Steve Madden expects that its private label business with Walmart and Target will increase notably next year as the mass retailers have shown strong resilience and benefited from the market disruption caused by the Covid-19 pandemic.

Last year, Walmart and Target represented nearly a third of the fashion company’s accounts receivable. During a conference call on the company’s third-quarter results, the chairman and chief executive officer, Edward Rosenfeld, noted that the two retailers total close to $300 million in business and he expects them to represent a “more significant percentage of the mix next year.” In 2019, Steve Madden’s overall revenues reached $1,800 million.

“We’re doing well with them and we’re in a lot of discussions with them about new initiatives, and that business should grow for us in 2021,” Rosenfeld added referring to the two retailers.

He noted that gross margins are considerably lower in the private label business. Operating expenses margins are also weaker despite reduced operating expenses. Nevertheless, “it’s a nice business because we do it with no inventory risk or investment.”

While Rosenfeld anticipated growing opportunities with Walmart and Target, he pointed out that wholesale clients are “taking a fairly conservative approach” towards the spring/summer season and that on average orders could be down 15-20 percent for the fashion industry as a whole, compared with 2019.

In the second quarter ended on July 31, Walmart’s revenues rose by 5.6 percent to $137.7 billion, and comparable sales in the U.S. increased by 9.3 percent. Meanwhile, Target’s sales in the second quarter, ended on Aug. 1, grew by 24.8 percent to $22.7 billion, with comparable sales up by 24.3 percent.

Move out of China to resume, freight costs surge

Due to the outbreak of the coronavirus, Steve Madden has suspended the process of moving out production from China. Currently, the country “has been the most reliable place to be” and that the bulk of the autumn collection will come from the Asian power house, according to Rosenfeld. But, with the spring collection, he expects the company will be able to resume its policy of diversifying sourcing to countries such as Mexico, Cambodia, Brazil and Vietnam. Rosenfeld noted that the percentage of goods produced in China has fallen to the low 60s from the 90s seen a couple of years ago.

The company warned that the fashion industry is suffering delays due to disruption in the supply chain caused by the pandemic. It noted that there are problems in obtaining containers and vessels for maritime transport. Meanwhile, labor shortage and other shortcomings are slowing down processing in the company’s warehouses and those of its clients. “It’s probably added a couple of weeks to the whole process of getting shoes from the factory to the store,” Rosenfeld commented. The situation has also led to increases in freight rates, with the cost of air transport doubling year-over-year and maritime shipment costs rising by 25-30 percent.

Third-quarter sales above expectations

In the third quarter, Steve Madden saw revenues decrease by 30.9 percent year-on-year to $346.9 million, “significantly” above the company’s expectations. In wholesale footwear, revenues dropped by 32.5 percent, compared with the company’s forecast 35 percent, to $213.3 million with European sales increasing for the Steve Madden brand thanks to strong gains with e-commerce clients.

The company expects overall wholesale sales to post a “nice improvement” in the fourth quarter compared with the previous three months driven by the Steve Madden brand, both in footwear and handbags. On an annual basis, it anticipates fourth-quarter revenues to drop by a high teen rate.

Retail revenues decreased by 22 percent year-on-year to $59 million, against an expected 25 percent, but online sales continued to grow, up by 63.3 percent, with revenues on the platform up by 81.8 percent. It also expects retail sales to contract by a high teen percentage, year-on-year, in the final quarter.

Due to a change in customer demand, the company noted that slippers will represent about 9 percent of the women’s footwear product mix in the fourth quarter compared with 1 percent in 2019, while boots and booties will be around half of the product mix, up from some 44 percent a year earlier. It also estimates that when combining the wholesale and retail channels, online sales have grown from about 20 percent of sales in 2019 to nearly 40 percent currently and could represent half of sales “at some point.”

Steve Madden’s third-quarter gross margin increased 1.30 percentage points to 40.3 percent and the loss from operations totaled $3.0 million, compared to income from operations of $68.0 million a year earlier. The company believes that gross margins could improve slightly in the fourth quarter.

The net loss was $6.9 million against profits of $52.5 million. On an adjusted basis, the bottom line showed a profit of $31.8 million compared to $56.0 million the previous year.