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Executives

Cara O’Brien – Financial Dynamics

Edward R. Rosenfeld – Interim Chief Executive Officer & Director

Analysts

Scott Krasik - C.L. King & Associates, Inc.

Jeff Van Sinderen - B. Riley & Company, Inc.

Heather Boksen - Sidoti & Company

Jeff Mintz - Wedbush Morgan Securities, Inc.

Steven Madden, Ltd. (LTD) Q3 2008 Earnings Call November 6, 2008 10:00 AM ET

Operator

Welcome to the Steven Madden Limited conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. Any reproduction of this call in whole or in part is not permitted without prior express written authorization of the company. As a reminder, ladies and gentlemen this conference is being recorded.

I would like to introduce your host for today’s conference Ms. Cara O’Brien of Financial Dynamics.

Cara O’Brien

Thank you for joining this discussion of Steven Madden Limited’s third quarter results. Before we begin I'd like to remind you that statements in this conference call that are not statements of historical or current facts constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements involve known and unknown risks, uncertainties and other unknown factors that could cause the actual results of the company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. The statements contained herein are also subject generally to other risks and uncertainties that are described from time-to-time in the company's report and registration statements filed with the SEC. Also please refer to the earnings release for more information on risk factors that could cause actual results to differ.

Finally, please note that any forward-looking statements used in this call should not be relied upon as current after today. I'd now like to turn the call over to Mr. Edward R. Rosenfeld, Interim CEO of Steven Madden Ltd.

Edward R. Rosenfeld

On today’s call I will review the company’s results for the third quarter ended September 30, 2008 and provide an update on our outlook for the remainder of the year. We are encouraged by our performance in the third quarter as we continued to build on our momentum from the first half of the year despite a very difficult economic environment.

In particular, we are pleased to have achieved strong gains in our core Steve Madden Women’s and Steven by Steve Madden wholesale segments and our retail division in Q3. In addition to continuing our strong performance in our Madden Girl and Daniel M. Friedman segments. Steven and his design team created exceptional products to capitalize on footwear trends during the quarter particularly in the boot category.

We recognize the challenges facing the industry. However, we are very pleased with the strength of our current position in the market in comparison to our peers. Both our wholesale customers and consumers are responding positively to our assortment in women’s and girl’s footwear and accessories. We continue to have a strong product selection with our merchandise remaining trend right and relevant and we are confident that Steven Madden can continually to successfully produce merchandise to capitalize on industry trends.

We believe that our business is healthy and well positioned for the long term. Now, let’s turn to our financial results for the quarter. Consolidated net sales increased 13% in the quarter to $128.1 million as strong trend right product drove double digit percentage gains in both wholesale and retail despite the challenging economic environment.

Gross margin for the quarter was 41.4% versus 41.3% last year based on a 10 basis point increase in wholesale gross margin and a retail gross margin that was flat to last year. We were able to leverage our expense structure against the increasing sales leading to a 180 basis point decrease in operating expenses as a percent of sales. In comparison to last year excluded a one-time charge of $1.2 million related to a provision to prior year custom duties from last year’s third quarter.

Taking all of this together, operating income increased 26% to $17.7 million or 13.8% of sales compared to $14 million or 12.4% of sales last year. Again, excluding the one-time charge from last year’s figures. Diluted EPS for the quarter was $0.62 per share on 18 million diluted weighted average shares outstanding compared to adjusted EPS excluding one-time items of $0.42 per share on 21.2 million diluted weighted average shares outstanding in the prior year period.

Now, on to the performance of each of our divisions, I’d like to first talk about our wholesale division which was comprised of eight segments in the quarter: Steve Madden Women’s, Steven by Steve Madden, Steve Madden Menes, Madden Girl, Candies, Stevies, Steven Madden Fix and Daniel M. Friedman. We recorded strong top line increases in our core Steve Madden Women and Steven by Steve Madden wholesale segments in the quarter. Net sales in Steven Madden Women increased 16% to $40.7 million from $35 million in last year’s third quarter while net sales in Steven were up 15% to $4.7 million from $4.1 million a year ago.

Boots were the big fashion driver, particularly flat boots, western influence looks and other casual styles. Up front footwear and ballet flats also performed well. Steven Madden Menes remains challenging. Net sales in the quarter for means was $10.8 million versus $15.3 million in the year ago period. The decline is primarily due to two factors: one, the tough retail environment which seems to be having a more acute impact on men’s footwear than women’s; and two, our continuing struggles in the sport category.

