Business context and reporting period
Steven Madden, Ltd. designs, sources, markets and sells branded and private-label footwear, handbags and accessories, and licenses its trademarks. This Form 10-K covers the fiscal year ended December 31, 2012; quarterly figures below compare the three months ended December 31, 2012 with the same quarter of 2011. The company reported five segments: Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing.
Financial performance
Unless otherwise indicated, amounts are in millions of dollars.
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Net sales | $1,227.1 | $968.5 | +27% |
| Gross profit / margin | $455.7 / 37.1% | $361.9 / 37.4% | Margin down 0.3 pts |
| Operating income / margin | $179.0 / 14.6% | $153.8 / 15.9% | Income +16%; margin down |
| Net income attributable to Steven Madden, Ltd. | $119.6 | $97.3 | +23% |
| Diluted EPS | $2.71 | $2.25 | +20% |
| Operating cash flow | $143.3 | $75.0 | +$68.4 |
In Q4 2012, sales were $315.5 million versus $279.8 million (+13%); net income attributable to the company was $33.0 million versus $23.8 million (+39%), and diluted EPS was $0.74 versus $0.55. Q4 gross profit was $124.1 million, compared with $99.3 million.
Segments and operating developments
- Wholesale Footwear sales grew 24.8% to $794.5 million; segment operating income before impairment and litigation charges rose to $104.3 million. Growth included acquisitions and 10.4% organic sales growth; segment gross margin fell to 31.4% from 32.3%, partly reflecting mix.
- Wholesale Accessories sales rose 36.5% to $241.3 million, with segment operating income increasing to $41.4 million. Organic sales growth excluding Cejon was 43.1%.
- Retail sales increased 23.5% to $191.2 million; comparable store sales, including e-commerce, rose 7.9%. The company ended the year with 109 stores, up from 84.
- First Cost income declined to $7.8 million from $9.8 million, partly due to Bakers-related bad debt and reduced business. Licensing income decreased to $7.6 million from $8.9 million.
Liquidity, cash flow and obligations
At December 31, 2012, cash and cash equivalents were $168.8 million and marketable securities were $97.5 million. Working capital was $306.8 million, versus $211.5 million a year earlier. The company reported no short- or long-term debt and no borrowings on its $30 million receivables-related credit facility. Management said available resources should meet commitments and operating needs for at least 12 months.
Cash from operations was $143.3 million, supported by net income and lower accounts receivable, partly offset by a $35.7 million increase in amounts due from factor and lower accrued incentive compensation. Investing cash outflow was $91.3 million, including $29.4 million for SM Canada, $22.9 million of acquisition-related contingent payments and $20.1 million of capital expenditures. Financing cash inflow was $13.9 million, primarily from stock-option exercises and related tax benefits.
Disclosed contractual obligations totaled $465.2 million, including $188.8 million of operating leases, $228.3 million of purchase obligations and $42.0 million of contingent acquisition payments. These amounts are contractual commitments, not funded debt.
Outlook, commentary and risks
- Management expected to open 10–14 retail stores in 2013 and did not anticipate closing stores. It reported 2012 e-commerce sales growth of 16% and planned an enterprise resource planning system launch in summer 2013.
- Wholesale backlog was $302.3 million as of February 1, 2013, up from $280.8 million a year earlier; the filing cautions that backlog comparisons may not predict eventual shipments.
- No specific 2013 revenue or EPS guidance is provided in the supplied filing text. Management cited consumer demand, fashion trends, competition, economic conditions, inventory management, store expansion and acquisition integration as important uncertainties.
- Virtually all products are sourced overseas; approximately 88% of 2012 purchases came from China. Supplier continuity, import duties, currency exposure, product quality and labor practices are risks. The company also identified reliance on key personnel, retailer credit risk, cybersecurity and information-system disruption as risks.
- 2012 included $5.9 million of impairment charges related to the Betsey Johnson and Bakers bankruptcies and a $2.5 million accrual for a text-message class-action settlement. A separate $0.9 million Bakers-related bad-debt charge was reported. The class settlement fund was $10 million, but management estimated company liability at $2.5 million or less after insurance and anticipated claimant participation; final court approval was pending.
- A U.S. Customs matter concerning historical import duties remained unresolved: the company accrued $1.25 million against potential total damages of approximately $1.7 million. The derivative lawsuits concerning amendments to Steven Madden’s employment and loan agreements were dismissed, with the appeal period expired.
- The company acquired SM Canada in February 2012 for approximately $29.4 million in cash, plus earn-outs; the year-end fair value of contingent consideration was $20.0 million. SM Canada’s internal controls were excluded from the company’s 2012 internal-control assessment, although management and the auditor concluded that the company’s controls were effective within the stated scope.
Important facts for investors to verify
- Whether sales growth and margins can be sustained, particularly given the annual gross-margin decline and lower Wholesale Footwear margin.
- How much of reported growth and future earnings depends on acquisitions, and whether SM Canada and other acquired businesses meet earn-out projections.
- Actual cash conversion and receivables exposure, including the increase in amounts due from factor and the effect of longer payment terms.
- Final costs and status of the class-action settlement and U.S. Customs matter, including insurance recoveries and any changes to recorded reserves.
- Execution and cost of planned store expansion and the ERP implementation, alongside the company’s substantial lease and purchase commitments.