Steven Madden, Ltd. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited results; dollar amounts below are in millions unless stated otherwise. The company designs, sources, markets and sells branded and private-label footwear and accessories, operates retail stores and e-commerce sites, and licenses trademarks.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $441.2 | $408.4 | $1,181.7 | $1,063.1 |
| Gross profit / margin | $165.9 / 37.6% | $154.5 / 37.8% | $438.0 / 37.1% | $391.8 / 36.8% |
| Operating income / margin | $65.4 / 14.8% | $63.8 / 15.6% | $138.1 / 11.7% | $129.5 / 12.2% |
| Net income attributable to Steven Madden, Ltd. | $44.2 | $43.8 | $93.4 | $92.2 |
| Diluted earnings per share | $0.77 | $0.74 | $1.61 | $1.54 |
| Cash from operations | — | $35.0 | $73.5 |
At September 30, cash and cash equivalents were $92.1 and marketable securities were $84.8; together these totaled $176.9. The company reported no long-term debt, working capital of $437.7, total stockholders’ equity of $803.0, and total liabilities of $268.4. Cash, cash equivalents and short-term investments were $143.1, including $91.6 held by foreign subsidiaries. The company said available liquidity and operating cash flows should cover commitments and operating needs for at least 12 months.
Material changes and business drivers
- Q3 sales rose 8.0%; nine-month sales rose 11.2%. Wholesale footwear was the main growth driver. Excluding Schwartz & Benjamin acquisition sales, footwear sales rose 2.8% in Q3 and 6.9% year to date.
- Wholesale footwear margins improved, supported by higher initial margins, fewer closeouts and favorable brand and business mix. The acquired business’s sales mix reduced reported footwear margin; excluding its effect, Q3 and year-to-date footwear margins were 36.0% and 34.1%.
- Wholesale accessories operating income fell to $10.3 in Q3 from $15.5 and to $19.6 year to date from $25.8. Lower cold-weather margins, prior-season closeouts and comparison against a prior-year contingent-liability reversal weighed on results.
- Retail sales rose 4.0% in Q3 and 4.6% year to date, helped by 16 net additional stores year over year. Comparable sales declined 3.8% in Q3 and 2.3% year to date. Retail reported operating losses of $2.0 in Q3 and $3.1 year to date, versus profits in the comparable 2016 periods.
- Q3 consolidated gross margin declined 0.2 percentage point and operating margin declined 0.8 point year over year. Nine-month gross margin improved 0.3 point, while operating margin declined 0.5 point.
- Inventory turnover decreased to 8.2 times from 8.7 times; average receivable collection time rose to 63 days from 56 days, which management attributed primarily to changed customer payment terms.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or EPS guidance. Management expressed confidence that liquidity would fund at least the next 12 months.
- The January 2017 Schwartz & Benjamin acquisition had an approximately $40.4 purchase price, including $17.4 paid at closing and potential earn-outs. The recorded contingent consideration liability was $23.1; the preliminary purchase-price allocation included $16.4 of goodwill. The company also formed controlled distribution joint ventures in China and Taiwan in September.
- The company recorded a $7.5 bad-debt expense related to Payless ShoeSource’s bankruptcy and $1.3 of one-time Schwartz & Benjamin integration costs during the first nine months. It reported adjusted nine-month net income attributable to the company of $101.8 excluding those items; this is a company-defined non-GAAP measure.
- Operating cash flow fell to $35.0, principally reflecting a $143.8 increase in factor receivables, partly offset by net income and working-capital movements. Financing used $69.3, including $73.2 of treasury-stock purchases. The board extended the repurchase authorization by $200.0; $194.8 remained available at quarter-end.
- Contractual obligations totaled $443.4, including $257.0 of operating leases, $157.3 of purchase obligations and $23.1 of contingent payments. The company reported no off-balance-sheet arrangements.
- Risks include retail comparable-sales weakness, customer credit and collection exposure, dependence on overseas manufacturing, foreign-exchange and marketable-securities risks, and acquisition earn-out estimates. A 10% currency move against the dollar on outstanding forward contracts was estimated to change their fair value by approximately $0.1. The company disclosed ordinary-course lawsuits and said any resulting liabilities were not expected to be material.
- Foreign-subsidiary earnings of $134.2 were considered indefinitely reinvested; the company estimated approximately $26.6 of cumulative taxes not previously provided if those earnings were not indefinitely reinvested. Adoption of the new lease standard was expected to have a material financial-statement impact; the company was still evaluating other forthcoming accounting standards.
Important facts for investors to verify
- Whether the rise in collection days and factor receivables reflects a lasting change in customer terms, and how it affects future operating cash flow.
- Retail comparable-sales trends, store-level profitability and whether new-store growth can offset ongoing operating losses.
- Schwartz & Benjamin’s post-acquisition results, final purchase-price allocation and the assumptions underlying its $23.1 contingent consideration estimate.
- The continuing effect of Payless-related credit exposure and any further customer bankruptcies or chargebacks.
- Use of the remaining share-repurchase authorization relative to cash generation, foreign-held liquidity and contractual obligations.
- Management’s stated outlook and risk factors in subsequent filings; this quarter’s filing contains no specific forward guidance.