Madden Girl on the other hand continues to be our fastest growing business. Net sales were $15.1 million up 90% from $8 million in the third quarter last year. Great styling and a strong price value proposition have driven exceptional sell throughs in this division which in turn have resulted in increased orders from retailers. Net sales in Candies were $4.4 million in the quarter versus $6.9 million a year ago.

However, as we noted on last quarter’s call we have transitioned this division to our Adesso-Madden first cost model. Taking this in to account, the comparison to last year is more favorable when you consider that over $1 million of Candies business at wholesale was done first cost. We are pleased to report that our business at Candies has improved materially with the new team in place. Sell throughs are up dramatically and we feel much better about the health of this business.

Net sales in Stevies in Q3 were $2.4 million versus $3.5 million in the prior year’s third quarter. While our kids business has been a challenge this year, we feel that this division has turned the quarter and will return to year-over-year sales growth in Q4. The last wholesale footwear segment is our newest brand Steve Madden Fix which we continue to roll out slowly given the current retail environment. Fix had net sales of $700,000 in the quarter.

Moving on to accessories, the Daniel M. Friedman business was another standout segment in our wholesale division with net sales of $18.4 million in the quarter up 45% from $12.7 million in last year’s third quarter. Betseyville, Steve Madden and Steven handbags all recorded dramatic year-over-year percentage sales gains in Q3.

Taking all of this together, overall net sales for the wholesale division were $97.3 million in the quarter, a 13% increase compared to $86 million a year ago. Overall wholesale gross margin increased modestly from 36.2% last year to 32.3% this year. Moving on to our retail division, net sales in the quarter were $30.7 million, up 12% from last year’s $27.4 million. Comp store sales increased 7.8% in the quarter based on the strong performance of boots, booties and sandals.

Stores opened for the full 12 months ended September 30, 2008 generated $644 in sales per square foot. As of September 30th we had 99 stores in operation including our Internet store. During the quarter we opened two new stores in New York and closed one underperformer in Kansas. Gross margin in the retail division was flat to last year at 57.4%. Moving to other income, the company’s commission and licensing fee income net of expenses increased 4% to $4.5 million in the quarter compared to $4.3 million last year.

Our Adesso-Madden first cost division grew 14% to $4.1 million from $3.6 million in last year’s third quarter due primarily to growth in our international segment. Licensing income for the quarter was $400,000 versus $800,000 a year ago. This decrease was due primarily to the discontinuation of our line of dresses.

With respect to the balance sheet, we continue to maintain a pristine balance sheet with no debt and $56.7 million in cash, cash equivalents and marketable securities as of the end of the quarter. Total inventory at the end of Q3 was $40.7 million and our inventory turn for the last 12 months was 8.1 times. Accounts receivable and due from factor were $62.2 million reflecting the collection of 53 days.

Cap ex for the quarter was $2.6 million and stockholders’ equity as of September 30th was $199 million. Before I turn the call over for your questions, I’d like to quickly review some recent business highlights as well as our outlook for the balance of the year. In addition to improving performance in our existing segments, we’ve also continued to expand our brand portfolio signing there key agreements in the past three months.

Importantly, the new agreements have positioned Steve Madden to be marketing merchandise across the retail spectrum spanning value to luxury. The first was an exclusive agreement with Kimora Lee-Simmons and Kellwood to design, manufacture, market and distribute a line of footwear and accessory for the Fabulosity brand in JC Penny stores. First deliveries of this collection will ship to 250 JC Penny doors at the end of December.

We also signed an exclusive agreement with Jones Apparel to design, manufacture and distributor a collection of junior and girl’s footwear under the LEI brand. First deliveries of LEI product to Wal-Mart will also ship at the end of December. Finally, we entered in to an agreement with Mary Kate and Ashley Olsen’s Dual Star Entertainment to create footwear for the Elizabeth and James brand which will be available at luxury retailers starting in March, 2009

As you can see, we continue to look towards the future and are implementing initiatives that we feel will strength and grow the company over the long term. We are very encouraged by our results so far this year and believe we have good momentum going in to the fourth quarter. With that said, we are maintaining our prudent approach to managing the business given the difficult economic environment.

