Steven Madden, Ltd. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Unaudited consolidated results; amounts below are in millions of dollars unless otherwise noted. The company designs, sources, markets and sells footwear, handbags and accessories, operates retail stores and e-commerce sites, and earns commission and licensing income.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $278.9 | $266.0 |
| Gross profit / gross margin | $102.6 / 36.8% | $96.1 / 36.1% |
| Operating income / margin | $36.4 / 13.1% | $35.4 / 13.3% |
| Net income attributable to Steven Madden, Ltd. | $23.4 | $21.9 |
| Diluted earnings per share | $0.52 | $0.50 |
| Operating cash flow | $26.4 | $13.7 |
At March 31, cash and cash equivalents were $154.7 and marketable securities totaled $123.2. The company reported working capital of $303.1, stockholders’ equity of $644.7, no short- or long-term debt, and no borrowing under its $30 million receivables facility. Cash, cash equivalents and marketable securities together were $277.9. Cash declined $14.1 during the quarter, including $29.6 of net purchases of marketable securities, $4.2 of capital expenditures and $11.1 of share repurchases.
Changes versus the prior comparable period
- Sales grew 4.9% and attributable net income rose 7.0%; diluted EPS increased from $0.50 to $0.52. The effective tax rate fell to 37.0% from 38.8%, primarily due to a tax benefit related to foreign earnings invested indefinitely.
- Gross margin improved, while operating margin eased as operating expenses rose to $70.5 million from $65.2 million, partly reflecting retail mix and SM Canada acquisition costs. Management attributed the gross-margin improvement mainly to a higher share of sales from retail.
- Wholesale Footwear sales decreased 1.2% to $189.2 million; operating income fell to $22.6 million from $23.5 million. Management cited a 22.8% decline in Topline business, including the loss of two significant customers, partly offset by private label, international, and acquired-business sales.
- Wholesale Accessories sales increased 19.3% to $44.7 million and operating income rose to $7.5 million from $5.3 million, supported by handbag growth. Retail sales increased 21.7% to $45.1 million; comparable-store sales rose 3.0%, but retail operating income declined to $2.0 million from $2.1 million, partly due to a fixed-asset write-off.
- International sales increased to $26.5 million from $13.6 million. Retail locations, including e-commerce stores, numbered 110 versus 89 a year earlier.
Outlook, risks and unusual items
- Outlook: The filing provides no specific revenue, earnings or EPS guidance. Management said available liquidity should meet financial commitments and operating needs for at least the next twelve months; Q1 results are not necessarily indicative of full-year results.
- Commitments: Contractual obligations totaled $486.5 million, including $237.0 million of purchase obligations, $197.0 million of operating leases and $46.8 million of contingent payment liabilities. The company also had $1.9 million of open inventory letters of credit.
- Acquisition earn-outs: Contingent consideration was valued at $46.8 million at quarter-end. The SM Canada earn-out is performance-based through 2017; a final Big Buddha earn-out payment was expected in Q2 2013.
- Legal matter: The Ellison TCPA class settlement received final court approval on May 7, 2013, after quarter-end. The company reported a $2.5 million liability in Q2 2012 and said it paid that amount in 2012; estimated maximum exposure under the settlement was approximately $6.25 million, with actual liability expected by counsel to be $2.5 million or less.
- Operating risks: The company identifies customer deductions and credit losses, inventory valuation, intangible-asset impairment, litigation reserves and acquisition earn-out estimates as areas involving significant judgment. Nearly all products are manufactured overseas, principally in China; the company has no long-term manufacturing or supply contracts. Foreign-exchange movements, consumer demand and potential cost inflation may affect results.
- Other items: The company repurchased 252,214 shares for approximately $11.1 million at an average $44.17 per share, with approximately $35.9 million remaining authorized. Mexican-peso forward contracts had a $1.7 million fair value and were designated as cash-flow hedges.
Important facts for investors to verify
- Whether footwear wholesale sales and profitability stabilize after the loss of two significant customers, and how the Topline business performs.
- Whether accessories and retail growth persists and offsets higher retail operating costs and the company’s changing sales mix.
- The timing and amount of acquisition earn-out payments, particularly the SM Canada liability and the expected Big Buddha payment.
- Actual cash demands from purchase obligations, leases, share repurchases and the approved TCPA settlement.
- Whether receivable growth, customer payment terms, inventory levels and international expansion remain manageable.