Business Context and Reporting Period
Company: Steven Madden, Ltd.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
Business Overview: The Company designs, sources, markets, and sells fashion-forward footwear for women, men, and children. Operations are divided into three segments: Wholesale (8 brands including Steve Madden, l.e.i., and Candie's), Retail (98 stores and e-commerce), and Private Label (Adesso-Madden). The Company does not own manufacturing facilities, sourcing products primarily from China, Brazil, Italy, and Spain.
Key Financial Metrics
| Metric ($ in thousands) | 2005 | 2004 |
|---|---|---|
| Net Sales | $375,786 | $338,144 |
| Gross Profit | $142,500 | $122,669 |
| Gross Margin | 38% | 36% |
| Operating Income | $31,570 | $18,981 |
| Net Income | $19,200 | $12,275 |
| Diluted EPS | $1.38 | $0.86 |
| Operating Cash Flow | $42,742 | $12,863 |
| Total Assets | $211,728 | $186,430 |
| Working Capital | $114,066 | $101,417 |
| Debt | $0 | $0 |
| Cash & Equivalents | $52,842 | $30,853 |
Liquidity: The Company maintains a $25 million credit facility with GMAC Commercial Finance LLC (with a $15 million sub-limit on direct borrowings). As of December 31, 2005, no portion of the credit line was utilized. The Company holds $56,249 in marketable securities.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 11% to $375.8 million, driven by double-digit growth in the Madden Mens (74% increase), Candie's (44% increase), and Retail (13% increase) divisions.
- Profitability: Net income surged 56% to $19.2 million. Gross margin improved to 38% from 36% due to reduced inventory levels and fewer close-out sales.
- Segment Performance:
- Wholesale: Madden Mens and Candie's were primary growth drivers. l.e.i. and Steven divisions saw sales declines.
- Retail: Comparable store sales increased 5%. The division opened 12 new stores and closed 5 under-performing ones.
- Private Label: Commission income increased 55% to $7.1 million.
- Dividends: A special dividend of $1.00 per share was declared and paid in November 2005.
Outlook, Risks, and Unusual Items
Guidance and Outlook
- Expansion: Plans to open 8 to 10 new retail stores in 2006.
- Acquisition: On February 7, 2006, the Company acquired Daniel M. Friedman and Associates, Inc. for $18 million in cash to expand into handbags and accessories.
- Shareholder Commitment: Agreed to commit $25 million in 2006 and $10 million in 2007 to share repurchases and/or dividends.
Risks and Contingencies
- Legal Proceedings:
- adidas Arbitration: Pending arbitration regarding alleged infringement of the "three-stripe" mark on specific shoe models. The Company believes it has substantial defenses.
- Customs Duties: U.S. Customs estimated underpaid duties of $1.051 million for 1998-2004; a reserve has been recorded.
- Jojeli Lawsuit: Lawsuit filed by a former sales representative seeking damages up to $5 million; Company intends to vigorously defend.
- Operational Risks: Heavy reliance on foreign manufacturers (99% of products sourced outside the U.S., primarily China). Risks include supply chain disruptions, currency fluctuations, and inventory obsolescence.
- Customer Concentration: Federated Department Stores accounted for 28% of wholesale gross sales in 2005.
Investor Verification Checklist
- Inventory Management: Verify the effectiveness of new "cut-to-order" controls in maintaining the improved 38% gross margin.
- Legal Exposure: Monitor the status of the adidas arbitration and the U.S. Customs duty dispute to assess potential additional liabilities.
- Acquisition Integration: Track the performance of the Daniel M. Friedman acquisition and its contribution to diversifying revenue beyond footwear.
- Customer Concentration: Assess the impact of Federated Department Stores' performance on the wholesale segment.
- Shareholder Returns: Confirm the execution of the $25 million commitment for dividends or buybacks in 2006.