Steven Madden, Ltd. — Q1 2011 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2011, compared with Q1 2010. The company designs, sources, markets and sells footwear, handbags and accessories through wholesale, retail, licensing and other channels. Dollar figures below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $165.8 | $131.6 | +26% |
| Gross profit | $69.1 | $59.9 | +15% |
| Gross margin | 41.7% | 45.5% | -3.8 percentage points |
| Operating income | $27.5 | $24.9 | +10% |
| Net income | $17.9 | $15.4 | +16% |
| Diluted EPS | $0.63 | $0.55 | +15% |
- Operating expenses were $46.2 million, up from $41.3 million, but declined to 27.9% of sales from 31.4%.
- Net commission and licensing fee income fell to $4.6 million from $6.2 million. Interest and other income rose to $1.5 million from $0.8 million.
- Wholesale footwear sales rose 31% to $108.5 million; wholesale accessories rose 27% to $25.8 million; retail sales rose 10% to $31.5 million. Retail comparable sales, including e-commerce, increased 12%.
- Retail segment operating income improved to $0.1 million from a $1.1 million operating loss. First Cost commission income declined to $2.7 million from $4.9 million; licensing income increased to $1.9 million from $1.2 million.
Cash flow, liquidity and debt
- Operating activities used $1.6 million of cash, versus providing $13.1 million in Q1 2010. Working-capital uses included a $14.6 million increase in due from factor and an $8.1 million increase in accounts receivable; inventory declined $5.7 million.
- Investing activities used $5.0 million, including $3.7 million of capital expenditures. Financing activities provided $0.8 million. Cash declined $5.8 million to $60.4 million.
- Cash, cash equivalents and marketable securities totaled $188.8 million. Working capital was $153.0 million. The company reported no short- or long-term debt and stockholders’ equity of $378.4 million.
- A Rosenthal factoring/collection arrangement provides a $30 million facility, including a $15 million letter-of-credit sublimit. The filing reports no debt outstanding, but does not state facility utilization here.
- Contractual obligations totaled $261.1 million, including $125.5 million of operating leases, $122.4 million of purchase obligations and $10.5 million of contingent payments.
Material changes and management commentary
- Management attributed sales growth to the transition of business with Wal-Mart, Target and J.C. Penney from a commission model to wholesale sales; new Big Buddha and Betsey Johnson footwear; growth in Madden, Madden Girl and Kids; and international sales.
- Gross margin contracted mainly because of a sales mix shift toward lower-margin private-label, international and newer businesses. Wholesale footwear margin fell to 37.6% from 42.8%; accessories margin fell to 39.0% from 41.0%. Retail margin improved to 58.1% from 56.7%.
- Inventory was $33.8 million, up from $23.9 million a year earlier, reflecting new product lines and retail growth. Trailing-twelve-month inventory turns decreased to 9.5 from 10.4.
- Management said goods costs from southern China were rising approximately 5%–8%; the company was shifting some production to northern China and other countries and selectively raising prices. It said the net gross-margin effect was negligible in Q1 and expected that to remain the case in the near term.
Outlook, risks and unusual items
- No specific revenue, earnings or EPS guidance is provided. Management believes available liquidity will meet operating needs and financial commitments for at least the next twelve months.
- Key exposures include consumer demand and inventory valuation, customer deductions and collections, product and geographic mix, sourcing costs, and interest-rate movements affecting the $128.4 million marketable-securities portfolio. The company reported no off-balance-sheet arrangements.
- The company recorded a $2.75 million reserve for a California labor-law class action settlement; final approval was scheduled for May 10, 2011. A U.S. Customs matter remains unresolved: following a ruling, the company estimated the liability would not likely exceed $1.248 million; Customs had not made a formal collection claim, and the company waived the statute of limitations through December 5, 2013.
- Big Buddha earn-out consideration is tied to performance through March 31, 2013. The Q1 2011 contingent liability was $10.5 million, including amounts classified as current and non-current.
- After quarter-end, the board declared a 3-for-2 stock split, with shares expected to be distributed around May 31, 2011. The filing estimated approximately 42.3 million shares outstanding after the split, versus approximately 28.2 million beforehand.
Important facts for investors to verify
- Whether sales growth from the wholesale-model transition and new brands can continue without further material gross-margin pressure.
- How cash conversion develops, particularly receivables and amounts due from factor, given negative operating cash flow despite higher earnings.
- Inventory quality, turnover and potential markdown exposure as inventory and product lines expand.
- Actual costs and outcomes of China sourcing changes, price increases, the Big Buddha earn-out and the pending legal matters.
- Marketable-securities maturity, credit and interest-rate exposure, and utilization and terms of the Rosenthal facility.