Business Context and Reporting Period
Company: Steven Madden, Ltd.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: The Company designs, sources, markets, and sells fashion-forward footwear and accessories for women, men, and children. Operations are divided into five segments: Wholesale Footwear, Wholesale Accessories, Retail, First Cost (buying agent services), and Licensing. The Company distributes products through department stores, specialty stores, company-owned retail stores, e-commerce, and international distribution arrangements.
Key Financial Metrics (Fiscal Year 2009)
| Metric | 2009 Value | 2008 Value |
|---|---|---|
| Net Sales | $503.6 million | $457.0 million |
| Gross Profit | $216.2 million | $186.8 million |
| Gross Margin | 42.9% | 40.9% |
| Net Income | $50.1 million | $28.0 million |
| Diluted EPS | $2.73 | $1.51 |
| Operating Cash Flow | $64.3 million | $41.8 million |
| Total Assets | $326.9 million | $284.7 million |
| Working Capital | $139.0 million | $122.1 million |
| Long-Term Debt | $0 | $0 |
| Cash & Equivalents | $69.3 million | $89.6 million |
| Marketable Securities | $85.7 million | $35.2 million |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated net sales increased 10% to a record $503.6 million, driven primarily by a 15% increase in the Wholesale segment ($379.8 million). The Retail segment saw a slight 2% decline in sales to $123.7 million.
- Profitability: Net income surged 79% to $50.1 million. Gross margin expanded by 200 basis points to 42.9%, attributed to improved wholesale margins (up to 39%) and reduced close-out sales.
- Segment Performance:
- Wholesale: Madden Girl Division led growth with a 28% sales increase. The Steven Division grew 27%.
- Retail: Comparable store sales increased 1%. The Company closed seven underperforming stores and licensed out three, ending the year with 89 stores (down from 97).
- First Cost: Operating income increased 45% to $16.8 million, driven by the l.e.i. brand at Wal-Mart and the transition of the Candie's business to a commission model.
- Acquisitions: Acquired Zone 88 assets for $1.3 million in July 2009. Subsequent to year-end (Feb 2010), acquired Big Buddha, Inc. for $11.0 million plus earn-outs.
- Accounting Changes: International business shifted from a "first cost" to a "wholesale" model, moving $22.1 million of revenue from commissions to net sales. Candie's business shifted from wholesale to "first cost," removing $14.3 million from net sales.
Guidance, Outlook, Risks, and Contingencies
- Outlook: Management plans to open 1-3 new retail stores and close 6-9 underperforming stores in 2010. New licensing agreements for women's fashion apparel and jewelry are expected to ship in 2010.
- Liquidity: The Company holds $155.0 million in cash, cash equivalents, and marketable securities with no long-term debt. A $30 million credit facility with Rosenthal & Rosenthal, Inc. is available.
- Risks:
- Fashion Trends: Success depends on anticipating trends; misjudgments could lead to excess inventory and markdowns.
- Economic Conditions: Consumer spending on discretionary items is sensitive to economic downturns and credit availability.
- Supply Chain: Virtually all products are manufactured overseas (primarily China), exposing the Company to foreign currency fluctuations, customs duties, and supply disruptions.
- Customer Concentration: DSW accounted for 11% of total net sales and Macy's for 8% in 2009.
- Legal Contingencies:
- California Labor Lawsuit: Accrued $1.0 million for a class action regarding meal breaks and overtime; liability not expected to exceed $1.0 million.
- U.S. Customs Audit: Dispute regarding classification of commissions. Reserve increased to $3.0 million; liability not expected to exceed $2.7 million (excluding interest/penalties).
- Lead Content Lawsuit: Consent judgment finalized; terms not material to financial statements.
Investor Verification Checklist
- Inventory Valuation: Verify the adequacy of reserves for slow-moving inventory given the fashion industry's volatility and the Company's reliance on trend forecasting.
- Customer Concentration: Monitor sales dependency on top wholesale customers (DSW, Macy's) and the impact of any retailer consolidation or financial distress.
- Supply Chain Exposure: Assess risks related to the 84% of merchandise purchased from China, including potential tariff changes or shipping disruptions.
- Retail Store Performance: Track the success of the store rationalization strategy (closing underperformers) and the profitability of new store openings in 2010.
- Legal Reserves: Confirm the status of the U.S. Customs audit and the California labor lawsuit to ensure reserves remain adequate.
- Acquisition Integration: Evaluate the financial performance of the Zone 88 and Big Buddha acquisitions in subsequent periods.