Steven Madden, Ltd. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Steven Madden designs, sources, markets and sells branded and private-label footwear and accessories through wholesale, retail, first-cost and licensing businesses. Amounts below are in millions of dollars unless otherwise indicated.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $389.0 | $366.4 |
| Gross profit / margin | $140.7 / 36.2% | $132.7 / 36.2% |
| Operating income / margin | $36.6 / 9.4% | $30.8 / 8.4% |
| Net income attributable to Steven Madden, Ltd. | $28.7 | $20.2 |
| Diluted EPS | $0.50 | $0.35 |
| Operating cash flow | $(27.2) | $8.5 |
| Capital expenditures | $2.9 | $3.3 |
- Sales increased 6.2%; operating income rose 18.8%, and attributable net income increased 42.2%. The effective tax rate fell to 21.4% from 34.8%, primarily reflecting the Tax Cuts and Jobs Act.
- Gross margin was unchanged at 36.2%. Excluding a $1.2 million prior-year purchase-accounting inventory charge, management said gross margin declined 0.4 percentage points, primarily because private-label sales grew and carry lower margins.
- Operating expenses were $107.8 million, or 27.7% of sales, versus $105.9 million, or 28.9%. They included $2.8 million in legal charges and $0.3 million of acquisition integration and restructuring costs. Q1 2017 included a $7.5 million bad-debt charge tied to Payless ShoeSource’s bankruptcy. Management reported adjusted EBITDA of $45.1 million versus $45.4 million, a non-GAAP measure.
- Operating cash flow turned negative, primarily as increases in accounts receivable and factor receivables, and decreases in accounts payable and accrued expenses, offset net income and lower inventory. Cash and cash equivalents fell to $125.4 million from $181.2 million at year-end.
- At March 31, cash, cash equivalents and marketable securities totaled $200.6 million; the liquidity discussion separately reports cash, cash equivalents and short-term investments of $180.1 million. Working capital was $450.2 million, compared with $357.1 million at March 31, 2017. The company reported no long-term debt and no borrowings under its $30 million receivables-related credit facility.
- Total assets were $1.02 billion, total liabilities $213.7 million, and stockholders’ equity $808.2 million. Financing activities used $42.9 million, including $25.7 million for treasury stock purchases, $11.8 million in dividends and a $7.0 million acquisition earn-out payment.
Material changes and segment trends
- Wholesale footwear: Sales increased 5.3% to $275.1 million; operating income rose to $38.4 million from $30.7 million. Growth reflected international Steve Madden brand sales and private-label footwear.
- Wholesale accessories: Sales rose 8.0% to $56.1 million; operating income increased slightly to $2.4 million. Handbags drove sales growth.
- Retail: Sales increased 8.6% to $57.9 million, with 17 net additional stores year over year and 207 stores reported. Comparable-store sales declined 1.2% on a constant-currency basis. Gross margin fell to 56.7% from 58.7%, primarily due to discounting slow-moving boots; the operating loss widened to $7.9 million from $6.2 million.
- First cost: Net commissions and fees declined to $0.9 million from $1.5 million, primarily due to lower commissions from certain key customers. Licensing: Net licensing income rose to $2.8 million from $2.4 million.
- Accounts-receivable average collection days increased to 65 from 56, primarily due to changes in payment terms with certain customers. Trailing-twelve-month inventory turnover improved to 8.7 times from 8.1 times.
Outlook, risks and notable items
- The filing provides no quantified revenue or earnings 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.
- The company began a quarterly dividend in 2018: $0.20 per share was paid in March, and a further $0.20 dividend was declared for payment in June. Future dividends remain at the board’s discretion.
- Contractual obligations totaled $535.5 million, including $241.8 million of operating lease obligations, $228.5 million of purchase obligations, $62.1 million of future minimum royalties and $3.0 million of contingent payments. Purchase obligations are due in the remainder of 2018.
- The company recorded a provisional $22.0 million transition-tax and related withholding-tax obligation under the Tax Cuts and Jobs Act; $1.6 million was expected to be paid in Q2 2018, with the balance payable over eight years beginning in 2019. Tax calculations were not finalized and could change.
- Management cited ordinary-course lawsuits and said any resulting liabilities should not materially affect financial position or results. The quarter included a $2.8 million provision for legal charges. The company also retains a $3.0 million potential Schwartz & Benjamin payment contingent on renewal of specified license agreements.
- Market risks include foreign-currency exposure, interest-rate and credit risks on marketable securities, and reliance on overseas independent manufacturers. The company uses forward foreign-exchange contracts to hedge certain forecast inventory purchases. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether sales growth and wholesale profitability can continue, and whether private-label mix will pressure gross margins.
- Whether retail comparable sales, boot discounting and the retail segment’s operating losses improve.
- Whether the rise in collection days and receivables reverses, given negative operating cash flow in Q1.
- The final transition-tax calculation and the timing and effect of related payments.
- The status of legal matters, the contingent acquisition payment, and the company’s ability to meet substantial lease and purchase commitments.
- The basis for the two reported liquidity totals, which use different labels and scope in the filing.