Steven Madden, Ltd. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited consolidated results. Unless otherwise noted, financial amounts are in millions of dollars.
Business context and performance
The company designs, sources, markets and sells branded and private-label footwear, handbags and accessories, operates retail stores and e-commerce sites, and earns commissions and licensing income. Its segments are Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $297.6 | $288.7 | $576.6 | $554.7 |
| Gross profit / margin | $110.6 / 37.2% | $104.3 / 36.1% | $213.2 / 37.0% | $200.3 / 36.1% |
| Operating income / margin | $45.6 / 15.3% | $37.5 / 13.0% | $82.0 / 14.2% | $72.9 / 13.1% |
| Net income attributable to Steven Madden, Ltd. | $29.0 | $26.9 | $52.4 | $48.8 |
| Diluted EPS | $0.65 | $0.61 | $1.17 | $1.11 |
Q2 sales rose 3.1% and attributable net income rose 7.6% year over year. For the first half, sales increased 3.9% and attributable net income increased 7.4%. The effective tax rate was 37.1% in Q2 2013 versus 31.3% in Q2 2012; the prior-year quarter included a $2.8 million tax benefit related to foreign earnings.
Segment and operating changes
- Wholesale Footwear: Q2 sales were nearly flat at $199.2 million; operating income grew to $27.0 million. Higher margins reflected fewer markdowns. First-half sales declined 0.5%, partly due to lost Topline customers and discontinued Big Buddha footwear; growth in Adesso Madden partly offset the decline.
- Wholesale Accessories: Q2 sales grew 5.6% to $52.2 million and operating income rose to $9.4 million. First-half sales increased 11.5%, while gross margin declined amid a greater mix of lower-margin mid-tier retail sales.
- Retail: Q2 sales increased 13.9% to $46.2 million; comparable sales increased 2.5%. First-half sales rose 17.6%, with comparable sales up 3.2%. The company had 113 stores, including e-commerce, versus 96 a year earlier; it opened 17 stores during the preceding 12 months. Retail margins benefited from fewer markdowns.
- First Cost and Licensing: Q2 net commission income fell to $1.9 million from $2.4 million, reflecting reduced Kohl’s business and loss of Bakers business after its bankruptcy. Licensing income was broadly steady at $1.8 million.
Q2 operating expenses increased to $68.7 million from $66.7 million, mainly due to additional retail stores, while expenses remained 23.1% of sales. First-half operating expenses rose to $139.2 million and 24.1% of sales from $131.9 million and 23.8%.
Cash flow, liquidity and capital
- First-half operating cash flow was $65.2 million, up from $43.1 million. Working-capital movements included a $27.6 million inventory increase and a $20.5 million increase in accounts receivable, partly offset by a $41.7 million increase in accounts payable and accrued expenses.
- Investing cash outflow was $41.4 million, including $46.4 million of marketable-security purchases and $10.7 million of capital expenditures. Financing cash outflow was $24.9 million, including $32.8 million of share repurchases.
- At June 30, cash and cash equivalents were $167.7 million and marketable securities were $122.5 million, totaling $290.1 million. Working capital was $310.2 million. The company reported no short- or long-term debt and no borrowings under its $30 million receivables facility.
- Total liabilities were $230.2 million and stockholders’ equity was $658.5 million. Contingent consideration liabilities were $46.8 million. Contractual obligations totaled $498.8 million, including $245.8 million of purchase obligations and $204.3 million of operating leases.
- The company repurchased 707,830 shares for $32.8 million in the first half, at an average $46.29 per share. The board approved an additional $125 million of repurchase authorization in June; $139.3 million remained available at quarter-end.
Outlook, risks and unusual items
Management stated that available cash, cash equivalents and marketable securities should be sufficient to meet financial commitments and operating needs for at least the next 12 months. The filing provides no specific earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- The 2012 comparison included $4.31 million of charges for a text-messaging class-action matter and impairment of a Betsey Johnson note receivable; neither charge recurred in the first half of 2013.
- A shareholder demand letter received in May 2013 revisited allegations concerning amendments to Steven Madden’s employment agreement and related-party loan. The earlier lawsuits were dismissed and appeal time expired; a board special committee was investigating the new demand. Management said other ordinary-course lawsuits were not expected to materially affect financial position or results.
- Marketable securities may fluctuate with equity values, interest rates and credit risk. Foreign currency exposure includes Mexican-peso-denominated forecast purchases; the company used forward contracts and reported no hedge ineffectiveness.
- Most products are manufactured overseas, primarily in China, without long-term manufacturing or supply contracts. Management cited alternative sourcing but noted inflationary costs may not always be offset.
- Contingent earn-outs from acquisitions, including expected payments in Q3 2013, depend on acquired businesses’ performance and management estimates.
Most important facts for investors to verify
- Whether sales growth and margin improvement persist, particularly in wholesale footwear and retail, and whether the planned store base generates adequate returns.
- How much of reported growth reflects organic performance versus acquisitions, including SM Canada, and the effect of lost Topline and Bakers business.
- Cash conversion and working-capital trends, especially inventory, receivables and payables, alongside planned capital spending and share repurchases.
- Future acquisition earn-out payments, related contingent liabilities and the outcome of the shareholder demand investigation.
- Changes in tax rate, marketable-security values, foreign-exchange exposure and overseas sourcing conditions.