Business Context and Reporting Period
Company: Steven Madden, Ltd.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
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, David Aaron, l.e.i., Stevies, and Steve Madden Mens), Retail (company-owned stores and e-commerce), and Private Label (Adesso-Madden, Inc.). The Company sources products globally, primarily from China, Brazil, Italy, and Spain, and distributes through department stores, specialty retailers, and its own retail locations.
Key Financial Metrics
| Metric | 2002 | 2001 | 2000 |
|---|---|---|---|
| Net Sales | $326,136,000 | $243,391,000 | $205,113,000 |
| Gross Profit | $126,683,000 | $99,873,000 | $89,618,000 |
| Gross Margin % | 39% | 41% | 44% |
| Operating Income | $33,212,000 | $19,362,000 | $25,632,000 |
| Net Income | $19,841,000 | $12,116,000 | $16,043,000 |
| Diluted EPS | $1.45 | $0.94 | $1.26 |
| Operating Cash Flow | $29,593,000 | $9,393,000 | $8,748,000 |
| Working Capital | $86,461,000 | $82,633,000 | $57,207,000 |
| Total Assets | $150,500,000 | $121,862,000 | $91,733,000 |
| Stockholders' Equity | $130,075,000 | $102,360,000 | $76,566,000 |
Liquidity & Debt: The Company maintains a $15,000,000 factoring credit line with Capital Factors, Inc., allowing draws on 80% of invoiced receivables. No borrowings were outstanding under this line as of December 31, 2002. Cash and cash equivalents totaled $56,713,000.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 34% to $326.1 million, driven by a full year of operations for the Madden Mens division ($45.2 million sales), a 16% increase in Retail sales, and double-digit gains in other wholesale divisions.
- Profitability: Net income rose 64% to $19.8 million. This increase was aided by the absence of the $6.95 million non-recurring loss mitigation insurance charge incurred in 2001.
- Margin Pressure: Gross margin decreased to 39% from 41% in 2001 due to increased markdowns and selling allowances necessitated by sluggish business conditions and economic softness.
- Operating Expenses: Increased to $100.1 million (from $79.5 million) due to the first full year of Madden Mens operations, expansion of retail stores (10 new stores opened), and higher legal expenses related to ongoing litigation.
- Segment Performance:
- Wholesale: Madden Women's sales grew to $108.6 million; Madden Mens grew to $45.2 million.
- Retail: Sales reached $91.9 million with same-store sales increasing 6%.
- Private Label: Commission income increased 14% to $4.8 million.
Guidance, Outlook, Risks, and Contingencies
Outlook and Guidance
Management intends to open approximately 8 to 10 new retail stores in 2003. The Company expects to meet financial commitments through December 31, 2003, based on current cash flow and financial position. No specific numerical guidance for 2003 revenue or earnings was provided in the text.
Legal Proceedings and Contingencies
- Former CEO Indictment: Steven Madden (former CEO) was sentenced to 41 months in prison for securities fraud and money laundering. The Company purchased a $6.95 million loss mitigation policy in 2001 to cover related legal costs. Class action and shareholder derivative suits related to this matter have reached settlements in principle within insurance limits.
- Trademark Litigation:
- Adidas: Two lawsuits filed alleging trademark infringement regarding the use of two and four stripes on footwear. Trial scheduled for May 2003.
- Skechers: Lawsuit filed alleging patent infringement and unfair competition. An agreement in principle to settle has been reached.
- SEC Investigation: A formal investigation regarding trading in the Company's securities was issued in March 2001; no recent communications reported.
Risk Factors
- Inventory Management: High risk of obsolescence due to fashion trends; excess inventory requires markdowns.
- Customer Concentration: Significant reliance on major department stores (e.g., Federated, May, Nordstrom) which accounted for 49% of wholesale sales in 2002.
- Foreign Sourcing: Approximately 80% of products are sourced overseas (China, Brazil, Italy, Spain), exposing the Company to supply chain disruptions, currency fluctuations, and import duties.
- Competition: Highly competitive industry with well-funded competitors (e.g., Nike, Nine West, Kenneth Cole).
Investor Verification Checklist
- Legal Settlements: Verify the final execution and terms of the settlements regarding the class action and derivative suits related to the former CEO's indictment.
- Trademark Litigation: Monitor the outcome of the Adidas trademark infringement trial scheduled for May 2003 and the finalization of the Skechers settlement.
- Margin Sustainability: Assess whether the 39% gross margin is sustainable given the noted economic softness and reliance on markdowns.
- Retail Expansion: Track the profitability of the 10 new stores opened in 2002 and the planned 8-10 openings in 2003.
- Supplier Concentration: Review the impact of sourcing 54% of inventory from China and 30% from Brazil on supply chain stability and costs.