Steven Madden, Ltd. — Q2 2016 Form 10-Q
Business context and period. This unaudited report covers the quarter and six months ended June 30, 2016, compared with the same periods in 2015. Steven Madden designs, sources, markets and sells branded and private-label footwear, handbags and accessories, and earns commission and licensing income. Amounts below are in millions of dollars except per-share data, percentages and store counts.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $325.4 | $323.6 | $654.8 | $647.5 |
| Gross profit / margin | $121.0 / 37.2% | $116.1 / 35.9% | $237.2 / 36.2% | $227.5 / 35.1% |
| Operating income / margin | $35.9 / 11.0% | $36.8 / 11.4% | $65.8 / 10.0% | $66.7 / 10.3% |
| Net income attributable to Steven Madden | $24.7 | $24.5 | $44.6 | $44.3 |
| Diluted EPS | $0.42 | $0.40 | $0.75 | $0.72 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $55.0 | $53.8 |
- Q2 sales rose 0.6%; attributable net income rose 0.7%. For the first half, sales rose 1.1% and attributable net income rose 0.7%.
- Operating expenses increased to $88.0 million in Q2 and $176.5 million in the first half. Commission and licensing income declined to $2.8 million and $5.0 million, respectively.
- Cash and cash equivalents were $76.3 million at June 30. Marketable securities totaled $122.7 million; working capital was $295.4 million. Total stockholders’ equity was $700.8 million.
- The company reported no long-term debt and no borrowings under its $30 million receivables facility. The filing states it expects available liquidity and operating cash flows to meet commitments and operating needs for at least 12 months.
- First-half investing cash outflow was $11.2 million, including $8.4 million of capital expenditures and $3.7 million to acquire Mad Love’s remaining minority interest. Financing cash outflow was $39.9 million, including $41.1 million of share repurchases.
Material changes and operating drivers
- Consolidated gross margin improved, driven principally by a more favorable branded/private-label mix and less closeout activity in Wholesale Footwear. Operating income nevertheless declined as expenses grew faster than sales.
- Wholesale Footwear Q2 sales fell 1.8%, while segment operating income rose to $18.7 million; margin improvement reflected less closeout activity and sales mix. Wholesale Accessories sales were essentially flat, but operating income fell 8.8% to $9.5 million. First-half accessories sales and operating income declined, reflecting softness in branded handbags and lower-margin mix.
- Retail Q2 sales grew 9.9% and comparable-store sales rose 5.4%; first-half retail sales grew 11.0% and comparable-store sales rose 7.8%. The company had 180 stores versus 161 a year earlier. Retail operating income declined to $4.9 million in Q2 and $2.0 million in the first half, as costs and store expansion weighed on profitability.
- First Cost income and licensing income declined in both reported comparisons. Management attributed the first-half licensing decline primarily to discontinuation of Steve Madden eyewear licenses.
- Inventory turnover fell to 8.5 times from 9.4 times on a trailing-twelve-month basis. Average receivable collection days improved to 63 from 64.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said it expects liquidity to cover financial commitments and operating needs for at least the next 12 months.
- Management identified advertising, foreign-exchange effects and joint-venture costs as contributors to higher Q2 expenses. The Q2 effective tax rate declined to 32.0% from 33.9%, primarily due to planned permanent investment of foreign earnings abroad.
- About 71% of cash, cash equivalents and short-term investments was held in foreign subsidiaries. The company considered $85.1 million of foreign earnings indefinitely reinvested and estimated approximately $17.5 million in additional taxes if those earnings were not indefinitely reinvested.
- Contractual obligations totaled $518.2 million, including $246.6 million of operating leases and $244.6 million of purchase obligations. Contingent acquisition payments were $20.0 million; the company paid $6.3 million during the first half. These obligations and store expansion commitments warrant monitoring.
- Key exposures include consumer demand and inventory valuation, customer returns and chargebacks, foreign-currency and marketable-securities fluctuations, acquisition earn-outs, and pending litigation. Management said ordinary-course lawsuits were not expected to materially affect financial position or results; earlier disclosed proceedings remained outstanding unless otherwise noted.
- The first half of 2015 included a $3.0 million Wild Pair trademark impairment and a $3.0 million benefit from early termination of a New York store lease. Neither item recurred in first-half 2016, complicating year-over-year operating comparisons.
- The company expected adoption of share-based payment guidance in Q3 2016 could materially affect the income statement; it expected the new lease standard to materially affect the balance sheet. Other cited accounting standards were still under evaluation.
Important facts for investors to verify
- Whether improved wholesale footwear margins can persist while operating expenses continue to rise.
- Whether retail comparable-store growth translates into stronger segment operating income as new-store costs normalize.
- Inventory turnover, inventory levels, and the adequacy of reserves for customer deductions and slow-moving goods.
- Cash availability and potential tax consequences related to foreign-held and indefinitely reinvested earnings.
- Timing and amounts of acquisition earn-outs, lease and purchase commitments, and ongoing share repurchases.
- The eventual reported effects of new accounting standards and the status of pending legal matters.