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Steve Madden, Ltd. (NASDAQ:SHOO)

Q1 2009 Earnings Call

May 5, 2009 8:30 am ET

Executives

Jean Fontana – ICR, Inc. Investor Relations

Edward R. Rosenfeld – Chairman & Chief Executive Officer

Analysts

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

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

Heather Boksen - Sidoti & Company

Operator

Welcome to the Steve Madden Limited first quarter 2009 earnings conference call. Today’s call is being recorded. There will be a question and answer session at the end of the call today and instructions will be given at that time. At this time for opening remarks to Ms. Fontana.

Jean Fontana

Thank you for joining this discussion of Steve Madden Limited’s first quarter 2009 earnings results. Before we begin I would 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 and uncertainties and other unknown factors that could cause actual results of the company to be materially different from their 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 reports and registration statements filed with the SEC.

Also, please refer to their 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 could not be relied upon as current after today. I would now like to turn the call over to Ed Rosenfeld, Chairman and CEO of Steve Madden.

Edward R. Rosenfeld

On today’s call I will review the company’s results for the first quarter ended March 31, 2009 and provide our outlook for the full year 2009. We are pleased to have reported solid first quarter results in light of the difficult macro environment. I believe that our performance speaks to the strength of our brand and the designed excellence of Steve and his team.

Net sales for the first quarter rose 6.9% while EPS increased to $0.37 from $0.10 in last year’s Q1. Including the impact of one-time charges related to the departure of the company’s former CEO, EPS is $0.25 for first quarter 2008. We believe that our performance reflects that consumers in this environment are looking for two things. First, differentiation, consumers will add to their closet when they find an item they can get excited about or that enhances their wardrobe. Second, value, it isn’t about being the lowest priced in the market but it is important to provide fashion right product at a reasonable price point.

Now, turning to the financial results for the first quarter, consolidated net sales increased 6.9% in the quarter to $107.4 million. Net sales did not reflect sales from our Candies division which transitioned to a first cost model from a wholesale model. Revenue from this business is now solely reported in our other income line. Last year the Candies division contributed $4.9 million to net sales.

However, net sales did reflect $5.2 million from the international segment which was transitioned from a wholesale model from a first cost model. In last year’s first quarter net sales did not include revenues from our international business. Therefore, the shift in these two businesses resulted in a net benefit of $300,000 to net sales compared to the prior year.

Net sales in our wholesale business rose 7.6% to $81.3 million in the quarter compared to $75.6 million in Q1 last year. The increase in wholesale sales was primarily driven by strong gains in our Steve Madden Women’s and Madden Girl wholesale footwear division as well as the Daniel M. Friedman accessories division.

Net sales in the core Steve Madden Women’s segment increased 9% in the quarter to $34.6 million from $31.8 million a year ago. The key trend was embellishment with flowers and studs being the most popular accents. Flat sandals represented the strongest selling category. Madden Girl net sales grew 20% to $12.5 million in the first quarter 2009 versus $10.4 million in the first quarter 2008 as retailers continued to increase their receipts of Madden Girl in response to strong sell throughs.

We are particularly pleased with the growth of our Macys business with Madden Girl and as of Q2 we are in all Macys doors with two Madden Girl Styles. In Steven by Steve Madden net sales totaled $3.8 million, up 2% from $3.7 million in last year’s first quarter. Again, embellished styles, particularly flats drove the business.

Net sales in Steve Madden Men’s were $7.7 million versus $8.4 million in the year ago period. Driving mocs and dress shoes are performing well but the casual category continues to be very challenging. We also recorded modest declines in Stevies and Steve Madden Fix. Stevies’ net sales totaled $1.1 million in the first quarter versus $1.2 million in the year ago first quarter while Fix had net sales of $500,000 compared to $800,000 last year.

Daniel M. Friedman accessories business grew 11% in the first quarter to $16.1 million from $14.5 million a year ago. The increase was driven by strong performance in our branded handbag business led by Steven and Steve Madden as well by the Betsey Johnson and Betsey [inaudible] brands. Belts continued to show improvement.

For our retail division net sales in the first quarter were $26.1 million, a 5% increase over the $25 million in net sales for the first quarter of last year. Comp store sales increased 7.6% due to a stronger merchandise assortment and a better flow of inventory. Stores opened for the latest 12 months generated $639 in sales per square foot. We opened one store and closed four stores in the quarter bringing our total at the end of the first quarter to 94 stores including our Internet stores. We continue to view the Internet as a major opportunity to drive sales growth.

Other income, the company’s commission and licensing fee income net of expenses decreased to $2.9 million in the quarter versus $3.4 million last year. Our Adesso Madden first cost business had commission income net of expenses of $2.1 million as compared to $2.3 million in last year’s Q1. Including international from last year’s numbers and Candies from this year’s numbers for an apples-to-apples comparison, Adesso Madden income increased 7% year-over-year.

