Steven Madden, Ltd. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Steven Madden designs, sources, markets and sells branded and private-label footwear, handbags and accessories, operates retail stores and e-commerce sites, and earns commissions and licensing income. Unless stated otherwise, amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance
| Metric | Q3 2013 | Q3 2012 | First 9 months 2013 | First 9 months 2012 |
|---|---|---|---|---|
| Net sales | $394.8m | $356.9m | $971.3m | $911.5m |
| Gross profit / margin | $139.7m / 35.4% | $131.2m / 36.8% | $352.9m / 36.3% | $331.6m / 36.4% |
| Operating income / margin | $68.1m / 17.2% | $56.4m / 15.8% | $150.1m / 15.5% | $129.2m / 14.2% |
| Net income attributable to Steven Madden | $44.0m | $37.9m | $96.3m | $86.7m |
| Diluted EPS | $0.66 | $0.57 | $1.44 | $1.31 |
| Operating cash flow | Not separately reported for the quarter | $58.1m | $14.8m |
Quarterly sales rose 10.6% and attributable net income rose 16.1%; nine-month sales increased 6.6% and attributable net income increased 11.2%. Quarterly gross margin contracted mainly because of increased lower-margin private-label footwear sales. Operating expenses increased in dollars but declined as a percentage of sales, supporting higher operating margins. The effective tax rate was 36.5% in Q3 versus 35.4% a year earlier, partly because Q3 2012 included a $2.1 million tax benefit related to foreign earnings.
Segments and notable operating changes
- Wholesale footwear: Q3 sales increased 19.2% to $272.7 million, led by private label growth of 37.5% and branded growth of 10.9%. Segment operating income rose to $46.0 million, while gross margin declined to 31.1% from 33.1% due to sales mix.
- Wholesale accessories: Q3 sales fell 11.5% to $73.3 million, reflecting declines in cold-weather accessories and belts; handbag growth partly offset the decline. Operating income decreased to $13.6 million.
- Retail: Q3 sales increased 7.8% to $48.9 million as the store base expanded to 117 from 99, but comparable-store sales declined 3.5%. Promotional activity reduced gross margin to 60.2%, and operating income declined to $3.5 million. Nine-month retail sales rose 14.0%, while comparable-store sales also decreased 3.5%.
- Other income streams: Q3 commission and licensing income was $4.9 million, up from $3.9 million; the prior-year comparison included a $0.9 million Bakers Footwear Group bad-debt charge. Licensing income benefited from a new Betsey Johnson dress licensee.
- Management attributed nine-month footwear growth partly to private label. The loss of two private-label customers following the Topline acquisition adversely affected sales growth.
Cash, liquidity and capital allocation
- At September 30, 2013, cash and cash equivalents were $122.4 million and marketable securities totaled $112.3 million. The company reported $234.7 million in cash, cash equivalents and marketable securities, working capital of $331.5 million, no short- or long-term debt, and total equity of $672.6 million.
- Nine-month operating cash flow was $58.1 million, up from $14.8 million. Cash uses included a $79.8 million increase in amounts due from factor and a $36.0 million increase in inventory; cash sources included a $59.8 million increase in accounts payable and other accrued expenses.
- Investing cash outflow was $43.7 million, including $16.4 million of capital expenditures and net purchases of marketable securities. Financing cash outflow was $60.7 million, principally reflecting $69.5 million of share repurchases.
- The company repurchased 2.10 million shares during the first nine months at an average $33.01 per share. Approximately $102.6 million remained authorized for repurchases at quarter-end. A three-for-two stock split was declared in August; shares were distributed October 1, and share and per-share data in the filing reflect the split retroactively.
- The Rosenthal receivables facility provides a $30 million credit facility, including a $15 million letter-of-credit sublimit; no facility borrowings were outstanding at quarter-end. Management stated that available resources should meet financial commitments and operating needs for at least the next 12 months.
Outlook, risks, contingencies and unusual items
- The filing provides no specific financial guidance or quantified forecast. Management cautioned that interim results are not necessarily indicative of full-year results.
- Contractual obligations totaled $454.4 million, including $229.3 million of operating leases, $184.3 million of purchase obligations and $39.7 million of contingent payment liabilities. These amounts are scheduled across future periods and are not all immediately payable.
- Contingent earn-outs relate to acquisitions, including SM Canada; the company estimated total contingent consideration at $39.7 million. The first SM Canada earn-out payment, based on results through March 31, 2013, was made in Q4 2013. Changes in acquired businesses’ performance assumptions could affect the recorded liability and earnings.
- Substantially all products are manufactured overseas, primarily in China, with no long-term manufacturing or supply contracts. The company cited alternative sourcing availability, but sourcing, consumer demand, weather, inventory valuation, retailer chargebacks and foreign exchange remain relevant exposures. Forward currency contracts hedge forecast Mexican-peso purchases.
- Marketable securities were $112.3 million and may fluctuate with equity values, interest rates and credit risk. The company also identified estimation-sensitive areas including receivable allowances, inventory valuation, intangible assets, litigation reserves and contingent liabilities.
- Management said ordinary-course legal matters were not expected to have a material effect, while noting certain previously reported proceedings remained outstanding. No off-balance-sheet arrangements were reported. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether continued sales growth, especially in private-label footwear, can be sustained without further gross-margin pressure.
- Whether the 3.5% comparable-store sales decline improves and new store additions generate adequate returns.
- How receivables due from factor and inventory levels evolve, given their substantial contribution to operating cash outflows.
- Future earn-out payments and remeasurement of acquisition-related contingent liabilities, particularly for SM Canada.
- Use of the remaining repurchase authorization relative to liquidity, operating needs and share-based compensation dilution.
- Developments in outstanding legal matters, retailer allowances, and overseas sourcing and currency exposures.