Trade Alerts: Steven Madden (SHOO) – November 27, 2018
Sector: Apparel / Footwear
Current Price: $31.04
Target: $28 and under
Stop Loss: $33.50
Time Duration: 108 days
Trade Idea – Buy SHOO March 30 Puts for $2.00 or less.
The bid/ask spread currently is 1.50 x 1.85 and volume at this strike is zero and open interest is zero. You will be first to buy puts at this strike. Placing the alert 15 cents above the offer.
Alternate Trade – Buy straight SHOO June 30 puts for $2.40 or less.
SHOO rarely appears on my radar. On average day trades only 31 contracts and very little open interest in option chain. Unusual buyers of 1,800+ December 30 puts for up to $0.75 offer side. Approx $135,000 bearish bet with implied volatility jumping higher.
Last quarter as reported on October 30th company missed revenues at $458.5M vs $473M estimate and FY2018 EPS guidance was lowered to $1.77 vs $1.8 estimate. Technically stock is failing at 50-day moving average and this is potential start of new leg lower.
Last night Trump made a specific comment that if we don’t make a deal with China in G20 meeting this weekend, he is going to go ahead with 25% blanket tariff on everything coming from China. What does this mean for SHOO? Keep reading.
Heavy exposure to China. SHOO sources nearly 90% of manufacturing from China according to Wells Fargo which is simply too much risk for investors to get comfortable with. On October 22, the analyst cut estimates and pointed out a scenario which paints a very negative picture if Trump moves forward with 25% tariffs. Here are biggest things to keep in mind:
- Over 90% of SHOO’s products are sourced from China (or roughly 70% excluding private-label goods where SHOO transfers ownership before it leaves China). Roughly 90% of sales are generated in the US. This is simply a terrible combo for current administration in the White House.
- The company’s accessories business (20% of sales) is subject to already-announced tariffs which was part of $200 billion that went into affect on September 24th. This should begin flowing through the P&L next year. This creates a risk to 2019 numbers but important thing the risk will be significantly magnified if we enter into a “tariff everything from China” scenario.
- Specifically, Wells Fargo estimates that the impact of already-announced tariffs on SHOO’s handbag business are a $0.15-$0.20 headwind to FY2019 EPS estimate – or about 9% headwind based on their prior split adjusted EPS estimate of $1.96.
Wells Fargo points out:
“The bigger issue is if we go to a “tariff everything” scenario, as a 25% tariff on SHOO’s footwear that is imported from China would likely create an incremental $1.00-$1.25 of EPS risk. So, when coupled with the on-the horizon impact from handbag tariffs, the total potential headwind to SHOO’s FY19E EPS is $1.25-$1.50, or roughly 70% of the earnings base.”
Meaning, even though general consensus right now is SHOO’s business trends are solid in general (strong brand momentum, rapid international growth, etc.), there is significant amount of “negative optionality” from tariffs, which is likely to over-shadow the company’s fundamentals until we gain greater clarity around trade policies with China.