Steven Madden, Ltd. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited results; dollar amounts are in thousands except per-share data. The company designs, sources, markets and sells branded and private-label footwear, handbags and accessories, and licenses its trademarks.
Financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $323,582 | $295,715 | $647,527 | $600,339 |
| Gross profit / margin | $116,146 / 35.9% | $107,060 / 36.2% | $227,524 / 35.1% | $215,408 / 35.9% |
| Operating income | $36,817 | $40,312 | $66,664 | $76,305 |
| Net income attributable to Steven Madden, Ltd. | $24,503 | $28,002 | $44,327 | $51,639 |
| Diluted EPS | $0.40 | $0.44 | $0.72 | $0.80 |
| Operating cash flow | Not separately reported | Not separately reported | $53,783 | $67,813 |
- Q2 sales increased 9.4%, while attributable net income declined 12.5%. Six-month sales rose 7.9%, but attributable net income fell 14.2%.
- Operating expenses rose to $82,456 in Q2 from $69,935, and to $164,860 for the six-month period from $145,461. The six-month 2015 amount includes a $3,048 benefit from early termination of the 5th Avenue store lease.
- Cash and cash equivalents were $68,994 at June 30; marketable securities totaled $120,639. Together these were $189,633. Working capital was $257,566. Management reported no long-term debt and said available liquidity and operating cash flows should meet commitments and operating needs for at least 12 months.
- Six-month investing cash outflow was $17,810; financing cash outflow was $48,429. Cash declined by $12,456 to $68,994. Share repurchases used $74,156 during the six months.
Material changes and operating drivers
- Wholesale footwear sales increased including acquisitions, but declined 6% in Q2 and 6.5% for the six months excluding acquisitions; management cited declines in branded and private-label footwear. Segment margins weakened, primarily from markdown activity, and segment operating income fell.
- Wholesale accessories sales increased 15.6% in Q2 and 15.2% for the six months, while margins declined as sales shifted toward value-priced retailers and private-label handbags.
- Retail sales grew 23.9% in Q2 and 22.3% for the six months. Comparable-store sales rose 18.5% and 15.3%, respectively, on a constant-currency basis. The store count was 161 versus 124 a year earlier. Retail operating income was $5,817 in Q2; six-month income of $4,234 included the $3,048 lease-termination benefit.
- Recent acquisitions included Dolce Vita, SM Mexico and Blondo. The company recorded a $3,045 first-quarter impairment of the Wild Pair trademark after a significant customer’s lower expected sales reduced anticipated cash flows.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or EPS guidance. Management’s stated liquidity outlook is that resources are sufficient for at least the next 12 months.
- Management identified risks including changes in consumer demand, retailer inventory and sell-through, markdowns, inventory valuation, acquisition performance and contingent earn-outs, litigation estimates, and foreign-exchange movements. Most products are made overseas, primarily in China; the company reported no long-term manufacturing or supply contracts.
- Contingent payment liabilities totaled $35,541, including current and long-term amounts. Contractual obligations totaled $458,453, primarily operating leases and purchase obligations. The company reported no off-balance-sheet arrangements.
- Cash-flow hedges cover forecast inventory purchases denominated in Mexican pesos; the company reported a $2,543 derivative liability and said hedging activities were effective. Foreign earnings of $64,147 were considered indefinitely reinvested; potential tax on repatriation was estimated at approximately $11,867.
- Management said other lawsuits in the ordinary course were not expected to materially affect financial position or results. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the weakness in organic wholesale footwear sales and lower wholesale margins persist, and how much reported growth continues to depend on acquisitions.
- Retail comparable-store sales trends, store-level profitability and the ongoing costs of the expanded store base.
- Cash conversion and working-capital needs, particularly receivables and inventory, alongside the pace of share repurchases and acquisition-related payments.
- Final purchase-price allocations and future earn-out payments for acquisitions, as well as the performance assumptions underlying contingent liabilities and intangible-asset valuations.
- Exposure to foreign currency, overseas sourcing and any potential liquidity or tax effects associated with foreign-held cash and indefinitely reinvested earnings.