Steven Madden, Ltd. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also presents unaudited fourth-quarter results. Amounts below are in millions of dollars unless otherwise stated.
Business context
The company designs, sources, markets and sells branded and private-label footwear, handbags and accessories, and licenses its brands. It reports five segments: Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing. Sales are generated through wholesale customers, company-operated stores and e-commerce.
Financial results and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $1,399.6 | $1,405.2 |
| Gross profit / margin | $522.0 / 37.3% | $500.5 / 35.6% |
| Operating income / margin | $169.2 / 12.1% | $171.6 / 12.2% |
| Net income attributable to Steven Madden, Ltd. | $120.9 | $112.9 |
| Diluted EPS | $2.03 | $1.85 |
| Cash from operating activities | $153.6 | $136.0 |
- Fourth-quarter 2016 net sales were $336.4 million, versus $344.3 million in Q4 2015. Net income attributable to the company was $28.7 million, versus $25.7 million; diluted EPS was $0.49 versus $0.43.
- FY 2016 cash and cash equivalents were $126.1 million; marketable securities totaled $110.1 million. Working capital was $359.5 million. The company reported no short- or long-term debt and no borrowings under its $30 million credit facility.
- Operating cash flow increased to $153.6 million. Inventory rose $17.7 million during the year. Capital expenditures were $15.9 million; financing cash use was $95.5 million, including $86.0 million of share repurchases.
- Total stockholders’ equity was $741.1 million, compared with $678.7 million a year earlier. The company repurchased 2.14 million shares under its program at an average price of $35.11; approximately $117.4 million remained authorized.
Changes versus the prior year
- Sales declined 0.4%, as lower Wholesale Footwear and Wholesale Accessories sales outweighed Retail growth. Wholesale Footwear sales fell to $881.9 million from $898.4 million; Accessories sales fell to $254.9 million from $266.6 million.
- Retail sales rose 9.3% to $262.8 million, supported by 4% comparable-store growth and a net increase of 20 stores. The segment operated 189 stores at year-end, including four e-commerce sites.
- Gross margin improved 1.7 percentage points, attributed mainly to higher initial markups, lower markdown allowances and fewer close-outs in Wholesale Footwear. Operating expenses increased to $364.7 million from $342.4 million.
- Operating income decreased 1.4%, while attributable net income rose 7.1% and diluted EPS rose 9.7%. The effective tax rate fell to 29.1% from 34.1%, including a $5.2 million tax benefit from early adoption of share-based payment guidance.
- Inventory turnover slowed to 8.2 times from 8.7 times. Average receivables collection days improved to 66 from 67.
Outlook, commentary and risks
- The filing gives no clear consolidated revenue or earnings forecast for 2017. Management expected to open seven to eight new retail stores and close one location. Wholesale backlog was approximately $337 million as of February 1, 2017, versus $295 million a year earlier; management cautions that backlog comparisons may not predict eventual shipments.
- Management cited growth in Steve Madden Women’s, Dolce Vita and Blondo despite a challenging environment. It formed a majority-controlled European distribution joint venture in 2016.
- After year-end, the company acquired Schwartz & Benjamin for $15.75 million in cash, subject to working-capital adjustment, plus performance-based earn-outs over six years.
- Key exposures include rapidly changing fashion preferences, intense competition, dependence on significant retailers and key personnel, inventory and delivery risks, foreign currency and trade-policy changes, cybersecurity, and reliance on overseas manufacturers. Approximately 87% of 2016 product purchases came from China. Target represented 12.0% of sales and 16.9% of accounts receivable.
- The company disclosed an unresolved U.S. Customs matter concerning historical import duties and alleged penalties. It accrued $1.248 million; the stated maximum potential amount was approximately $1.7 million. Management said other ordinary-course lawsuits were not expected to materially affect results.
- Contractual obligations totaled $462.9 million, including $248.3 million of operating lease obligations and $200.5 million of purchase obligations. The filing reported no off-balance-sheet arrangements. Management stated available liquidity was expected to fund commitments and operating needs for at least 12 months.
Important facts for investors to verify
- Whether the 2017 sales and earnings trajectory can improve given flat-to-lower wholesale sales, slower inventory turnover and higher operating costs.
- How much of the net-income and EPS increase reflects sustainable operations versus the $5.2 million share-based compensation tax benefit and lower effective tax rate.
- Retail comparable-store performance, profitability of new stores, and the balance between store expansion and lease commitments.
- Progress integrating Schwartz & Benjamin and the eventual cost of its contingent earn-outs; also review the performance and economics of the European joint venture.
- Exposure to China sourcing, Target concentration, customer credit risk, and the outcome of the customs matter. Also monitor cash deployment, share repurchases and foreign earnings that management intends to keep reinvested abroad.