Steven Madden, Ltd. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Unless stated otherwise, amounts below are in U.S. dollars.
Business context
Steven Madden designs, sources, markets and sells branded and private-label footwear, handbags and accessories, and licenses its trademarks. It reports five segments: Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing. Wholesale accounted for 82% of 2018 net sales; Retail accounted for 18%. The company relies on independent overseas manufacturers and operates stores, e-commerce sites and international distribution arrangements.
Financial results and liquidity
| Metric | FY 2018 | FY 2017 | Change or context |
|---|---|---|---|
| Net sales | $1,653.6 million | $1,546.1 million | Up 7.0% |
| Gross profit / margin | $616.0 million / 37.3% | $577.7 million / 37.4% | Margin down 0.1 percentage point |
| Operating income / margin | $173.4 million / 10.5% | $169.8 million / 11.0% | Income up; margin lower |
| Net income attributable to Steven Madden, Ltd. | $129.1 million | $117.9 million | Up 9.5% |
| Diluted EPS | $1.50 | $1.36 | Up; figures reflect the three-for-two stock split |
| Cash provided by operating activities | $154.4 million | $157.9 million | Down $3.6 million |
At year-end, cash and cash equivalents were $200.0 million and marketable securities were $67.0 million. Working capital was $478.4 million, and the company reported no short- or long-term debt and no borrowings under its $30 million credit facility. Total assets were $1,072.6 million and stockholders’ equity was $814.7 million. Cash from investing activities was $11.1 million; cash used in financing was $145.8 million, including $105.9 million of share repurchases and $47.3 million of dividends.
Wholesale Footwear sales rose 4.0% to $1,058.4 million, with operating income before impairment charges of $140.1 million. Wholesale Accessories sales rose 17.1% to $300.1 million, but gross margin fell to 30.6% from 31.5%. Retail sales rose 8.4% to $295.2 million; comparable store sales increased 2.8%, and segment operating income was $0.7 million versus a $1.1 million loss. First Cost recorded a $4.5 million loss, while Licensing income increased to $10.0 million.
Material changes and unusual items
- First Cost and commission/licensing income was affected by the Payless ShoeSource bankruptcy: the company recorded $12.1 million in bad-debt expense and write-off charges, including $8.5 million in commission and licensing income and $3.6 million in operating expenses.
- Fourth-quarter 2018 included an $8.8 million prepaid-tax adjustment related to prior years. Fourth-quarter net income attributable to the company was $12.5 million, compared with $24.6 million in fourth-quarter 2017; diluted EPS was $0.15 versus $0.28.
- The effective tax rate declined to 26.4% from 30.9%, primarily reflecting U.S. tax-law changes, partially offset by the prior-year tax adjustment.
- The company repurchased 2.84 million shares under its program for approximately $89.9 million during 2018. It began quarterly dividends in 2018 and declared $0.53 per share for the year. A $0.14-per-share dividend was declared for payment in March 2019.
- Inventory turnover declined to 8.1 times from 8.6 times. Inventory increased to $137.2 million from $110.3 million.
Outlook, risks and contingencies
- No specific 2019 revenue or earnings guidance is provided in the supplied filing text. Management said it expects to open 14–16 retail stores and close 8–10 locations in 2019.
- U.S. tariffs on Chinese imports were a key risk: 94% of 2018 product purchases were from China, and management said tariffs had contributed to lower fourth-quarter wholesale gross margin in handbags and certain accessories. Further tariff increases could pressure margins or require price increases.
- Other major risks include changing fashion demand, competition and shifts to online shopping; retailer credit exposure and customer concentration; overseas sourcing, shipping and manufacturing disruption; foreign exchange; cybersecurity and technology risks; and weather and economic uncertainty.
- Wal-Mart, Target and Nordstrom represented 17.6%, 13.8% and 10.6% of year-end accounts receivable, respectively. No customer represented more than 10% of annual net sales. The factor assumed credit risk for approximately 84% of trade receivables.
- Future contractual obligations totaled $398.7 million, including $230.0 million of operating lease commitments, $98.1 million of purchase obligations and $18.0 million of transition tax. The company expected adoption of the new lease standard in 2019 to add approximately $195 million of right-of-use assets and $210 million of lease liabilities to the balance sheet.
- Management said ordinary-course legal matters were not expected to have a material impact. A previously reported material weakness in IT general controls was declared remediated in 2018; management and the auditor concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Whether tariff developments and sourcing diversification affect product costs and gross margin, particularly given the company’s reliance on China.
- Whether the Payless-related receivable and buying-agency losses are fully reflected and whether other retail customer credit exposures increase.
- Whether the lower fourth-quarter earnings base, tax adjustment and segment trends affect subsequent-period profitability.
- Whether retail expansion produces sustainable returns, given 2.8% comparable sales growth, lower sales per square foot and modest 2018 Retail operating income.
- How lease-standard adoption changes reported liabilities, assets and operating metrics, and whether the stated adoption estimates are realized.
- Whether cash generation can continue to support dividends, repurchases, investment and contractual commitments without weakening liquidity.