Steven Madden, Ltd. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Amounts below are in millions of dollars, except per-share data, percentages, and where noted. The company designs, sources, markets, and sells branded and private-label footwear, handbags, and accessories through wholesale, retail, e-commerce, and licensing channels.
Financial performance
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $356.9 | $313.9 | $911.5 | $688.8 |
| Gross profit | $131.2 | $109.5 | $331.6 | $262.7 |
| Gross margin | 36.8% | 34.9% | 36.4% | 38.1% |
| Operating income | $56.4 | $50.5 | $129.2 | $115.2 |
| Net income attributable to Steven Madden, Ltd. | $37.9 | $31.9 | $86.7 | $73.5 |
| Diluted EPS | $0.86 | $0.74 | $1.97 | $1.70 |
- Q3 sales rose 14% and attributable net income rose 18%; nine-month sales increased 32% and attributable net income increased 18%.
- Q3 gross margin improved year over year, while nine-month margin declined, mainly reflecting mix shifts toward Topline, Target private-label, and international sales, which generally have lower margins.
- For the first nine months, operating cash flow was $14.8 million, versus $7.4 million a year earlier. Investing used $64.0 million and financing provided $11.3 million; cash declined $37.9 million to $64.9 million.
- At September 30, cash and cash equivalents were $64.9 million and marketable securities totaled $89.4 million. Working capital was $274.2 million. The company reported no short- or long-term debt.
Business changes and segment trends
- Q3 growth came from wholesale footwear, wholesale accessories, and retail. Q3 segment sales were $228.7 million, $82.8 million, and $45.3 million, respectively. Retail comparable sales increased 8.6%; the company operated 99 stores versus 82 a year earlier.
- For the first nine months, wholesale footwear sales rose to $618.9 million and accessories sales to $169.7 million. Retail sales reached $122.9 million. Accessories benefited from strong handbag and private-label growth; footwear growth included acquired businesses and private-label sales.
- The company acquired SM Canada in February 2012 for approximately $29.4 million, plus potential earn-outs. It also acquired Topline and Cejon in 2011. Acquisitions contributed to sales, expenses, goodwill, and intangible assets.
- Q3 wholesale footwear and accessories margins improved, while the nine-month footwear margin fell to 31.3% from 34.0%, primarily due to sales mix. First Cost and licensing income declined year over year.
Outlook, risks, contingencies, and unusual items
- No specific numerical earnings or sales guidance is provided. Management believes available cash, securities, and current financial resources will meet operating needs and commitments for at least the next 12 months.
- After the quarter, Bakers Footwear Group filed for Chapter 11 on October 3, 2012. The company recorded Q3 impairment charges of $5.1 million for its Bakers investment and debenture, and $0.9 million of bad-debt expense in commission income. The nine-month results also include a $1.8 million Betsey Johnson note impairment and a $2.5 million accrued expense for the text-message class settlement.
- The text-message settlement has a $10.0 million gross fund; insurance applies, and management estimated its liability at $2.5 million, with maximum company exposure of approximately $6.25 million. Court approval was preliminary pending further proceedings.
- A U.S. Customs matter carries approximately $1.7 million maximum stated damages; $1.248 million was accrued. The company disputes the proposed penalty. Derivative lawsuits challenging amendments to Steven Madden’s employment agreement and loan were dismissed; no appeal had been filed as of the report.
- Contingent consideration liabilities totaled $57.8 million, including acquisition earn-outs. Contractual obligations totaled $420.9 million, including $187.0 million of purchase obligations and $169.4 million of operating leases. Most products are manufactured overseas, primarily in China, and the company has no long-term manufacturing or supply contracts.
- Marketable securities are exposed to changes in market rates, equity prices, and credit risk. Management also identifies estimation risks involving receivable allowances, inventory valuation, intangible assets, and litigation reserves. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether Q3 sales and margin trends persist, particularly given weaker nine-month gross margin from product and channel mix.
- Collections and working-capital demands: cash flow was modest relative to earnings, with a substantial increase in receivables due from the factor and inventory.
- Final Bakers and Betsey Johnson bankruptcy recoveries and any resulting additional impairment or credit losses.
- Final cost and approval of the text-message settlement, and developments in the U.S. Customs matter.
- Actual acquisition earn-out payments and performance, particularly the SM Canada contingent consideration.
- Fulfillment of large purchase commitments and the effect of overseas sourcing, consumer demand, and inventory risk.