Business Context and Reporting Period
Company: STEVEN MADDEN, LTD.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2005
Business Overview: The Company designs, markets, and distributes contemporary footwear and accessories under various brands including Steve Madden, l.e.i., Madden Mens, Candie's, and Steven. Operations are divided into Wholesale and Retail divisions, with significant reliance on overseas manufacturing.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2005 |
Nine Months Ended Sep 30, 2005 |
Nine Months Ended Sep 30, 2004 |
|---|---|---|---|
| Net Sales | $100,067 | $284,361 | $253,612 |
| Gross Profit | $36,231 | $103,059 | $95,434 |
| Gross Margin % | 36.2% | 36.2% | 37.6% |
| Operating Income | $9,001 | $18,879 | $19,023 |
| Net Income | $5,513 | $11,761 | $11,902 |
| Diluted EPS | $0.39 | $0.85 | $0.83 |
| Cash & Equivalents | $55,708 | $55,708 | $18,128 |
| Total Debt | $0 | $0 | $0 |
| Working Capital | $125,354 | $125,354 | $101,417 |
Liquidity: The Company reported no short-term or long-term debt as of September 30, 2005. It maintains a $25 million credit facility with GMAC Commercial Finance, LLC, with a $15 million sub-limit on direct borrowings; no portion of this line was utilized at period end. Total cash, cash equivalents, and marketable securities totaled approximately $99.6 million.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 13% for the quarter and 12% for the nine-month period compared to the prior year. This was driven by strong performance in the Madden Mens division (106% quarterly growth), Candie's (25% quarterly growth), and the Retail division (12% same-store sales growth).
- Profitability: While Net Income for the nine-month period remained flat year-over-year ($11.76M vs $11.90M), quarterly Net Income surged 50% to $5.51M. Diluted EPS for the quarter rose to $0.39 from $0.26.
- Inventory Management: Total inventory decreased 26% year-over-year to $22.66 million despite sales growth, reflecting improved inventory controls and "cut-to-order" procedures. Annualized inventory turnover improved to 7.9 times.
- Impairment Charge: The Company recorded a one-time impairment charge of $519,000 in the second quarter of 2005 related to the discontinuation of the "Shoe Biz" brand and closure of related stores.
- Legal Settlements: Operating expenses included a $1.5 million settlement payment to LaRue Distributors, Inc. regarding a license agreement dispute.
Guidance, Outlook, and Risks
Management Commentary: Management attributes recent success to the return of Steven Madden as Creative and Design Chief and the appointment of Awadhesh Sinha as Chief Operating Officer. The Company plans to open two to three new retail stores for the remainder of 2005. A special dividend of $1.00 per share was declared on November 3, 2005.
Risks and Contingencies:
- Legal Proceedings: The Company is involved in an arbitration demand filed by adidas regarding alleged infringement of the "three-stripe" mark on specific shoe models. The Company believes it has substantial defenses. Additionally, the U.S. Customs Department has asserted that certain commissions should be treated as dutiable, resulting in a recorded reserve of $1.051 million.
- Supply Chain: Approximately 90% of products are sourced from overseas (primarily China, Brazil, Italy, and Spain), exposing the Company to foreign currency fluctuations, trade regulations, and manufacturing delays.
- Inventory Risk: As a fashion-oriented retailer, the Company faces risks of inventory obsolescence and the need for markdowns if consumer demand shifts.
- Accounting Standards: The Company is evaluating the impact of SFAS No. 123R (Share-Based Payment), expected to be adopted in the first quarter of 2006, which may materially impact reported earnings.
Investor Verification Checklist
- Inventory Valuation: Verify the adequacy of inventory reserves given the 26% reduction in stock levels and the fashion industry's volatility.
- Legal Exposure: Monitor the status of the adidas arbitration and the U.S. Customs duty assessment to assess potential future liabilities beyond the current $1.051M reserve.
- Segment Performance: Review the sustainability of the 106% sales growth in the Madden Mens division and the continued decline in the "Steven" and "Stevies" wholesale brands.
- Stock-Based Compensation: Assess the potential impact of the upcoming adoption of SFAS 123R on future Net Income and EPS.
- Dividend Impact: Confirm the cash outflow associated with the declared $1.00 per share special dividend and its effect on liquidity.