Steven Madden, Ltd. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Steven Madden designs, sources, markets and sells branded and private-label footwear, handbags and accessories, operates retail and e-commerce businesses, and earns commission and licensing income.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $304.6 million | $278.9 million | +9.2% |
| Gross profit / margin | $108.3 million / 35.6% | $102.6 million / 36.8% | Margin down 1.2 percentage points |
| Operating income / margin | $36.0 million / 11.8% | $36.4 million / 13.1% | Operating income down 1.2% |
| Net income attributable to Steven Madden | $23.6 million | $23.4 million | +1.0% |
| Diluted EPS | $0.36 | $0.35 | Up $0.01 |
| Cash from operating activities | $21.6 million | $26.4 million | Down $4.8 million |
- At March 31, cash and cash equivalents were $153.1 million and marketable securities totaled $122.7 million, or $275.7 million combined. The company reported no short- or long-term debt and working capital of $337.7 million.
- Current assets were $473.8 million and current liabilities $136.1 million. Total stockholders’ equity was $677.9 million.
- Cash decreased $27.2 million in the quarter. Investing activities used $20.6 million, including $9.4 million net purchases of marketable securities, $4.4 million of capital expenditures and the $6.75 million Brian Atwood acquisition payment. Financing activities used $28.2 million, primarily for $29.3 million of share repurchases.
- Inventory turnover was 10.5 times, flat year over year; average accounts-receivable collection time improved to 63 days from 67 days.
Material changes and operating trends
- Wholesale footwear: Sales rose 16.2% to $219.7 million, supported by branded footwear growth and private-label growth, including with Target. Operating income increased to $31.1 million from $22.6 million; gross margin improved to 31.4% from 30.6%.
- Wholesale accessories: Sales edged up 1.3% to $45.3 million, but operating income fell 20.5% to $6.0 million. Management cited lower margin from product mix and higher payroll-related and legal settlement costs.
- Retail: Sales fell 12.1% to $39.6 million; comparable-store sales declined 17.2% on a constant-currency basis. The segment moved from $2.0 million operating income to a $4.2 million loss. Management attributed the sales weakness to lack of fashion footwear trends and a soft retail environment; promotional activity also reduced gross margin. Store count was 123 versus 110 a year earlier.
- First Cost commission income declined to $1.4 million from $2.3 million, primarily due to lower sales with certain customers. Licensing income fell to $1.8 million from $2.1 million, reflecting increased promotional spending and certain obligations paid on behalf of Betsey Johnson.
- Consolidated operating expenses increased to $75.5 million from $70.5 million, largely due to retail expansion, but declined as a share of sales to 24.8% from 25.3%. The effective tax rate decreased to 35.1% from 37.0%, primarily due to planned reinvestment of foreign earnings and a state tax benefit.
Outlook, risks and notable items
- The filing provides no specific revenue, earnings or EPS guidance. Management said available cash, cash equivalents and marketable securities should be sufficient to meet commitments and operating needs for at least the next 12 months.
- In March, the company acquired Brian Atwood intellectual property and related assets for approximately $6.75 million in cash and a 20% ownership interest in BA Brands. It licensed the designer brand to Brian Atwood, who has operational and creative control; the company will manage the B Brian Atwood brand.
- On April 29, 2014, the board approved continuation of the share repurchase program for up to $150 million, including amounts remaining under the previous authorization. Approximately $40.6 million remained at quarter-end.
- Contractual obligations totaled $571.1 million, including $292.2 million of purchase obligations, $242.6 million of operating lease obligations and $34.8 million of contingent payment liabilities. Purchase obligations were due in the remainder of 2014.
- Risks include retail demand and fashion trends, inventory valuation and customer deductions, dependence on overseas manufacturing (primarily China), foreign exchange exposure, and potential acquisition earn-out payments. The company uses forward contracts to hedge forecast Mexican-peso inventory purchases and held $122.7 million in marketable securities exposed to market, interest-rate and credit-risk fluctuations.
- Previously disclosed legal proceedings remained outstanding unless reported as concluded. Management stated that other ordinary-course lawsuits were not expected to materially affect financial position or results. 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 the severe retail comparable-store sales decline and operating loss continue, and whether promotional activity further pressures margins.
- Whether wholesale footwear growth persists and offsets weakness in retail, accessories, commissions and licensing.
- Cash conversion and working-capital movements, particularly changes in factor receivables, customer receivables, inventories and payables.
- Execution and financial performance of the Brian Atwood brands, and the assumptions underlying acquisition-related contingent payments.
- Use of the expanded repurchase authorization relative to liquidity, contractual commitments and the company’s operating needs.