SHOO

Business Context and Reporting Period

Company: Steven Madden, Ltd.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: The Company designs, sources, markets, and retails fashion-forward footwear and accessories. Operations are divided into three segments: Wholesale (department and specialty stores), Retail (company-owned stores and e-commerce), and First Cost (private label buying agent services). As of December 31, 2007, the Company operated 100 retail stores and one e-commerce site.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Consolidated net sales decreased 9% to $431.1 million, driven by an 11% drop in Wholesale sales and a 5% drop in Retail sales. The decline was attributed to a lack of significant fashion trends, a weakening economy, and the discontinuation of three brands (Rule, l.e.i., and Jump) in late 2006.
• Margin Compression: Overall gross margin decreased to 40.2% from 41.8%. Wholesale gross margin fell to 34% (from 37%) due to increased markdown allowances, particularly in the Candie's and Steven divisions. Retail gross margin improved to 57% (from 54%) due to better inventory controls and reduced freight costs.
• Profitability: Operating income decreased 32% to $52.9 million. Net income decreased 23% to $35.7 million. This decline was partially offset by a one-time tax benefit of $2.5 million related to amended New York tax returns.
• One-Time Charges: The Company recorded a $1.2 million charge related to a provision for prior years' customs duties, increasing the total reserve to $2.7 million.
• Share Repurchases: The Company repurchased approximately 1.96 million shares of common stock for $50.1 million, reducing working capital.

Guidance, Outlook, and Risks

• Outlook: Management anticipates an effective tax rate of approximately 39% for 2008. The Company plans to open three new retail stores in 2008.
• Subsequent Event: On February 19, 2008, the Company announced a tender offer to purchase up to 2.6 million shares (approx. 13% of issued shares) at a price between $16.50 and $20.00 per share, funded by available cash.
• Liquidity Risk (Auction Rate Securities): The Company held $37.3 million in auction rate securities (ARS) at year-end. As of March 7, 2008, $8.8 million of these securities failed to auction, limiting short-term liquidity. The Company reclassified $16.3 million of ARS as long-term assets.
• Key Risks:
  • Fashion Trends: Success depends on anticipating trends; misjudgments lead to excess inventory and markdowns.
  • Customer Concentration: Macy's accounted for 12% of total net sales and 17% of wholesale sales in 2007.
  • Supply Chain: 99% of products are manufactured overseas, primarily in China, exposing the Company to foreign currency fluctuations and trade disruptions.
  • Legal Contingency: A dispute with U.S. Customs regarding duty classification has a recorded reserve of $2.7 million, subject to change.

Investor Verification Checklist

• Auction Rate Securities Liquidity: Verify the current status of the $16.3 million in long-term classified ARS and any potential impairment charges if credit ratings of issuers deteriorate.
• Customs Duty Liability: Monitor the resolution of the U.S. Customs dispute to determine if the $2.7 million reserve is sufficient or if additional charges are required.
• Wholesale Margin Recovery: Assess whether the Wholesale division can reverse the trend of increasing markdown allowances and restore gross margins to historical levels (37%+).
• Tender Offer Execution: Confirm the final number of shares tendered and the impact on cash reserves and share count following the February 2008 tender offer.
• Customer Concentration: Evaluate the risk associated with Macy's representing 12% of total sales and the potential impact of any changes in that relationship.