Steven Madden, Ltd. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Amounts are in U.S. dollars; financial statements report dollars in thousands unless noted. The filing was signed March 2, 2020.
Business context and reporting period
The company designs, sources, markets and sells branded and private-label footwear, handbags, apparel and accessories, and earns royalties from trademark licensing. It reports five segments: Wholesale Footwear, Wholesale Accessories/Apparel, Retail, First Cost and Licensing. Sales are seasonal and depend on fashion trends, consumer demand and retailer orders.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Total revenue | $1,787.2 million | $1,677.7 million | +6.5% |
| Gross profit / margin | $686.0 million / 38.4% | $640.2 million / 38.2% | Margin +0.2 percentage points |
| Operating income / margin | $176.8 million / 9.9% | $173.4 million / 10.3% | Income +2.0% |
| Net income attributable to Steven Madden | $141.3 million | $129.1 million | +9.4% |
| Diluted EPS | $1.69 | $1.50 | +12.7% |
| Cash from operations | $233.8 million | $154.4 million | +$79.4 million |
- Cash, cash equivalents and marketable securities totaled $304.6 million at year-end, including $264.1 million of cash and equivalents and $40.5 million of marketable securities. The company reported no short- or long-term debt and no borrowings on its $30 million credit facility.
- Working capital was $437.6 million, down from $478.4 million. Management attributed the decrease primarily to adoption of lease accounting, which added current operating lease liabilities, and cash spent on acquisitions.
- Investing activities used $27.7 million, including $37.2 million for acquisitions, net of cash acquired, and $18.3 million in capital expenditures. Financing activities used $142.2 million, primarily for $101.8 million of treasury-stock purchases and $48.4 million of dividends.
- Operating cash flow improved year over year; inventory turnover remained 8.1 times, while average accounts-receivable collection days rose to 70 from 69.
Material changes and segment results
- Wholesale Footwear sales rose 5.1% to $1,112.1 million; operating income increased to $163.5 million. Segment gross margin improved to 33.6% from 32.7%, supported by Steve Madden Women’s growth and the absence of low-margin Payless sales.
- Wholesale Accessories/Apparel sales increased 11.6% to $334.9 million, including growth in Steve Madden handbags and the addition of BB Dakota. Segment gross margin fell to 29.3% from 30.6%, primarily due to tariffs; operating income declined to $22.5 million from $27.1 million.
- Retail sales increased 8.8% to $321.2 million, with comparable sales, including e-commerce, up 6.1%. The segment reported an operating loss of $9.1 million versus income of $0.7 million, amid higher expenses and specified legal, lease, impairment and acquisition-related charges. Sales per square foot declined to about $580 from $612.
- First Cost revenue fell 33.7% to $7.4 million, largely due to Payless ShoeSource’s bankruptcy; the segment recorded an $8.2 million operating loss. Licensing revenue declined 10.2% to $11.6 million, also affected by Payless-related royalty weakness.
- The effective tax rate declined to 21.8% from 26.4%; diluted EPS also benefited from a lower weighted-average diluted share count.
Outlook, commentary, risks and unusual items
- Management described the near-term outlook as cautious because of the coronavirus outbreak, China tariffs and termination of the Kate Spade footwear license, while expressing confidence in long-term earnings growth and shareholder value creation. The filing does not provide numerical revenue or earnings guidance.
- As of the filing, management said Chinese manufacturing facilities had resumed operations after coronavirus-related shutdowns but were not yet at full capacity; the timing and extent of recovery and resulting business effects were uncertain. The company sourced 88% of its 2019 product purchases from China.
- U.S. tariffs on Chinese goods affected handbags and other accessories, and footwear and apparel. The 15% tariff applied to certain goods from September 1, 2019 was reduced to 7.5% effective February 14, 2020; planned tariffs on additional covered goods were suspended indefinitely under the U.S.-China phase-one agreement. Management said tariffs had weighed on wholesale gross margin.
- Other notable items included a $4.1 million impairment of the Brian Atwood trademark after distribution was discontinued; Payless-related bad debt/vendor-support charges; legal and early lease termination costs; and acquisition-related costs. Reported net income attributable to the company included $21.4 million of net after-tax charges, compared with $28.6 million in 2018, as defined in management’s reconciliation.
- The company acquired 90% of GREATS for a purchase price of $16.9 million, net of cash acquired, and acquired BB Dakota for $29.4 million, net of cash acquired and adjustments; both deals include performance-based contingent consideration. It also formed a controlled 51%-owned China distribution joint venture.
- The Kate Spade footwear license ended December 31, 2019; the Donna Karan license also terminated. The company planned to open 10–13 retail stores and close 4–6 locations in 2020. The quarterly dividend was increased to $0.15 per share, subject to future Board approval and business conditions.
- Key risks include fashion and inventory misjudgments, competitive and retail-channel changes, dependence on major customers, supplier and shipping disruptions, China concentration, tariffs, foreign exchange, cybersecurity, and dependence on founder/Creative and Design Chief Steven Madden. Walmart represented 11.9% of 2019 revenue; Walmart, Target and Nordstrom each exceeded 10% of year-end accounts receivable. Management said pending ordinary-course legal matters were not expected to have a material impact.
Important facts for investors to verify
- Whether coronavirus-related production and delivery disruptions, China sourcing concentration and tariff changes affected subsequent sales, costs and gross margins.
- Whether retail and Wholesale Accessories/Apparel profitability improved, and whether comparable-sales growth continued without further increases in operating expenses.
- Customer exposure and collectability, especially Payless-related recoveries and receivable concentrations at Walmart, Target and Nordstrom.
- Acquisition performance, integration, goodwill and intangible-asset valuations, and the eventual GREATS and BB Dakota contingent payments.
- Cash deployment among repurchases, dividends, acquisitions and store investment, alongside lease commitments of $193.9 million in undiscounted payments and other contractual obligations.
- Management’s subsequent outlook and the effects of the Kate Spade license termination; the 10-K provides no numerical earnings or revenue guidance.