Steven Madden, Ltd. — Q1 2017 Form 10-Q
Business context and period: The company designs, sources, markets and sells branded and private-label footwear and accessories, operates retail stores and e-commerce sites, and earns licensing and commission income. This unaudited report covers the three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise stated. Dollar amounts below are in millions, except per-share data.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Net sales | $366.4 | $329.4 | Up 11.2%; up 7.0% excluding Schwartz & Benjamin sales |
| Gross profit / margin | $132.7 / 36.2% | $116.2 / 35.3% | Margin improved; 36.9% excluding the acquired-inventory purchase-accounting charge |
| Operating income / margin | $30.8 / 8.4% | $29.9 / 9.1% | Income rose modestly, but margin declined |
| Net income attributable to Steven Madden, Ltd. | $20.2 | $23.7 | Down 14.8% |
| Diluted EPS | $0.35 | $0.39 | Down 10.3% |
| Operating cash flow | $8.5 | $15.2 | Lower year over year |
| Cash and cash equivalents, March 31 | $94.3 | $70.9 | Period-end balance |
At March 31, 2017, total assets were $944.0 million, total liabilities $205.1 million, and stockholders’ equity $738.8 million. Working capital was $357.1 million. Cash, cash equivalents and marketable securities totaled $193.2 million; cash, cash equivalents and short-term investments were $139.9 million. The company reported no long-term debt and no outstanding borrowings under its $30 million Rosenthal facility. Management said available liquidity and operating cash flows should meet financial and operating needs for at least 12 months.
Operating cash flow was affected by a $41.2 million increase in factor receivables and a $45.8 million decrease in accounts payable and accrued expenses, partly offset by declines in inventory and accounts receivable. Investing cash use was $9.4 million, including $17.4 million paid for the acquisition and $3.3 million of capital expenditures. Financing cash use was $31.3 million, primarily reflecting $33.2 million of share repurchases. Cash fell by $31.9 million during the quarter.
Material changes and segment results
- Wholesale footwear: Sales rose 14.2% to $261.4 million, including $14.1 million from Schwartz & Benjamin; excluding the acquisition, sales increased 8.0%. Segment operating income was $30.7 million. Gross margin improved to 32.7% from 31.0%.
- Wholesale accessories: Sales increased 10.8% to $52.0 million; operating income rose to $2.4 million. Gross margin declined to 31.0% from 32.4%.
- Retail: Sales edged down 0.9% to $53.1 million. Comparable-store sales fell 6.0%, while the store count rose to 190 from 171. Operating loss widened to $6.2 million from $3.1 million.
- First Cost and licensing: Net commission income increased to $1.5 million from $0.6 million; licensing income increased to $2.4 million from $1.6 million.
Operating expenses increased to $105.9 million from $88.5 million. The company cited the $7.5 million Payless ShoeSource bankruptcy-related bad-debt charge and the Schwartz & Benjamin acquisition. Excluding those items, operating expenses as a share of sales were 26.8%, compared with 26.9% a year earlier. The effective tax rate rose to 34.8% from 19.6%, mainly because Q1 2016 included a $3.7 million share-based compensation tax benefit and because the Payless-related impact shifted profitability toward higher-tax jurisdictions.
Outlook, commentary and risks
- The filing provides no specific revenue or earnings guidance. Management stated that current liquidity was sufficient for at least the next 12 months; interim results are not necessarily indicative of full-year results.
- The January 2017 Schwartz & Benjamin acquisition had an approximately $40.4 million purchase price: $17.4 million paid at closing and $23.1 million estimated fair value of potential earn-outs. Earn-outs depend on future performance through 2023; purchase-price allocations remained preliminary.
- The $7.5 million bad-debt expense relates to Payless ShoeSource’s April 2017 bankruptcy filing. The filing also reports a $1.2 million non-cash inventory fair-value adjustment related to the acquisition.
- Contractual obligations totaled $495.2 million, including $257.3 million in operating lease obligations, $199.8 million in purchase obligations and $31.8 million in contingent payment liabilities.
- Management identifies risks including customer credit and chargebacks, inventory valuation and consumer demand, acquisition earn-out estimates, litigation, foreign exchange, and marketable-security values. Most products are manufactured overseas, primarily in China, and the company has no long-term manufacturing or supply contracts.
- $78.1 million, about 56% of cash, cash equivalents and short-term investments, was held by foreign subsidiaries. Management did not expect to repatriate $134.2 million of foreign earnings designated indefinitely reinvested; it estimated approximately $26.6 million of cumulative taxes would arise if those earnings were not indefinitely reinvested.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It said ordinary-course legal matters were not expected to materially affect the company, while previously disclosed proceedings remained outstanding unless otherwise noted.
Important facts for investors to verify
- Whether the $7.5 million Payless-related bad-debt charge fully reflects expected exposure, and whether further customer-credit effects arise.
- Retail comparable-store sales trends, store-level profitability and the costs or returns associated with store expansion and the new point-of-sale system.
- Schwartz & Benjamin’s contribution to sales and earnings, final purchase accounting, and potential earn-out payments.
- Cash conversion and working-capital trends, particularly factor receivables and payables, alongside the company’s substantial lease and purchase obligations.
- The effect of the higher effective tax rate and whether foreign cash and indefinitely reinvested earnings remain accessible as management expects.