Business context and reporting period
Steven Madden, Ltd. designs, sources, markets and sells branded and private-label footwear, handbags and accessories, and licenses its trademarks. This Form 10-K covers the fiscal year ended December 31, 2015; amounts are in U.S. dollars. Its five segments are Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing.
Financial performance and position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $1,405.2 million | $1,335.0 million | +5.3% |
| Gross profit / margin | $500.5 million / 35.6% | $469.0 million / 35.1% | Margin +0.5 percentage points |
| Income from operations / margin | $171.6 million / 12.2% | $167.6 million / 12.6% | Income +2.4%; margin down |
| Net income attributable to Steven Madden, Ltd. | $112.9 million | $111.9 million | +1.0% |
| Diluted earnings per share | $1.85 | $1.76 | +5.1% |
| Cash from operations | $134.7 million | $152.0 million | Down $17.3 million |
| Working capital | $283.0 million | $264.6 million | Up $18.4 million |
At year-end, cash and cash equivalents were $72.4 million and marketable securities were $120.9 million, totaling $193.3 million. The company reported no short- or long-term debt and no borrowings on its $30 million credit facility. Total assets were $914.4 million; stockholders’ equity was $678.7 million. Capital expenditures were $19.5 million.
Material changes versus the prior year
- Acquisitions of Dolce Vita, SM Mexico and Blondo contributed $118.5 million of 2015 sales. Excluding acquisitions, sales declined 1%, reflecting organic declines in both wholesale segments, partly offset by retail growth.
- Retail sales rose 15.9% to $240.3 million; comparable sales, including e-commerce, increased 11.2%. The company ended the year with 169 stores, versus 160 a year earlier.
- Wholesale Footwear sales increased to $905.8 million, but organic sales fell 5.7%; segment operating income before the Wild Pair impairment declined to $100.1 million from $105.6 million.
- Wholesale Accessories sales grew 5% to $259.1 million, while gross margin fell to 33.1% from 34.3% and operating income edged down to $38.2 million.
- Share repurchases totaled $135.6 million for 3.7 million shares. The board subsequently authorized an additional $136 million, bringing reported remaining authorization to approximately $200 million.
- Inventory turnover declined to 8.7 times from 10.4 times, and average accounts-receivable collection days increased to 67 from 62.
Outlook, commentary and risks
Management expected to open 17–20 retail stores in 2016 and stated that available liquidity and operating cash flows should meet commitments and operating needs for at least 12 months. The filing provides no clear numeric 2016 revenue or earnings guidance. Wholesale backlog was approximately $295 million at February 1, 2016, compared with $312 million a year earlier; management cautions that backlog is affected by seasonality and order timing and may not predict shipments.
Unusual items included a $3.0 million impairment charge for the Wild Pair trademark, following lower expected sales from a significant customer, and a $3.0 million benefit from early termination of the company’s Fifth Avenue store lease. The company’s Customs matter remained unresolved: it had accrued $1.248 million against estimated maximum damages of approximately $1.7 million and had submitted a $342,000 offer in compromise without admitting liability. An IRS audit of the 2013 tax return, including transfer-pricing questions, was also ongoing; management said it believed adequate provisions had been made.
Principal risks include changing fashion trends and discretionary consumer demand; intense competition and dependence on key personnel; reliance on large retailers (Target represented 12.2% of sales); and concentration of sourcing in China (approximately 90% of 2015 purchases). Other risks include overseas manufacturing and shipping disruptions, tariffs, inventory obsolescence, cybersecurity and privacy incidents, foreign currency movements, acquisition integration, and significant lease and contingent acquisition obligations. The company reported $228.2 million of future operating lease payments and $24.8 million of contingent-payment liabilities. Auditors issued an unqualified opinion and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- How much of reported sales growth and earnings depends on acquisitions, and whether organic wholesale trends improve.
- Whether retail comparable-sales growth and the planned store expansion continue without margin deterioration.
- Inventory turnover, receivable collection days, and the effect of inventory levels on markdowns and cash flow.
- Final outcomes and potential costs of the Customs matter and IRS audit, along with acquisition earn-out payments.
- Liquidity available domestically versus the $85.1 million of foreign earnings designated indefinitely reinvested; repatriation could entail approximately $17.5 million of unprovided taxes.
- Exposure to China sourcing, Target concentration, lease commitments, and the effect of ongoing share repurchases on capital allocation.