Business context and reporting period
Steven Madden, Ltd. filed this Form 10-K for the fiscal year ended December 31, 2013. The company designs, sources, markets and sells branded and private-label footwear, handbags and accessories, operates retail stores and e-commerce sites, and earns licensing and buying-agent income. Wholesale footwear and accessories generated 84% of sales; retail generated 16%. Per-share and share data reflect the three-for-two stock split declared in 2013.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $1,314.2 million | $1,227.1 million |
| Gross profit / margin | $482.4 million / 36.7% | $455.7 million / 37.1% |
| Operating income / margin | $203.8 million / 15.5% | $179.0 million / 14.6% |
| Net income attributable to Steven Madden, Ltd. | $132.0 million | $119.6 million |
| Diluted EPS | $1.98 | $1.81 |
| Cash from operations | $155.5 million | $143.3 million |
Sales increased 7% and attributable net income increased 10%. Gross margin declined 0.4 percentage points, while operating margin improved 0.9 points. The effective tax rate rose to 36.2% from 35.1%, primarily due to a lower tax benefit related to foreign earnings intended to remain invested overseas.
Fourth-quarter sales were $342.9 million versus $315.5 million in 2012; attributable net income was $35.7 million versus $33.0 million. Diluted EPS was $0.54 versus $0.49.
At year-end, cash and cash equivalents were $180.3 million and marketable securities totaled $111.9 million. Working capital was $342.1 million; the company reported no short- or long-term debt and no borrowings under its $30 million receivables-related credit facility. Stockholders’ equity was $678.8 million. Investing activities used $40.4 million, including $20.7 million of capital expenditures; financing activities used $103.6 million, principally reflecting $102.2 million of share repurchases.
Material changes versus the prior year
- Wholesale footwear sales rose 8.3% to $860.4 million, led by private-label and international growth and the newer FREEBIRD by Steven line. Its margin fell to 30.7% from 31.4%, partly due to a greater mix of lower-margin private-label and international sales.
- Wholesale accessories sales increased 1% to $244.2 million; operating income rose to $44.7 million from $41.4 million.
- Retail sales increased 10% to $209.6 million as the store base expanded to 121 from 109. Comparable-store sales fell 2.1%, and retail operating income declined to $24.7 million from $26.3 million.
- The impairment and litigation line was a $0.983 million positive amount in 2013, compared with an $8.432 million expense in 2012, which included impairment charges and a class-action settlement expense.
- The company repurchased 3.0 million shares for approximately $102.2 million; about $69.9 million remained authorized at year-end.
Outlook, risks and unusual items
The filing provides no specific 2014 revenue or earnings guidance. Management expected to open 13–16 retail stores and close three in 2014, and said available cash, securities and financial resources should cover commitments and operating needs for at least 12 months. Wholesale backlog was approximately $295 million at February 1, 2014, slightly below $302 million a year earlier; management cautioned that backlog can vary with seasonality and order timing and may not predict shipments.
Key risks include fast-changing fashion preferences, competition, consumer spending and weather volatility, inventory obsolescence, dependence on third-party manufacturers, and import, currency and geopolitical exposure. Approximately 85% of 2013 product purchases came from China. The company also highlighted execution risks from growth, retail expansion, acquisitions and its continuing company-wide ERP system rollout.
Contingencies include a U.S. Customs dispute over historical buying-agent duties and penalties: the company accrued $1.248 million against an estimated maximum exposure of approximately $1.7 million and disputes the allegations. A TCPA class action settlement was approved in 2013; the company’s reported actual expense was approximately $1.8 million. A shareholder demand relating to executive employment and loan amendments was reviewed by a special committee, which recommended no company action. Management said other routine litigation was not expected to materially affect results. The company has substantial lease commitments ($236.9 million) and acquisition-related contingent payment liabilities ($34.8 million). Auditors gave an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether growth can continue despite the decline in comparable-store sales and gross margin.
- 2014 execution of the planned store openings, closures and ERP rollout, and the profitability of new retail locations.
- Potential outcomes and changes in estimates for the customs matter and acquisition earn-out liabilities.
- Inventory levels, markdown exposure, and the effects of concentrated sourcing in China and overseas production.
- Cash deployment, including future repurchases, capital spending and acquisition-related payments.