Turning to our guidance for the full year, as we noted in our release, we raised our sales and earnings projections. Based on trends to date this year and current visibility, we now expect net sales for the year will increase 5% to 6% compared to fiscal 2007 and diluted EPS will range between $1.65 and $1.70 excluding the impact of one-time charges resulting from the resignation of the company’s former CEO that was recognized in the first quarter.

Including the impact of the one-time charge, earnings per diluted share are now expected to range between $1.49 and $1.54. We are cautiously optimistic about the remainder of the year as we continue to see steady improvement across a number of our business segments. However, we remain cognoscente of the ongoing economic turbulence and are keeping close track of how the current macro economy is affecting our customers and consumers.

While we are certainly not immune to the current weakness in the retail environment, we have a very strong balance sheet as well as demand for our product assortment that we believe will enable us to weather the volatility. Importantly, we are well positioned versus our peers and have been gaining market share during this economic downturn. We continue to build a stronger, healthier company that is able to continue to generate long term growth and value for our shareholders.

Now, I’d be happy to answer any questions you may have.

Question-and-Answer Session

Operator

Our first question comes from Scott Krasik - C.L. King & Associates, Inc.

Scott Krasik - C.L. King & Associates, Inc.

Talk about the trends maybe beginning and the middle of September and if you can how they’ve continued through October with your wholesale partners as well as in your own retail stores?

Edward R. Rosenfeld

Well, certainly we felt the impact of what’s been going on in the economy and certainly after the financial crisis worsened we did see an impact both in our own retail stores and in our wholesale partners. That being said, because of our exceptional merchandise right now and the great product that Steve and his team have created we’re still outperforming our competitors.

We still are seeing sell throughs in the wholesale customers for instance that exceed what we were achieving last year and our wholesale partners tell us that we are leading the pack in terms of sell through. But, nobody’s immune to what’s happened and we certainly have seen an impact on the business.

Scott Krasik - C.L. King & Associates, Inc.

Have your comps stayed positive through October in retail?

Edward R. Rosenfeld

Quarter to date we’re flat.

Scott Krasik - C.L. King & Associates, Inc.

Then, maybe talk about obviously you got a big boost from having boots early. Now that there’s a lot of boots on the floor and you figure department stores are going to get more aggressive with pricing, what do you have sort of in terms of the deliveries now that will continue to distinguish Madden and continue to perform?

Edward R. Rosenfeld

Well, to date it’s really been the casual boots that have been driving the business, the flat boots, the western inspired looks have been very strong for us but really what we’re seeing just now is new deliveries of dress boots which are starting to really perform so I think that’s going to carry us through the end of the season as well as continuing with new casual styles.

Scott Krasik - C.L. King & Associates, Inc.

Is that more unique or are you on that earlier than because it seems like most people are now on flats and casual?

Edward R. Rosenfeld

We believe so.

Scott Krasik - C.L. King & Associates, Inc.

Can you talk about where your inventory is? It’s up about 12% year-over-year?

Edward R. Rosenfeld

Yes, it’s up about 12% but the sales for fourth quarter certainly support that. In fact, you’ll see that the guidance implies 12% to 16% sales growth in Q4.

Scott Krasik - C.L. King & Associates, Inc.

Then just I missed the numbers for Steve Madden Men’s, what was the sales numbers there?

Edward R. Rosenfeld

Men’s $10.8 million this quarter versus $15.3 million year ago.

Scott Krasik - C.L. King & Associates, Inc.

Then it seemed like you started to get a little bit of momentum, you sold some shoes to a customer that hadn’t before or hadn’t been taken in a while, any progress there?

Edward R. Rosenfeld

Yes, I think we’re seeing some glimmers of hope there. It’s very tough now, there’s very few companies doing well right now in men’s. The men’s business overall in fashion is very tough. But, we’ve talked about the new designer that we brought on to revitalize our sport looks and we do feel that he’s making some progress. In fact, on the strength of the product that he developed, we’ve gotten back in to some accounts, what we call the middle of the mall accounts that we had not been in, in some time.

So, as of February we’re going to be in 350 Journeys, 125 Underground Stations and in a test with Finish Line in 25 doors with Men’s. Those are all accounts that we were basically not in, in 2008, specialty retailers. We got back in there because they see something they like in our casual styles.

Operator

Our next question comes from Jeff Van Sinderen - B. Riley & Company, Inc.

Jeff Van Sinderen - B. Riley & Company, Inc.

