Business Context and Reporting Period
Company: Steven Madden, Ltd.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1998
Business Overview: The Company designs, sources, and sells fashion footwear under the Steve Madden(R), lei(R), and David Aaron(R) brands. Operations are divided into three segments: Wholesale (department and specialty stores), Retail (company-owned stores), and Private Label (Adesso-Madden, Inc.). The Company also maintains an aggressive licensing program for non-footwear products.
Key Financial Metrics
| Metric | 1998 | 1997 | Change |
|---|---|---|---|
| Net Sales | $85,783,000 | $59,311,000 | +45% |
| Gross Profit | $35,890,000 | $24,567,000 | +46% |
| Gross Margin | 42% | 41% | +1% |
| Operating Income | $9,214,000 | $4,626,000 | +99% |
| Net Income | $5,447,000 | $2,700,000 | +102% |
| Diluted EPS | $0.50 | $0.30 | +67% |
| Working Capital | $33,627,000 | $16,545,000 | +103% |
| Cash & Equivalents | $14,642,000 | $3,887,000 | +277% |
| Total Assets | $48,928,000 | $29,277,000 | +67% |
Segment Performance (1998):
- Wholesale: $59.2M revenue (Steve Madden, David Aaron, lei); Operating Income $5.1M.
- Retail: $26.6M revenue; Operating Income $2.7M. Same-store sales increased 3.8%.
- Private Label (Adesso-Madden): $2.7M commission revenue; Operating Income $1.3M.
Material Changes vs. Prior Period
- Revenue Growth: Driven by the addition of 12 new retail stores and 3 outlet stores in 1998, increased wholesale accounts, and the launch of the lei(R) footwear line in Q3 1998.
- Cost of Sales: Decreased as a percentage of sales from 59% to 58% due to volume purchasing efficiencies.
- Operating Expenses: Increased 35% to $29.9M, primarily due to a 43% rise in payroll/bonuses and a 48% increase in advertising/marketing expenses.
- Liquidity: Significant cash inflow of $13.3M from the exercise of stock options and warrants, including $10.8M from the redemption of Class B Warrants in July 1998.
- David Aaron Segment: Experienced a decline in sales ($5.8M vs $6.4M) and a shift to an operating loss ($64k) due to management changes and higher markdowns.
Outlook, Risks, and Contingencies
Management Outlook:
- Plans to open approximately 10 new retail stores in 1999.
- Anticipates growth in the lei(R) division and the new Jordache(R) private label line.
- Focus on expanding e-commerce capabilities and licensing partnerships.
Key Risks:
- Key Personnel: Heavy dependence on CEO/Designer Steven Madden and COO Rhonda Brown.
- Customer Concentration: Federated Department Stores (20%) and Nordstrom (17%) represent significant wholesale revenue.
- Supply Chain: 95% of products are sourced from foreign manufacturers (Mexico, China, Brazil, Spain), exposing the company to trade disruptions and currency fluctuations.
- Inventory Management: High risk of excess inventory if fashion trends are misjudged.
Legal Contingencies:
- Ooga Associates Corp. Lawsuit: Pending litigation alleging breach of contract and misappropriation of trade secrets regarding retail store designs. The court dismissed breach of contract claims in October 1998 and suspended the action in January 1999. Management believes claims are without merit.
- Year 2000 Compliance: Company is expending approximately $200,000 to ensure computer systems are Y2K compliant by mid-1999.
Investor Verification Checklist
- Verify the sustainability of the 45% revenue growth rate given the aggressive retail expansion plan.
- Monitor the performance of the new lei(R) and Jordache(R) lines to ensure they meet projected growth targets.
- Assess the impact of the David Aaron segment's operating loss and management restructuring on future profitability.
- Review the status of the Ooga Associates litigation for potential financial exposure.
- Confirm the Company's ability to manage inventory levels effectively as it scales production and retail footprint.