Business Context and Reporting Period
Company: STEVEN MADDEN, LTD.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2002
Business Overview: The Company designs, markets, and distributes contemporary footwear and accessories through wholesale divisions (including brands like l.e.i., Madden Mens, Diva, and Stevies) and a retail division. The Company also operates licensing and commission-based businesses.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | Three Months Ended Sep 30, 2002 |
Nine Months Ended Sep 30, 2002 |
Nine Months Ended Sep 30, 2001 |
|---|---|---|---|
| Net Sales | $93,018 | $247,740 | $183,203 |
| Gross Profit | $36,255 | $95,780 | $77,127 |
| Gross Margin % | 39% | 39% | 42% |
| Operating Income | $10,502 | $26,311 | $22,114 |
| Net Income | $6,268 | $15,623 | $13,440 |
| Diluted EPS | $0.46 | $1.14 | $1.04 |
| Cash & Equivalents | $44,896 | $44,896 | $50,179 (Dec 31, 2001) |
| Working Capital | $93,917 | $93,917 | $78,348 (Sep 30, 2001) |
| Operating Cash Flow (9mo) | N/A | $8,435 | $(7,116) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 35% year-over-year for the nine-month period ($247.7M vs. $183.2M) and 32% for the quarter. Growth was driven by a 489% increase in Madden Mens Wholesale sales and double-digit gains in other divisions.
- Margin Compression: Consolidated gross margin decreased from 42% in 2001 to 39% in 2002. Factors included a "broad and shallow" assortment strategy, higher costs for USA/Europe production, increased airfreight, and a shift in sales mix toward lower-margin wholesale channels.
- Expense Increases: Selling, General, and Administrative (SG&A) expenses rose 26% year-over-year ($74.1M vs. $59.0M) due to payroll growth, increased advertising (18% increase), and higher selling/designing costs.
- Profitability: Despite margin pressure, Net Income increased 16% to $15.6M for the nine-month period, and Operating Income rose 19% to $26.3M.
- Cash Flow: Operating cash flow turned positive at $8.4M for the nine-month period, compared to a use of cash of $7.1M in the prior year. However, investing activities consumed $17.6M, primarily for marketable securities.
Guidance, Outlook, Risks, and Contingencies
Management Commentary and Outlook
- Expansion: The Company opened 11 new retail stores since September 2001, bringing the total to 77. Plans include opening 2-4 additional stores in Q4 2002.
- Strategy: Management continues to focus on brand recognition, clearing slower-moving inventory early to fund best-sellers, and expanding the Madden Mens division.
- Seasonality: Results are subject to seasonal fluctuations, weather, and fashion trends. Q3 results are not necessarily indicative of full-year performance.
Risks and Contingencies
- Legal Proceedings (Litigation):
- Adidas: Two lawsuits filed in 2002 alleging trademark infringement regarding the use of stripes on footwear. The Company believes it has substantial defenses.
- Skechers: A lawsuit filed in October 2002 alleging patent infringement and unfair competition. The Company has not yet responded but believes it has defenses.
- Former CEO Indictment: Steven Madden (former CEO) was sentenced to 41 months in prison in May 2002 for securities fraud and money laundering. The Company purchased a $6.95M loss mitigation policy to cover related legal costs. Class action and derivative suits related to this matter are in settlement negotiations.
- SEC Investigation: The SEC is investigating possible securities law violations regarding trading in the Company's securities prior to the 2000 indictment.
- Operational Risks: Heavy reliance on foreign manufacturers (80% of products sourced from China, Brazil, Italy, Spain) exposes the Company to supply chain disruptions, currency fluctuations, and labor practice issues.
- Customer Concentration: Significant portions of wholesale sales depend on a few large department store customers.
Investor Verification Checklist
- Litigation Exposure: Verify the status and potential financial impact of the Adidas and Skechers trademark/patent lawsuits, as well as the final settlement terms for the class actions related to the former CEO's indictment.
- Margin Sustainability: Assess whether the 3% decline in gross margin is a temporary result of inventory clearance or a structural shift due to higher production costs and sales mix.
- Inventory Levels: Review inventory turnover and obsolescence risks, given the $24.8M inventory balance and the fashion industry's volatility.
- Foreign Sourcing: Evaluate the Company's contingency plans for supply chain disruptions in key manufacturing countries (China, Brazil, Italy, Spain).
- Retail Expansion ROI: Monitor the profitability of the 11 new retail stores opened in the last year to ensure they meet comparable store sales targets.