Steven Madden, Ltd. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The company designs, sources, markets and sells branded and private-label footwear, handbags and accessories, and operates retail stores and licensing businesses. Financial statements are unaudited; amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $395.8 | $374.1 | $784.8 | $740.5 |
| Gross profit / margin | $147.8 / 37.3% | $139.4 / 37.3% | $288.5 / 36.8% | $272.1 / 36.7% |
| Operating income / margin | $41.6 / 10.5% | $41.9 / 11.2% | $78.1 / 10.0% | $72.7 / 9.8% |
| Net income attributable to Steven Madden | $32.4 | $29.0 | $61.1 | $49.1 |
| Diluted earnings per share | $0.56 | $0.50 | $1.06 | $0.85 |
| Operating cash flow | Not presented separately | Not presented separately | $44.9 | $49.5 |
- Q2 sales rose 5.8%; attributable net income rose 11.9%. First-half sales increased 6.0% and attributable net income increased 24.4%.
- Q2 gross margin was unchanged year over year, while operating margin declined 0.7 percentage points. First-half gross margin improved 0.1 point and operating margin improved 0.2 point.
- Q2 effective tax rate was 23.9%, versus 31.9%; first-half rate was 22.7%, versus 33.1%. Management attributed the reduction mainly to the Tax Cuts and Jobs Act.
Segments and business trends
- Wholesale footwear: Q2 sales increased to $252.1 million from $238.1 million; operating income increased to $28.9 million from $27.7 million. First-half sales were $527.2 million and operating income $67.3 million.
- Wholesale accessories: Q2 sales increased to $69.3 million from $67.5 million, but operating income declined to $6.5 million from $6.9 million. First-half operating income was $8.9 million versus $9.3 million.
- Retail: Q2 sales rose 8.5% to $74.3 million, with comparable sales up 1.6%; operating income fell to $3.9 million from $5.1 million. First-half sales rose 8.5% to $132.2 million, comparable sales increased 0.4%, and the segment recorded an operating loss of $4.0 million versus a $1.1 million loss. The company had 208 stores, compared with 193 a year earlier.
- First-half First Cost commission income declined to $1.5 million from $2.8 million; licensing income increased to $4.4 million from $3.3 million, primarily on higher Betsey Johnson royalties.
Financial position and capital resources
- At June 30, cash and cash equivalents were $191.0 million; marketable securities totaled $66.4 million, including $2.1 million classified as non-current. Management cited $257.4 million in cash, equivalents and marketable securities and working capital of $480.6 million.
- The company reported no long-term debt and no borrowings under its $30 million receivables-related credit facility. Total liabilities were $257.3 million; stockholders’ equity was $830.3 million.
- First-half operating cash flow was $44.9 million, down from $49.5 million. Cash was affected by higher factor receivables and inventories, partly offset by net income and higher accounts payable and accrued expenses. Investing activities provided $19.6 million, primarily reflecting net security maturities and sales; financing activities used $54.5 million.
- First-half cash uses included $35.1 million of treasury stock purchases, $23.5 million of dividends and a $7.0 million acquisition earn-out payment. The company paid two quarterly dividends of $0.20 per share and declared another $0.20 dividend for payment in September, subject to board discretion.
- Inventory was $133.6 million, up from $110.3 million at December 31, 2017. Average receivable collection increased to 68 days from 61 days year over year, which management attributed primarily to changes in some customers’ payment terms. Trailing-twelve-month inventory turnover improved to 8.6 times from 8.3 times.
Outlook, risks and unusual items
- Management said available cash, equivalents and marketable securities should cover financial commitments and operating needs for at least the next 12 months. The filing provides no numerical revenue or earnings guidance.
- Q2 operating expenses included $1.2 million for closing the Cejon warehouse and $1.1 million of Schwartz & Benjamin integration and restructuring costs. First-half expenses also included $2.8 million of legal charges. First-half 2017 included a $7.5 million provision related to the Payless bankruptcy; management also cited prior-period purchase-accounting inventory charges when comparing margins.
- Retail profitability was pressured in the first half by discounting slow-moving boot inventory, new-store expenses and costs associated with a new point-of-sale system. Management cited customer mix as a factor in wholesale margin pressure.
- The company identified potential U.S. and retaliatory tariffs and changing trade policies as risks that could increase sourcing costs, affect selling prices, reduce demand and materially adversely affect results. Products are predominantly manufactured overseas, particularly in China; purchases are primarily denominated in U.S. dollars.
- Other considerations include foreign-exchange exposure, marketable-security interest-rate and credit risk, and a provisional $22.0 million transition-tax liability whose calculation was still being refined. The company disclosed normal-course lawsuits but said any resulting liabilities were not expected to be material. It reported no off-balance-sheet arrangements.
- Operating lease obligations totaled $243.8 million; purchase obligations totaled $194.1 million. The company expected the forthcoming lease-accounting standard to have a material impact on its financial statements and disclosures.
Most important facts for investors to verify
- Whether sales growth translates into sustained operating-profit growth, given Q2 operating income was nearly flat and operating margin declined.
- Whether retail investment and expansion improve segment profitability after the first-half operating loss and lower comparable-sales growth.
- Whether receivable days and inventory levels normalize, and how working-capital movements affect cash conversion.
- How tariffs, sourcing costs, customer mix and foreign exchange affect gross margins and demand.
- Final measurement of the transition-tax liability, the remaining $3.0 million acquisition earn-out, and the company’s capacity to sustain dividends and repurchases alongside contractual commitments.