Steven Madden, Ltd. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited financial statements; dollar amounts below are in millions unless noted. The company designs, sources, markets and sells branded and private-label footwear, handbags and accessories, operates retail stores and e-commerce sites, and licenses its trademarks.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $408.4 | $413.5 | $1,063.1 | $1,061.0 |
| Gross profit / margin | $154.5 / 37.8% | $148.8 / 36.0% | $391.8 / 36.8% | $376.3 / 35.5% |
| Operating income / margin | $63.8 / 15.6% | $66.3 / 16.0% | $129.5 / 12.2% | $132.9 / 12.5% |
| Net income attributable to Steven Madden, Ltd. | $43.8 | $42.9 | $92.2 | $87.2 |
| Diluted EPS | $0.74 | $0.70 | $1.54 | $1.42 |
- Q3 operating expenses rose to $96.1 million from $89.1 million; net commission and licensing income declined to $5.4 million from $6.6 million. The effective tax rate fell to 32.3% from 34.1%.
- Nine-month operating cash flow was $73.5 million, versus $50.1 million. Investing activities used $9.9 million and financing activities used $73.2 million; cash declined $9.7 million to $62.7 million.
- At September 30, cash and cash equivalents were $62.7 million and marketable securities totaled $120.7 million. Working capital was $322.5 million; total equity was $723.6 million. The company reported no long-term debt and no borrowings under its receivables facility.
- Inventory was $112.0 million, up from $102.1 million at December 31, 2015. Factor receivables increased to $230.3 million from $155.2 million at year-end, contributing to operating cash use.
Changes versus comparable periods
- Q3 sales declined 1.2%, while gross margin improved 1.8 percentage points, primarily from better Wholesale Footwear margins, higher initial markups, and fewer markdowns and closeouts. Operating income nevertheless fell 3.8%, as higher operating expenses more than offset gross profit growth.
- Nine-month sales increased 0.2%; gross margin rose 1.3 percentage points. Net income attributable to the company increased 5.7%, while operating income declined 2.6%.
- Wholesale Footwear sales declined in both periods, but margin improved. Wholesale Accessories sales declined, with nine-month margin pressured by branded handbag softness and greater lower-margin private-label mix. Retail sales rose 9.5% in Q3 and 10.4% year to date; comparable sales increased 1.3% and 5.5%, respectively. The company had 186 stores versus 165 a year earlier.
- First Cost and Licensing income declined year to date. Management attributed First Cost weakness to reduced business with certain private-label customers and Licensing weakness partly to discontinuation of the Steve Madden eyewear licenses.
Outlook, commentary and risks
- The filing provides no specific revenue, earnings or EPS guidance. Management said available cash, securities and operating cash flows should fund operating needs and commitments for at least the next 12 months.
- Nine-month 2016 net income included a $3.8 million tax benefit from early adoption of share-based payment accounting guidance. The 2015 comparison included a $3.0 million lease-termination benefit and a $3.0 million Wild Pair trademark impairment charge.
- The company repurchased 1.7 million shares for approximately $58.4 million during the first nine months; total treasury-stock purchases in financing cash flow were $66.4 million. Approximately $134.1 million remained authorized for repurchases at September 30.
- Contractual obligations totaled $537.6 million, including $244.1 million of operating lease obligations, $269.8 million of purchase obligations and $16.7 million of contingent payments. A further Dolce Vita earn-out payment was expected in Q4 2016; an SM Mexico earn-out may be due in Q1 2017.
- Risks include consumer demand and fashion trends, inventory obsolescence, customer deductions and collections, foreign currency and marketable-securities exposure, and dependence on overseas manufacturing (primarily China). Management identifies estimates for receivables, inventory, intangible assets, litigation and acquisition earn-outs as significant judgment areas. Existing legal matters remain outstanding; management said other ordinary-course claims were not expected to materially affect results.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales and margin trends persist, particularly in Wholesale Footwear and Accessories, and whether retail comparable-sales growth offsets store expansion costs.
- How operating expenses, including advertising, compensation, new-store and European joint-venture costs, affect operating margins.
- Cash conversion and working-capital movements, especially the sharp increase in factor receivables and inventory.
- The nature and timing of acquisition earn-out payments, and the assumptions underlying the $16.7 million contingent liability.
- Cash held by foreign subsidiaries: $69.0 million of cash, cash equivalents and short-term investments was abroad; management estimated $17.5 million of additional cumulative taxes if $85.1 million of indefinitely reinvested foreign earnings were not kept invested abroad.