SHOO

Business Context and Reporting Period

Company: STEVEN MADDEN, LTD.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2001
Business Overview: The Company designs, markets, and distributes footwear and accessories under the Steve Madden, l.e.i., Stevies, and David Aaron brands. Operations are divided into Wholesale, Retail, and Licensing segments.

Key Financial Metrics

All figures in thousands, except per share data.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 23% for the six-month period and 24% for the quarter compared to the prior year. Growth was driven by new wholesale accounts, a 28% increase in retail sales, and the launch of the Madden Mens division.
• Profitability: Net income rose 17% year-over-year for the six-month period. Operating income increased 21%.
• Expense Increases: Selling, General, and Administrative (SG&A) expenses increased significantly (20% for six months) due to a 31% rise in payroll and bonuses, and a 28% increase in selling and designing expenses.
• Cash Flow: Despite net income growth, operating cash flow was negative ($11.1M used) primarily due to a $13.1M increase in factored accounts receivable and a $4.2M increase in inventory.
• Segment Performance:
  • Wholesale: Madden Wholesale sales grew; l.e.i. Wholesale sales grew 3% but operating income declined due to higher expenses. Diva Acquisition Corp. sales surged 108%.
  • Retail: Sales increased 28% with 67 stores open (up from 57). Same-store sales increased 4%.

Guidance, Outlook, Risks, and Unusual Items

• Management Commentary: Management attributes growth to brand awareness, concept shop expansion (approx. 1,300 concept shops), and successful new product lines (Madden Mens). The Company plans to roll out an EDI open stock replenishment program for Madden Mens in Q3 2001.
• Liquidity: Working capital increased to $70.5M. The Company has lease obligations totaling approximately $49M through 2011. No new debt was incurred; financing activities were driven by stock option exercises ($3.98M proceeds) and a prior stock repurchase program (900,000 shares repurchased at $6.076M total cost, with no repurchases in 2001).
• Legal Proceedings & Contingencies:
  • 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 Steven Madden. Liability cannot be determined.
  • Derivative Action: A shareholder derivative suit seeks damages from Steven Madden regarding his indictment and potential disgorgement of profits.
  • SEC Investigation: The SEC 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/directors. The Company denies wrongdoing by the entity or other officers.
• Executive Changes: Steven Madden resigned as CEO and Board member effective July 1, 2001, following a plea agreement regarding securities fraud and money laundering charges. He will serve as Creative and Design Chief post-incarceration. Jamieson Karson was appointed CEO.

Investor Verification Checklist

• Cash Flow vs. Earnings: Verify the sustainability of operations given the $11.1M negative operating cash flow despite $8.1M net income, driven heavily by receivables factoring and inventory buildup.
• Legal Exposure: Monitor the status of the consolidated class action lawsuits and the SEC investigation into pre-June 2000 trading, as potential liabilities are currently undetermined.
• Executive Transition: Assess the impact of the leadership change (Madden to Karson) and the ongoing legal constraints on the former CEO's role.
• Inventory Management: Review future inventory levels and markdown risks, as the filing notes decreased gross margins in certain divisions (Diva, Stevies) due to clearing underperforming inventory.
• Concentration Risk: Note that Federated and May Department Stores combined account for approximately 39% of wholesale sales.