Steven Madden Ltd

NASDAQ:SHOO

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the first quarter Steven Madden, Ltd Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference to Danielle McCoy, Vice President of Corporate Development and Investor Relations. Please go ahead.

[Danielle McCoy, Director of Corporate Development and IR]

Thanks, Norma, and good morning, everyone. Thank you for joining our first quarter 2022 earnings call and webcast.

Before we begin, I'd like to remind you that our remarks that follow, including answers to your questions, contain statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to materially differ from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our press release issued earlier today and filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all.

The financial results discussed on today's call are on an adjusted basis, unless otherwise noted. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release. Joining the call today are Ed Rosenfeld, Chairman and Chief Executive Officer; and Zine Mazouzi, Chief Financial Officer.

With that, I'll turn the call over to Ed. Ed?

[Ed Rosenfeld, Chairman and Chief Executive Officer]

Thanks, Danielle. Good morning, everyone, and thank you for joining us to review Steven Madden's first quarter 2022 results.

Before I begin, I would like to acknowledge the devastating war in Ukraine and the heartbreaking humanitarian crisis we are seeing in the region. We at Steven Madden have provided over $500,000 in assistance for the relief effort through cash donations from the Steven Madden Foundation as well as donations of footwear, clothing, blankets and accessories. We will continue to look for ways to help and stand alongside the global community calling for an immediate end to the war.

Now moving on to our first quarter results. We got off to an outstanding start to the year, delivering the highest quarterly earnings in our history in the first quarter. Q1 revenue increased 55% and diluted EPS increased 180% compared to the prior year.

Overall, these results reflect the strength of our strategy and our team's execution. We are winning with product and supporting that great product with effective marketing, and that combination is driving closer connections with our consumers and increasing brand relevance, particularly for our 2 largest brands, Steve Madden and Dolce Vita. That, in turn, is enabling success with each of our 4 key business drivers: First, driving our direct-to-consumer business led by digital. DTC revenue grew over 60% in the quarter; second, expanding in categories outside of footwear like handbags and apparel. Our branded handbag business increased more than 50% and our apparel revenue was up more than 100% in Q1; third, growing in international markets. Our international revenue increased over 60% in the quarter; and fourth, strengthening or our core U.S. wholesale footwear business. That business also grew over 60% in Q1.

So across the board, we are executing on our key strategic initiatives and seeing the results and we are confident that our continued focus on these initiatives will enable us to continue to drive top and bottom line growth going forward.

So turning to our performance by segment in Q1. Our Wholesale Footwear segment revenue increased 60% compared to the prior year. The Steve Madden brand drove the majority of the growth with strong gains across Steve Madden Women's, Men's and Kids as well as Madden Girl. Dolce Vita was also outstanding, with revenue up over 100% to last year as that brand's momentum continues to accelerate.

In international markets, we had triple-digit percentage increases in Canada and Mexico and another strong quarter of growth in Europe. In our Wholesale Accessories and Apparel segment, revenue increased 37% compared to the prior year. Growth in this segment was driven primarily by strong gains in Steve Madden handbags, which is up more than 60% to the prior year, and BB Dakota Steve Madden apparel, which more than doubled compared to the year-ago period.

And in our direct-to-consumer segment, revenue increased 61% versus the prior year period. E-commerce continued to account for the majority of our DTC revenue and e-com revenue increased 57% compared to last year. Brick-and-mortar revenue increased 64% year-over-year.

Overall, we are seeing robust consumer demand for our brands and strong performance across channels, product categories and geographies. Our strategic initiatives are paying dividends, and we are confident that we are well positioned to deliver sustainable growth for years to come.

So now I will turn it over to Zine to review our first quarter financial results in more detail and provide an update to our outlook for 2022.

[Zine Mazouzi, Chief Financial Officer]

Thanks, Ed, and good morning, everyone. Our consolidated revenue in the first quarter was $559.7 million, a 55% increase compared to 2021 and a 34.6% increase versus 2019. Our wholesale revenue was $449 million, up 54.1% compared to the prior year and up 29% compared to 2019. Wholesale footwear revenue was $346.7 million, a 59.9% increase from 2021 and a 25.4% increase from 2019.

