Steven Madden, Ltd. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Steven Madden designs, sources, markets and sells branded and private-label footwear, apparel and accessories through wholesale, retail, e-commerce, licensing and other channels. All figures below are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $346.9 | $502.1 | $848.8 | $1,367.5 |
| Gross profit / margin | $139.9 / 40.3% | $195.8 / 39.0% | $329.2 / 38.8% | $527.7 / 38.6% |
| Operating income (loss) | $(3.0) | $68.0 | $(52.9) | $157.3 |
| Net income (loss) attributable to Steven Madden | $(7.0) | $52.5 | $(41.0) | $123.6 |
| Diluted earnings (loss) per share | $(0.09) | $0.63 | $(0.52) | $1.48 |
Revenue fell 30.9% in Q3 and 37.9% for the first nine months, principally because of the COVID-19 pandemic, store closures and wholesale order cancellations. Gross margin improved modestly, reflecting a greater mix of higher-margin e-commerce sales; wholesale footwear margins were pressured by closeouts and inventory reserves. Operating expenses were $109.9 million in Q3 and $339.6 million year to date. Their share of revenue rose sharply as sales declined, with additional effects from store and lease impairments, lease-related charges and restructuring.
Q3 included $33.0 million of intangible-asset impairment charges; year-to-date impairment charges were $42.5 million. Separately, the company recorded $36.9 million of impairment charges for store fixed assets and lease right-of-use assets during the first nine months. Restructuring charges were $5.4 million in Q2 and $1.0 million in Q3, largely related to workforce reductions.
Liquidity, cash flow and balance sheet
- At September 30, cash and cash equivalents were $223.8 million and short-term investments were $33.3 million, for combined liquidity of $257.2 million. Working capital was $429.8 million.
- The company reported no cash borrowings or letters of credit under its credit facility and stated it had no debt at quarter-end. Total stockholders’ equity was $767.7 million.
- Operating cash flow was $0.6 million for the first nine months, down from $83.2 million in 2019. The filing attributes the decline primarily to working-capital changes, including lower accounts payable and accrued expenses; inventory reductions partly offset these uses.
- Investing cash flow provided $0.5 million, including net proceeds from short-term investment maturities and sales; capital expenditures were $5.5 million. Financing cash outflow was $40.9 million, including $29.8 million of share repurchases and $12.5 million of dividends paid.
- Inventory was $109.7 million, down from $148.1 million at September 30, 2019. Management reported trailing-twelve-month inventory turnover of 6.9 times versus 8.0 times a year earlier, citing excess stock associated with store closures and order cancellations.
Material changes and segment results
- Q3 revenue declined across wholesale footwear, wholesale accessories/apparel and retail. Wholesale footwear revenue fell 32.5%; accessories/apparel fell 33.3%; retail fell 22.1%.
- Retail recorded a Q3 operating loss of $19.6 million, compared with a $3.1 million loss a year earlier. E-commerce strength partly offset weaker brick-and-mortar sales; the company had 220 stores versus 227 a year earlier and did not report comparable-store sales for the quarter.
- Wholesale accessories/apparel posted a Q3 operating loss of $8.0 million, including $18.4 million of trademark impairment. Wholesale footwear operating income was $22.1 million, compared with $58.1 million a year earlier, and included $14.6 million of trademark impairment.
- Q3 effective tax rate was negative 145.6%, versus 23.0% in 2019, reflecting tax effects of the pretax loss, contingent-consideration valuation changes, GILTI and a foreign uncertain tax position. The company recorded a $1.1 million liability for an uncertain foreign tax position.
- Total assets fell to $1,104.4 million from $1,282.5 million at September 30, 2019. The balance sheet included $144.2 million of operating lease liabilities; these are not reported as borrowings.
Outlook, risks and contingencies
Management expected the pandemic to continue to have a significant negative impact on revenue and earnings during the remainder of 2020. The filing gives no quantified revenue or earnings guidance. Management said available cash, investments and the revolving facility were expected to meet financial commitments and operating needs for at least the next 12 months.
In July 2020, the company entered into a secured, asset-based revolving credit agreement with maximum availability of $150 million, maturing in July 2025. Availability depends on eligible receivables and inventory, and the agreement includes minimum-availability requirements but no other financial maintenance covenants. No amount was drawn at quarter-end. The company had $274.1 million of listed contractual obligations, including operating leases, purchase obligations, minimum royalties and advertising payments, and transition tax.
COVID-19 risks include renewed store closures or capacity restrictions, demand and wholesale-order weakness, inventory management, and further impairment or liquidity effects. Other disclosed risks include fashion and competitive pressures, supply-chain disruption, foreign exchange and trade-policy changes, key-personnel retention, acquisitions and tax matters. Management said ordinary-course lawsuits were not expected to materially affect financial position or results. The quarterly dividend and share repurchases were suspended in response to the pandemic; management gave no assurance that dividends would resume. Executive and board compensation suspensions were reinstated October 1, 2020.
Important facts for investors to verify
- Whether store traffic, e-commerce demand and wholesale orders recover, and how that affects subsequent revenue and margins.
- Whether reduced operating cash flow reflects temporary working-capital timing or persists, including movements in receivables, payables and inventory.
- The assumptions and potential for further impairment of trademarks, store assets and lease right-of-use assets.
- Actual borrowing-base availability and covenant compliance under the secured revolver, particularly if liquidity needs increase.
- Progress on inventory clearance, restructuring savings, lease concessions and the suspended dividend and repurchase programs.
- Developments in the foreign tax position, contractual obligations and other contingencies disclosed in the filing.