Steven Madden, Ltd. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Amounts are in millions of dollars unless stated otherwise. The company designs, sources, markets and sells footwear, handbags and accessories through wholesale, retail, e-commerce and licensing channels.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $313.9 | $184.1 | $688.8 | $474.4 |
| Gross profit | $109.5 | $77.5 | $262.7 | $206.3 |
| Income from operations | $50.5 | $37.4 | $115.2 | $94.3 |
| Net income | $31.9 | $22.9 | $73.4 | $58.1 |
| Diluted EPS | $0.74 | $0.54 | $1.70 | $1.37 |
| Gross margin | 34.9% | 42.1% | 38.1% | 43.5% |
- Q3 sales rose about 71% and net income about 39%; management reported record quarterly sales and earnings. Nine-month sales rose 45%, operating income 22% and net income 26%.
- Management calculated Q3 organic sales growth of 11.7%, excluding Topline and Cejon acquisitions and Target and Olsenboye footwear sales that were not in the prior-year net sales line. Acquired Topline and Cejon contributed $81.7 million of Q3 sales; the Target business transition from commission to wholesale added $25.1 million to reported sales.
- Q3 gross margin fell to 34.9% from 42.1%, chiefly from sales mix, including the lower-margin Topline, Cejon, Target and Olsenboye businesses. Management said gross margin excluding these businesses was flat year over year. Nine-month gross margin declined to 38.1% from 43.5%.
- Wholesale footwear Q3 sales were $211.2 million and operating income $31.6 million; wholesale accessories sales were $67.0 million and operating income $11.0 million. Retail sales were $35.6 million, with comparable sales up 13.2%; the segment returned to $2.3 million operating income from a $1.7 million loss. First Cost commission income declined, while licensing income increased, partly reflecting Betsey Johnson intellectual property.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $7.4 million, down from $42.4 million. Receivables, amounts due from factors and inventory used $40.0 million, $53.2 million and $25.3 million, respectively; payables and accrued expenses provided $42.0 million. Management attributed working-capital increases primarily to the Topline and Cejon acquisitions.
- Investing cash outflow was $46.6 million, including $85.2 million for acquisitions and $12.2 million of capital expenditures; financing cash inflow was $8.2 million. Cash declined $31.0 million to $35.1 million.
- At September 30, cash and cash equivalents were $35.1 million and marketable securities were $76.7 million, or $111.8 million combined. Working capital was $197.6 million; current assets were $359.4 million and current liabilities $161.8 million. Stockholders’ equity was $447.0 million.
- The company reported no short- or long-term debt and no borrowings under its $30 million Rosenthal credit facility, which includes a $15 million letter-of-credit sublimit. The filing states there were $4.1 million of open letters of credit.
- Contingent payment liabilities totaled $40.0 million. Contractual obligations totaled $317.1 million, including $148.5 million of operating leases and $126.5 million of purchase obligations.
Changes, outlook and risks
- May 2011 acquisitions of Topline, a footwear business, and Cejon, an accessories business, expanded the company’s product platform and increased goodwill and intangible assets. Their purchase-price allocations remained preliminary. Earn-outs are tied to future performance; management’s fair-value estimates may change, with remeasurement affecting earnings.
- Retail comparable sales increased 13.2% in Q3 and 12.0% for the first nine months. The company had 82 stores at quarter-end, unchanged year over year. Sales per square foot for the twelve months ended September 30 rose to $792 from $710.
- Management said available cash and marketable securities should meet financial commitments and operating needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- Product cost inflation in southern China was averaging about 5%–8%. Management said it was shifting some production to northern China and other countries and raising prices on selected items; it expected the net gross-margin impact to remain not material in the near term. Approximately 99% of products are manufactured overseas, mostly in China, and the company has no long-term manufacturing or supply contracts.
- Cejon’s business is weighted toward the second half of the year, and management noted its receivables, payables and inventory are seasonally high at Q3 close. Accounts receivable average days outstanding increased to 62 from 55; inventory turnover was 9.5 versus 9.7.
- A U.S. Customs matter related to historical buying-agent commissions had a recorded reserve of $1.248 million. Customs had not formally sought collection and requested a statute-of-limitations waiver through December 5, 2013; terms were not agreed, and absent an agreement the collection-action limitation was due to expire December 5, 2011. A California labor class action was finally settled for $1.968 million in June 2011 without a material financial-position effect. Management said other ordinary-course litigation was not expected to be material.
- Management assessed disclosure controls as effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much reported growth and future profitability is attributable to acquired businesses and the shift of Target and Olsenboye from commission to wholesale accounting, versus underlying organic demand.
- Whether gross margins recover as acquisition and business-mix effects evolve, and whether stated mitigation offsets sourcing-cost inflation.
- Whether receivables, factor balances and inventory convert to cash after the acquisition-related working-capital build; operating cash flow was substantially below net income.
- Actual earn-out payments and fair-value changes for Cejon, Topline and Big Buddha, including the potential effect on earnings and liquidity.
- Resolution and any subsequent developments in the U.S. Customs matter, along with the company’s significant purchase obligations and lease commitments.