Business Context and Reporting Period
Company: Steven Madden, Ltd.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2000
Business Overview: The Company designs, markets, and distributes footwear and accessories under the "Steve Madden" and "l.e.i." brands, operating through wholesale divisions, a retail division (57 stores as of June 30, 2000), and licensing agreements. A new brand, "Stevies," targeting girls and tweens, was introduced in the first quarter of 2000.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2000 |
Six Months Ended June 30, 1999 |
Three Months Ended June 30, 2000 |
Three Months Ended June 30, 1999 |
|---|---|---|---|---|
| Net Sales | $92,166 | $64,787 | $48,057 | $38,056 |
| Gross Profit | $39,118 | $27,110 | $20,934 | $16,168 |
| Gross Margin % | 42.4% | 41.8% | 43.6% | 42.5% |
| Operating Income | $10,837 | $6,231 | $6,069 | $3,951 |
| Net Income | $6,925 | $3,775 | $3,743 | $2,364 |
| Diluted EPS | $0.52 | $0.31 | $0.28 | $0.19 |
| Cash & Equivalents (End of Period) | $21,787 | $16,460 | $21,787 | $16,460 |
| Working Capital | $48,508 | $36,843 | N/A | N/A |
| Net Cash Used in Operating Activities | ($7,858) | $3,539 | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 42% year-over-year for the six-month period, driven by new wholesale accounts, increased reorders, a 41% rise in retail sales (due to store openings and same-store sales growth), and the launch of the Stevies brand.
- Profitability: Net income increased 83% to $6.9 million for the six-month period. Operating income rose 74% to $10.8 million.
- Expense Increases: Selling, General, and Administrative (SG&A) expenses increased to $30.4 million (from $22.4 million) due to a 25% rise in payroll, increased selling/designing costs, and higher occupancy expenses from new retail locations.
- Cash Flow: Operating cash flow turned negative ($7.9 million used) compared to a positive $3.5 million in the prior year. This was primarily due to significant increases in inventory ($6.3 million) and factored accounts receivable ($4.2 million), alongside a decrease in accounts payable.
- Segment Performance:
- Retail: Sales up 41% to $27.5 million; operating income slightly up to $2.2 million.
- Wholesale (Steve Madden): Sales up 43% to $43.2 million; operating income up 188% to $4.9 million.
- Diva Acquisition Corp: Sales declined 49% to $1.7 million, resulting in an operating loss of $42,000 compared to a profit of $426,000 in the prior year.
Guidance, Outlook, Risks, and Unusual Items
- Management Outlook: The Company expects internet sales to continue growing and anticipates that new management and business modifications at the Diva division will enhance future operations. Licensing revenues increased 85% year-over-year.
- Capital Allocation: The Company repurchased 855,000 shares of common stock for $5.8 million during the six-month period. A $1.5 million stock repurchase program was announced in February 2000.
- Legal Proceedings (Significant Risk):
- CEO Indictment: On June 20, 2000, former Chairman and current CEO Steven Madden was indicted on securities fraud and money laundering charges. He temporarily resigned as Chairman but remains CEO. The Company states the indictments do not allege wrongdoing by the Company itself.
- Class Action Lawsuits: Six putative class action lawsuits were filed against the Company and individual officers alleging violations of the Securities Exchange Act related to statements concerning Mr. Madden. Damages are unspecified.
- Arbitration: Ongoing arbitration with Magnum Fashions, Inc. regarding a handbag license. Magnum seeks damages exceeding $5 million; the Company has filed counterclaims.
- Operational Risks: A significant portion of products is manufactured in foreign countries (Brazil, China, Italy, Mexico). The Company relies on department stores (Federated and May) for approximately 36% of wholesale sales.
Investor Verification Checklist
- CEO Legal Status: Verify the current status of the indictment against Steven Madden and the potential impact on Company leadership and operations.
- Class Action Exposure: Monitor the progression of the six class action lawsuits and any potential settlement costs or reputational damage.
- Cash Flow Sustainability: Assess the Company's ability to fund operations given the negative operating cash flow driven by inventory buildup and receivables factoring.
- Inventory Levels: Review inventory turnover rates to ensure the $16.4 million inventory balance does not lead to future markdowns or obsolescence.
- Wholesale Concentration: Confirm the stability of relationships with major department store customers (Federated and May), which represent a significant portion of revenue.