Steven Madden, Ltd. 2010 Annual Report (10-K) Summary
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2010. Steven Madden, Ltd. designs, sources, markets, and sells fashion-forward footwear, handbags, and accessories. The company operates through five segments: Wholesale Footwear, Wholesale Accessories, Retail, First Cost, and Licensing. Fiscal 2010 was a record year, marked by significant brand expansion through the acquisition of Big Buddha, Inc. and the intellectual property of Betsey Johnson LLC, as well as a 3-for-2 stock split executed in May 2010.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Net Sales | $635.4 million | $503.6 million |
| Gross Profit | $275.9 million | $216.2 million |
| Gross Margin | 43.4% | 42.9% |
| Net Income | $75.7 million | $50.1 million |
| Diluted EPS | $2.68 | $1.82 |
| Operating Cash Flow | $86.9 million | $64.3 million |
| Total Assets | $447.7 million | $326.9 million |
| Working Capital | $138.6 million | $139.0 million |
| Long-Term Debt | $0 | $0 |
| Cash & Marketable Securities | $193.8 million | $87.2 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 26% to a record $635.4 million, driven by double-digit growth in Wholesale Footwear (30% increase) and Wholesale Accessories (40% increase).
- Profitability: Net income surged 51% to $75.7 million. Gross margin improved by 50 basis points to 43.4%, aided by higher margins in the Accessories and Retail segments.
- Acquisitions:
- Big Buddha: Acquired in February 2010 for $11.1 million cash plus contingent payments, adding a handbag brand.
- Betsey Johnson: Acquired intellectual property in October 2010 via a restructuring agreement involving the purchase of distressed debt ($29.2 million cost basis).
- Retail Performance: Comparable store sales increased 12.7%. Sales per square foot rose to $742 from $640 in 2009. The company closed 8 underperforming stores and opened 3 new ones, ending the year with 84 stores.
- Inventory: Total inventory increased to $39.6 million (from $30.5 million), causing annualized inventory turnover to decline slightly to 9.4 times.
Guidance, Outlook, and Risks
- Outlook: Management expects to open 6 to 9 new retail stores and close 3 to 5 underperforming stores in 2011. The company aims to evolve the Steve Madden brand into a global lifestyle brand beyond footwear.
- Liquidity: The company holds $193.8 million in cash and marketable securities with no long-term debt. Management believes current resources are sufficient to meet commitments for the next 12 months.
- Key Risks:
- Fashion Trends: Success depends on anticipating trends; misjudgments could lead to excess inventory.
- Competition: Intense competition from companies with greater resources (e.g., Nike, Nine West).
- Supply Chain: Virtually all products are sourced overseas (89% from China in 2010), exposing the company to foreign sourcing risks, currency fluctuations, and import regulations.
- Customer Concentration: DSW accounted for 10% of total net sales in 2010.
- Legal Contingencies:
- Class Action: A labor law class action lawsuit was settled in August 2010 with a reserve of $2.75 million.
- Customs Audit: A U.S. Customs audit regarding buying agent commissions resulted in a reduced reserve of $1.248 million following a favorable ruling on most claims.
Investor Verification Checklist
- Verify the integration and performance of the newly acquired Big Buddha and Betsey Johnson brands in upcoming quarterly reports.
- Monitor inventory turnover and gross margin trends to ensure the company can manage inventory levels without excessive markdowns.
- Assess the impact of foreign sourcing costs (noted 5-8% increase in southern China) on future gross margins.
- Review retail store profitability as the company continues to open new locations and close underperforming ones.
- Confirm the status of the U.S. Customs liability regarding pre-2002 buying agent commissions.