Steven Madden, Ltd. — FY2017 Form 10-K
Business context and reporting period. The company designs, sources, markets and sells branded and private-label footwear, handbags and accessories, and earns licensing and buying-agent commissions. This filing covers the fiscal year ended December 31, 2017; it also reports quarterly results. Unless noted otherwise, financial figures below are in millions of dollars.
Financial results and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $1,546.1 | $1,399.6 |
| Gross profit / gross margin | $577.7 / 37.4% | $522.0 / 37.3% |
| Operating income / margin | $169.8 / 11.0% | $169.2 / 12.1% |
| Net income attributable to Steven Madden, Ltd. | $117.9 | $120.9 |
| Diluted EPS | $2.04 | $2.03 |
| Cash provided by operating activities | $157.9 | $153.6 |
- FY2017 operating expenses rose to $421.2 million, or 27.2% of sales, from $364.6 million, or 26.1%.
- At year-end, cash and cash equivalents were $181.2 million and marketable securities were $93.6 million, totaling $274.8 million. Working capital was $438.9 million; the company reported no short- or long-term debt and no borrowings under its $30 million receivables facility.
- Total assets were $1,057.2 million, total liabilities $248.2 million and stockholders’ equity $808.9 million.
- Investing activities used $13.4 million, including $14.8 million of capital expenditures and $16.8 million for acquisitions, partly offset by net marketable-security maturities and sales. Financing activities used $90.3 million, including $99.4 million of treasury-stock purchases, partly offset by $16.4 million of option-exercise proceeds.
- FY2017 adjusted EBIT was $184.8 million and adjusted EBITDA $206.7 million. These are non-GAAP measures; the company’s reconciliation includes specified acquisition, legal, bad-debt, impairment and other items.
Fourth-quarter results
For the quarter ended December 31, 2017, net sales were $364.4 million versus $336.4 million in the prior-year quarter. Net income attributable to the company was $24.6 million versus $28.7 million; diluted EPS was $0.43 versus $0.49.
Material changes versus prior year
- Sales increased 10.5%, reflecting $80.0 million of sales from the Schwartz & Benjamin acquisition and growth in the existing business. Wholesale Footwear sales rose to $1,017.6 million; Wholesale Accessories sales were nearly flat at $256.3 million.
- Gross margin edged up to 37.4%; management said it would have been 38.3% excluding Schwartz & Benjamin. Wholesale Footwear margin improved, but Accessories margin fell to 31.5% from 33.1%, mainly due to cold-weather inventory closeouts.
- Net income attributable to the company declined 2.5%, while diluted EPS rose slightly to $2.04 as diluted weighted-average shares fell to 57.8 million from 59.6 million.
- Retail sales increased 3.6% to $272.2 million with net store additions, but comparable store sales fell 3.2%. Retail operating results moved from $15.8 million of income to a $1.1 million loss; operating expenses rose substantially, including costs tied to new stores, legal matters and employee expenses.
- Operating cash flow increased to $157.9 million from $153.6 million. Inventory declined by $21.1 million, while factor receivables increased by $57.3 million; average receivable collection days rose to 75 from 66.
Outlook, risks and unusual items
- Outlook: The filing gives no quantified FY2018 revenue or earnings guidance. Management expected to open 11–13 retail stores and close 8–10 locations in 2018. Backlog was approximately $367.1 million at February 1, 2018, compared with $337.0 million a year earlier; the company cautions that backlog is affected by timing and seasonality and may not predict shipments.
- Tax legislation: The Tax Cuts and Jobs Act led to a provisional $7.6 million net tax benefit in FY2017. The filing reports a one-time deemed-repatriation tax liability and related withholding tax of approximately $21.9 million, with $1.6 million expected within one year and the balance payable over eight years. Management said the estimates remained provisional and could be adjusted during 2018.
- Unusual charges and credits: FY2017 included a $5.5 million bad-debt expense related to Payless ShoeSource’s bankruptcy, a $1.0 million Wild Pair trademark impairment, acquisition-integration and legal costs, and charges related to preferred-interest investments. The amended Schwartz & Benjamin earn-out reduced the recorded liability and produced a credit to operating expenses.
- Business risks: Approximately 93% of product purchases came from China; the company has no long-term manufacturing contracts and is exposed to sourcing, shipping, tariff and trade-policy risks. Other key risks include shifting fashion preferences, retail-sector changes, customer credit exposure, weather and seasonality, cybersecurity, foreign exchange, and reliance on key personnel and licensed brands.
- Contingencies and commitments: Management said pending ordinary-course legal matters were not expected to have a material impact. Contractual obligations totaled $431.9 million, including $249.3 million of operating leases, $156.5 million of purchase obligations and $10.0 million of contingent payments. The company reported no off-balance-sheet arrangements.
- Capital returns: The company repurchased 2.25 million shares under its program for approximately $84.8 million in FY2017; $180.9 million remained authorized at year-end. In February 2018, the board declared a $0.20-per-share quarterly dividend and said it expected to continue quarterly dividends, subject to board discretion and business conditions.
- The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end.
Important facts for investors to verify
- How much of sales and earnings growth is organic versus attributable to Schwartz & Benjamin and international joint ventures, and whether acquisition integration delivers expected returns.
- Whether weaker comparable retail sales and the FY2017 Retail operating loss improve, and whether planned store openings and closures meet profitability targets.
- The quality and collectability of receivables, including increased collection days, Payless-related exposure and customer balances; Target and Walmart represented 13.4% and 14.6% of year-end receivables, respectively.
- The final tax-reform accounting and cash-tax effects. The filing gives different figures for the transition-tax expense in its discussion and tax note; the precise reconciliation is not clear from the filing text.
- The effect of China sourcing concentration, potential tariffs or other trade changes, and inventory closeouts on future margins and supply continuity.
- How much of FY2017 operating performance reflects recurring operations versus legal, acquisition, impairment, bad-debt and contingent-consideration items.