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Steve Madden, analysts warn that boot sales could be derailed by warm weather

MarketWatch

DSW was downgraded on concerns that boots might not be flying off the shelves.

Warm weather could derail boots sales, and both DSW Inc. and Steve Madden Ltd. are already feeling the pinch.

DSW DSW, -1.62% was downgraded to neutral from outperform at Wedbush on boot sales concerns, and its price target was cut to $20 from $23. Analysts led by Christopher Svezia say it has been “unseasonably warm” in many metro markets where DSW has set up shop.

DSW shares closed down nearly 3% in Wednesday trading.

“Recall boots account for about 30% of second-half sales and in our view were likely planned flat with increases in fashion and casual booties and declines in cold weather product,” the note said. Analysts were hoping for a good start to the season in October as a lead in for same-store sales and margin upside.

“Given the slower start from uncooperative weather, it caps some of the upside that we hoped would have developed during the second half,” analysts wrote. “Recently, we have seen some improvement as the weather breaks in certain markets, but it’s later in the season and still limits the chase opportunity.”

For much of the month of October temperatures were above normal in Eastern markets, wrote Planalytics in a recent report.

“The generally warm conditions in the heavily populated Northeast region outweighed neutral to more favorable conditions in other regions, generating a net negative (-$54 million versus October 2016) weather-based sales impact for U.S. apparel stores,” Planalytics wrote, noting that October 2016 was also warm.

Steve Madden SHOO, -0.13% said on its Tuesday earnings call that same-store sales for its retail business dropped 3.8% for the quarter because sales of sneakers and sandals couldn’t offset the drop in the dress and boot categories.

“For October, boots have accounted for the entire decline in our comp stores,” Chief Executive Edward Rosenfeld said, according to a FactSet transcript. “As we look ahead, we anticipate that the retail environment will remain challenging and that the boot category in particular will continue to be a headwind through the fourth quarter.”

Even with the boot barrier, analysts are bullish about the company’s long-term prospects. Men’s merchandise, international business, and handbags were bright spots this past quarter, KeyBanc Capital Markets analysts wrote.

“While quarter-to-date retail comp trends have weakened amid boot headwinds, longer term we believe the company remains well-positioned to continue share gains,” wrote analysts led by Edward Yruma.

KeyBanc rates Steve Madden shares sector weight.

Wedbush shaved a $1 off its price target for Steve Madden, down to $47 from $48, but think the sharp stock decline on Tuesday was “overdone.” Shares closed down nearly 9% on Tuesday and closed down 1.4% in Wednesday trading.

Analysts played down the boot business headwind, saying it was planned down 10%, but now looks like it will be down 12%.

“These trends are largely pressuring owned retail while wholesale remains significantly less impacted,” Wedbush said in a note. “The issue is not about the brand or execution, more the weather and underlying demand in the category. Looking through this, the Steve Madden story remains unchanged.”

Analysts also note strength in “fashion boots” while casual, riding and tall boots are weak.

Wedbush rates Steve Madden shares outperform.

Steve Madden stock is up 7.7% for the past year, DSW is down 8.4%, and the S&P 500 index SPX, -0.05% is up 22.9% for the period.

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