Business Context and Reporting Period
Company: Steven Madden, Ltd.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1999
Business Overview: The Company designs, markets, and distributes footwear, handbags, and apparel through wholesale divisions (Steven Madden, Diva, l.e.i., Adesso-Madden) and a retail division. The reporting period covers the nine months ended September 30, 1999, with significant expansion in retail locations and wholesale distribution channels.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 1999 | Nine Months Ended Sep 30, 1998 | Three Months Ended Sep 30, 1999 | Three Months Ended Sep 30, 1998 |
|---|---|---|---|---|
| Net Sales | $113,750,000 | $59,235,000 | $48,963,000 | $23,991,000 |
| Gross Profit | $47,111,000 | $24,642,000 | $20,001,000 | $10,083,000 |
| Gross Margin % | 41.4% | 41.6% | 40.9% | 42.0% |
| Income from Operations | $12,114,000 | $6,173,000 | $5,883,000 | $3,203,000 |
| Net Income | $7,223,000 | $3,534,000 | $3,448,000 | $1,880,000 |
| Diluted EPS | $0.59 | $0.33 | $0.27 | $0.17 |
| Cash from Operations | $5,796,000 | ($1,031,000) | N/A | N/A |
| Cash and Equivalents (End of Period) | $18,423,000 | $15,219,000 | $18,423,000 | $15,219,000 |
| Working Capital | $40,740,000 | N/A | N/A | N/A |
| Total Debt (Lease Payables) | $349,000 | $402,000 | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 92% year-over-year for the nine-month period and 104% for the quarter. Growth was driven by new wholesale accounts, increased reorders, EDI size replenishment (up 155% in Q3), and the opening of 12 new retail stores and 2 outlet stores in 1999.
- Profitability: Net income increased 104% for the nine-month period. Operating income rose 96% due to sales volume outpacing expense growth, despite a slight compression in gross margins.
- Margin Compression: Gross margin decreased slightly from 42% to 41% (nine months) due to the rapid growth of the l.e.i. product line, which carries lower selling prices and margins, and changes in product mix.
- Expense Increases: Selling, General, and Administrative (SG&A) expenses increased significantly (78% for nine months) due to a 60% rise in payroll, increased licensing costs, and occupancy expenses related to new retail and warehouse facilities.
- Cash Flow: Operating cash flow turned positive ($5.8M) compared to a negative $1.0M in the prior year, primarily driven by net income and an increase in accounts payable, offset by increases in inventory and factored receivables.
Guidance, Outlook, Risks, and Unusual Items
- Management Outlook: Management anticipates continued growth driven by brand popularity, expanded distribution, and the success of the EDI replenishment program. The Company is expanding its internet presence via stevenmadden.com and a new partnership with America Online (Shop @ AOL).
- Unusual Items: In August 1999, the Company paid $600,000 to settle a dispute regarding an option issued during the 1993 IPO. This was a one-time settlement payment.
- Legal Contingencies:
- Magnum Fashion, Inc.: A former licensee has filed for arbitration seeking release from financial obligations and damages. In September 1999, Magnum disclosed a claim for $5 million in damages. The Company denies the claims and intends to defend vigorously.
- Ooga Associated Corp.: A pending lawsuit regarding alleged breach of contract and misappropriation of trade secrets was suspended by the court in January 1999 but can be revived within one year. The Company believes the claims are without merit.
- Lee N' Gi: The Company commenced an action in October 1999 against Lee N' Gi for allegedly inducing Magnum to breach its license agreement.
- Risks: The Company notes risks associated with the Year 2000 computer problem (though systems were deemed compliant as of July 1999), reliance on foreign manufacturers (primarily Brazil and Mexico), and concentration of wholesale sales (Federated Department Stores and Nordstrom account for ~37% of wholesale sales).
Investor Verification Checklist
- Legal Exposure: Verify the status and potential financial impact of the $5 million claim by Magnum Fashion, Inc. and the suspended Ooga Associated Corp. lawsuit.
- Margin Sustainability: Assess whether the slight decline in gross margins is a temporary result of the l.e.i. launch or a structural shift in the product mix.
- Inventory Management: Review the $3.6 million increase in inventory and the $9.7 million increase in factored receivables to ensure they align with sales growth and do not signal future write-downs.
- Retail Expansion ROI: Evaluate the profitability of the 12 new retail stores and 2 outlet stores opened in 1999, noting the 23% increase in same-store sales.
- Concentration Risk: Confirm the stability of relationships with major department store customers (Federated and Nordstrom), which represent a significant portion of wholesale revenue.