Steven Madden, Ltd. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Unaudited consolidated results; dollar amounts below are in millions unless noted. The company designs, sources, markets and sells branded and private-label footwear and accessories through wholesale, retail, licensing and other channels.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $265.97 | $165.76 | +60% |
| Gross profit / margin | $96.09 / 36.1% | $69.13 / 41.7% | Margin down 5.6 percentage points |
| Operating income / margin | $35.36 / 13.3% | $27.46 / 16.6% | Margin down 3.3 percentage points |
| Net income attributable to Steven Madden, Ltd. | $21.87 | $17.85 | +22% |
| Diluted EPS | $0.50 | $0.42 | +19% |
| Cash from operations | $13.73 | $(1.58) | Improved |
- Gross margin compression reflected a sales mix shift toward Topline, Target private-label and international business, which generally have lower margins. Management reported that gross margin excluding Topline and Target was 45.2%, versus 44.8% excluding Target in Q1 2011.
- Operating expenses rose to $65.21 from $46.24, mainly due to acquired businesses, but declined as a share of sales to 24.5% from 27.9%. Interest and other income fell to $0.47 from $1.52.
- Wholesale footwear sales rose 77% to $191.50, including Topline and growth in several brands and channels. Wholesale accessories sales rose 45% to $37.44. Retail sales increased 18% to $37.03; comparable sales rose 12%, retail gross margin improved to 60.1% from 58.1%, and operating income increased to $2.13 from $0.06.
- At March 31, cash and cash equivalents were $61.95 and marketable securities were $103.04; working capital was $185.06. The company reported no short- or long-term debt and total stockholders’ equity of $507.35.
- Quarter-end cash declined $40.88, principally reflecting $60.66 of investing outflows, including the SM Canada acquisition, securities purchases and a seller loan. Operating cash flow benefited from net income and lower receivables and inventory, partly offset by a $22.32 increase in amounts due from factor.
Material changes and transactions
- On February 21, 2012, the company acquired the Canadian distributor’s footwear, handbags and accessories businesses for approximately $29.13 cash, plus potential earn-outs. The estimated fair value of contingent consideration was $19.98 at quarter-end; maximum aggregate earn-outs are up to C$38 million over five years. Purchase-price allocation was preliminary.
- Topline and Cejon, acquired in 2011, also contributed to current-period results. Management said acquisition impacts were not material enough to require pro forma financial information, but acquisitions affect year-over-year comparability and segment mix.
- Total contingent payment liability was $64.81, including current and long-term portions. Goodwill was $85.98 and net intangible assets were $138.11 at quarter-end.
- Average receivable collection days increased to 66 from 56, which management attributed primarily to acquired businesses and growth in Target private-label sales with longer payment terms. Trailing-twelve-month inventory turnover improved to 10.6 times from 9.5 times.
Outlook, risks and unusual items
- No specific revenue, earnings or EPS guidance was provided. Management stated that available cash, securities and its financial position should support commitments and operating needs for at least the next 12 months.
- Management reported cost increases averaging approximately 5%–8% from southern China suppliers. It is shifting some production to northern China and other countries and raising prices on selected products; it expected the net gross-margin effect to remain negligible in the near term.
- Contractual obligations totaled $466.31, including $225.18 of purchase obligations, $168.21 of operating leases and $64.81 of contingent payment liabilities. These are contractual amounts, not all current-period cash payments.
- Two derivative lawsuits challenge amendments to CEO Steven Madden’s employment agreement and related-party loan. The amended loan extends maturity to 2023, ends further interest accrual after 2011 and provides for conditional annual forgiveness beginning in 2014. Mr. Madden also received 975,371 restricted shares, subject to long-term vesting and continued employment.
- In a U.S. Customs matter, the company had accrued $1.25 against potential total damages of approximately $1.70, including a disputed penalty proposal. The company contested liability and intended to seek withdrawal or mitigation. Management considered other ordinary-course lawsuits not expected to materially affect results.
- Marketable securities are exposed to interest-rate and credit risk; the company said it could hold them to maturity. Other key estimates include customer allowances, inventory valuation, acquired intangibles and litigation reserves. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of sales and earnings growth came from acquired businesses versus organic growth, and whether lower-margin sales mix persists.
- Whether retail’s improved comparable sales, gross margin and operating profitability continue as store count expands.
- The assumptions behind acquisition earn-outs, preliminary purchase accounting and the contingent liability’s future remeasurement.
- Receivables and factor balances, collection days, and the conversion of reported earnings into operating cash flow.
- Developments in the shareholder lawsuits and U.S. Customs proceeding, including whether recorded reserves remain adequate.
- The financial and governance implications of the CEO employment agreement, restricted-stock award and related-party loan amendments.