Steven Madden, Ltd. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; unaudited. The company designs, sources, markets and sells branded and private-label footwear, apparel, handbags and accessories through wholesale, retail, e-commerce, licensing and other channels.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $497.3 million | $458.5 million | $1,353.2 million | $1,243.2 million |
| Gross margin | 38.4% | 38.2% | 37.9% | 37.3% |
| Operating income | $68.0 million | $70.2 million | $157.3 million | $148.3 million |
| Net income attributable to Steven Madden, Ltd. | $52.5 million | $55.6 million | $123.6 million | $116.6 million |
| Diluted EPS | $0.63 | $0.64 | $1.48 | $1.35 |
Quarterly sales rose 8.5%, while attributable net income declined 5.6%. For the first nine months, sales rose 8.8% and attributable net income rose 5.9%. Operating margin was 13.7% in Q3 versus 15.3% a year earlier, and 11.6% year to date versus 11.9%. Adjusted EBITDA, a non-GAAP measure, was $77.8 million for Q3 and $183.3 million year to date, compared with $76.1 million and $170.4 million, respectively.
Cash flow and liquidity: Nine-month operating cash flow was $83.2 million, compared with $46.5 million; capital expenditures were $9.2 million. Cash and cash equivalents were $167.5 million, with $27.5 million of marketable securities, at September 30. Working capital was $454.4 million. The company reported no long-term debt and no borrowings on its $30 million receivables-related credit facility. Cash, equivalents and marketable securities totaled $194.9 million. Management said available resources should meet financial commitments and operating needs for at least the next 12 months.
Material changes and operating trends
- Wholesale Footwear sales increased 6.3% in Q3; segment operating income rose to $58.1 million. Nine-month sales increased 6.6%, with margin improvement attributed partly to reduced promotions and the absence of low-margin Payless sales.
- Wholesale Accessories/Apparel sales increased 15.8% in Q3, including BB Dakota, but segment operating income fell to $10.9 million. Gross margin declined to 29.8% from 32.7%, with tariffs cited as a factor. Year-to-date margin also declined, to 29.6% from 32.1%.
- Retail sales increased 8.3% in Q3 and 8.9% year to date. Comparable sales rose 5.1% in Q3 and 5.9% year to date. The segment posted operating losses of $3.1 million for Q3 and $14.5 million year to date; the company cited store and e-commerce costs and lease-related charges.
- First Cost and Licensing income declined, primarily reflecting the Payless ShoeSource bankruptcy and related lower commissions and royalties.
- Nine-month repurchases totaled approximately $73.2 million under the program, and cash dividends paid totaled $35.8 million. Total financing cash outflow was $109.5 million; cash declined $32.5 million from year-end.
Outlook, risks and unusual items
- The filing provides no quantified sales or earnings guidance. Management’s liquidity statement covers the next 12 months, not an earnings forecast. In October, the board raised the quarterly dividend to $0.15 per share, payable December 27, 2019; future dividends remain discretionary.
- U.S. tariffs on Chinese imports were a material risk: the filing says tariffs had already pressured accessories margins and anticipated further pressure on wholesale margins as tariffs on footwear, apparel and other accessories took effect. Most U.S.-sold products were manufactured in China. USMCA ratification and implementation were also identified as uncertainties.
- The company acquired 90% of GREATS Brand, Inc. and 100% of B.B. Dakota, Inc. in August, for purchase prices of approximately $17.5 million and $29.0 million, respectively, net of cash acquired. Contingent consideration liabilities totaled $9.8 million. Purchase-price allocations were preliminary.
- Other notable items included a $4.1 million Brian Atwood trademark impairment, $1.9 million of lease right-of-use asset impairment, early lease termination and acquisition-related costs, and a net benefit tied to reversal of a contingent liability and accelerated amortization related to the Kate Spade license termination. Operating lease liabilities were $177.8 million after adoption of the new lease accounting standard.
- Contractual obligations totaled $330.7 million, including $201.5 million of undiscounted operating lease payments, $80.0 million of purchase obligations, $31.2 million of minimum royalty and advertising payments, and $18.0 million of transition tax. Ordinary-course lawsuits were not expected by management to materially affect results or financial position.
- After quarter-end, the board ratified certain option and restricted-stock awards because they may not have been duly authorized originally; the filing describes a 120-day period for bringing specified claims. Management reported effective disclosure controls and no material change in internal control during the quarter, while excluding the newly acquired businesses from that evaluation.
Important facts for investors to verify
- Whether tariffs, sourcing changes or pricing actions affect wholesale margins, particularly in Accessories/Apparel and footwear.
- Whether GREATS and BB Dakota meet operating expectations and how preliminary acquisition valuations and contingent payments develop.
- Retail segment profitability, including the contribution of comparable-store growth, e-commerce, store additions and lease costs.
- Cash generation and working-capital trends, including factor receivables, inventory, buybacks, dividends and the company’s foreign-held cash balance.
- The effects of the Kate Spade license termination, Payless-related exposures, the Brian Atwood brand decision and the equity-award ratification process.