These results were primarily driven by strong performance in our flagship brand, Steve Madden as well as in Dolce Vita and Betsey Johnson. Q1 revenue also benefited from a pull forward of orders as some wholesale customers elected to front load deliveries. Wholesale Accessories and Apparel revenue was $102.3 million, up 37.1% to last year and up 43% to 2019. These results were primarily driven by a strong quarter in Steve Madden handbag, which grew 59% compared to 2021 and 70% compared to 2019, in part due to some accelerations of handbag shipments from Q2.

The apparel business also saw significant strength, growing triple digits compared to last year. In our direct-to-consumer segment, revenue was $108.3 million, a 60.5% increase compared to 2021 and a 72.4% increase compared to 2019. E-commerce revenue increased 57.5% compared to last year, and 244% versus 2019, reflecting strong performance in the Steve Madden, Dolce Vita and Betsey Johnson digital businesses.

Brick-and-mortar revenue increased 64.1% to last year or 52% on a comp store basis. Comparing to 2019, a brick-and-mortar revenue was up 10.4% or 13% on a comp basis. We ended the quarter with 213 brick-and-mortar retail stores, including 66 outlets as well as 6 e-commerce websites and 19 company-operated concessions in international markets.

Turning to our Licensing and First Cost segments. Our license and royalty income was $1.6 million in the quarter compared to $1.5 million last year and $2.5 million in 2019. First Cost commission income was $0.8 million in the quarter compared to $0.6 million last year and $2.4 million in 2019. Consolidated gross margin was 40.7% in the quarter, expanding 220 basis points from the prior year, and wholesale gross margin was 35.2%, a 290 basis point improvement compared to last year, driven by an increase in wholesale footwear.

Direct-to-consumer gross margin was 62.3% compared to 63.5% last year, driven primarily by freight pressure. Operating expenses were $133.5 million in the quarter compared to $103.5 million last year. As a percentage of revenue, operating expenses were 23.8% in the quarter compared to 28.7% last year, reflecting expense leverage on the increased revenue and our continued discipline around expense management.

Operating income for the quarter totaled $94.4 million or 16.9% of revenue, up from $35.6 million or 9.9% of revenue in the last year, and $45.1 million or 10.8% of revenue in 2019.

Our effective tax rate for the quarter was 22.3% compared to 21.1% in 2021. Finally, net income attributable to Steve Madden Limited for the quarter was $73.4 million or $0.92 per diluted share, up from $26.9 million or $0.33 per diluted share in 2021 and $35.1 million or $0.42 per diluted share in 2019.

Moving to the balance sheet. Our financial foundation remains very strong. As of March 31, 2022, we had $180.2 million of cash, cash equivalents and short-term investments and no debt. Inventory totaled $233.4 million compared to $106.6 million last year. Inventory continues to be higher than historical levels due to our need to place production orders earlier due to the supply chain disruption and longer transit lead times. But we remain comfortable with the amount and the content of our inventory and our ability to meet our customer-ship windows. Our CapEx in the quarter was $3.6 million.

During the quarter, we repurchased $42.4 million of the company's common stock, which includes shares acquired through the net settlement of employee stock awards. The company's Board of Directors approved a quarterly cash dividend of $0.21 per share. The dividend will be payable on June 24, 2022, to stockholders of record as of the close of business on June 13, 2022.

Turning to our outlook. Based on the strong start to the year, we are raising our revenue and earnings per share guidance. We now expect revenue to increase 13% to 16% compared to 2021, and we expect diluted EPS to be in the range of $2.90 to $3. Now I'd like to turn the call over to the operator for questions. Norma?

[Operator]

[Operator Instructions] Our first question comes from Paul Lejuez with Citi.

