Steven Madden, Ltd. — Q3 2015 Form 10-Q
Business context and reporting period. The company designs, sources, markets and sells branded and private-label footwear, handbags and accessories, and earns commission and licensing income. This unaudited quarterly report covers the three and nine months ended September 30, 2015. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $413.5 | $392.0 | $1,061.0 | $992.3 |
| Gross profit / margin | $148.8 / 36.0% | $136.1 / 34.7% | $376.3 / 35.5% | $351.5 / 35.4% |
| Operating income / margin | $66.3 / 16.0% | $59.3 / 15.1% | $132.9 / 12.5% | $135.6 / 13.7% |
| Net income attributable to Steven Madden, Ltd. | $42.9 | $39.2 | $87.2 | $90.9 |
| Diluted EPS | $0.70 | $0.62 | $1.42 | $1.42 |
| Operating cash flow | Not separately reported | Not separately reported | $50.1 | $74.1 |
Q3 net sales rose 5.5%; attributable net income increased 9.3%. The effective tax rate fell to 34.1% from 35.0%, which management primarily attributed to planned reinvestment of foreign earnings. Nine-month sales rose 6.9%, while attributable net income declined about 4.0% and operating income fell about 2.0%.
At September 30, cash and cash equivalents were $38.7, marketable securities were $112.5, and total cash, cash equivalents and marketable securities were $151.2. The company reported no long-term debt, working capital of $267.1, total assets of $969.9 and stockholders’ equity of $685.3. Working capital was down from $376.5 at September 30, 2014. Nine-month operating cash flow decreased year over year, with cash absorbed by increases in factor receivables, inventory and accounts receivable. The company used $103.9 for share repurchases and ended the period with $95.9 remaining under its repurchase authorization.
Material changes and operating drivers
- Q3 margin improvement: Consolidated gross margin expanded 1.3 percentage points, primarily from lower footwear markdowns, less retail promotion and sales mix. Operating expenses rose to $89.1 from $81.9 and increased as a share of sales, reflecting store growth, acquisitions and organic-sales deleverage, partly offset by a contingent-liability reversal benefit.
- Wholesale footwear: Reported Q3 sales increased, including acquired businesses; excluding acquisitions, sales declined 4.4%, driven primarily by private-label footwear. Nine-month organic sales, excluding acquisitions, declined 4.3% amid declines in branded and private-label footwear.
- Accessories and retail: Q3 wholesale accessories sales grew 11.7%, though segment margin narrowed to 34.7% from 35.1% due to lower-margin customer and private-label mix. Retail sales rose 15.1% in Q3; comparable-store sales grew 11.2% on a constant-currency basis. The company had 165 stores versus 133 a year earlier. Retail returned to operating profit in Q3.
- Nine-month segment pressure: Wholesale footwear operating income declined to $82.6 from $98.0, with higher operating expenses and weaker organic sales. Accessories sales increased, but gross margin fell to 34.0% from 36.1%. Retail operating income was $5.7 versus a $3.1 loss, including a $3.0 lease-termination benefit; excluding that benefit, retail operating income was $2.7.
- Acquisitions: The period includes Dolce Vita, SM Mexico and Blondo from their respective acquisition dates. Blondo was acquired in January 2015 for approximately $9.1. Acquisition-related sales contributed to reported growth; results excluding acquisitions are not directly comparable with reported totals.
Outlook, risks and unusual items
- No specific sales or earnings guidance is provided. Management said available cash, marketable securities and operating cash flows should be sufficient for operating needs and commitments for at least the next 12 months.
- Contractual obligations totaled $451.5, including $235.7 of operating lease obligations, $175.4 of purchase obligations and $33.2 of contingent payment liabilities. Management’s projections of acquired-business performance affect contingent earn-outs; Dolce Vita has an aggregate minimum earn-out of $5.0 for its two-year period.
- Nine-month results included a $3.0 impairment charge for the Wild Pair trademark, triggered by reduced expected future cash flows from a significant customer, and a $3.0 pre-tax benefit from early termination of the lease for the company’s 5th Avenue store.
- Foreign-exchange volatility is a risk: the company uses Mexican-peso forward contracts, and certain discontinued cash-flow hedges generated $1.4 of losses reclassified to earnings during the 2015 periods. Currency translation also reduced accumulated other comprehensive income.
- Management identified estimation-sensitive areas including customer allowances and receivables, inventory valuation, intangible-asset impairment, litigation reserves and acquisition earn-outs. It noted risks from consumer demand, markdowns, customer chargebacks, overseas sourcing and foreign currency. Most products are manufactured overseas, principally in China; the company has no long-term manufacturing or supply contracts.
- Management stated that pending ordinary-course lawsuits were not expected to materially affect financial position or results, while proceedings disclosed in the prior annual report remained outstanding unless otherwise indicated. The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether footwear sales excluding acquisitions stabilize, given the reported organic declines and lower nine-month footwear operating income.
- Whether retail comparable-store growth and improved margins persist as the store base expands.
- Whether working-capital pressures, especially factor receivables and inventory, reverse and operating cash flow recovers.
- Whether acquisition earn-outs and integration performance align with management’s projections, and whether any further impairment is needed.
- How much of the reported liquidity is readily available domestically: $48.2 of cash, cash equivalents and short-term investments was held by foreign subsidiaries; $64.1 of foreign earnings was considered indefinitely reinvested, with an estimated $11.9 tax cost if not reinvested.
- Whether share repurchases and contractual commitments remain consistent with the company’s liquidity and capital-allocation priorities.