Business Context and Reporting Period
Company: STEVEN MADDEN, LTD.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2004
Business Overview: The Company designs, markets, and distributes contemporary footwear and accessories through wholesale and retail channels. Key brands include Steven Madden, l.e.i., Madden Mens, Candie's, Steven, Stevies, and Unionbay.
Key Financial Metrics
| Metric (in thousands) | Q1 2004 | Q1 2003 |
|---|---|---|
| Net Sales | $78,768 | $78,698 |
| Gross Profit | $31,272 | $30,965 |
| Gross Margin % | 40% | 39% |
| Operating Income | $6,580 | $8,263 |
| Net Income | $4,126 | $5,049 |
| Diluted EPS | $0.29 | $0.36 |
| Cash & Equivalents (End of Period) | $22,302 | $44,614 |
| Working Capital | $96,196 | $94,054 (Mar 31, 2003) |
| Net Cash Used in Operating Activities | ($11,096) | ($6,837) |
Liquidity: The Company holds approximately $50.3 million in marketable securities. It maintains a $15 million credit line with Capital Factors, Inc., of which $0 was utilized as of March 31, 2004.
Material Changes vs. Prior Period
- Revenue: Total net sales remained virtually flat ($78.8M vs $78.7M). Wholesale sales declined slightly due to conservative buying patterns, while Retail sales grew 12% to $23.7M, driven by an 8% increase in comparable store sales.
- Profitability: Net income decreased 18% to $4.1M. Operating income declined 20% to $6.6M, primarily due to increased operating expenses ($26.1M vs $24.4M) associated with new wholesale divisions (Candie's, Unionbay), higher advertising, and occupancy costs.
- Margins: Gross margin improved to 40% from 39%, aided by cost-effective sourcing and a higher mix of retail sales (30% of total vs 27% prior year).
- Cash Flow: Operating cash outflows increased significantly to $11.1M (vs $6.8M outflow), driven by increases in accounts receivable (both factored and non-factored) and inventory build-up.
Guidance, Outlook, and Risks
- Outlook: Management plans to open 8-10 additional retail stores in 2004. The Company expects the new Candie's brand to gain market share. However, the outlook for the Unionbay division remains cautious following a product direction change and management shift.
- Legal Contingencies:
- Class Action & Derivative Suits: Settlements have been reached regarding securities fraud class actions and shareholder derivative suits. A hearing is scheduled for May 19, 2004. The Company believes costs are covered by insurance and a $6.95M loss mitigation policy.
- Steven Madden Indictment: The former Chairman/CEO is serving a 41-month sentence for securities fraud and money laundering. He remains employed as Creative and Design Chief.
- SEC Inquiry: On April 26, 2004, the SEC requested information regarding Steven Madden's employment. The Company intends to fully comply.
- Risks: Key risks include dependence on fashion trends, inventory obsolescence, foreign manufacturing disruptions (85% of products sourced overseas), and intense competition. The Company notes that results may fluctuate due to seasonality and economic conditions.
Investor Verification Checklist
- Settlement Approval: Verify the outcome of the May 19, 2004 court hearing regarding the class action and derivative suit settlements to confirm insurance coverage sufficiency.
- Unionbay Performance: Monitor the performance of the Unionbay division in the upcoming fall season following the recent management and product strategy overhaul.
- Inventory Levels: Review inventory turnover rates given the $2.2M increase in inventory and the fashion industry's risk of obsolescence.
- SEC Compliance: Track the Company's response to the SEC's April 2004 information request regarding the former CEO's employment.
- Wholesale Trends: Assess whether wholesale customers' conservative buying patterns persist or if demand recovers in subsequent quarters.