[Brendon Shea, Citi]

This is Brendon Shea I'm on for Paul. I was wondering if you could talk a little bit about recent supply chain developments. Have you seen any changes from recent world events? And what are you expecting near-term on the supply chain front?

[Ed Rosenfeld, Chairman and Chief Executive Officer]

Yes. We really have not seen any material change to the supply chain. We're still experiencing extended lead times and transit times, we're still experiencing quite a bit of pressure on freight. If anything, I think the freight pressure has gotten incrementally a little worse since the last time we were on the call, at least in terms of the impact to our forecast for the year. But overall, no. No material change as of now.

[Brendon Shea, Citi]

Appreciate that. And can you talk a little bit about the -- it sounds like wholesale pulled forward some deliveries. Was that helpful for 1Q and you think it pulled from maybe the second quarter?

[Ed Rosenfeld, Chairman and Chief Executive Officer]

Yes. There was definitely a change in timing of deliveries Q1 versus Q2 compared to what we -- the pattern historically. So you will see the Q2 wholesale revenue growth decelerate a little bit, although it will still be strong. We're up by 54% in wholesale in Q1 versus last year. I think for Q2, you should be thinking more around high 30s.

[Brendon Shea, Citi]

That's super helpful. And one last one for me. Can you talk about price increases for the second half? And what are you seeing on the cost side and expectations for the second half on product?

[Ed Rosenfeld, Chairman and Chief Executive Officer]

Sure. Yes, we continue to see pressure on our costs. There's some pressure on FOB costs based on what's meaning factoring costs, meaning based on what's going on with both labor and materials. And then, of course, there's also quite a bit of pressure that we continue to see from freight.

So the good news is we have -- we've been raising prices. And for the most part, feel very good about by customers' acceptance of those prices. Particularly when we have newness, we're seeing that the customers are not pushing back on the price increases. If the products are what we call LY products, last year type products, there may be a little bit more resistant, but anything new, we're seeing the customer willing to pay. So for the most part, we're offsetting those pressures with the price increases.

[Operator]

And next question comes from Jay Sole with UBS.

[Jay Sole, UBS]

Maybe my question is just on the guidance for the full year. How do you think about adjusting the guidance given that you beat the consensus by $0.41 in Q1. You're raising the midpoint of the guide by about $0.17 for the full year. Was there something that you're seeing in the environment that makes you think the back half of the year won't be as strong as you thought previously? Or is it sort of -- this was your plan for Q1 and sort of everything is sort of a little bit better than Q1, but just treat it undermodeled it. How do you think about it?

[Ed Rosenfeld, Chairman and Chief Executive Officer]

Yes. It's a good question. We definitely -- we're not aligned -- or the Street was not aligned with how we were looking at Q1. So our internal forecast was about $0.20 ahead of consensus for Q1. So you talked about, I think, a $0.41 beat. About half of that just accounted for the difference in how the Street was looking at it versus our internal forecast. So we did obviously come in another $0.20 or so ahead of our internal forecast. And as you said, we're raising the full year $0.17. Keep in mind, part of that increase or beat to our internal forecast was a little bit of pull forward from Q2. So essentially, what we've done is taken what we beat into Q1 and roll that forward and not change the back 9 months of the year.

[Jay Sole, UBS]

All right. Got it. And then maybe if I could ask just another question on the quarter. it seems like there was not just strong trend right product, but a lot of great execution like on social media with marketing. Can you just talk about some of the successes that you had in the quarter, which maybe helped amplify the growth that you had in the business. And maybe talk about what you expect to see as we go forward into Q2 and the rest of the year.

[Ed Rosenfeld, Chairman and Chief Executive Officer]

Yes. Look, I feel very good about how the team is executing. And that goes for Steve Madden, it goes for Dolce Vita, it goes for some of our smaller brands like Betsey Johnson, I think for us, -- it always starts with product and the team has done a great job of creating trend-right products that are resonating with the consumers. And so that's -- I think that's where it starts.

