenge.
“While we face a near-term headwind due to the bankruptcy of Payless ShoeSource, a significant private label customer for the company, we are confident that our diversified business model positions us for long-term growth and value creation going forward,” said Steve Madden Chief Executive Edward Rosenfeld in a statement.
Payless announced that it had filed for bankruptcy on Feb. 18. It is now selling $1 billion worth of merchandise, furniture and fixtures at a discount, and will shutter 2,300 stores in the U.S., Puerto Rico and Canada.
Read: Find the Payless ShoeSource liquidation sale near you
On the earnings call, Rosenfeld called Payless “a meaningful customer” for Steve Madden SHOO, +3.98% .
“During 2018, we conducted some of our business with Payless through the first-cost model in which we do not recognize sales on the top line, but instead showed a profit in the line called commission and licensing fee income net,” he said, according to a FactSet transcript.
Net sales to Payless for 2018 totaled $52 million, but the total jumps to $105 million including first-cost business.
For the fourth quarter, Steve Madden said it had an $8.5 million pre-tax adjustment related to the Payless bankruptcy. Year-over-year, Rosenfeld said the Payless bankruptcy had a 16-cent-per-share negative impact.
For fiscal 2019, Steve Madden expects a $2.1 million pre-tax bad-debt expense associated with the bankruptcy.
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Even if Payless is no longer in the picture, Rosenfeld says Steve Madden has other solid retail partners.
“I actually saw an interesting statistic yesterday, which is that consumers that shopped at Payless in 2018 nearly half also purchased footwear at Walmart in 2018 and approximately 20% also purchased footwear at Target. And those were the two largest customers in terms of overlap with Payless shoppers,” he said.
Steve Madden has “significant” private-label partnerships with Walmart Inc. WMT, -0.49% and Target Corp. TGT, +0.80% , he said and talks with them have already begun.
Steve Madden has also launched discussion with “other retailers that think they may be beneficiaries from Payless going out of business in the U.S. about how we can grow our business there and how we can assist them in trying to capture some of the market share that’s going to be up for grabs,” Rosenfeld said.
Steve Madden reported adjusted earnings per share of 42 cents, beating the FactSet consensus of 38 cents. And sales totaled $410.4 million, up from $364.4 million last year and ahead of the $402.0 million FactSet expectation.
Steve Madden shares are up 3.6% in Wednesday trading.
“In our view, while the core business remains solid, the loss from Payless is real income/profits that will have to be made up over time and needs to be considered in valuating the company,” wrote Wedbush analysts led by Christopher Svezia.
Wedbush rates Steve Madden stock neutral with a $32 price target.
Steve Madden shares have rallied 15.4% over the past year while the S&P 500 index SPX, -0.26% is up 1.4% for the period.
