Business Context and Reporting Period
Company: Steven Madden, Ltd.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2001
Business Overview: The Company designs, sources, markets, and sells fashion-forward footwear for women, men, and children through three primary segments: Wholesale (brands include Steve Madden, David Aaron, l.e.i., Stevies, and Steve Madden Mens), Retail (company-owned stores and e-commerce), and Private Label (Adesso-Madden, Inc.). The Company operates approximately 73 retail locations and distributes products primarily in the United States and Canada.
Key Financial Metrics
| Metric | 2001 | 2000 |
|---|---|---|
| Net Sales | $243,391,000 | $205,113,000 |
| Gross Profit | $99,873,000 | $89,618,000 |
| Gross Margin | 41.0% | 43.7% |
| Operating Income | $19,362,000 | $25,632,000 |
| Net Income | $12,116,000 | $16,043,000 |
| Diluted EPS | $0.94 | $1.26 |
| Working Capital | $82,633,000 | $57,207,000 |
| Cash and Cash Equivalents | $50,179,000 | $35,259,000 |
| Total Assets | $121,862,000 | $91,733,000 |
| Total Liabilities | $19,502,000 | $15,167,000 |
Segment Performance (2001):
- Wholesale: $163.9 million (67% of total sales).
- Retail: $79.5 million (33% of total sales).
- Private Label/Other: $4.2 million commission revenue.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 19% to $243.4 million, driven by the launch of the Steve Madden Mens line ($10.5 million), a 14% increase in retail sales, and significant growth in the Stevies (79%) and David Aaron (106%) wholesale divisions.
- Profitability Decline: Net income decreased 24% to $12.1 million. Operating income dropped 24% to $19.4 million.
- Unusual Item: A non-recurring charge of $6,950,000 was recorded in Q4 2001 for the purchase of a loss mitigation insurance policy related to the former CEO's legal issues. This charge significantly impacted operating income.
- Margin Compression: Gross margin decreased from 44% to 41% due to increased promotional activity following the September 11 attacks and margin pressures from large wholesale accounts.
- Liquidity: Working capital increased by $25.4 million, primarily due to net income and proceeds from stock option exercises ($9.0 million).
Guidance, Outlook, Risks, and Contingencies
Management Outlook:
- The Company plans to open approximately 10 new retail stores in 2002.
- Expansion into South Korea was initiated via an agreement with Mille 21, Inc. to open four stores in 2002.
- Management anticipates retaining earnings to finance growth with no current intention to pay cash dividends.
Material Risks and Contingencies:
- Legal Proceedings: Former CEO Steven Madden pleaded guilty to federal securities fraud and money laundering charges in May 2001. He resigned as CEO but remains Creative and Design Chief. The Company purchased a $6.95 million loss mitigation policy to cover related litigation costs. A class action lawsuit regarding the indictment has reached a tentative settlement within insurance limits. Shareholder derivative actions remain pending.
- Key Personnel Dependence: The Company relies heavily on Steven Madden for design and creative direction. His inability to perform could materially harm the business.
- Customer Concentration: Three major department store groups (May, Federated, and Nordstrom) accounted for approximately 50% of wholesale sales in 2001.
- Supply Chain: Approximately 90% of products are sourced from foreign manufacturers (primarily Brazil and China), exposing the Company to foreign currency fluctuations and trade disruptions.
Investor Verification Checklist
- Legal Exposure: Verify the final status of the class action settlement and shareholder derivative suits related to the former CEO's indictment.
- Margin Sustainability: Assess whether the 41% gross margin is sustainable given the competitive retail environment and reliance on promotions.
- Customer Concentration: Monitor the financial health of top wholesale customers (May, Federated, Nordstrom) which represent half of wholesale revenue.
- Key Person Risk: Evaluate the Company's succession planning and design capabilities independent of Steven Madden.
- Inventory Management: Review inventory turnover and obsolescence risks, particularly given the fashion-forward nature of the product line and the impact of the September 11 events on consumer traffic.