STEVEN MADDEN, LTD. quarterly report, Q1 FY2019

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Steven Madden, Ltd. — Q1 2019 Form 10-Q

Business context and reporting period. This unaudited quarterly report covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. Steven Madden designs, sources, markets and sells branded and private-label footwear, handbags and accessories through wholesale, retail, e-commerce and licensing businesses. Financial amounts below are in millions of dollars unless otherwise noted.

Financial performance and position

  • Revenue and profitability: Net sales rose 5.6% to $410.9 million. Gross profit was $157.0 million; gross margin expanded to 38.2% from 36.2%. Operating income increased to $44.7 million from $36.6 million, and operating margin rose to 10.9% from 9.4%.
  • Net income and EPS: Net income attributable to Steven Madden was $34.5 million, up from $28.7 million. Diluted EPS increased to $0.41 from $0.33. The effective tax rate rose to 23.1% from 21.4%.
  • Cash flow: Operating activities used $15.8 million of cash, compared with $27.2 million used in Q1 2018. Investing activities provided $2.8 million; financing activities used $27.2 million, including $17.2 million for treasury-stock purchases and $12.0 million in dividends. Cash and cash equivalents declined $39.8 million during the quarter to $160.3 million.
  • Liquidity and debt: Cash, cash equivalents and marketable securities totaled $221.6 million at quarter-end, versus $267.0 million at December 31, 2018. Working capital was $457.2 million. The company reported no long-term debt and no borrowings under its $30 million Rosenthal credit facility. About 85% of cash, cash equivalents and short-term investments were held by foreign subsidiaries.
  • Balance sheet and obligations: Total assets were $1.210 billion and stockholders’ equity was $830.5 million. Adoption of the lease accounting standard resulted in $195.8 million of operating lease liabilities and a $181.9 million right-of-use asset on the balance sheet. Contractual obligations totaled $415.4 million, including operating leases, purchase obligations, minimum royalties and advertising payments, and transition tax.
  • Other indicators: Trailing-twelve-month inventory turnover declined to 7.8 times from 8.7 times; average receivable collection time increased to 66 days from 65 days. Adjusted EBIT, a non-GAAP measure, was $45.1 million versus $39.6 million; adjusted EBITDA was $50.6 million versus $45.1 million.

Material changes and segment results

  • Wholesale Footwear sales increased slightly to $276.6 million. Operating income rose to $48.3 million, with gross margin improving to 35.5% from 32.8%. Management cited Steve Madden brand growth and the addition of Anne Klein, partly offset by the absence of Payless sales; the mix also benefited from not selling to the low-margin Payless customer.
  • Wholesale Accessories sales grew to $71.5 million from $56.1 million, primarily on private-label and owned-brand handbag growth and Anne Klein handbags. Operating income increased to $4.9 million, while gross margin eased to 30.6% from 31.4%.
  • Retail sales rose 8.6% to $62.8 million, supported by a 6.3% comparable-store sales increase and a net addition of 18 stores year over year. The segment’s operating loss widened to $9.7 million from $7.9 million, with operating expenses increasing as a share of sales.
  • First Cost reported a $0.4 million operating loss, compared with $0.9 million income, primarily due to a $1.6 million provision for Payless-related bad debts. Licensing income declined to $1.6 million from $2.8 million, primarily due to lower Betsey Johnson royalties.

Outlook, commentary, risks and unusual items

  • The filing provides no specific full-year revenue or earnings guidance. Management said current financial resources should cover financial commitments and operating needs for at least the next 12 months. Results for the quarter are not necessarily indicative of full-year results.
  • Q1 results included a $1.6 million Payless ShoeSource bankruptcy bad-debt provision and $0.7 million in early lease termination charges. A $3.0 million contingent liability related to the Schwartz & Benjamin acquisition was reversed following the planned termination of the Kate Spade license; the related net benefit was partly offset by accelerated amortization. The license termination was expected by year-end 2019.
  • Management identified risks including customer chargebacks and allowances, retailer performance, foreign currency movements, marketable-security interest-rate and credit risk, overseas manufacturing and supply-chain exposure, and legal matters. It reported no off-balance-sheet arrangements. Management said ordinary-course lawsuits were not expected to have a material effect.
  • The board declared a further $0.14-per-share quarterly dividend in April, payable June 28, 2019. Future dividends remain subject to board discretion and business conditions. In April, the board extended the share repurchase program for up to $200 million, inclusive of the prior authorization.
  • The company adopted ASC 842 leases effective January 1, 2019 using a modified retrospective approach; comparative periods were not recast. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  1. Whether revenue and margin gains persist, especially the contribution from brand and product mix and the absence of low-margin Payless sales.
  2. The collectability of receivables and exposure to customer distress, including the Payless bankruptcy provision and related receivable allowances.
  3. Retail segment profitability, store-level performance and the cost impact of store expansion and e-commerce growth.
  4. Cash conversion and working-capital trends, including the decline in cash balances, receivable days and inventory turnover.
  5. The financial effects and timing of the Kate Spade license termination, associated amortization, and remaining license-related commitments.
  6. Capital allocation and liquidity, including planned repurchases, dividends, lease and purchase obligations, and the availability of cash held by foreign subsidiaries.