Licensing and royalty income for the quarter was $800,000 versus $1 million in the first quarter of 2008. Gross margin for the first quarter increased to 40.5% from 40.0% in the comparable period last year drive by margin improvement in our wholesale segment. Wholesale gross margin increased 70 basis points to 38.1% from 37.4% in the same period last year benefitting from significantly lower mark down allowances due to the strong sell through at retail.

Margin improvement was achieved despite the inclusion of the international business in our wholesale segment which negatively impacted gross margin by 90 basis points. Gross margin in the retail division was flat at 47.8%. We benefitted from a stronger merchandise assortment and freight savings but we continued to be promotional in our stores in order to remain competitive from a pricing standpoint in a highly promotional environment.

Operating expenses as a percent of sales for the first quarter of 2009 were 33.6% versus 40.5% in the same period of the prior year. Operating expenses for the first quarter of 2008 included the previously mentioned $4.9 million pre-tax charge related to the resignation of the company’s former CEO. Excluding this charge, operating expenses as a percentage of sales were 35.6% for the period, a 200 basis point year-over-year decline on an adjusted basis was primarily due to cost control initiatives and sales leverage.

Operating income for the first quarter of 2009 increased to $10.3 million or 9.6% of net sales compared to $2.8 million or 2.8% of net sales in last year’s first quarter. Including the $4.9 million pre-tax charge from last year’s first quarter, operating income rose 33% in the first quarter of 2009. Net income was $6.6 million or $0.37 per diluted share compared to $2.1 million or $0.10 per diluted share in the prior year’s first quarter. Net income for the first quarter of 2008 included the aforementioned charge totaling $3 million post tax or $0.15 per diluted share.

With respect to the balance sheet we continue to have a strong financial foundation with $92.6 million in cash and marketable securities. Total inventory at the end of Q1 was $28.1 million versus $26.4 million a year ago. Our inventory turn over the last 12 months was 8.1 times and the 6.4% increase in inventory is supported by the sales plan for second quarter.

Accounts receivable and due from factor were $49.4 million at the end of the quarter reflecting average collection in 57 days. Fx for the quarter was $1.2 million and stockholders’ equity as of March 31, 2009 was $214.1 million.

Turning to our guidance, for fiscal 2009 we expect net sales to range from flat to a decline of 2% compared to 2008. This guidance incorporates the shift in the Candies business to a first cost model from a wholesale model and the shift in the international business from a wholesale model to a first cost model. Excluding the impact of these changes, sales are expected to decline 2% to 4% for fiscal 2009. Diluted EPS for fiscal 2009 is expected to be in a range of $1.85 to $1.95.

In conclusion, we were pleased with our first quarter results and feel good about our positioning going forward. We continued to capitalize on the strength of our brands, our design capabilities and our operational skills as we manage through a challenging environment. We remain excited about the company’s long term growth prospects and look forward to continuing to drive value for shareholders.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Scott Krasik - C.L. King & Associates, Inc.

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

When you guys raised your guidance a couple of weeks ago you really took it up quite a bit given only one quarter of results and since you guys work typically so close to season and not a lot of visibility what gives you the confidence to raise your full year as much as you did?

Edward R. Rosenfeld

Well, quite simply the goods have been selling through very well at retail and our order file looks a bit better today than it did when we put out our original guidance on the fourth quarter call. There’s really three factors driving the increase in the guidance. Number one is Steve Madden Women’s the wholesale segment, we’ve just been doing very well there, gotten very good reception to our spring product and both sales and margin are coming in better than anticipated in Steve Madden Women’s.

It’s a very similar store in Madden Girl and we’ve taken those numbers up from what we were previously anticipating. Then, the last factor is L.e.i. at Wal-Mart. We’re off to a great start there and our current expectations for L.e.i. at Wal-Mart are about double what we had in our original budget. So, when you put those three things together we think this new guidance makes sense.

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

Then, the wholesale gross margin was very good even with the international hit. It’s as high as its been since I think the first quarter of ’06, what’s going on in that line item? Is it just lower levels of markdowns or is there something you’re doing better and how should we think just in terms of short of peakish or what can we do there?

Edward R. Rosenfeld

Well, the big improvement there was in the reduction in markdown allowances. That is as low as it’s been for some time but there’s also been a positive mix shift, Madden Girl is a fairly high margin business for us and that’s been growing so I wouldn’t classify this as peak but certainly it does represent a good performance particularly in the markdown area.

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

Just in terms of mix is there anything that can improve there to help the margin? Either Daniel Friedman contributing?

Edward R. Rosenfeld

No, I don’t see any major changes from the mix going forward.

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

Then just lastly, you’re on plan to generate a substantial amount of cash this year north of $2.00 incrementally. Any thoughts there in terms of timing or use of cash?