But as you point out, we also -- an important part of our strategy is to support that great product with effective marketing. And I think that's an area where we've been raising our game over the last few years, particularly in the digital marketing front and all the work that we do, in particular, to drive our owned and operated e-commerce businesses. And I think you're seeing the results of that, not only in Steve Madden, but also tremendous success, for instance, in Dolce Vita. Again, a smaller brand but Betsey Johnson's owned and operated e-commerce is growing rapidly. So we feel good about the execution on that front, and we're going to continue to lean into those initiatives.

[Operator]

Our next question comes from Tom Nikic with Wedbush.

[Tom Nikic, Wedbush]

I wanted to ask about the gross margin. You had a pretty strong increase in the wholesale gross margin despite freight costs being really, really elevated. How are you able to do that when most other brands out there are seeing a lot of gross margin pressures from freight?

[Ed Rosenfeld, Chairman and Chief Executive Officer]

Yes. We saw some nice improvement, particularly in the wholesale really driven by the Wholesale Footwear business, and it was really a -- nice to see was it was broad-based. So we were up in the branded business. We were up in the private label business, but we also did benefit from a mix shift because the branded business grew much stronger than the private label business, and that's obviously higher margin. So that definitely contributed increase.

But look, we've pushed through some pricing increases, and our sell-throughs have been very good. So very limited promotional activity, limited amount of markdown allowances, very limited amount of closeouts. So good full price selling. And that's obviously the biggest driver of gross margin for us.

[Tom Nikic, Wedbush]

All right. And just a quick modeling question. I believe when you reported Q4, you said that the 1H versus 2H revenue split this year should be similar to what you had in 2019, I think something like a 48-52 split. Should we still think about that being the 1H-2H split this year?

[Ed Rosenfeld, Chairman and Chief Executive Officer]

No, at this point because we overachieved by $0.20 or so in Q1. I think that you're going to see at least the way we're modeling it now is that it will be more front-half weighted than 2019.

[Operator]

Our next question comes from Laura Champine with Loop Capital.

[Laura Champine, Loop Capital]

So a follow-up on that. What would be the reason that you would see a sequential slowdown in the back half, especially if you lap your toughest comp this next quarter. And I think you just mentioned you might be able to grow Wholesale Footwear 30% plus on top of that. So what would drive a big slowdown in the back half.

[Ed Rosenfeld, Chairman and Chief Executive Officer]

Well, I guess there's a couple of things I'd say is, first of all, our comparisons in the back half are dramatically tougher than in the first half. So that's number one. But I think also there is some level of caution that we have on the back half just given all the macro headwinds -- or potential macro headwinds. And we have heard from some of our -- basically all of our big wholesale customers that they're taking a somewhat cautious approach to the back half overall. I think that they'll be less cautious with us because of how well we're performing and the sell-throughs that we've been driving for them.

But certainly, we know that folks are our cautious heading into the back half. And we know, for instance, in our wholesale business, quite a lot about what Q2 is going to look like. And we have a pretty good sense of Q3, but we don't have a lot of visibility in Q4. And we had a blowout Q4 last year. And at this point, we are modeling that to be down to last year.

[Operator]

Our next question comes from Camilo Lyon with BTIG.

[Camilo Lyon, BTIG]

Great job on Q1 here. Kind of following that train of thought and how to think about the cadence of the year. And how that unfolds and I appreciate the comments on the lower visibility as we get out into the back half of the year. Can you think -- can you help us understand your ability to kind of meet more of the in-season demand that you typically are geared to do? So said differently, you've been pulling forward a lot of the production given the supply chain issues that you've -- that everyone has been experiencing and that's been working very well to garner more shelf space and more market share. Is this -- is it limiting your ability to fulfill in-season orders. So if there is a cautious ordering pattern that unfolds for the back half of the year, and demand does not change and continues to be robust. We have an ability to meet that demand.

