Steven Madden, Ltd. — 2011 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2011. Steven Madden designs, sources, markets and sells branded and private-label footwear, handbags and accessories through wholesale, retail, e-commerce, licensing and buying-agent operations. Its five segments are Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing.
2011 was the company’s third consecutive year of record sales and earnings. Growth reflected both business expansion and acquisitions: Topline (women’s footwear) and Cejon (accessories) were acquired in May 2011. The company also shifted certain customer programs from commission-based buying-agent arrangements to wholesale sales.
Financial results and liquidity
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $968.5 million | $635.4 million | +52% |
| Gross profit / margin | $361.9 million / 37.4% | $275.9 million / 43.4% | Margin down 6.0 percentage points |
| Operating income / margin | $153.8 million / 15.9% | $121.6 million / 19.1% | Income +26% |
| Net income | $97.2 million | $75.7 million | +28% |
| Diluted earnings per share | $2.25 | $1.78 | +26% |
| Cash from operations | $75.0 million | $86.9 million | Down $11.9 million |
Gross margin contracted primarily because of acquired businesses and lower-margin wholesale programs; operating expenses rose in dollars but fell as a share of sales, to 23.4% from 27.8%. Retail same-store sales, including e-commerce, increased 13.3%; store operating income margin improved to 13.1% from 6.8%. E-commerce sales grew 25%, and international sales rose 53% to $53.3 million.
At year-end, cash and cash equivalents were $102.8 million and marketable securities totaled $77.7 million. Working capital was $211.5 million; the company reported no short- or long-term debt and no borrowings under its $30 million credit facility. Operating cash flow was supported by net income but reduced by higher receivables, inventories and other working-capital needs. Inventory was $59.6 million, up from $39.6 million, while inventory turnover improved to 10.2 times from 9.4 times. Accounts-receivable collection days increased to 65 from 56.
Material changes and unusual items
- Topline and Cejon acquisitions involved approximately $85.2 million in stated cash consideration, plus contingent payments; acquisition cash outflow was approximately $89.7 million, partly offset by $12.0 million of refundable cash received from the Topline seller. Year-end contingent consideration liabilities for Topline, Cejon and Big Buddha totaled $37.9 million.
- Wholesale Footwear sales grew 58%, with operating income up to $86.7 million, but segment gross margin declined to 32.3% from 38.9%. Wholesale Accessories sales grew 79%, and operating income nearly doubled to $28.0 million.
- The company spent $15.5 million on capital expenditures, principally systems, stores and facilities. Contractual obligations totaled $358.8 million, including $151.2 million of operating leases, $168.0 million of purchase obligations and $37.9 million of contingent-payment liabilities.
- A three-for-two stock split was effected in May 2011; share and per-share figures in the filing are adjusted retroactively.
- Quarterly results show fourth-quarter 2011 sales of $279.8 million versus $161.0 million in fourth-quarter 2010, and diluted EPS of $0.55 versus $0.41.
Outlook, commentary and risks
Management said available cash, securities and expected 2012 operating cash flow should meet financial and operating needs for at least 12 months. It expected to open five to seven retail stores and close three to five underperforming stores in 2012. No specific full-year 2012 sales or earnings guidance is provided in the supplied filing text. Management reported product-cost increases averaging approximately 5%–8% in southern China, addressed through sourcing shifts and selective price increases, and expected the net gross-margin effect to remain immaterial in the near term.
Key risks include rapidly changing fashion demand and inventory obsolescence; intense competition and discretionary consumer spending; dependence on founder Steven Madden and significant wholesale customers; reliance on independent overseas manufacturers, especially in China; import duties, currency and supply-chain disruption; and execution and integration risks from acquisitions and growth. The company reported effective disclosure controls and internal control over financial reporting, but the audit scope excluded Topline and Cejon, which together represented about 31% of year-end assets and 18% of revenue.
Two derivative shareholder suits filed in February 2012 challenge amendments to Steven Madden’s employment agreement and related loan terms. The amended agreement extends his employment through 2023 and includes a February 2012 restricted-stock award valued at approximately $40 million; plaintiffs seek damages, disgorgement and to void the amendments. The company said it intended to seek dismissal. Separately, U.S. Customs alleged underpaid duties and proposed penalties related to certain pre-2002 buying agreements; the company disputed the allegations. The filing states a maximum exposure of approximately $1.7 million and an accrued reserve of $1.248 million. The 2009 California labor-law class action settled in 2011 for approximately $1.97 million, without material effect on financial position.
After year-end, the company closed its acquisition of the Canadian distributor’s businesses for approximately C$29 million, with possible earn-outs up to C$38 million over five years. This is a subsequent event, not part of 2011 operating results.
Important facts for investors to verify
- How much of the 52% sales increase and earnings growth is sustainable organic growth versus acquisitions and wholesale-model transitions, and whether gross margins stabilize.
- Actual performance against the earn-out assumptions and the cash obligations for Topline, Cejon, Big Buddha and the Canadian acquisition.
- Whether elevated receivables, inventory and collection days convert into cash without greater markdowns, bad debts or working-capital pressure.
- Outcomes of the shareholder litigation and U.S. Customs matter, including any additional expense or payment beyond recorded reserves.
- The economics and governance implications of Steven Madden’s revised compensation, stock awards and amended related-party loan.
- Progress on integrating acquired businesses and controls, given Topline and Cejon were excluded from the 2011 internal-control audit assessment.