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.#-ad_banner-#

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 (NYSE: SKX) 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 tough economy while catering to customers with inconsistent preferences. Just take a look at the journey these three footwear companies have made and you will see what I mean…

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 seen shares 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 States, Steve Madden (Nasdaq: SHOO) designs trendsetting footwear and accessories often found in upscale department stores targeted toward a demographic of young-adult consumers.

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 encompasses multiple 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 improve earnings 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% of net 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 improvement. 

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 competition.

P.S. — If you like Steve Madden, then you don’t want to miss our Top Picks for 2013. We’ve just finished putting the final touches on our special presentation, which you can view here.