Business Context and Reporting Period
Company: STEVEN MADDEN, LTD.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: The Company designs, markets, and distributes footwear, handbags, and accessories under the Steve Madden and Steven by Steve Madden brands. Operations are segmented into Wholesale, Retail, and First Cost (commission-based private label). The period includes the impact of the February 2006 acquisition of Daniel M. Friedman, a handbag and accessories designer.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2006 |
|---|---|---|
| Net Sales | $123,240 | $361,055 |
| Gross Profit | $51,023 | $151,861 |
| Gross Margin % | 41.4% | 42.1% |
| Operating Income | $21,874 | $61,644 |
| Net Income | $12,647 | $36,203 |
| Diluted EPS | $0.57 | $1.64 |
| Cash & Cash Equivalents | $43,356 | $43,356 |
| Total Marketable Securities | $69,100 | $69,100 |
| Working Capital | $162,577 | $162,577 |
| Long-term Debt | $0 | $0 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 23% for the quarter and 27% for the nine-month period compared to 2005. Growth was driven by the Wholesale Division (including the new Daniel M. Friedman segment) and new brand launches (SMNY, Rule).
- Profitability Expansion: Net income surged 129% for the quarter and 208% for the nine-month period. Diluted EPS increased 119% and 188% respectively.
- Margin Improvement: Gross margins expanded significantly, rising from 35% to 41% (quarter) and 35% to 42% (nine months). This was attributed to reduced inventory markdowns, lower off-price sales, and improved product mix.
- Operating Leverage: Operating expenses as a percentage of sales decreased from 28% to 27% (quarter) and 30% to 28% (nine months), despite absolute dollar increases due to the acquisition and new brand costs.
- Acquisition Impact: The Daniel M. Friedman acquisition contributed $12.7 million in sales for the quarter and $38.3 million for the nine months, though it recorded a slight operating loss of $216,000 in the quarter due to inventory markdowns.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Brand Expansion: Management is evolving Steve Madden into a global lifestyle brand, recently licensing dress lines (shipping Spring 2007) and expanding into watches and children's apparel.
- Capital Return: The Board declared a special one-time cash dividend of $1.00 per share (payable Nov 22, 2006). Combined with $8.3 million in share repurchases, total capital returned in 2006 is approximately $29.3 million.
- Liquidity: The Company holds $112.5 million in cash and marketable securities with no debt. Management expects to meet all financial commitments for the next 12 months.
Risks and Contingencies:
- Legal Proceedings:
- adidas Arbitration: Settled with no material financial effect.
- Jojeli, Inc. Lawsuit: Settled in September 2006; terms confidential, no material effect on financial statements.
- Customs Duties: A reserve of $2.0 million was recorded regarding potential underpayment of duties from 1998-2004.
- Inventory Risk: Inventory turnover decreased to 7.5 times (from 8.2) due to higher open stock requirements and the acquisition. Management monitors excess inventory closely.
- Market Risk: Investments in marketable securities ($69.1 million) are subject to interest rate risk.
Investor Verification Checklist
- Dividend Payment: Verify the payment of the $1.00 special dividend declared in October 2006.
- Acquisition Integration: Monitor the profitability trajectory of the Daniel M. Friedman division, which posted a quarterly operating loss due to markdowns.
- Inventory Levels: Track inventory turnover and markdown allowances to ensure the recent margin expansion is sustainable.
- Customs Reserve: Watch for updates on the $2.0 million reserve related to the U.S. Customs Department dispute.
- Licensee Performance: Assess the performance of new licensing agreements (dresses, watches) as they begin shipping in 2007.