Edward R. Rosenfeld

We are looking quite a bit more seriously at acquisitions right now and we think that there are some very interesting opportunities that have arisen, good brands, good companies that probably would not have otherwise become available if not for the challenging economic climate. So, we’re looking at a couple of things in that regard. These would be opportunities that not only would be a very strong strategic fit but would also be very financially attractive transactions, accretive to EPS, providing a high return on investment, etc.

But, in addition to that we’ll obviously continue to look at returning capital to shareholders. As you know that’s something that we’ve done pretty actively over the last three years and that’s something we’re evaluating as well.

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

Would you characterize the deals you’re looking at as company changing or more bolt on strategic fit?

Edward R. Rosenfeld

I would say these are tuck in, bolt on, companies that we could plug in to our existing infrastructure.

Operator

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

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

I guess my first question, I know your product is selling through really well but do you think that inventory is cleaning up in the channel in general and what are you hearing about the overall footwear business of your major accounts?

Edward R. Rosenfeld

Certainly, the overall business remains fairly challenging. However, I think the inventory in the channel is at a much more reasonably level than it was. Back in fourth quarter a lot of people got caught, they were surprised by the deceleration of the business and got caught with inventory and that’s why you saw some of the very heavy discounting in fourth quarter. People planned spring much more conservatively and so the inventory levels are much more in line with sales.

In fact, in some cases we’ve found that there have been selected retailers with too little inventory and I think that is one of the reasons we’ve been able to be successful is by being there with the right goods at a time when some of our competitors don’t have enough inventory in the channel.

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

So in some cases they’ve actually scaled back inventory to the point where they’re having to chase some product it sounds like?

Edward R. Rosenfeld

Absolutely. I mean, the strategy from the retailers this year has really been to order less up front and to try and chase goods.

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

Then did you mention, I know you talked about your overall gross margins at retail, did you mention merchandise margins there?

Edward R. Rosenfeld

That is a pure merchandise margin for us, we don’t have any occupancy costs or anything else in the gross margin.

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

Then can you talk a little bit more about L.e.i in terms of maybe some specifics of what’s really driving that business and how we should expect that to evolve?

Edward R. Rosenfeld

Yes, as you know we launched it in December and as of February we’re in about 2,400 doors and the product has just been selling through very, very well. We initially I think when we talked on the last call, our initial budget was for about $1.5 million of other income contribution from L.e.i in 2009 and we think that we can do at least twice that based on what we’re seeing to date so we’re very, very pleased with the performance there.

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

Finally, not sure if anything has changed on this front but what do you feel at this point is the longer term operating margin potential of the company? And, I guess what kind of time frame are you looking at there?

Edward R. Rosenfeld

Well, we’ve articulated previously a mid teen operating margin goal. We established that last year and said I believe that it was a three to four year time horizon that we were hoping to achieve that. Based on what we’re seeing this year we think that perhaps we could get there next year.

Operator

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

Heather Boksen - Sidoti & Company

Just curious, you said that in the retail division things were a little more promotional in the first quarter. Just curious how you see the promotional cadence playing out the remainder of the year?

Edward R. Rosenfeld

We’re currently expecting that is going to continue for the remainder of the year. The consumer remains very, very price sensitive and very value focused and so we’re expecting that we’re going to have to continue to be promotional in our retail stores. For that reason looking for gross margin to be roughly flat to a year ago.

Heather Boksen - Sidoti & Company

With regards to SG&A, obviously you got a lot of savings on that line in the first quarter, I’m just curious how we should think about that during the remainder of the year?

Edward R. Rosenfeld

Well, we’ve done a pretty good job I think taking some expenses out and I think on the last call we talked about flat operating expenses, flat SG&A for the year. Now, we’re including the international business in the top line and that means the expenses will no longer be netted against other income, commission income on the other income line, it will be in the expense line so that’s going to add about $2.7 million of expenses this year. So, I think you should still continue to expect SG&A to be at this point about $2.7 million higher than a year ago, still flat excluding this international change.

Heather Boksen - Sidoti & Company

Just one housekeeping question, I think I missed it, did you give Fabulocity sales for the quarter?

Edward R. Rosenfeld

There were none. We shipped the first shot of Fabulocity all in December, that was about $1.2 million at cost and the plan was always to see how those sold through in the initial 250 doors. We do have an order file for second quarter.

Operator

It appears that there are no further questions at this time. Mr. Rosenfeld I’d like to turn the conference back over to you for any additional for closing remarks.

Edward R. Rosenfeld

Thanks very much for joining us. I do want to make one correction, the collection days in the quarter were 54 days not 57 days. But, thanks again for joining us and we look forward to speaking with you soon.

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Source: Steve Madden, Ltd. Q1 2009 Earnings Call Transcript
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