Business Context and Reporting Period
Company: Steven Madden, Ltd.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2000
Business Overview: The Company designs, markets, and distributes footwear and accessories under the "Steve Madden," "l.e.i.," "Stevies," and "Diva" brands. Operations are segmented into Wholesale Divisions, Retail Division, and Licensing (Adesso-Madden). The Company operates 64 retail stores as of September 30, 2000.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2000 | Nine Months Ended Sep 30, 2000 | Nine Months Ended Sep 30, 1999 |
|---|---|---|---|
| Net Sales | $60,108 | $152,274 | $113,750 |
| Gross Profit | $26,488 | $65,606 | $47,111 |
| Gross Margin % | 44% | 43% | 41% |
| Operating Income | $7,699 | $18,536 | $12,114 |
| Net Income | $4,600 | $11,525 | $7,223 |
| Diluted EPS | $0.38 | $0.89 | $0.59 |
| Cash and Equivalents | $24,219 | $24,219 | $37,361 (Dec 31, 1999) |
| Working Capital | $51,927 | $51,927 | $40,740 (Sep 30, 1999) |
| Net Cash Used in Operating Activities | N/A | ($2,857) | $5,796 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 34% year-over-year for the nine-month period ($152.3M vs. $113.8M) and 23% for the quarter ($60.1M vs. $49.0M). Growth was driven by new wholesale accounts, increased reorders, and a 43% increase in retail sales due to store openings (64 stores vs. 45 in prior year) and same-store sales growth.
- Profitability: Net income increased 60% for the nine-month period ($11.5M vs. $7.2M). Gross margins improved to 43% (nine months) and 44% (quarter) due to product mix changes and improved inventory management.
- Expense Increases: SG&A expenses rose significantly due to payroll increases (28% for nine months), expanded marketing efforts (85% increase in the quarter), and occupancy costs associated with new retail locations.
- Cash Flow: Operating cash flow turned negative for the nine-month period ($2.9M used) compared to positive $5.8M in the prior year, primarily due to increased inventory levels ($7.3M increase) and factored accounts receivable ($6.3M increase).
- Segment Performance: The new "Stevies" brand generated $4.7M in revenue for the nine months. The "Diva" division saw a decline in sales and a shift from profit to a slight loss due to management changes.
Guidance, Outlook, Risks, and Contingencies
- Legal Proceedings (Critical): On June 20, 2000, CEO Steven Madden was indicted on securities fraud and money laundering charges. The Company is not named as a defendant in the indictment but faces six class-action lawsuits and one shareholder derivative action alleging false statements and failure to disclose material information regarding Mr. Madden. The Company believes it has substantial defenses.
- Management Changes: Steven Madden resigned as Chairman of the Board on June 21, 2000, but remains CEO. Charles Koppelman was appointed Acting Chairman.
- Outlook: Management expects internet sales to continue growing. The Company plans to expand licensing opportunities for both Steve Madden and Stevies brands.
- Liquidity: The Company maintains strong working capital ($51.9M). It has a stock repurchase program (900,000 shares repurchased for $6.1M as of Sept 30, 2000) and relies on cash from operations and stock option exercises for capital needs.
- Supply Chain: A significant portion of products is manufactured in Brazil, China, Italy, and Mexico. The Company believes alternative sources exist if current suppliers fail.
Investor Verification Checklist
- Legal Exposure: Verify the status of the six class-action lawsuits and the derivative action against the Company and Mr. Madden, and assess potential financial impact.
- CEO Indictment: Monitor developments regarding the indictment of CEO Steven Madden and its potential effect on Company operations and reputation.
- Cash Flow vs. Profit: Analyze the divergence between strong net income growth and negative operating cash flow, specifically regarding inventory buildup and receivables factoring.
- Retail Expansion Costs: Review the sustainability of SG&A growth driven by the rapid expansion of retail stores (from 45 to 64) and associated occupancy costs.
- Concentration Risk: Note that Federated and May Department Stores account for approximately 36% of Wholesale Division sales combined.