Steven Madden, Ltd. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. The company designs, sources, markets and sells branded and private-label footwear and accessories, operates retail stores and e-commerce sites, and licenses trademarks. Amounts below are in millions of dollars unless otherwise noted.
Financial performance and liquidity
- Revenue: Net sales were $329.4 million, up 1.7% from $323.9 million.
- Profit and margins: Gross profit was $116.2 million; gross margin improved to 35.3% from 34.4%. Operating income was $29.9 million, roughly flat, with operating margin of 9.1% versus 9.2%. Net income attributable to Steven Madden was $20.0 million, up 0.7%; diluted EPS increased to $0.33 from $0.32. The effective tax rate declined to 32.0% from 34.3%, primarily due to planned permanent investment of foreign earnings abroad.
- Cash flow: Operating activities provided $12.0 million, compared with $2.4 million used in Q1 2015. Cash and cash equivalents declined $1.5 million during the quarter to $70.9 million. Capital expenditures were $4.4 million; share repurchases used $14.0 million.
- Liquidity and debt: Working capital was $305.3 million; current assets were $457.7 million and current liabilities $152.4 million. Cash, cash equivalents and marketable securities totaled $192.9 million; cash, cash equivalents and short-term investments were $105.3 million. The company reported no long-term debt and no borrowings or letters of credit under its $30 million factor facility.
- Balance sheet: Total assets were $915.5 million, total liabilities $211.8 million and stockholders’ equity $703.7 million at March 31, 2016. Contingent consideration liabilities totaled $21.3 million.
Material changes versus Q1 2015
- Wholesale footwear sales rose 2.7% to $228.9 million, supported by Steve Madden Women’s and Dolce Vita; segment operating income before impairment charges rose to $26.3 million from $24.8 million.
- Wholesale accessories sales fell 12.1% to $46.9 million, reflecting double-digit declines in branded handbags. Segment operating income declined to $4.3 million from $5.6 million.
- Retail sales increased 12.2% to $53.6 million, reflecting 13 net additional stores and 10.7% comparable-store sales growth on a constant-currency basis. The segment nevertheless recorded an operating loss of $2.8 million, versus a $1.5 million loss.
- First Cost commission income declined to $0.6 million from $1.5 million, and licensing income declined to $1.6 million from $2.4 million. Management cited reduced business with certain private-label customers, customer order timing and discontinuation of the Steve Madden eyewear license.
- Operating expenses rose to $88.5 million from $82.4 million. The prior-year period included a $3.0 million benefit from early termination of the 5th Avenue store lease; excluding that benefit, prior-year expenses were $85.5 million. No impairment charge was recorded in Q1 2016, compared with a $3.0 million Wild Pair trademark impairment in Q1 2015.
- Inventory turnover on a trailing 12-month average declined to 8.6 times from 9.8 times. Accounts-receivable collection averaged 61 days in both periods.
Outlook, commentary and risks
- No specific revenue or earnings guidance is provided. Management stated that available cash, marketable securities and operating cash flows are expected to meet commitments and operating needs for at least the next 12 months.
- About 65% of cash, cash equivalents and short-term investments was held in foreign subsidiaries. Management does not intend or foresee a need to repatriate $85.1 million of earnings considered indefinitely reinvested; it estimated approximately $17.5 million of taxes could arise if those earnings were not indefinitely reinvested.
- Contractual obligations totaled $490.5 million, including $243.6 million of operating lease obligations, $218.3 million of purchase obligations and $21.3 million of contingent payment liabilities. These amounts are scheduled across future periods and are not all current liabilities.
- Most products are manufactured overseas, primarily in China, with a smaller but growing share in Mexico. The company has no long-term manufacturing or supply contracts. Management cited customer demand, inventory valuation, receivable allowances, intangible-asset valuations, litigation reserves and acquisition earn-outs as areas involving significant estimates and uncertainty.
- Management said inflation had not significantly affected Q1 results but cautioned that future cost increases may not be offset. Marketable securities are exposed to changes in interest rates, equity values and credit risk. Pending legal proceedings remain outstanding; management said other ordinary-course lawsuits are not expected to materially affect results or financial position.
- The company repurchased 391,685 shares at an average $35.83 per share for $14.0 million. Approximately $186.1 million remained available under the repurchase program at quarter-end. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether growth in footwear and retail can offset continuing weakness in branded handbags, First Cost and licensing, and whether retail can improve profitability.
- Whether the lower inventory-turnover rate signals increased markdown or inventory-valuation risk.
- The timing and amount of acquisition earn-out payments, including the remaining obligations and performance assumptions underlying the $21.3 million contingent liability.
- The availability and practical accessibility of foreign-held cash, the company’s indefinite-reinvestment position, and potential tax consequences of repatriation.
- Execution of store expansion and repurchases alongside substantial lease, purchase and other contractual obligations.