Those Shoes Are Fabulous!
THE COBBLESTONE STREETS of New York's fashionable SoHo neighborhood can be treacherous for women with any respectable shoe sense. Yet the inevitable blood blisters and sprained ankles hardly deter trendy chicas from teetering on fabulously funky platforms or tottering in super-sleek heels from store to store in search of even less practical footwear. Such devil-may-care dedication to female fashion has been a boon for shoe makers Kenneth Cole Productions (KCP) and Steven Madden (SHOO).
At first glance, you wouldn't think these companies have much in common. Kenneth Cole's sleek footwear and clothing appeals to urban sophisticates, while Steven Madden's chunky-heeled offerings score big with downtown fashionistas. And unlike Kenneth Cole, Steven Madden's eponymous founder has a sordid past. In April, Madden was convicted of securities fraud, sentenced to 41 months in prison and ordered to pay $3.1 million in restitution, plus an $80,000 fine. He resigned as chief executive of Steven Madden last year. The company was never charged with any wrongdoing.
Still, these companies have some similarities. Both sport tiny market capitalizations — Kenneth Cole's is $553 million, while Steven Madden's is just $226 million. And both stocks have been rising at a stunning clip. Year to date, Kenneth Cole is up 63%, while Steven Madden is up 40% — and that's on the back of an 84% rise last year. Talk about shoes that were made for walking.
Both companies posted first-quarter earnings on Wednesday, and provided investors with a glimpse of what's to come. But while each report was solid, these stocks don't seem to be on equal footing any longer.
First, Kenneth Cole, which has pulled off something of a turnaround of late. Last year, the company's growth was hampered by a major fashion misstep (it offered too many square-toed styles after customers' appreciation for them had cooled). Adding to its woes, it neglected to discount merchandise while other retailers were stimulating sales with heavy markdowns. The result: 2001 earnings fell 54% year-over-year, compared to historical growth of 24%.
But Kenneth Cole's first-quarter results showed some decent progress. After upping expectations last month, Kenneth Cole on Wednesday reported a quarterly profit of 27 cents a share, a penny better than Wall Street's estimates and well above the 21 cents it earned a year earlier. Improved margins and expense control compensated for weaker sales, which, at $92.9 million, were down 4.6% year-over-year. Sales for the company's lower-priced lines, Reaction and Unlisted, outpaced those for the pricier Kenneth Cole New York line. Encouragingly, management upped its earnings guidance for the second, third and fourth quarters.
Trouble is, the strong performance is already baked into the stock price — and then some. When Kenneth Cole stumbled last year, shares plunged 56%, from $40.25 to $17.70. Now, after its fast climb, the stock carries a forward price/earnings multiple of 27.55 — greater than the industry average of 20.85, the Standard & Poor's 500's 22.05 and the company's five-year average of 21.05, according to Zacks Research. Moreover, its price-to-earnings-growth, or PEG, ratio of 1.96 is pretty rich when compared with the S&P's 1.76 and the industry's 1.25.
David Lamer, senior equity analyst at Ferris Baker Watts, believes Kenneth Cole is a good brand and is confident that management's working to improve the business. But he remains cautious on the stock. "Shares certainly appear to be trading ahead of themselves at these multiples," he says. (Lamer doesn't own Kenneth Cole shares, nor does Ferris Baker Watts have a banking relationship with the company.) He attributes the stock rise this year to a heavy short squeeze, which occurs when a heavily shorted stock rises and investors rush to cover their positions, boosting the stock even more. "There are certainly opposing views on this [company]," he says. Some think it'll turn around quickly; others disagree, and are shorting it. "Oddly enough, those two combinations are driving the stock [upward]," says Lamer.
As for Steven Madden, the founder's legal troubles don't seem to have affected the company's operations thus far. "The customer doesn't care," says Gary Kane, analyst at Berman Capital, a small New York-based hedge fund with a retail focus. "[Madden] puts out a good shoe." (Kane declined to comment on the hedge fund's position in Steven Madden.) In the first quarter, Madden earned 30 cents a share, vs. 29 cents a year earlier and Wall Street's estimate of 27 cents. Sales of $66.6 million were up 25% year-over-year, thanks to favorable weather in the Northeast and early delivery of Madden's spring collection to stores. The company also upped its full-year earnings guidance to between $1.28 and $1.33 a share from a range of $1.25 to $1.30.
Although there was good revenue growth and earnings improvement, net margins slipped slightly to 6.14% from 6.83% a year earlier. But Amir Ali, an analyst at Sidoti and Co., says net margin declines are an industry-wide issue. That said, Steven Madden is more than holding its own in this competitive business, says Ali, one of two Wall Street analysts covering the stock. Not only has it diversified with different lines of shoes for men, women and children, but it also boasts a strong balance sheet and respectable net margins for the industry, says Ali. (Ali doesn't own shares of Steven Madden, nor does Sidoti have a banking relationship with the company.)
As for the stock, despite its considerable run-up, Steven Madden isn't terribly expensive. Its forward P/E of 14.62 still falls below its five-year average of 17.80, according to Zacks Research. And its three-to-five year growth rate of 15% gives it an attractive PEG of 0.97. Picking stocks is just as tricky as selecting a pair of shoes, and price tags are important in both cases. Steven Madden doesn't give us sticker shock
