SHOO

Business Context and Reporting Period

Company: Steven Madden, Ltd.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: The Company designs, sources, markets, and sells fashion-forward footwear for women, men, and children. Operations are divided into three segments: Wholesale (brands include Steve Madden, l.e.i., Candie's, Steven, Stevies, Unionbay), Retail (company-owned stores and e-commerce), and Private Label (Adesso-Madden, Inc.).

Key Financial Metrics

Liquidity: The Company maintains a $15 million factoring line of credit with Capital Factors, Inc., which was unused during 2003. As of December 31, 2003, the Company held approximately $32.7 million in marketable securities.

Material Changes vs. Prior Period

• Revenue: Total net sales decreased slightly by 0.6% to $324.2 million, primarily due to declines in the Madden Men's and Stevies wholesale divisions and a sustained promotional environment.
• Profitability: Net income increased 3% to $20.5 million, driven largely by higher interest and other income rather than operational growth.
• Segment Performance:
  • Wholesale: Madden Women's sales grew slightly; l.e.i. sales increased due to new retail doors. Madden Men's sales dropped significantly due to a shift in consumer trends away from casual styles. New licenses (Candie's and Unionbay) contributed minimal revenue in 2003.
  • Retail: Sales increased 4% to $95.5 million due to the opening of six new stores, though comparable store sales declined 4% due to competition from lower-priced sneakers.
  • Private Label: Commission income rose 6% to $5.1 million.
• Expenses: Operating expenses remained virtually flat at $100.3 million (31% of sales), offsetting costs from new store openings and new brand launches with cost reductions.

Guidance, Outlook, and Risks

Outlook: Management plans to open 8 to 10 new retail stores in 2004. The Company anticipates the Candie's brand will continue to infiltrate the marketplace. No specific financial guidance for 2004 was provided in the text.

Risks and Contingencies:

• Legal Proceedings: Several class action and shareholder derivative lawsuits related to the 2000 indictment of founder Steven Madden are pending settlement. The Company believes these are covered by insurance and a $6.95 million loss mitigation policy purchased in 2001. Other patent infringement suits (e.g., Global Brand Marketing) are in negotiation.
• Inventory Management: The fashion-oriented nature of the business creates risks of inventory obsolescence and the need for markdowns if trends are misjudged.
• Customer Concentration: Wholesale sales are concentrated among major department stores (e.g., Federated and May Department Stores accounted for ~27% of wholesale sales combined).
• Foreign Sourcing: Approximately 85% of products are sourced from outside the U.S. (primarily China, Brazil, Italy, Spain), exposing the Company to supply chain disruptions and currency fluctuations.

Investor Verification Checklist

• Comparable Store Sales: Verify the 4% decline in comparable store sales and the impact of sneaker competition on the core casual shoe category.
• Legal Settlements: Monitor the final approval and terms of the settlements regarding the Steven Madden indictment-related litigation to ensure no unexpected costs exceed insurance coverage.
• Wholesale Trends: Assess the sustainability of the Madden Men's division given the reported shift in consumer preference away from casual styles.
• Inventory Levels: Review inventory turnover ratios to ensure the Company is not carrying excess stock that could lead to future margin compression.
• Store Expansion ROI: Track the profitability of the 6 new stores opened in 2003 and the planned 8-10 openings in 2004.