Steven Madden, Ltd. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited results; amounts below are in millions of dollars unless noted. The company designs, sources, markets and sells branded and private-label footwear, handbags and accessories, and earns licensing and commission income.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $374.1 | $325.4 | $740.5 | $654.8 |
| Gross profit / margin | $139.4 / 37.3% | $121.0 / 37.2% | $272.1 / 36.7% | $237.2 / 36.2% |
| Operating income / margin | $41.9 / 11.2% | $35.9 / 11.0% | $72.7 / 9.8% | $65.8 / 10.0% |
| Net income attributable to Steven Madden, Ltd. | $29.0 | $24.7 | $49.1 | $48.4 |
| Diluted earnings per share | $0.50 | $0.41 | $0.85 | $0.81 |
- For the first six months, operating cash flow was $49.5 million, compared with $58.5 million a year earlier. Investing activities used $13.2 million and financing activities used $63.6 million. Cash and equivalents ended the period at $99.4 million.
- Marketable securities totaled $99.2 million; cash, cash equivalents and marketable securities together were $198.6 million. Working capital was $377.8 million. The company reported no long-term debt and total stockholders’ equity of $749.7 million.
- Inventory was $121.2 million. Factor accounts receivable rose to $213.8 million from $144.2 million at December 31, 2016; management identified the increase in factor receivables as a use of operating cash.
Material changes versus prior periods
- Q2 sales increased 15.0%; first-half sales increased 13.1%. Wholesale footwear was the main growth driver: Q2 sales rose to $238.1 million, with management reporting 11.2% growth excluding Schwartz & Benjamin acquisition sales. Wholesale footwear gross margin improved to 31.6% in Q2 from 30.6%.
- Wholesale accessories Q2 sales were essentially flat at $67.5 million, while operating income declined to $6.9 million from $8.3 million amid lower margins and higher operating expenses. First-half segment operating income fell to $9.3 million from $10.3 million.
- Retail Q2 sales rose 9.6% to $68.5 million, and comparable sales increased 2.2%. For the first half, comparable sales decreased 1.5%; the segment recorded an operating loss of $1.1 million versus $1.4 million income in the prior-year period. The company had 193 stores versus 180.
- First-half reported net income attributable to the company rose 1.5%, less than sales growth. The effective tax rate increased to 33.1% from 26.3%, primarily due to the prior-year share-based award tax benefit and a shift in profitability toward higher-tax jurisdictions.
Management commentary, outlook and significant items
- Management said existing cash, securities and operating cash flows are sufficient for operating needs and financial commitments for at least the next 12 months. The filing gives no specific forward revenue or earnings guidance.
- The January 2017 Schwartz & Benjamin acquisition had an estimated total purchase price of $40.4 million, including $17.4 million paid at closing and contingent earn-outs. The fair value of contingent consideration was $23.1 million at June 30; purchase-price allocation remained preliminary.
- The Payless ShoeSource bankruptcy resulted in a $7.5 million bad-debt charge in the first half. Management’s adjusted measures exclude this charge and specified acquisition costs; these non-GAAP measures should be considered alongside GAAP results.
- U.S. Customs accepted a $0.342 million offer in compromise in June, settling the identified civil claims. The company reversed $0.906 million of excess reserve in Q2.
- The company repurchased approximately 1.68 million shares in the first half for about $61.9 million. On July 28, the board authorized an extended repurchase program of up to $200 million, including amounts remaining under the prior authorization.
- Contractual obligations totaled $457.1 million, including $264.5 million of operating lease obligations and $161.6 million of purchase obligations. The company stated that most products are manufactured overseas, primarily in China, and it has no long-term manufacturing or supply contracts.
- Key risks and sensitivities include customer credit and chargebacks, foreign exchange and marketable-security values, dependence on overseas manufacturing, and execution of store expansion and acquisitions. The company holds $86.3 million of cash, cash equivalents and short-term investments in foreign subsidiaries; it estimates $26.6 million of potential cumulative taxes if indefinitely reinvested foreign earnings were not treated as such.
- The company expects the new lease accounting standard to have a material impact on its financial statements; its effect was still under evaluation. Other listed standards were also being assessed, with no material impact expected for certain standards as described in the filing.
Important facts for investors to verify
- Whether wholesale footwear growth and margin improvement persist, and whether accessories profitability stabilizes.
- Retail comparable-sales trends, store-level profitability, and the effect of new stores and point-of-sale system costs.
- Payless-related receivable exposure and the continued increase in factor receivables, including implications for cash conversion.
- Schwartz & Benjamin’s contribution to sales and earnings, final purchase accounting, and the performance-based earn-out liability.
- Cash deployment through repurchases and acquisitions, the scale and timing of contractual obligations, and the effect of lease-standard adoption.