SHOO

Business Context and Reporting Period

Company: Steven Madden, Ltd.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2001
Business Overview: The Company designs, markets, and distributes footwear and accessories through wholesale divisions (Steven Madden, l.e.i., Madden Mens, Diva, Stevies) and a retail division. The reporting period covers the three and nine months ended September 30, 2001.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 17% for the quarter and 20% for the nine-month period compared to 2000. Growth was driven by new wholesale accounts, the launch of the Madden Mens division, and an expansion of retail stores (68 stores as of Sep 30, 2001 vs. 64 in 2000).
• Margin Compression: Gross profit margin decreased from 44% to 42% (quarterly) and 43% to 42% (nine-month). Management attributed this to aggressive markdowns at retail due to sluggish July sales and the economic impact of the September 11th tragedy, as well as margin pressures in wholesale.
• Expense Increases: Selling, general, and administrative (SG&A) expenses rose 12% for the quarter and 17% for the nine-month period. Increases were primarily due to a 31-32% rise in payroll and bonuses, and higher selling/designing expenses.
• Profitability: Despite margin pressure, Net Income increased 17% for both the quarter and the nine-month period due to volume growth.
• Cash Flow: Operating cash flow turned negative for the nine-month period ($(7,116) vs. $(2,857) in 2000), primarily due to a $17,028 increase in factored accounts receivable and a $5,965 increase in inventory.

Guidance, Outlook, Risks, and Unusual Items

• Management Commentary: Management noted that same-store sales for the retail division remained flat for the nine-month period and decreased 6% for the quarter, citing the September 11th tragedy and a challenging business climate. However, internet store revenues grew 49% (nine months) and 26% (quarter).
• Legal Proceedings (Significant Risk):
  • Class Action Litigation: Consolidated securities fraud class actions are pending against the Company and former executives, alleging false statements related to the June 2000 indictment of former CEO Steven Madden. Liability is undetermined.
  • Derivative Action: A shareholder derivative suit seeks damages from Mr. Madden on behalf of the Company.
  • SEC Investigation: The SEC has issued a formal order of investigation regarding trading in the Company's securities prior to June 20, 2000, focusing on potential insider trading by officers and directors.
  • Former CEO Status: Steven Madden pleaded guilty to federal charges, resigned as CEO/Board member effective July 1, 2001, and is barred from serving as an officer/director of a public company for 7 years. He is expected to return as Creative and Design Chief post-incarceration.
  • Contract Dispute: A former independent contractor is suing for approximately $1.3 million in damages.
• Unusual Items: The Company recorded a $230 gain on the sale of marketable securities in the nine-month period.

Investor Verification Checklist

• Legal Exposure: Verify the status of the consolidated class action lawsuits and the SEC investigation into pre-June 2000 trading activities.
• CEO Transition: Confirm the operational impact of Steven Madden's resignation and his planned return as a non-executive Creative Chief.
• Cash Flow Dynamics: Analyze the significant increase in "Due from factor" (factored receivables) and inventory levels, which drove negative operating cash flow despite net income growth.
• Retail Performance: Monitor same-store sales trends given the reported decline in the third quarter and the impact of the September 11th events.
• Margin Sustainability: Assess whether the 42% gross margin is sustainable given the reliance on promotional activity and markdowns to clear inventory.