Steven Madden, Ltd. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The company designs, sources, markets and sells branded and private-label footwear and accessories, operates retail stores and e-commerce sites, and earns licensing and commission income. Financial figures below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $323.9 | $304.6 | +6.3% |
| Gross profit / margin | $111.4 / 34.4% | $108.3 / 35.6% | Margin down 1.2 percentage points |
| Operating income / margin | $29.8 / 9.2% | $36.0 / 11.8% | Down 17.1% |
| Net income attributable to Steven Madden, Ltd. | $19.8 | $23.6 | Down 16.1% |
| Diluted EPS | $0.32 | $0.36 | Down 11.1% |
| Operating cash flow | $(2.4) | $21.6 | Declined $24.0 |
Cash and cash equivalents were $50.5 million; marketable securities totaled $118.2 million, for combined cash and securities of $168.7 million. Working capital was $257.0 million. The company reported $9.5 million in factor advances and no long-term debt. Stockholders’ equity was $660.7 million. Management said available liquidity was sufficient to meet financial commitments and operating needs for at least the next 12 months.
Material changes versus the prior-year quarter
- Sales increased 6.3%, but lower gross margin and higher operating expenses contributed to lower operating income and net income.
- Wholesale footwear sales were $225.1 million, up 2.5% reported, but down 7.0% excluding recent acquisitions. Segment operating income fell to $22.0 million from $31.1 million.
- Wholesale accessories sales rose 14.6% to $51.9 million, while gross margin fell to 32.8% from 38.1%; operating income declined to $5.4 million from $6.0 million.
- Retail sales rose 18.5% to $46.9 million, including 11.6% comparable-store sales growth on a constant-currency basis. The store count increased to 158 from 123. Retail operating loss narrowed to $1.4 million from $4.2 million, including a one-time lease-termination benefit.
- International revenue increased to $35.8 million from $23.2 million; domestic revenue was $288.1 million versus $281.4 million.
- Cash used in operations was $2.4 million, versus cash provided of $21.6 million. Factor receivables increased $64.5 million and accounts payable and accrued expenses declined $20.8 million, among the reported working-capital movements.
Management commentary, unusual items and risks
- Operating expenses included a $3.0 million benefit from early termination of the lease for the company’s 5th Avenue New York store. Excluding the benefit, operating expenses were $85.5 million and retail segment operating loss was $4.5 million.
- The quarter included a $3.0 million impairment charge for the Wild Pair trademark, following reduced expected sales from a significant customer.
- Recent acquisitions included Blondo, acquired in January 2015 for approximately $9.1 million; the reported results also include Dolce Vita and SM Mexico from their acquisition dates. Acquisition-related goodwill and intangible valuations remained subject to finalization.
- The company repurchased 1.43 million shares for approximately $52.8 million and extended its repurchase authorization by $150 million; $147.0 million remained available at quarter-end.
- Contractual obligations totaled $504.6 million, including $235.9 million of operating leases, $222.1 million of purchase obligations and $39.1 million of contingent payment liabilities. The company also reported potential acquisition earn-outs.
- Most products are manufactured overseas, primarily in China, with a smaller and growing share in Mexico. The company reported no long-term manufacturing or supply contracts. Risks include supplier dependence, customer concentration, changing consumer demand, currency fluctuations, inventory valuation, acquisition performance and contingent liabilities.
- Foreign subsidiaries held $55.1 million of cash, cash equivalents and short-term investments at quarter-end. The company considered $64.1 million of foreign earnings indefinitely reinvested and estimated approximately $11.9 million of tax would be incurred if those earnings were not indefinitely reinvested.
- No formal earnings or revenue guidance was provided in the filing. Management cautioned that forward-looking statements are uncertain and actual results may differ materially. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales growth and retail comparable-store momentum persist, particularly as wholesale footwear sales excluding acquisitions declined.
- Whether gross-margin pressure from acquisition mix, customer mix, off-price sales and outlet promotions continues.
- Whether operating cash flow improves, given the quarter’s negative cash flow and movements in factor receivables and payables.
- Final acquisition purchase-price allocations, earn-out estimates and the operating performance of Dolce Vita, SM Mexico and Blondo.
- The sustainability of the Wild Pair trademark value and exposure to significant customers, along with foreign-currency and overseas-sourcing risks.
- Execution of the large share repurchase program relative to liquidity, acquisition spending and contractual commitments.