Steven Madden, Ltd. - Q3 2009 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2009, for Steven Madden, Ltd., a designer, marketer, and retailer of fashion-forward footwear and accessories. The company operates through Wholesale Footwear, Wholesale Accessories, Retail, First Cost, and Licensing segments. Notable operational changes in 2009 include shifting the international business from a "first cost" to a "wholesale" model and transitioning the Candies business to a "first cost" model.
Key Financial Metrics
| Metric (in thousands) | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Net Sales | $140,138 | $128,093 | $364,039 | $337,949 |
| Gross Profit | $61,676 | $52,979 | $154,726 | $138,731 |
| Gross Margin % | 44% | 41% | 43% | 41% |
| Operating Income | $28,314 | $17,706 | $57,990 | $32,690 |
| Net Income | $17,831 | $11,088 | $36,552 | $20,774 |
| Diluted EPS | $0.97 | $0.62 | $2.00 | $1.11 |
| Cash & Equivalents | $47,622 | $33,115 | N/A | |
| Marketable Securities | $78,069 | $23,554 | ||
| Total Debt | $0 | $0 | N/A | |
| Working Capital | $121,406 | $133,172 | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated net sales increased 9% in Q3 2009 and 8% for the nine-month period, driven primarily by a 15% increase in the Wholesale Segment. The Wholesale Footwear division saw significant growth in the Madden Girl (+34%) and Steven (+30%) divisions.
- Margin Expansion: Gross margin improved to 44% in Q3 2009 from 41% in Q3 2008. This was attributed to decreased markdowns and allowances due to better retail sell-throughs and savings in inbound freight costs.
- Profitability: Net income surged 61% in Q3 and 76% for the nine-month period compared to the prior year. Operating expenses as a percentage of sales decreased to 28% in Q3 2009 from 31% in Q3 2008.
- Segment Performance: The Retail Segment reported a loss from operations of $641 in Q3 2009, an improvement from the $675 loss in Q3 2008, despite a 7.6% decrease in same-store sales. The First Cost Segment income increased due to the growth of the l.e.i. brand and the shift of the Candies business.
- Acquisitions: The company acquired the Zone 88 and Shakedown Street lines for $1.3 million in cash, contributing $5.3 million in net sales in Q3 2009.
Outlook, Risks, and Contingencies
- Liquidity: The company holds $125.7 million in cash, cash equivalents, and marketable securities with no long-term debt. Management believes this is sufficient to meet obligations for the next 12 months. A new $30 million credit facility with Rosenthal & Rosenthal, Inc. was established in September 2009, though no borrowings were made as of the quarter end.
- Strategic Expansion: The company signed a license agreement for the "Olsenboye" trademark for J.C. Penney and a subsequent agreement for worldwide distribution of women's fashion apparel under the Steve Madden brand, with initial shipments expected in Spring 2010.
- Legal Proceedings: A class action lawsuit filed in June 2009 alleges violations of California Labor Laws regarding breaks and overtime pay. Management cannot currently assess the financial impact. Additionally, a U.S. Customs dispute regarding dutiable commissions has a recorded reserve of approximately $2.96 million.
- Operational Risks: 99% of products are manufactured overseas, primarily in China. The company relies on foreign suppliers and has no long-term manufacturing contracts. Inflation and supply chain disruptions remain potential risks.
Key Facts for Investor Verification
- Verify the sustainability of the gross margin improvement (44%) given the historical volatility of markdowns and allowances in the fashion retail sector.
- Monitor the performance of the new "Olsenboye" and women's apparel license agreements to assess their contribution to future revenue streams.
- Review the status of the California labor class action lawsuit and the U.S. Customs duty dispute for potential future liabilities.
- Assess the impact of the Retail Segment's declining same-store sales (-7.6% in Q3) on overall profitability, despite cost-cutting measures.
- Confirm the integration and sales performance of the Zone 88 acquisition in subsequent quarters.