Contrary to clothing companies, which tend to have a steady flow
of customers, footwear companies come in and out of vogue. Far too
many companies place their efforts on trying to attract the highly
profitable teen niche. Yet trying to appease a capricious
teenager's taste is an uphill battle. While this retail segment is
highly lucrative, it's challenging because fashion tastes for this
demographic are unpredictable and change far too frequently.
Originality is very important to teens, making them perhaps the
most fickle customer group in the world.
Even shoe companies with broad appeal have a tough go as fashion
trends change in a heartbeat. Consumers in general change like the
wind -- people get bored of old styles quickly, which can
significantly affect the profitability of a footwear company. Think
of all the shoe styles that have come and gone --
Deckers Outdoors Corp. (Nasdaq: DECK)
with its Ugg brand or
Sketchers USA (
with its recent high-top wedge sneakers. And don't forget about
Crocs (Nasdaq: CROX)
, which seemed to go from hero to zero in no time.
These stocks have been through quite the roller-coaster ride
during the past five years, having to operate in a tougheconomy
while catering to customers with inconsistent preferences. Just
take a look at the journey these three footwear companies have made
and youwill see what Imean ...
Simply put, when you are trendy your stock soars, but when
tastes change you can crash and burn. But I recently found a
footwear company that has been able to buck the trend in a big way.
Despite a tough economy during the past five years, this stock has
delivered positive returns for its shareholders, growing almost
400%. In fact, it'is up nearly 30% in 2012 alone, while competitors
have seenshares fall 20-50% or more.
What is behind this company's secret?
It doesn't follow trends; it sets them.
Self-touted as the most successful shoe designer in the United
Steve Madden (Nasdaq: SHOO)
designs trendsetting footwear and accessories often found in
upscale department stores targeted toward a demographic of
The company was founded 22 years ago, when Founder Steve Madden
spent just $1,100 to create his shoe designs. Today, his $2 billion
company encompassesmultiple brands and products from clothes to
eyewear, hosiery and handbags, among other things.
Years of growth and no debt
Steve Madden is a very stable stock that's been able to
improveearnings steadily throughout the years. From the tough times
of 2009 through the end of 2011, the company increased its earnings
by 100% to $100 million. During this amazing growth trajectory,
Steve Madden has been rewarding shareholders with 20% average
annual returns and average earnings of $1.66 per share during the
past five years.
The best part about this stock is it still has plenty of room to
grow. Its international division accounted for only 4% ofnet sales
($39.4 million) in 2011. This represents a huge
opportunity for growth in the future as the company continues to
expand its product lines and amount of store locations in the
United States and internationally. In addition, while Madden's
women division accounted for 29% of net sales, its men's division
only accounted for 8% of total sales, a major area for growth and
Risks to Consider:
Though this stock has clearly bucked the trend the past five
years, it is not immune to downturns in consumer spending.
Higher-priced shoes like Madden's can see slower sales in tough
economic conditions. Additionally, consumer style preferences can
change at any time. If Steve Madden's signature look went out of
style or if the company failed to adapt, then the stock could
suffer the up-and-down fate of competitors.
Action to Take -->
Given this amazing growth trajectory and strong prospects, buy
Steve Madden up to $47 a share. This stock should hit $55-$60
within the next 12 months. It is undervalued compared to many
others in the footwear space, with a price-to-earnings (P/E ) ratio
of 18.6, compared with the industry average of 20. Profit margins
of almost 14% are higher than the industry's average of roughly 9%,
and with no debt, Steve Madden is surely crushing the