I wanted to see if you maybe can talk a little bit more about what’s driving the Madden Girl business?

Edward R. Rosenfeld

I think we’re in a sweet spot there, we’ve got great styling at an opening price point. They’ve done a fantastic job with the product but it’s also the price value proposition that we’re offering there. This is really great fashion – the key price point here is really a $40 footwear and I think in these challenging economic times if you can get great styling at that price that’s something that’s very compelling to the consumer right now.

Jeff Van Sinderen - B. Riley & Company, Inc.

Then I wonder if you can talk a little bit more about what you’re hearing from some of your department store accounts in terms of their open to buy. Then, maybe how that plays in with it seems like retailers are wanting to buy closer to season, not so much ahead of schedule and I know you guys typically sell close to season anyway so I’m wondering if that helps you?

Then also, I guess just generally how you see what they’re doing with open to buy impacting your business and the outlook going forward?

Edward R. Rosenfeld

Well certainly you’re right, they’re moving to buying less upfront and reserving more open to buy later in season and that really again plays in to our strength. That’s how we have always liked to operate our business so we think that is actually beneficial to Steve Madden. You’re right, they are trying to be conservative with inventory and in many cases cutting budgets. We’re not seeing our budgets cut, we’re maintaining our budgets because our sell throughs, quite frankly, we think are the best in our department stores in the junior area.

But, it is challenging, it’s tougher to get reorders than it otherwise normally is and we’re very fortunate to have great product right now.

Operator

Our next question comes from Heather Boksen - Sidoti & Company.

Heather Boksen - Sidoti & Company

I had a question, you talked about LEI and Fabulosity shipping end of December, do you know yet when you’re going to start shipping Elizabeth and James product and are any doors committed to that yet?

Edward R. Rosenfeld

No, we have not shown the product to any potential retailers but the goal would be for the first shipments to be at the end of March.

Heather Boksen - Sidoti & Company

Anybody expressing interest in it yet?

Edward R. Rosenfeld

Everybody is expressing interest in it, yes. But, we don’t have product yet to show them and we’ll be showing that at the December shoe show.

Operator

Your next question comes from the line of Jeff Mintz - Wedbush Morgan Securities, Inc.

Jeff Mintz - Wedbush Morgan Securities, Inc.

Can you talk a little bit about the metrics at retail? The plus 7.8% comp is really impressive. Can you just talk a little bit about what’s driving that?

Edward R. Rosenfeld

Our average unit retail is up dramatically and that’s really contributed to the comp store increase. We were up 15% AUR in third so units obviously were down roughly 7% on a comp basis and the AUR is driven by two things: one, is the shift in mix, more boots this year; and then two, we have increased prices this year. It’s about half and half those two factors contributing to the 15% increase.

Jeff Mintz - Wedbush Morgan Securities, Inc.

Now, as you move in to Q4 it’s great to here comps are flat quarter to date because you have a much more difficult comparison but, are the same kind of factors still contributing to pretty decent comps?

Edward R. Rosenfeld

Yes. We’re again seeing the average unit retail increase and a decline in units.

Jeff Mintz - Wedbush Morgan Securities, Inc.

Then I just want to make sure I understand on Candies, does that move totally to the Adesso-Madden line starting in Q4 or is that in 2009?

Edward R. Rosenfeld

Virtually all of it will be in other income in Q4.

Operator

Your next question comes from the line of Scott Krasik - C.L. King & Associates, Inc.

Scott Krasik - C.L. King & Associates, Inc.

Just quickly, the first cost business that tends to lag your wholesale business by a quarter or so but since we’re talking about such seasonal product to you expect a big uptick in your – excluding Kohl’s which would be new for Candies, the first cost business will that start to peak up fourth quarter, first quarter because of the better performance?

Edward R. Rosenfeld

First quarter you’ll see a year-over-year improvement.

Scott Krasik - C.L. King & Associates, Inc.

And sort of looking out is spring a different animal because of sandals we just don’t know how they’re going to -?

Edward R. Rosenfeld

I expect we can grow in spring as well. Yes, both fourth and first.

Operator

There are no further questions. Are there any closing remarks?

Edward R. Rosenfeld

No. Thanks very much for joining us and we look forward to talking to you on the next call.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: Steven Madden Ltd. Q3 2008 (Qtr End 9/30/08) Earnings Call Transcript
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