[Ed Rosenfeld, Chairman and Chief Executive Officer]

Yes. Well, look, given the supply chain disruption, we don't have the same ability to chase goods in season that we normally do. I won't say we don't have any ability to do that. And I still think that we have an advantage against our closest competitors in our speed to market and in our ability to work in season. But certainly, it's not the same capability that we had when we had shorter lead times prior to the pandemic. So that does create a challenge. Again, in fall, in particular, we do a lot out of Mexico, which does help with regard to chasing in season. But part of what you're seeing here is that we do need to get more of the orders upfront. And fortunately, we're doing that.

[Camilo Lyon, BTIG]

And so then the follow-up to that is, I think last year, you talked about switching 50% of your Madden production to Mexico and Brazil. Is there an intent to increase that percentage to both of those countries?

[Ed Rosenfeld, Chairman and Chief Executive Officer]

There's definitely a long-term goal to continue to move more production out of China and into countries like Brazil and Mexico. You're not going to see us get past that level this year.

[Camilo Lyon, BTIG]

Okay. Okay. Got it. And then I apologize if you've addressed this already -- so many issues today. Have you talked about -- or are you seeing any sort of impact to your Chinese manufacturing facilities from the COVID shutdowns?

[Ed Rosenfeld, Chairman and Chief Executive Officer]

So far, we have not seen any material impact.

[Camilo Lyon, BTIG]

Good luck and congrats on the great execution.

[Operator]

Our next question comes from Marni Shapiro with The Retail Tracker.

[Marni Shapiro, The Retail Tracker]

This is Marni. Can you guys hear me?

[Ed Rosenfeld, Chairman and Chief Executive Officer]

Yes. we can.

[Marni Shapiro, The Retail Tracker]

Congratulations. So a couple of very quick questions. Could you talk a little bit about REBOOTED? I know it's very early, but have you seen good response to the launch? And how are you marketing it? Is it getting out there? Are people learning about it? And then could you also talk a little bit about your private label business? Your core business has been so strong. Your products are in prime positions in all of the key department stores. So are you seeing increased interest from other retailers of their people to do private label, again, things like that?

[Ed Rosenfeld, Chairman and Chief Executive Officer]

Sure. Yes. Okay. So the first one was about REBOOTED. And just for the folks on the call, that's our resale marketplace on Steve Madden. We also have 1 on Dolce Vita, called re:vita. And yes, we're off to a good start there. I mean I think it's exciting. I think that our customers are responding to our efforts here to do right by the planet and to help folks to help keep products out of the landfill and extend their life. And I think it's really our first -- or it's an important first step towards circularity, which is obviously where the fashion industry needs to move long term if we want to lessen our environmental impact.

So I think that we feel good about it. I think the customers like -- I think are -- it's important to our employees, too. So that's another important factor here. Do I think this is going to be a big revenue driver in the near-term? No.

But it's building. It's -- we're getting more products placed up there every week. And I think we feel good about the fact that we're leaving here in and want to continue to drive it. You asked about the marketing. I think we've taken a fairly -- have we posted about it? Sure. Sent e-mails about it? Yes. But we haven't marketed it aggressively yet. But I think that given the early success, we will look to market it more meaningfully going forward.

And then in terms of private label, yes, we are looking at a couple of additional private label accounts. But I wouldn't say that adding new private label accounts is a really core part of our strategy. If you look at our private label business, the vast majority of the revenue is still done with a couple of big mass merchants. And we're going to continue to focus on driving that business and then be selective about adding other private label accounts where we think it makes sense.

[Marni Shapiro, The Retail Tracker]

That makes sense. Can I just do one quick follow-up on REBOOTED. Do you take ownership of the merchandise back from your clients? Like do you do you buy it back? What does that look like? What does that transaction look like?

[Ed Rosenfeld, Chairman and Chief Executive Officer]

No.

[Marni Shapiro, The Retail Tracker]

Okay, you don't.

[Ed Rosenfeld, Chairman and Chief Executive Officer]

No. We do not.

