Business Context and Reporting Period
Company: STEVEN MADDEN, LTD.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2004
Business Overview: The Company designs, markets, and distributes contemporary footwear and accessories under various brands including Steve Madden, l.e.i., Steven, Stevies, Unionbay, and Candie's. Operations are divided into Wholesale and Retail divisions, with significant reliance on overseas manufacturing.
Key Financial Metrics
Revenue (Nine Months Ended Sept 30, 2004): $253.6 million (Flat vs. prior year).
Net Income: $11.9 million (Down from $17.9 million in 2003).
Diluted EPS: $0.83 (Down from $1.27 in 2003).
Gross Margin: 37.6% (Down from 39.1% in 2003).
Operating Income: $19.0 million (Down from $29.6 million in 2003).
Cash and Cash Equivalents: $18.1 million (Down from $53.1 million at year-end 2003).
Total Marketable Securities: $50.4 million.
Debt: No short-term or long-term debt outstanding.
Working Capital: $100.2 million.
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased 33.5% year-over-year due to compressed gross margins and increased operating expenses.
- Margin Pressure: Gross profit percentage dropped to 35.5% for the quarter (from 40.1% in 2003) and 37.6% for the nine-month period. This was driven by higher inventory costs from expedited sourcing, pricing pressure from wholesale customers, and increased sales deductions (markdowns/allowances).
- Inventory Build-up: Inventory levels rose to $30.4 million (from $23.0 million in 2003), causing inventory turnover to slow to 7.6 times (from 9.7 times). This was partly intentional to avoid shipping delays and support new store openings.
- Segment Performance:
- Wholesale: Sales declined in l.e.i. and Madden Mens divisions due to weak consumer demand and markdowns. The new Candie's division contributed $12.3 million in sales.
- Retail: Sales increased to $73.9 million (from $66.6 million) with 90 stores (up from 82). Comparable store sales were flat for the quarter but up 8% for the nine-month period.
- Cash Flow: Operating activities used $5.3 million in cash, primarily due to increased factored receivables and inventory purchases.
Guidance, Outlook, and Risks
Management Outlook: Management anticipates the fourth quarter will remain difficult. They project continued markdowns and gross margin pressure in both wholesale and retail businesses due to soft consumer demand for l.e.i., Stevies, and Unionbay brands.
Key Risks and Contingencies:
- Legal Proceedings:
- Steven Madden Indictment: The former Chairman/CEO is serving a 41-month sentence for securities fraud and money laundering. The Company maintains a loss mitigation policy for related lawsuits.
- LaRue Distributors: Ongoing litigation regarding a terminated license agreement; Company believes it has substantial defenses.
- Robert Marc: Trademark infringement claim regarding eyewear design; licensee is handling the defense.
- Operational Risks: Heavy reliance on foreign manufacturers (88% of products sourced overseas), primarily in China, Brazil, Italy, and Spain. Risks include shipping delays, currency fluctuations, and labor practices.
- Inventory Risk: High risk of obsolescence due to the fashion-oriented nature of products; excess inventory requires significant markdowns.
Investor Verification Checklist
- Verify the sustainability of gross margins given the stated pressure from wholesale customers and increased markdowns.
- Monitor inventory turnover rates and the potential for future write-downs as inventory levels remain elevated.
- Assess the impact of the l.e.i. and Madden Mens wholesale declines on overall revenue growth.
- Review the status of the LaRue Distributors litigation and potential financial exposure.
- Confirm the Company's ability to manage cash flow given the $5.3 million cash burn from operations in the first nine months.