Business Context and Reporting Period
Company: Steven Madden, Ltd.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: The Company designs, sources, markets, and retails fashion-forward footwear and accessories. Operations are divided into three segments: Wholesale (department and specialty stores), Retail (company-owned stores and e-commerce), and First Cost (commission-based buying agent services). As of December 31, 2008, the Company operated 97 retail stores.
Key Financial Metrics
| Metric ($ in thousands) | 2008 | 2007 |
|---|---|---|
| Net Sales | $457,046 | $431,050 |
| Gross Profit | $186,824 | $173,404 |
| Gross Margin | 41.0% | 40.0% |
| Operating Income | $44,906 | $52,914 |
| Net Income | $27,976 | $35,690 |
| Diluted EPS | $1.51 | $1.68 |
| Working Capital | $122,086 | $121,138 |
| Cash & Equivalents | $89,588 | $29,446 |
| Advances Payable (Factor) | $30,168 | $0 |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated net sales increased 6% to $457.0 million, driven by a 7% increase in Wholesale sales and a 4% increase in Retail sales.
- Profitability Decline: Net income decreased 22% to $28.0 million. This was primarily due to a $4.9 million one-time charge related to the resignation of the former CEO and Chairman, increased operating expenses, and a decline in commission/licensing income.
- Segment Performance:
- Wholesale: Operating income increased to $37.5 million (from $35.1 million) due to improved gross margins and sales growth in Madden Girl and Accessories divisions.
- Retail: Operating income turned negative at $(4.2) million (from $3.1 million profit) due to increased promotional activity, store closing costs, and higher operating expenses.
- First Cost: Operating income decreased to $11.6 million (from $14.7 million) as private label customers scaled back orders.
- Liquidity Event: In November 2008, the Company borrowed the maximum $30.2 million allowed under its factoring agreement with GMAC to hedge against potential GMAC bankruptcy risks. This loan was fully repaid by February 17, 2009.
Guidance, Outlook, and Risks
- Management Commentary: Despite a weak economic environment, the Company achieved revenue growth. Management plans to open 2 new retail stores and close approximately 10 underperforming stores in 2009.
- Executive Changes: Edward Rosenfeld was appointed CEO in March 2008 and Chairman in August 2008 following the resignation of the previous CEO.
- Key Risks:
- Economic Uncertainty: Declining consumer confidence and credit availability negatively impact discretionary spending.
- Inventory Management: High risk of obsolescence due to fashion trends; excess inventory requires markdowns.
- Foreign Manufacturing: Reliance on overseas manufacturers (93% of inventory from China) exposes the Company to supply chain disruptions and currency fluctuations.
- Customer Concentration: Macy's accounted for 10% of total net sales in 2008.
- Legal Contingencies: A reserve of $2.96 million is maintained for a U.S. Customs dispute regarding duty classifications. A class action lawsuit regarding credit card data collection was dismissed in December 2008.
Investor Verification Checklist
- CEO Resignation Charge: Verify the $4.9 million one-time charge impact on operating expenses and EPS.
- GMAC Factoring Agreement: Confirm the status of the $30.2 million advance and the amended terms regarding title to receivables effective January 1, 2009.
- Retail Segment Turnaround: Monitor the impact of closing 10 underperforming stores and the performance of new store openings in 2009.
- Inventory Levels: Review inventory turnover (8.1x) and reserves for obsolescence given the economic downturn.
- Customer Concentration: Assess reliance on Macy's (10% of sales) and the stability of wholesale relationships.