Business Context and Reporting Period
Company: STEVEN MADDEN, LTD.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 2003
Business Overview: The Company designs, markets, and distributes contemporary footwear and accessories under various brands including Steve Madden, l.e.i., Steven, and Stevies. Operations are divided into Wholesale and Retail segments.
Key Financial Metrics
| Metric (in thousands) | 9 Months Ended Sep 30, 2003 | 9 Months Ended Sep 30, 2002 | 3 Months Ended Sep 30, 2003 | 3 Months Ended Sep 30, 2002 |
|---|---|---|---|---|
| Net Sales | $253,105 | $247,740 | $88,663 | $93,018 |
| Gross Profit | $98,869 | $95,780 | $35,596 | $36,255 |
| Gross Margin % | 39% | 39% | 40% | 39% |
| Operating Income | $29,585 | $26,311 | $11,707 | $10,502 |
| Net Income | $17,902 | $15,623 | $7,073 | $6,268 |
| Diluted EPS | $1.27 | $1.14 | $0.50 | $0.46 |
| Cash & Equivalents (Sep 30, 2003) | $34,180 | |||
| Working Capital (Sep 30, 2003) | $94,138 | |||
| Net Cash from Operating Activities (9mo) | $1,091 | $8,435 | N/A |
Material Changes vs. Prior Period
- Revenue Growth (9 Months): Net sales increased 2% to $253.1 million, driven by an 18% surge in the l.e.i. Wholesale Division and a 5% gain in the Retail Division. This offset a 21% decline in Madden Men's sales due to a downturn in the casual category and a late spring season.
- Profitability: Net income rose 15% to $17.9 million for the nine-month period. Operating income increased 12% to $29.6 million, aided by higher interest and royalty income and improved gross margins in the l.e.i. and Steven brands.
- Quarterly Decline (3 Months): Q3 2003 net sales decreased 5% to $88.7 million compared to Q3 2002. The decline was attributed to a drop in Men's Wholesale sales and a sustained promotional environment. However, operating income still grew 11% due to effective expense management.
- Cash Flow: Net cash provided by operating activities dropped significantly to $1.1 million (from $8.4 million in the prior year) due to increased factored accounts receivable ($10.1 million), higher inventory levels ($3.5 million), and increased prepaid expenses.
- Segment Performance:
- l.e.i. Footwear: Operating income jumped 70% (9 months) due to new retail doors and improved inventory management.
- Steven Brand: Operating income increased 96% (9 months) following a repositioning strategy and improved gross margins.
- Retail Division: Comparable store sales decreased 4% (9 months) and 5% (Q3) due to unseasonably cool weather and competition from lower-priced sneakers.
Guidance, Outlook, Risks, and Contingencies
- Liquidity: Management believes current cash and marketable securities ($44.4 million invested) are sufficient to meet financial commitments for at least the next 12 months. The Company has a $15 million credit line with Capital Factors, Inc., which was unused during the period.
- Expansion: The Company opened 5 new retail stores in the first nine months of 2003, bringing the total to 82. Plans include opening one additional store by year-end.
- Legal Proceedings:
- Class Action & Derivative Suits: Settlements in principle have been reached for shareholder class actions and derivative suits. The Company believes costs are covered by insurance.
- Patent Infringement: An action by Global Brand Marketing, Inc. regarding patent infringement is ongoing; the Company is in settlement negotiations and believes it has substantial defenses.
- Insurance Dispute: A dispute with Safeco Surplus Lines Insurance Company regarding policy rescission has reached a resolution pending judicial approval of other settlements.
- Risks: Key risks include dependence on fashion trends, inventory obsolescence, concentration of customers (department stores), reliance on foreign manufacturers (85% of products sourced overseas), and potential economic downturns affecting discretionary spending.
Investor Verification Checklist
- Inventory Levels: Verify the impact of the $3.5 million increase in inventory on future gross margins and potential markdowns, given the fashion industry's volatility.
- Men's Segment Recovery: Monitor the Madden Men's division for signs of recovery from the 21% sales decline, specifically regarding the shift from casual to dressy trends.
- Factoring Agreement: Review the terms of the Capital Factors agreement, noting that while the credit line is unused, the Company relies on factoring for 95% of receivables credit risk.
- Legal Settlements: Confirm the final approval and financial impact of the pending settlements regarding class action and derivative lawsuits.
- Retail Expansion ROI: Assess the profitability of the 5 new retail stores opened in 2003 against the backdrop of declining comparable store sales.