Steven Madden, Ltd. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Financial statements are unaudited. Dollar amounts below are in millions unless noted.
Business context and performance
The company designs, sources, markets and sells footwear, handbags and accessories through wholesale, retail, e-commerce, first-cost and licensing businesses. It operates primarily in the U.S. and Canada, with international distribution arrangements.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $392.0 | $394.8 | $992.3 | $971.3 |
| Gross profit / margin | $136.1 / 34.7% | $139.7 / 35.4% | $351.5 / 35.4% | $352.9 / 36.3% |
| Operating income / margin | $59.3 / 15.1% | $68.1 / 17.2% | $135.6 / 13.7% | $150.1 / 15.5% |
| Net income attributable to Steven Madden | $39.2 | $44.0 | $90.9 | $96.3 |
| Diluted EPS | $0.62 | $0.66 | $1.42 | $1.44 |
Q3 sales declined 0.7% year over year, while attributable net income fell 10.8%. For the first nine months, sales grew 2.2%, but attributable net income declined about 5.7%. Gross margin pressure and higher operating expenses weighed on profitability. Q3 effective tax rate was 35.0%, versus 36.5% a year earlier; management attributed the decrease primarily to planned reinvestment of foreign earnings abroad.
Segments and material changes
- Wholesale footwear: Q3 sales were $273.2 million, approximately flat as reported; excluding $14.2 million from Dolce Vita, sales declined 5.0%. Q3 segment operating income fell to $41.3 million from $46.0 million. Nine-month sales rose 3.7%, including Dolce Vita, and operating income increased to $98.0 million.
- Wholesale accessories: Q3 sales decreased 4.4% to $70.0 million; nine-month sales increased 1.5% to $172.8 million. Nine-month operating income declined to $29.3 million from $30.5 million.
- Retail: Q3 sales were nearly flat at $48.7 million, but comparable sales fell 7.4% on a constant-currency basis; segment operating loss was $0.1 million. Nine-month sales declined 4.2%, comparable sales fell 11.0%, and segment operating loss was $3.1 million versus $11.0 million of income. The company had 133 stores, compared with 117 a year earlier.
- Management cited promotional activity and weaker fashion footwear trends as pressures on retail margins and comparable sales. It attributed higher operating expenses partly to outlet-store growth and the Dolce Vita acquisition.
- First-cost commission income was $6.1 million for nine months, down from $7.1 million; licensing income was $5.4 million, down from $5.9 million.
Cash flow, liquidity and capital allocation
- Nine-month operating cash flow was $74.4 million, compared with $58.1 million. Investing cash flow was positive $20.9 million, including $112.3 million of marketable-security sales and $61.4 million of acquisition-related payments. Financing cash outflow was $105.7 million, including $101.8 million of share repurchases and $8.5 million of contingent-liability payments.
- At September 30, cash and cash equivalents were $169.9 million and marketable securities were $19.6 million; total cash and securities were $189.5 million. Working capital was $376.5 million. The company reported no short- or long-term debt and no borrowings under its $30 million Rosenthal facility.
- Total assets were $934.5 million and stockholders’ equity was $685.7 million. Management said available resources were expected to cover financial commitments and operating needs for at least the next 12 months.
- The company repurchased 3.0 million shares during the first nine months for $101.8 million, at an average $33.91 per share; $90.2 million remained authorized. Diluted weighted-average shares declined year over year.
- Contractual obligations totaled $486.8 million, including $264.8 million of operating leases, $191.4 million of purchase obligations and $29.6 million of contingent payment liabilities. These are scheduled obligations, not debt balances.
Acquisitions, outlook and risks
- In August 2014, the company acquired Dolce Vita for approximately $61.5 million, including $56.9 million paid at closing and estimated contingent consideration. The earn-out is based on performance through September 2016, with a combined minimum of $5.0 million. The preliminary allocation included $48.9 million of goodwill and remained subject to valuation updates.
- The company also acquired Brian Atwood intellectual property and related assets for approximately $6.8 million in March 2014; it owns 80% of the venture. A definitive agreement to acquire its Mexican distributor for approximately $15 million, plus loan repayment and potential earn-outs, was expected to close in January 2015.
- The filing provides no quantified earnings or sales guidance. Management’s stated liquidity outlook is that resources should meet operating needs for at least 12 months. It cautioned that forward-looking statements are subject to risks and actual results may differ.
- Key exposures include customer chargebacks and returns, inventory obsolescence and consumer demand, acquisition valuations and earn-outs, litigation estimates, marketable-security fluctuations, and foreign-exchange exposure. Most products are manufactured overseas, primarily in China; the company reported no long-term manufacturing or supply contracts. Existing legal proceedings remained outstanding; management said other ordinary-course lawsuits were not expected to materially affect results or financial position.
- Disclosure controls were assessed as effective, and management reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Check whether retail comparable-sales declines, promotions and store expansion continue to pressure retail profitability and consolidated margins.
- Track underlying wholesale footwear trends excluding Dolce Vita, and assess the acquired business’s contribution, integration and earn-out assumptions.
- Monitor cash conversion and working-capital needs, particularly receivables, inventory, purchase obligations and lease commitments.
- Review the final Dolce Vita purchase-price allocation, contingent consideration estimates, and the completion and terms of the proposed SM Mexico acquisition.
- Assess the scale and use of remaining repurchase authorization against acquisition spending and operating cash requirements.
- Review subsequent filings for changes in litigation, customer allowances, inventory valuation, foreign-exchange exposure and the company’s outlook.