[Marni Shapiro, The Retail Tracker]

And so when somebody sells something, say, I have a Steve Madden shoe that I want to sell a big flip flop, I post it through you. How do you vet them so that you know it's safe and secure for the people who are then buying it? Or does somebody host the platform for you?

[Ed Rosenfeld, Chairman and Chief Executive Officer]

Hosting the platform, I had to talk to our team about how they're managing that. I'd have to get back to you on that.

[Marni Shapiro, The Retail Tracker]

The assortment looks outstanding. Best of luck for the summer season.

[Operator]

Our next question comes from Sam Poser with Williams Trading.

[Sam Poser, Williams Trading]

I've got a few. Ed, you mentioned that the consensus numbers didn't quite match yours in the first quarter. So I'm going to ask for a little help, so we make sure we could match yours or at least get close to yours going forward. So first of all, on the prior call, you called out that the DTC growth would be mid- to high-single-digits with double-digit e-commerce growth. wholesale to be up low-double-digits, flat gross margin and flat SG&A. What does that look like now? And can you give us some idea of some number we should be looking at? What kind of increase we're looking at again in Q2 in total, just to help us out so we can all sort of get aligned to you?

[Ed Rosenfeld, Chairman and Chief Executive Officer]

Sure. So in terms of the annual revenue growth by segment. So Wholesale, we've taken up our expectations for both Wholesale and DTC compared to the numbers that you quoted last time. So I would say Wholesale now we're looking more at, let's say, mid- to high-teens versus '21. And DTC high singles at the midpoint, maybe getting to 10% at the high end of our guidance. Gross margins still looking at flat. And then did you ask about SG&A as well?

[Sam Poser, Williams Trading]

Yes.

[Ed Rosenfeld, Chairman and Chief Executive Officer]

SG&A as a percentage of revenue, we were at flat before, maybe now we're flat to maybe very modest leverage, 10 bps or something at the higher end of the guidance. And then in terms of Q2, I already gave you help on Wholesale revenue growth, sort of high 30s. DTC, obviously, very tough comparisons there. Going up against the impact of stimulus from a year ago and the big pop that we saw in that business. So in DTC, we'd be happy to get to flat versus '21 for Q2.

[Sam Poser, Williams Trading]

Got you. And then just you talked about the timing of orders and the price increases. What -- I think you said once before that your normal is like 40 days on the water, you were out at 70. What does it look like now? And are you having -- in China with production, are you having other issues? What kind of issues are there with, let's say, factories and then also the component factories that flow of all every materials and all that other stuff within China to get good. So how does this all look from sort of the outset of making of a product through the transportation. Is that -- is any part of that getting better? Or is this lockdown making it worse now?

[Ed Rosenfeld, Chairman and Chief Executive Officer]

Yes. So I'll take the transit first. you asked about 70-day transit times. Yes, that is still what we're experiencing, and that's actually up from more like 30 days on a normalized basis. So still more than double the amount of time that it's taking to get us the product. In terms of factory delays, have we had some issues here or there? Yes, but there really haven't been any material issues in terms of factory delays so far, but it's something we'll obviously have to watch carefully going forward. And obviously, with the zero-Covid policy in China, there's always a risk that there is some impact there going forward.

[Operator]

Our next question comes from Dana Telsey with Telsey Advisory Group.

[Dana Telsey, Telsey Advisory Group]

Congratulation on the great performance. Just a couple of things, can you talk about category performance? What you saw in the different categories and the outlook going forward. The magnitude of the price increases, does it [Indiscernible] by category and what are you looking at going forward in price increases. And international how did [Indiscernible] perform, what did you see there? And is there any update on GSP?

[Ed Rosenfeld, Chairman and Chief Executive Officer]

Okay. All right. So the first one was category performance. I assume you're talking about within footwear.

[Dana Telsey, Telsey Advisory Group]

Exactly.

[Ed Rosenfeld, Chairman and Chief Executive Officer]

Yes. So there's -- in terms of what's working, if you try to look at it thematically, I really think we're seeing a lot of success with this '90s and Y2K trend, and that really goes across category. So we're seeing success with platforms and with block heels and with big bottom sneakers and with loafers and all the stuff that really fits into this '90s Y2K trend.

