Steven Madden, Ltd. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited figures below are in thousands of dollars except per-share data, percentages, and where otherwise noted. The company designs, sources, markets, and sells branded and private-label footwear, apparel, handbags, and accessories through wholesale, retail, e-commerce, and licensing channels.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $142,812 | $449,629 | $501,980 | $865,417 |
| Gross profit / margin | $55,888 / 39.1% | $170,000 / 37.8% | $189,352 / 37.7% | $331,845 / 38.3% |
| Operating expenses | $79,590 | $121,317 | $229,784 | $238,502 |
| Operating income (loss) | ($23,702) | $44,633 | ($49,950) | $89,293 |
| Net income (loss) attributable to Steven Madden, Ltd. | ($16,586) | $36,572 | ($34,037) | $71,097 |
| Diluted earnings (loss) per share | ($0.21) | $0.44 | ($0.43) | $0.85 |
| Cash provided by operating activities | Not separately presented for the quarter | $57,867 | $59,761 |
Q2 revenue fell 68.2% year over year; first-half revenue fell 42.0%. Q2 gross margin improved year over year, which management attributed to a sales mix shift toward higher-margin e-commerce. First-half gross margin declined, primarily reflecting inventory reserves related to COVID-19. Q2 operating expenses were 55.7% of revenue versus 27.0% a year earlier, largely because of lower sales and restructuring costs. First-half operating expenses included substantial impairment and restructuring charges.
Segments and material changes
- Q2 wholesale footwear: Revenue decreased 72.8% to $77,966, mainly due to COVID-related order cancellations; operating loss was $10,699 versus $38,429 of operating income a year earlier. Gross margin declined to 27.9% from 33.1%, partly due to a shift toward lower-margin private-label sales.
- Q2 wholesale accessories/apparel: Revenue decreased 71.5% to $22,018; the segment recorded an operating loss of $4,404 versus $4,750 of operating income. Management cited order cancellations and weaker branded handbag and fashion accessories performance.
- Q2 retail: Revenue declined 49.2% to $41,379 as most stores were closed for much or all of the quarter. E-commerce partly offset store closures. The segment’s operating loss widened to $8,933 from $1,693; retail gross margin rose to 67.4% from 59.7% on the e-commerce mix shift.
- First half: Wholesale footwear revenue fell 44.4%, accessories/apparel fell 39.7%, and retail fell 34.6%. Retail recorded a $54,736 operating loss, and accessories/apparel recorded a $15,025 operating loss. The company reported 225 retail stores at June 30, 2020, compared with 224 a year earlier.
Liquidity, cash flow, and obligations
- At June 30, cash and cash equivalents were $318,101 and marketable securities were $38,837, for combined cash, equivalents, and securities of $356,938. Working capital was $398,029. Approximately 39% of combined cash, equivalents, and securities was held in foreign subsidiaries.
- The company had $42,662 outstanding as advances from its factor at June 30, classified as a current liability, and reported no long-term debt. First-half operating cash flow was $57,867, supported principally by lower factor receivables and inventory; the filing also reports a $76,183 decrease in accounts payable and accrued expenses.
- On July 22, 2020, the company entered into a $150,000 asset-based revolving credit facility, scheduled to mature in 2025, replacing its Rosenthal credit facility. The company reported no borrowings or letters of credit under the new facility at signing; it also stated that outstanding advances under the prior facility had been repaid.
- Contractual obligations totaled $265,348, including $169,747 of operating lease obligations, $52,790 of purchase obligations, and $26,401 of future minimum royalty and advertising payments.
- First-half capital expenditures were $4,320. The company paid $12,459 in dividends and spent $29,678 on treasury stock during the first half, but suspended quarterly dividends and share repurchases in response to the pandemic.
COVID-19, outlook, risks, and unusual items
- COVID-19 caused temporary closure of all U.S. stores and offices and most locations globally, significant order cancellations, lower sales, and increased wholesale customer collection times: average collection days rose to 141 from 65 a year earlier. Most stores and offices had reopened by July 2020, according to management.
- The company temporarily furloughed a significant number of employees, reduced salaries, cut discretionary spending and planned inventory purchases, and drew on its factor facility. It recorded $5,414 of Q2 restructuring and related charges associated with layoffs of approximately 250 employees. On July 31, it announced restoration of employee salaries effective August 1; the founder and CEO and board members continued to forgo compensation.
- First-half impairment charges included $9,518 for certain trademarks and approximately $30 million for retail store right-of-use and fixed assets. The company reported no goodwill impairment. It also recorded a tax benefit on its pretax loss; the effective tax rate was 26.6% for Q2 and 28.0% for the first half.
- Management said it believed available cash, securities, and credit access would meet financial commitments and operating needs for at least the next 12 months. The filing gives no quantified revenue or earnings guidance and cautions that the pandemic’s effects cannot be reasonably estimated and may continue to materially affect results, financial position, and cash flow.
- Key risks include prolonged pandemic disruption, fashion-trend and competitive risks, inventory and delivery disruption, reliance on overseas manufacturers, foreign exchange and trade-policy exposure, international operations, and the integration and performance of acquired businesses. Management described ordinary-course litigation as not expected to have a material effect; the filing provides no specific quantified litigation exposure.
Important facts for investors to verify
- Whether store reopenings, e-commerce growth, and wholesale order recovery continued after the reporting date, and how they affected revenue and margins.
- Whether customer collections normalized after average collection days rose to 141, and whether inventory levels and purchase commitments required further reserves.
- Drawings, availability, borrowing-base constraints, and interest costs under the new $150 million revolving facility, alongside the status of factoring arrangements.
- Further impairment, restructuring, or contingent-consideration adjustments, including the sensitivity of asset valuations to management’s forecasts.
- Whether dividends or share repurchases resumed; their suspension remained subject to board discretion and future business and financial conditions.