Business Context and Reporting Period
Company: Steven Madden, Ltd.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: The Company designs, sources, markets, and retails fashion-forward footwear and accessories for women, men, and children. Operations are segmented into Wholesale, Retail, and First Cost (private label buying agent) divisions. The Company operates 99 retail stores as of the reporting date.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2008 |
Nine Months Ended Sep 30, 2008 |
Nine Months Ended Sep 30, 2007 |
|---|---|---|---|
| Net Sales | $128,093 | $337,949 | $328,305 |
| Gross Profit | $52,979 | $138,731 | $134,432 |
| Gross Margin % | 41.4% | 41.1% | 41.0% |
| Operating Income | $17,706 | $32,690 | $45,960 |
| Net Income | $11,088 | $20,774 | $30,990 |
| Diluted EPS | $0.62 | $1.11 | $1.43 |
| Cash & Equivalents | $33,115 | $33,115 (as of Sep 30, 2008) | |
| Total Debt | $0 | ||
| Working Capital | $133,172 | $133,172 (as of Sep 30, 2008) |
Cash Flow (Nine Months Ended Sep 30, 2008):
- Operating Activities: $548 (Net cash provided)
- Investing Activities: $44,508 (Net cash provided, driven by sale of securities)
- Financing Activities: $(41,387) (Net cash used, primarily due to stock repurchases)
Material Changes vs. Prior Period
- Revenue Growth: Consolidated net sales increased 13% in the quarter and 3% for the nine-month period compared to the prior year. The Wholesale Division saw a 13% quarterly increase, driven by a 91% surge in the Madden Girl Division and double-digit growth in Accessories and Women's divisions.
- Profitability Decline (YTD): While quarterly net income rose slightly ($11.1M vs $10.9M), nine-month net income fell 33% to $20.8M from $31.0M. This decline was driven by a 29% drop in operating income, attributed to higher operating expenses and reduced commission/licensing fee income.
- Operating Expenses: Nine-month operating expenses increased to $117.1M from $103.9M. A significant portion ($4.9M) relates to charges associated with the resignation of the former CEO and Chairman in March 2008.
- Tax Rate Impact: The effective tax rate for the nine months ended Sep 30, 2008, was 38.6%, compared to 35.9% in the prior year. The prior year benefited from a one-time tax benefit related to amended New York State and City returns.
- Segment Performance: The Retail Division reported an operating loss of $675k for the quarter (improved from a $1.4M loss in 2007) but a $7.0M loss for the nine-month period (worsened from a $383k loss in 2007) due to higher operating costs from new street stores and promotional activity.
Guidance, Outlook, Risks, and Unusual Items
- Capital Allocation: The Company completed a tender offer in March 2008, repurchasing 2.6 million shares for $44.2 million ($17.00/share). No debt is outstanding.
- Investment Liquidity: The Company held $37.3M in Auction Rate Securities (ARS) at year-end 2007. Due to market illiquidity in early 2008, these were classified as long-term. However, the Company successfully sold $16.2M of these securities at full face value in June/July 2008, reversing a previously recorded unrealized loss. Only $75k of ARS remained as of September 30, 2008.
- Legal Proceedings:
- Class Action: Named in a California class action lawsuit (filed Aug 2008) alleging violation of the Song-Beverly Credit Card Act regarding zip code collection. Management cannot currently assess the impact.
- Customs Duties: Ongoing dispute with U.S. Customs regarding duty classification of commissions. The Company has increased its reserve to $2.7M, believing the liability will not exceed this amount.
- Executive Changes: Edward Rosenfeld was appointed CEO effective April 7, 2008. The former CEO resigned in March 2008, triggering a one-time charge of $4.9M in operating expenses.
- Outlook: Management believes current cash and marketable securities ($56.7M combined) are sufficient to meet financial commitments for the next 12 months. No specific forward-looking financial guidance was provided in the text.
Investor Verification Checklist
- Inventory Levels: Verify the $40.7M inventory balance against the challenging economic environment and the Company's ability to sell through stock without significant markdowns.
- Wholesale Allowances: Confirm the stability of the 15% sales increase in the Steven Division, which was driven by a "significant reduction in sales allowances," to ensure this is a sustainable trend.
- Retail Store Economics: Review the impact of closing 7 underperforming mall stores and opening 6 higher-cost street stores on future same-store sales and operating margins.
- Private Label Exposure: Assess the risk of further declines in the First Cost Division, which saw a 29% drop in nine-month income due to customers sourcing directly or scaling back orders.
- Legal Reserves: Monitor the status of the Customs duty dispute and the California class action lawsuit for potential reserve adjustments.