Business context and reporting period
Steven Madden, Ltd. designs, sources, markets and sells branded and private-label footwear, handbags and accessories, operates retail stores and e-commerce sites, and earns commission and licensing income. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2014; amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
- Second quarter: Net sales were $295.7, down 0.6% year over year. Gross profit was $107.1 and gross margin was 36.2%, versus $110.6 and 37.2%. Operating income was $40.3, versus $45.6; net income attributable to Steven Madden was $28.0, versus $29.0. Diluted EPS was $0.44, compared with $0.43.
- First six months: Net sales rose 4.1% to $600.3. Gross profit was $215.4 versus $213.2, while gross margin declined to 35.9% from 37.0%. Operating income fell to $76.3 from $82.0; net income attributable to the company was $51.6 versus $52.4. Diluted EPS increased to $0.80 from $0.78.
- Cash flow and liquidity: First-half operating cash flow was $68.2, compared with $65.2. Cash and equivalents were $155.8 and marketable securities were $126.8 at June 30; combined, $282.7. Working capital was $336.2. The company reported no short- or long-term debt and no borrowings under its $30.0 Rosenthal facility. Management said available resources should meet financial commitments and operating needs for at least twelve months.
- Balance sheet and capital allocation: Total assets were $905.5 and stockholders’ equity was $679.6. First-half capital expenditures were $8.0. The company repurchased shares for $65.6 during the first half; $126.4 remained available under the repurchase authorization. Inventory was $87.3, up from $73.7 at year-end 2013 but below $91.3 a year earlier.
Material changes versus the prior comparable period
- Second-quarter sales were nearly flat, but operating income and attributable net income declined as gross margin weakened and operating expenses increased.
- Wholesale footwear second-quarter sales declined 3.4%, mainly because of a temporary reduction in private-label sales to one customer; branded footwear grew. Wholesale accessories sales rose 10.0%, but lower-margin private-label mix and markdowns reduced its gross margin.
- Retail comparable sales fell 8.5% in the quarter and 12.8% for the first half. Retail segment operating income fell to $1.2 in the quarter from $5.5; the first-half segment reported a $3.0 operating loss versus $7.5 of income. The company had 124 stores, including e-commerce, compared with 113 a year earlier.
- For the first half, wholesale footwear sales grew 6.1% and accessories sales grew 6.0%; retail sales declined 6.3%. First Cost commission income and net licensing income also decreased.
- The second-quarter effective tax rate fell to 32.0% from 36.7%, primarily due to a $1.252 tax benefit related to prior-year state taxes. Lower diluted share counts, alongside the tax benefit, contributed to EPS rising despite lower attributable net income.
Outlook, commentary, risks and unusual items
- No numerical earnings or revenue guidance was provided. Management cited a soft retail environment and said the interim results are not necessarily indicative of full-year results.
- The company purchased Brian Atwood intellectual property and related assets in March 2014 for approximately $6.75 in cash and a 20% interest in the newly formed brand entity. It licensed the designer brand to Brian Atwood, while the company will manage the B Brian Atwood brand.
- Contractual obligations totaled $455.5, including $242.5 of operating leases, $181.3 of purchase obligations and $30.4 of contingent payment liabilities. Purchase obligations were due in the remainder of 2014. A further Cejon earn-out payment was expected in the third quarter.
- A U.S. Customs matter remains unresolved: the company offered $0.342 in compromise without admitting liability. Maximum exposure, including penalties, was estimated at approximately $1.7; the company had accrued $1.248.
- Key business risks include reliance on overseas manufacturers, primarily in China; retail demand, promotional activity and inventory valuation; customer deductions and receivable estimates; market-value and credit risk in $126.8 of marketable securities; and estimates used for litigation and acquisition earn-outs. The company reported no off-balance-sheet arrangements and no material change in internal control over financial reporting.
- A new revenue-recognition standard issued in May 2014 was being evaluated; the filing does not quantify its expected impact.
Important facts for investors to verify
- Whether retail comparable-sales declines and promotional pressure persist, and their effect on retail profitability and consolidated margins.
- Whether the temporary private-label footwear customer reduction reverses, and whether wholesale growth can offset weakness in retail.
- The resolution and ultimate cost of the U.S. Customs matter, plus future SM Canada and Cejon earn-out payments.
- The company’s use of cash for share repurchases, and its ability to maintain liquidity while meeting lease, purchase and other commitments.
- Potential effects of the Brian Atwood acquisition and the forthcoming revenue-recognition standard; neither outcome is quantified in this filing.