Business Context and Reporting Period
Company: Steven Madden, Ltd.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1998
Business Overview: The Company designs, markets, and distributes footwear and accessories. Operations are segmented into Wholesale (Steve Madden and Diva Acquisition Corp.), Retail (Steven Madden Retail Inc.), and Licensing/Commission (Adesso Madden Inc.). The Company is aggressively expanding its retail footprint and wholesale distribution.
Key Financial Metrics
| Metric | Six Months Ended June 30, 1998 | Six Months Ended June 30, 1997 | Three Months Ended June 30, 1998 |
|---|---|---|---|
| Net Sales | $35,244,000 | $25,488,000 | $18,733,000 |
| Gross Profit | $14,559,000 (41% Margin) | $9,472,000 (37% Margin) | $7,533,000 (40% Margin) |
| Operating Income | $2,970,000 (8% Margin) | $1,268,000 (5% Margin) | $1,631,000 (9% Margin) |
| Net Income | $1,654,000 | $758,000 | $881,000 |
| Diluted EPS | $0.16 | $0.09 | $0.08 |
| Cash and Equivalents | $4,297,000 | $3,887,000 (Dec 31, 1997) | N/A |
| Working Capital | $20,315,000 | $14,959,000 (Jun 30, 1997) | N/A |
| Operating Cash Flow | ($2,737,000) Used | $1,081,000 Provided | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 38% year-over-year for the six-month period and 53% for the quarter. Growth was driven by new wholesale accounts, increased reorders, and the opening of 17 new retail locations (including an outlet) since late 1997.
- Margin Expansion: Gross profit margin improved to 41% (from 37%) due to higher sales volume allowing for bulk purchasing and a shift toward lower-cost overseas suppliers (Brazil and Mexico).
- Expense Increases: Selling, General, and Administrative (SG&A) expenses rose 45% year-over-year. This was primarily due to a 65% increase in payroll/bonuses to strengthen management and a 58% increase in advertising/marketing spend.
- Segment Performance:
- Wholesale (Steve Madden): Sales up 27%; Operating income up 230% to $1.85M.
- Retail: Sales up 177% to $10.1M; Operating income up 42% to $610k.
- Diva Acquisition Corp.: Sales declined 6% to $2.8M; Operating loss widened to $165k due to higher markdowns and management transition.
- Cash Flow: Operating cash flow turned negative ($2.7M used) compared to positive in the prior year, driven by significant increases in inventory ($1.8M) and factored accounts receivable ($1.9M) to support growth.
Outlook, Risks, and Contingencies
- Capital Resources: The Company approved the redemption of Class B Warrants. If exercised, this could raise approximately $10 million. As of July 1998, $1.8 million had already been received from exercises.
- Litigation:
- Levenson/Siskin v. Diva: Consolidated lawsuits by former executives. The Company believes claims are without merit and is contesting vigorously.
- Ooga v. Steven Madden: Settlement negotiations terminated; Company filed a motion to dismiss claims.
- Diva v. D. Aaron: Trademark infringement suit filed by Diva against D. Aaron, Inc. and others.
- Year 2000 Compliance: The Company is spending approximately $200,000 to reprogram computer systems to address the Year 2000 problem, citing risks from both internal systems and third-party failures.
- Customer Concentration: Federated Department Stores accounts for approximately 16% of total sales. The Company relies on a mix of department stores (50%) and specialty stores (50%).
- Strategic Expansion: Management continues to invest in infrastructure, including a new retail warehouse and expanded office facilities, to support future growth.
Investor Verification Checklist
- Verify the sustainability of the 41% gross margin given the reliance on overseas suppliers and potential currency fluctuations.
- Monitor the cash burn rate from operating activities ($2.7M used in 6 months) against the $4.3M cash balance to assess liquidity runway.
- Track the outcome of the pending litigation (Levenson, Siskin, Ooga) for potential financial provisions or reputational impact.
- Assess the performance of the Diva Acquisition Corp. segment, which is currently operating at a loss and saw margin compression.
- Confirm the execution of the Class B Warrant redemption and the resulting capital infusion.