Steven Madden, Ltd. — Q2 2012 Form 10-Q
Business context and period. The company designs, sources, markets and sells branded and private-label footwear, handbags and accessories through wholesale, retail, e-commerce, commission and licensing businesses. This unaudited report covers the quarter and six months ended June 30, 2012; financial amounts below are in millions of dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $288.7 | $209.2 | $554.7 | $374.9 |
| Gross profit / margin | $104.3 / 36.1% | $84.1 / 40.2% | $200.3 / 36.1% | $153.2 / 40.9% |
| Operating income / margin | $37.5 / 13.0% | $37.2 / 17.8% | $72.9 / 13.1% | $64.6 / 17.2% |
| Net income attributable to Steven Madden, Ltd. | $26.9 | $23.8 | $48.8 | $41.6 |
| Diluted earnings per share | $0.61 | $0.55 | $1.11 | $0.97 |
| Operating cash flow | Not separately reported for the quarter | $43.1 | $21.9 |
- Quarterly sales rose 38%; management reported 18.5% organic growth excluding SM Canada, Topline and Cejon. Six-month sales rose 48%, with 18.3% organic growth on the same basis.
- Operating expenses were $66.7 million in Q2 and $131.9 million for the half, rising in dollars but declining as a share of sales year over year. Q2 net income included $2.5 million for a text-messaging class-action reserve and a $1.81 million impairment of the Betsey Johnson note.
- At June 30, cash and cash equivalents were $80.7 million and marketable securities were $109.1 million. Working capital was $210.9 million; management reported no short- or long-term debt. Total stockholders’ equity was $540.1 million.
- Cash declined $22.1 million during the first half. Investing cash outflow was $73.4 million, including $29.4 million for SM Canada, a $3.1 million seller loan, $8.0 million of capital expenditures and net purchases of marketable securities.
- Accounts receivable average collection days increased to 67 from 60, which management attributed mainly to acquired businesses and growth in private-label Target sales with longer payment terms. Inventory was $91.0 million, up from $59.6 million at year-end 2011.
Material changes and operating trends
- Gross margin contracted chiefly from mix shifts toward Topline, Target private-label and international sales, which generally carry lower margins. Management said wholesale margin excluding those mix shifts was up about 20 basis points in Q2.
- Wholesale footwear Q2 sales increased to $198.7 million from $148.5 million; operating income rose to $24.7 million from $23.9 million. Its gross margin fell to 29.9% from 35.0%.
- Wholesale accessories Q2 sales grew 86% to $49.4 million, partly reflecting Cejon; management reported 65% organic growth excluding Cejon. Operating income increased to $8.6 million from $3.0 million.
- Retail Q2 sales grew to $40.6 million from $34.0 million, and comparable sales increased 6.8%. The company had 96 stores versus 83 a year earlier; retail operating income declined to $4.3 million from $5.8 million, with increased promotional selling and store costs cited.
- The February 2012 SM Canada acquisition added Canadian wholesale and retail operations. Other recently acquired businesses include Topline and Cejon. Acquisition earn-outs make the company’s contingent-payment liability $62.7 million at June 30.
Outlook, risks and unusual items
- No quantified revenue, earnings or EPS guidance is provided. Management said it expected sourcing-cost pressures to have a negligible net effect on gross margin in the near term, after supplier shifts and selective price increases.
- The company reported average cost increases of approximately 5%–8% for goods from southern China and said it was shifting some production to northern China and, to a lesser extent, other countries. Virtually all products are produced overseas, primarily in China; the company has no long-term manufacturing or supply contracts.
- Management stated that cash, securities and its financial position should cover commitments and operating needs for at least the next 12 months. Contractual obligations totaled $461.3 million, including $229.6 million of purchase obligations, $161.5 million of operating leases and $62.7 million of contingent payments. The company also had approximately $5.0 million in unnegotiated inventory letters of credit.
- The unauthorized-texting class-action settlement, reached July 30 after quarter-end, remains subject to court approval. The settlement fund is $10.0 million, with insurance coverage; the company recorded a $2.5 million liability and disclosed estimated actual company liability of $2.0–$2.5 million, with maximum exposure of approximately $6.25 million under the contemplated terms.
- Two derivative shareholder suits challenge amendments to CEO Steven Madden’s employment agreement and related-party loan. The company intends to seek dismissal. Separately, a U.S. Customs matter has $1.248 million accrued against a potential total amount of approximately $1.7 million.
- Betsey Johnson LLC filed for Chapter 11 and announced liquidation; the company reduced its related note receivable by $1.81 million to $0.5 million. The filing also reports a related-party loan to Steven Madden, amendments to its terms, and restricted-stock grants, including 1.26 million shares granted July 3, 2012.
- Management identified estimates for customer allowances, inventory valuation, intangible assets and litigation reserves as areas where actual outcomes could differ materially. Marketable securities may fluctuate with equity prices, interest rates and credit risk.
Important facts for investors to verify
- Whether sales growth and profitability remain strong after separating organic growth from acquisition contributions, and whether gross margins recover from the reported mix-driven decline.
- Whether receivable collection days and inventory growth remain manageable, given higher working-capital needs and the increase in amounts due from the factor.
- Final court approval, insurance recovery and cash cost of the text-messaging settlement, along with the outcomes of the derivative shareholder suits and Customs matter.
- Actual earn-out payments and valuation changes for SM Canada, Cejon, Topline and other acquisitions; contingent liabilities are based partly on management projections.
- The effect of the related-party employment and loan amendments, subsequent restricted-stock issuance, and any resulting dilution or expense.
- Whether sourcing-cost inflation, overseas supplier exposure and the company’s ability to raise prices or shift production affect margins as management expects.