I think the second question was about the magnitude of price increases. And -- as you alluded to, it does vary depending on the category and also really the distribution of the price -- the price points. So private label, obviously, less than branded, for instance. But we're still -- I think sticking with that sort of 5% to 12% is the range on our various products, obviously. Steve Madden being towards the higher end of that.

The next one was about international. Overall, international has very strong momentum. Really excited about what we're seeing in just about every region outside the U.S. And Europe, of course, has been our shining star and we continue to have very strong momentum there, and that business should be up over 30% again this year versus 2021. And then Zine, you take the last one.

[Zine Mazouzi, Chief Financial Officer]

Sure. Dana, on the GSP, the only update since the last time we spoke is that the leadership conference committee, these are the negotiators that will work on reconciling the house incentive versions of the competition and innovation bill was announced on April 7, 2022. And the conference will consist of 26 senators, evenly split and 81 representatives with 50 of them Democrats and 31 Republicans. So they'll be assigned to subcommittees to work on science, foreign affairs, energy, commerce, [Indiscernible] and tariffs. And we hope that when they come back from their state work, which they're expected to be back this week from the state work that this is the top priority. That's based on leaders from both parties, talking about the USICA and the America COMPETES Act. So we're -- it's looking positive, but it looked positive before as well, and we haven't seen a lot of movement, but it seems like they're committed this time. Just a reminder, the annual impact that is built into our forecast is just about the same as last year. Over 2021, there's not much of an impact on gross margin. But over 2019, it's still about 50 basis points roughly.

[Operator]

Our next question comes from Susan Anderson with B. Riley.

[Susan Anderson, B. Riley]

Great job on the quarter. I was wondering if you could maybe just talk about the promotions. Obviously, the mess has still been pretty lean. Just curious if anything was layered back on versus those lean levels last year? And then how you're thinking about it for the rest of the year?

[Ed Rosenfeld, Chairman and Chief Executive Officer]

Yes. So in Q1, you're right. We did have very controlled promotional activity. As we look out, we do see some more promotional activity out in the market than we saw last year. It's certainly not back to the levels that we saw pre-pandemic. But I think we all recognized last year it was very low in the market overall, and we have seen an uptick there. So we've built a little bit of that into our forecast, just given the consumer demand for our for our brands and our products. We don't anticipate having to resort to a lot of promotional activity, but we do think it will be a little bit higher than it was in 2021.

[Susan Anderson, B. Riley]

Great. And then just on the apparel front, it looks like that was pretty strong in the quarter. I guess now that were kind of past COVID and we're returning to some more fashionable apparel and everything. Maybe if you could just give some color on how you're thinking about that business and maybe where you're thinking about it longer term?

[Ed Rosenfeld, Chairman and Chief Executive Officer]

Yes. We're excited about the opportunity we have in apparel. I think I discussed last time that we expect that business to be up close to 50% this year versus 2021. And also talked about how for fall of this year, we are going just to the Steve Madden label. So we're -- as you know, we've been operating with the co-branded label, BB Dakota Steve Madden and we're going to be going just to Steve Madden.

And we've gotten very good consumer response to the brand change and also to the line for fall, and we're very optimistic about that business. Continue to see some nice sell-throughs this spring, addresses particularly strong category for us, doing well with many to maxi lengths there. Our prints are doing very well across the range of silhouettes, we got some color, a lot of color on the line that's doing very well. So we're just excited about the opportunity there.

[Operator]

And currently, I'm showing no further questions in the queue at this time. I'd like to hand the call back to Mr. Ed Rosenfeld for closing comments.

[Ed Rosenfeld, Chairman and Chief Executive Officer]

Great. Well, thanks so much for joining us, everybody. We look forward to speaking with you on the next call. Have a great day.

[Operator]

Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect. Everyone, have a wonderful day.