Steven Madden, Ltd. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited; dollar amounts below are in millions unless stated otherwise. Share and per-share data reflect the three-for-two stock split.
Business context and reporting period
The company designs, sources, markets and sells footwear, handbags and accessories through wholesale, retail, e-commerce, first-cost and licensing businesses. Management reported record quarterly sales and earnings. Results include Topline from May 20 and Cejon from May 25, 2011; the acquisitions’ results were not included for a full quarter.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $209.2 | $158.7 | $374.9 | $290.3 |
| Gross profit | $84.1 | $68.8 | $153.2 | $128.8 |
| Gross margin | 40.2% | 43.4% | 40.9% | 44.4% |
| Operating income | $37.2 | $32.1 | $64.6 | $56.9 |
| Net income | $23.7 | $19.8 | $41.5 | $35.2 |
| Diluted EPS | $0.55 | $0.47 | $0.97 | $0.83 |
- Q2 sales rose 32%; net income rose 20%; diluted EPS rose 17%. For the first half, sales increased 29.2% and net income increased to $41.5 million.
- Operating margin was approximately 17.8% in Q2 versus 20.2% a year earlier, and 17.2% for the first half versus 19.6%. Lower gross margins were partly offset by operating expense leverage.
- Retail comparable sales, including e-commerce, increased 11.6% in Q2 and 11.4% for the first half. The company had 83 stores versus 84 a year earlier; trailing 12-month sales per square foot were $796 versus $690.
- Q2 segment highlights: wholesale footwear sales rose 43% to $148.5 million, with operating income of $23.9 million; wholesale accessories sales were $26.6 million and operating income declined to $3.0 million; retail sales rose to $34.0 million and operating income to $5.8 million. First-cost income fell to $2.6 million; licensing income increased to $1.8 million.
Cash flow, liquidity and obligations
- First-half operating cash flow was $21.9 million, compared with $20.9 million. Uses included increases in due from factor of $28.6 million and inventory of $16.0 million.
- Investing cash outflow was $64.1 million, including $85.2 million for acquisitions and $6.0 million of capital expenditures. Financing provided $7.3 million, mainly from option exercises and related tax benefits. Cash decreased $34.9 million to $31.3 million.
- Cash, cash equivalents and marketable securities totaled $132.2 million; the company reported no short- or long-term debt. Working capital was $145.3 million, down from $171.5 million at June 30, 2010.
- Recorded contingent consideration liabilities were approximately $42.8 million. Disclosed contractual obligations totaled $294.3 million, including $132.0 million of operating leases, $119.1 million of purchase obligations and $40.8 million of contingent payments.
Material changes, outlook and risks
- Acquisitions: Topline was acquired for $56.1 million cash, net of cash acquired, plus potential earn-out payments; Cejon was acquired for $29.1 million cash plus potential earn-outs. Fair values of contingent consideration at quarter-end were $7.4 million for Topline and $23.0 million for Cejon. Both purchase-price allocations were preliminary.
- Management attributed lower consolidated margins largely to product mix, including Topline’s lower-margin private-label footwear, the shift of Target and Olsenboye business from commission to wholesale, and growth in international sales. Q2 wholesale footwear margin fell to 35.0% from 38.5%.
- Management said it expected available liquidity to cover commitments and operating needs for at least 12 months. No specific revenue or earnings guidance was provided. It expected near-term gross-margin impact from cost-mitigation measures to remain negligible.
- Southern China product costs were rising approximately 5%–8%. The company was shifting some production to northern China and other countries and selectively increasing prices. Approximately 99% of products were made by overseas third parties, mainly in China; the company had no long-term manufacturing or supply contracts.
- Liquidity and market risks include working-capital requirements, interest-rate exposure on marketable securities, and customer receivable and inventory estimates. The company held $100.9 million of marketable securities, primarily bonds, whose values may decline if interest rates rise.
- A California labor-law settlement was approved for $2.0 million and management said payment had no material financial effect. A customs-duty matter remained unresolved: the company had a $1.2 million reserve, and waived the collection statute of limitations through December 5, 2013. Management stated other lawsuits were not expected to have a material effect.
Most important facts for investors to verify
- Whether acquired businesses deliver expected growth and earnings, and whether earn-outs or final purchase accounting differ materially from current estimates.
- Whether sales growth can be sustained while gross margins remain under pressure from business and product mix.
- Whether receivables, due from factor and inventory growth translate into cash generation; operating cash flow was substantially below net income.
- Whether supplier-cost inflation, overseas sourcing concentration and the absence of long-term supply contracts affect margins or product availability.
- How the customs-duty matter and other legal contingencies develop, and whether reported reserves remain adequate.