Steven Madden, Ltd. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results; dollar figures below are in millions unless otherwise noted. The company designs, sources, markets and sells branded and private-label footwear, handbags and accessories through wholesale, retail, e-commerce and licensing channels.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $445.0 | $395.8 | $855.9 | $784.8 |
| Gross profit / margin | $165.3 / 37.2% | $147.8 / 37.3% | $322.3 / 37.7% | $288.5 / 36.8% |
| Operating income / margin | $44.6 / 10.0% | $41.6 / 10.5% | $89.3 / 10.4% | $78.1 / 10.0% |
| Net income attributable to Steven Madden | $36.6 | $32.4 | $71.1 | $61.1 |
| Diluted EPS | $0.44 | $0.38 | $0.85 | $0.71 |
| Operating cash flow | Not separately reported | Not separately reported | $59.8 | $44.9 |
- Q2 sales rose 12.4% and attributable net income rose 12.8%; six-month sales increased 9.1% and attributable net income increased 16.4%.
- Management-reported non-GAAP adjusted EBITDA was $54.8 million for Q2 versus $49.2 million, and $105.5 million for six months versus $94.3 million. These measures exclude specified items and are not GAAP measures.
- For the six months, investing activities provided $25.8 million, including marketable-security maturities and sales; financing activities used $73.2 million. Cash and cash equivalents increased $12.6 million to $212.7 million.
Liquidity, debt and capital allocation
- Cash, cash equivalents and marketable securities totaled $248.8 million at June 30; approximately 60% was held in foreign subsidiaries. Working capital was $458.6 million, down from $480.6 million a year earlier.
- The company reported no long-term debt and no borrowings on its $30 million Rosenthal facility. It stated that available resources should meet financial commitments and operating needs for at least the next 12 months.
- Operating lease liabilities were $193.3 million ($38.7 million current and $154.6 million long-term), recognized following adoption of the new lease standard in 2019. Comparative periods were not restated.
- Six-month cash uses included $51.2 million of treasury-stock purchases and $24.0 million of common dividends. The board extended the repurchase authorization to $200 million; $166.8 million remained available at quarter-end. A further $0.14-per-share dividend was declared in July.
Material changes and segment trends
- Wholesale footwear: Q2 sales increased to $286.2 million from $252.1 million; operating income rose to $38.4 million from $28.9 million. Strong Steve Madden brand growth and Anne Klein sales were partly offset by no sales to bankrupt Payless. Gross margin improved, partly because Payless had been a low-margin customer.
- Wholesale accessories: Q2 sales increased to $77.3 million, but operating income fell to $4.8 million from $6.5 million. Gross margin declined to 28.5% from 31.8%, attributed to tariffs, a higher proportion of low-margin private-label sales and Anne Klein handbag sales.
- Retail: Q2 sales increased 9.6% to $81.5 million; comparable-store sales rose 6.2%. The segment moved from $3.9 million of operating income to a $1.7 million operating loss. Management cited markdowns and inventory liquidation, including the China joint-venture wind-down, higher operating costs, store additions and e-commerce growth. The company had 224 stores versus 208 a year earlier.
- For the first half, retail operating loss widened to $11.4 million from $4.0 million. Licensing income declined to $3.8 million from $4.4 million; first-cost income fell to $0.5 million from $1.5 million, including Payless-related bad-debt provisions.
Outlook, risks, contingencies and unusual items
- The filing provides no specific revenue, earnings or margin guidance. Management’s liquidity statement covers the next 12 months; results for the interim periods are not necessarily indicative of full-year results.
- A $4.1 million Brian Atwood trademark impairment was recorded in Q2 after the company decided to discontinue distribution while exploring alternatives. Q2 results also included a $1.5 million early lease termination charge and $0.7 million of divisional headquarters relocation expenses.
- The company reversed a $3.0 million acquisition-related contingent liability following the planned termination of the Kate Spade license agreement; the reversal was partly offset by accelerated amortization. The filing says termination was expected by year-end 2019.
- Management cited tariffs on accessories, inventory markdowns, foreign-exchange exposure and reliance on overseas independent manufacturers as relevant business risks. The company had $91.1 million of purchase obligations, $34.2 million of future minimum royalty and advertising payments, and $18.0 million of transition-tax obligations at June 30. Total contractual obligations presented were $362.9 million, including operating leases.
- Ordinary-course lawsuits were disclosed; management, after consulting counsel, did not expect resulting liabilities to materially affect financial position, results or cash flows. No off-balance-sheet arrangements were reported.
Key facts for investors to verify
- Whether sales growth and footwear performance can continue without Payless, and how much growth reflects Anne Klein additions or other changes in the business.
- Whether accessories tariffs and lower margins, and retail markdowns and operating losses, persist or improve.
- The effects of the China joint-venture wind-down and Kate Spade license termination, including any further charges or changes to licensing revenue.
- Cash generation and working-capital needs, including the sizable factor receivable balance and the amount of cash held overseas.
- Returns from buybacks and dividends relative to the company’s lease liabilities, purchase commitments and other contractual obligations.