SHOO

Business Context and Reporting Period

Company: STEVEN MADDEN, LTD.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2004
Business Overview: The Company designs, markets, and distributes contemporary footwear and accessories through wholesale and retail channels. Key brands include Steven Madden, l.e.i., Madden Mens, Candie's, Steven, Stevies, and Unionbay.

Key Financial Metrics (Six Months Ended June 30, 2004)

Cash Flow: Net cash used in operating activities was $11,934, driven by increases in receivables and inventory. Net cash used in investing activities was $23,472, primarily due to the purchase of marketable securities ($24,006).

Material Changes vs. Prior Period

• Revenue: Total net sales remained virtually flat ($165.0M vs. $164.4M). Growth in the Retail Division (+15% comparable store sales) and the new Candie's brand was offset by declines in l.e.i. (-32%), Madden Mens (-34%), and Stevies (-5%).
• Profitability: Net income decreased 24% to $8.2M. Operating expenses increased to $54.1M from $49.2M due to higher advertising, occupancy costs, and expenses related to new divisions (Candie's, Unionbay).
• Segment Performance:
  • Steven (Diva Acquisition): Sales surged 156% to $11.1M with operating income turning positive ($2.2M) from a loss.
  • Retail: Sales increased to $50.1M (30% of total) with operating income stable at $3.0M despite higher expenses.
  • l.e.i. & Madden Mens: Significant declines in sales and operating income due to market downturns in casual footwear and increased markdowns.
• Liquidity: Cash and cash equivalents decreased by $36.8M, largely due to the strategic shift of excess cash into long-term marketable securities.

Guidance, Outlook, and Risks

Management Commentary:

• Outlook: Management anticipates Candie's will continue to gain market share. Prospects for Unionbay are "somewhat improved" for Fall 2004, though management remains cautious.
• Expansion: Plans to open 8-10 additional retail stores in the remainder of 2004.
• Capital Resources: The Company believes current cash and marketable securities are sufficient to meet commitments for the next 12 months. A $15M credit line with Capital Factors remains unused.

Risks and Contingencies:

• Legal Proceedings: Class action and shareholder derivative lawsuits regarding the 2000 indictment of former CEO Steven Madden were settled and dismissed in May/June 2004 with no material financial effect. The Company is responding to an SEC information request regarding Mr. Madden's employment.
• Operational Risks: High dependence on foreign manufacturers (90% of products sourced overseas), primarily in China, Brazil, Italy, and Spain. Risks include supply chain disruptions, currency fluctuations, and labor practices.
• Market Risks: The fashion industry is cyclical and highly competitive. Misjudging trends could lead to excess inventory and markdowns.

Investor Verification Checklist

• Inventory Levels: Verify the impact of the $5.4M increase in inventory on future gross margins and potential markdowns, particularly for the underperforming l.e.i. and Madden Mens divisions.
• Wholesale Trends: Monitor the continued decline in wholesale sales for core brands (l.e.i., Madden Mens) versus the growth in the Retail channel.
• Legal Exposure: Confirm the final status of the SEC information request and any potential liabilities from the LaRue Distributors trademark dispute.
• Cash Deployment: Assess the yield and liquidity of the $51M portfolio of marketable securities relative to operating cash burn.
• Unionbay Turnaround: Evaluate the success of the new management team and product direction for the Unionbay brand in the upcoming Fall season.