Business Context and Reporting Period
Company: STEVEN MADDEN, LTD.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2003
Business Overview: The Company designs, markets, and distributes contemporary footwear and accessories. Operations are divided into Wholesale (Madden Women's, l.e.i., Madden Men's, Diva, Stevies) and Retail divisions, alongside licensing and commission-based businesses.
Key Financial Metrics
| Metric (in thousands) | Q1 2003 | Q1 2002 |
|---|---|---|
| Net Sales | $78,698 | $66,611 |
| Gross Profit | $30,965 | $26,541 |
| Gross Margin | 39.3% | 39.8% |
| Operating Income | $8,263 | $6,853 |
| Net Income | $5,049 | $4,093 |
| Diluted EPS | $0.36 | $0.30 |
| Cash & Equivalents (End of Period) | $44,614 | $33,186 |
| Working Capital | $94,054 | $83,398 |
| Net Cash Used in Operating Activities | ($6,837) | ($11,888) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 18% to $78.7 million, driven by a 26% increase in the Madden Women's Wholesale Division and a 12% increase in the Retail Division.
- Profitability: Net income rose 23% to $5.0 million. Operating income increased 21% to $8.3 million.
- Margins: Gross margin percentage decreased slightly from 40% to 39% due to promotional activities to clear fall inventories and product mix changes. Operating expenses as a percentage of sales improved to 31% from 32%.
- Cash Flow: Net cash used in operating activities improved significantly (decreased usage) from $11.9 million in 2002 to $6.8 million in 2003, despite increases in factored receivables and inventory.
- Segment Performance:
- Madden Women's: Operating income surged 114% to $3.5 million.
- Madden Men's: Operating income declined to $0.7 million from $1.3 million due to higher markdown allowances and payroll costs.
- Retail: Comparable store sales increased 4%; store count grew from 73 to 82.
Guidance, Outlook, and Risks
- Outlook: Management expects to open 8-10 additional retail stores for the remainder of fiscal 2003. The Company believes current cash and marketable securities ($26.8 million invested) are sufficient to meet commitments for the next 12 months.
- Legal Contingencies:
- Adidas Litigation: Two trademark infringement suits regarding stripe designs are pending; trial scheduled for July 2003. The Company believes it has substantial defenses.
- Skechers Litigation: Patent infringement suit filed in October 2002; outcome undetermined.
- Founder Indictment: Former CEO Steven Madden is serving a 41-month sentence for securities fraud and money laundering. The Company maintains no wrongdoing by the entity itself.
- Class Actions: Settlements in principle reached for class action and shareholder derivative suits, covered by a $6.95 million loss mitigation policy.
- Risks: Key risks include dependence on fashion trends, inventory obsolescence, foreign manufacturing disruptions (80% of products sourced overseas), and intense industry competition.
Investor Verification Checklist
- Inventory Levels: Verify the adequacy of inventory reserves given the 39% gross margin compression and reliance on promotional markdowns.
- Legal Exposure: Monitor the outcome of the Adidas trademark trial scheduled for July 2003 and the Skechers patent suit.
- Factoring Agreement: Confirm the status of the Capital Factors agreement, which covers 95% of receivables and includes a lien on inventory.
- Retail Expansion: Assess the profitability timeline for the 8-10 planned new retail stores and the impact on operating expenses.
- Foreign Sourcing: Evaluate exposure to currency fluctuations and supply chain disruptions in Brazil, China, Italy, and Spain.