Steven Madden, Ltd. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. The company designs, sources, markets and sells branded and private-label footwear, handbags and accessories, and operates retail and e-commerce businesses. Financial statement amounts below are in U.S. dollars; amounts are shown in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $458.5 | $441.2 | $1,243.2 | $1,181.7 |
| Gross profit / margin | $175.2 / 38.2% | $165.9 / 37.6% | $463.7 / 37.3% | $438.0 / 37.1% |
| Operating income / margin | $70.2 / 15.3% | $65.4 / 14.8% | $148.3 / 11.9% | $138.1 / 11.7% |
| Net income attributable to Steven Madden | $55.6 | $44.2 | $116.6 | $93.4 |
| Diluted EPS | $0.64 | $0.51 | $1.35 | $1.07 |
| Effective tax rate | 20.8% | 32.1% | 21.8% | 32.6% |
- Q3 sales rose 3.9%; nine-month sales rose 5.2%. Q3 growth came from Accessories and Retail, partly offset by lower Wholesale Footwear sales.
- For the first nine months, operating cash flow was $46.5 million, versus $35.0 million a year earlier. Working-capital outflows included increases in factor receivables ($81.4 million) and inventory ($37.2 million).
- At September 30, cash and cash equivalents were $172.5 million and marketable securities were $57.9 million, totaling $230.4 million. Working capital was $537.4 million. The company reported no long-term debt and no borrowings on its $30 million credit facility.
- Total assets were $1,125.1 million, total liabilities $257.9 million and stockholders’ equity $867.2 million. Cash and securities were down from $245.2 million at December 31, 2017.
- Investing activities provided $25.7 million, principally reflecting $76.4 million of security maturities and sales against $42.5 million of purchases; capital expenditures were $8.2 million. Financing used $80.2 million, including $50.9 million of share repurchases, $35.1 million of dividends and a $7.0 million acquisition earn-out payment, partly offset by $12.8 million of option-exercise proceeds.
Material changes and operating drivers
- Q3 gross margin increased 0.6 percentage points to 38.2%, with improvement across business segments. Nine-month gross margin rose 0.2 points to 37.3%; excluding a prior-year acquisition inventory accounting charge, the increase was 0.1 point.
- Wholesale Accessories sales increased 19.5% in Q3, mainly on private-label and owned-brand handbags; segment operating income rose to $14.0 million from $10.3 million. Wholesale Footwear sales decreased 1.1% in Q3, primarily because a private-label customer shifted from the wholesale model to the buying-agency model. Nine-month Wholesale Footwear sales nevertheless increased, supported by international growth.
- Retail Q3 sales increased 8.8%, including 5.5% comparable-store growth on a constant-currency basis; the company had 210 stores versus 202 a year earlier. Retail remained loss-making: Q3 operating loss was $2.1 million and the nine-month loss widened to $6.1 million from $3.1 million, with new-store costs cited as a factor.
- Nine-month Licensing income increased to $7.0 million from $6.0 million, while First Cost income declined to $3.9 million from $4.9 million. Q3 Licensing income declined to $2.6 million from $2.7 million.
- The lower tax rate primarily reflected the U.S. federal statutory rate reduction under the Tax Cuts and Jobs Act. The company said its accounting for certain tax effects remained provisional; its estimated transition-tax liability was $22.0 million, with 2017 tax overpayments offset against the liability.
Outlook, risks and unusual items
- Management stated that available cash, securities and its financial position should cover financial commitments and operating needs for at least the next 12 months. The filing provides no specific sales or earnings guidance.
- In October 2018, the board increased the quarterly dividend to $0.14 per share, payable December 31, 2018. Future dividends remain at the board’s discretion. A three-for-two stock split was distributed October 11, 2018; share and per-share data in the filing are retroactively adjusted.
- Operating lease obligations totaled $233.5 million, purchase obligations $88.6 million and future minimum royalty payments $55.2 million. A further $3.0 million contingent acquisition payment was recorded. The company expected adoption of lease accounting in 2019 to add approximately $200–$250 million of operating lease liabilities and corresponding right-of-use assets.
- The company reported a material weakness in internal control over financial reporting involving IT access controls and program change management; disclosure controls were therefore deemed ineffective at quarter-end. Management said it had implemented remediation measures but cautioned that they required further testing and could not yet be considered definitively effective.
- Management said ordinary-course lawsuits were not expected to materially affect financial position, results or cash flows; no loss range was provided. Key exposures also include foreign-exchange movements, marketable-security interest-rate and credit risk, reliance on overseas independent manufacturers, and the possibility that inflationary costs cannot be offset.
- Nine-month operating expenses included $2.8 million of legal charges, $1.8 million of acquisition integration and restructuring costs, and $1.2 million related to closing the Cejon warehouse. The company also disclosed prior-period Payless bankruptcy-related bad-debt expense of $7.5 million in the comparable nine-month period.
The company’s non-GAAP nine-month Adjusted EBIT was $154.2 million and Adjusted EBITDA was $170.4 million, compared with $148.5 million and $164.4 million, respectively, in 2017. These measures include company-defined adjustments and should be considered alongside, not instead of, GAAP results.
Most important facts for investors to verify
- Whether growth and margin gains persist, particularly in Wholesale Accessories and international Wholesale Footwear, and whether the private-label business-model transition affects future sales or commissions.
- Whether Retail comparable-store growth can improve segment profitability as the store base expands.
- Cash conversion and working-capital trends, especially the growth in factor receivables and inventory, alongside continued repurchases and dividends.
- Progress in testing and sustaining remediation of the material weakness in IT controls.
- Final accounting for the Tax Cuts and Jobs Act, the expected lease-liability recognition, and any changes to acquisition contingencies or legal exposures.