SHOO

Business Context and Reporting Period

Company: Steven Madden, Ltd.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1999
Business Overview: The Company designs, sources, and sells fashion footwear under the Steve Madden, l.e.i., and David Aaron brands. Operations are divided into three segments: Wholesale (department and specialty stores), Retail (company-owned stores), and Private Label (Adesso-Madden). As of year-end 1999, the Company operated 41 Steve Madden retail stores, 1 David Aaron store, and 6 outlet stores, alongside distribution through over 3,000 wholesale locations.

Key Financial Metrics

Liquidity & Debt: The Company maintained a strong liquidity position with $37.4 million in cash and cash equivalents. It holds a $15 million factoring line of credit with Capital Factors, Inc., against which it had not recently borrowed. Total current liabilities were $14.7 million, primarily consisting of accounts payable and accrued expenses.

Material Changes vs. Prior Period

• Revenue Growth: Sales nearly doubled, driven by the full-year contribution of the l.e.i. Wholesale Division (launched late 1998), an 83% increase in retail sales due to store openings and a 26% increase in same-store sales, and an 86% increase in EDI replenishment orders.
• Expense Increases: Operating expenses rose 77% to $52.9 million. This was primarily due to a 60% increase in payroll ($19.1M vs $11.9M), a 101% increase in advertising/marketing ($5.0M vs $2.5M), and an 88% increase in occupancy and facility costs due to retail expansion.
• Segment Performance:
  • Wholesale: Steve Madden wholesale sales grew 58%; l.e.i. sales grew significantly from $3.5M to $27.5M; David Aaron sales grew 36% with improved margins.
  • Retail: Sales increased 83% to $48.6M, with internet sales surging 700% to $1.2M.
  • Private Label: Commission revenue decreased slightly to $2.6M due to account closures, though Q4 showed a 31% increase.

Guidance, Outlook, and Risks

Outlook & Strategy: Management anticipates continued growth in all divisions. Plans for 2000 include opening approximately 10 new retail stores (9 Steve Madden, 1 David Aaron) and launching the "Stevies" brand for girls ages 6-12. The Company expects internet sales to increase considerably, though not at the 700% rate seen in 1999.

Risks & Contingencies:

• Key Personnel: Heavy reliance on CEO/Designer Steven Madden and President Rhonda Brown. Loss of either could materially adversely affect the business.
• Legal Proceedings: Pending arbitration with Magnum Fashions, Inc. regarding a handbag license (Magnum seeks >$5M; Company has counterclaims). Also pending litigation against Lee N' Gi (Company seeks $3M; counterclaim of $2M).
• Supply Chain: Approximately 90% of products are sourced from foreign manufacturers (China, Brazil, Mexico, Spain). Risks include work stoppages, currency fluctuations, and import duties.
• Customer Concentration: Federated Department Stores and May Department Stores account for 21% and 15% of wholesale sales, respectively.

Investor Verification Checklist

• Inventory Management: Verify the Company's ability to manage inventory levels given the 90% foreign sourcing and the high risk of fashion trends changing rapidly.
• Legal Exposure: Monitor the status of the Magnum Fashions arbitration and Lee N' Gi litigation, as outcomes could impact royalty income and result in significant damages.
• Retail Expansion ROI: Assess the profitability of the planned 10 new retail stores in 2000, considering the high fixed costs of occupancy and payroll.
• Customer Concentration: Evaluate the risk associated with the top two department store customers representing 36% of wholesale sales.
• Key Person Risk: Confirm the status of employment agreements and key person insurance for Steven Madden and Rhonda Brown.