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Executives

Jean Fontana - ICR, Inc. Investor Relations

Edward R. Rosenfeld - Chief Executive Officer

Analysts

Scott Krasik - C.L. King & Associates

Jeff Mintz – Wedbush Morgan

Jeff Van Sinderen - B. Riley & Company

Sam Poser - Sterne Agee

Heather Boksen - Sidoti & Company

Scott Krasik – CL King

Steve Madden, Ltd. (SHOO) Q2 2009 Earnings Call July 30, 2009 8:30 AM ET

Operator

Welcome to the Steve Madden, Ltd. second quarter 2009 earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Jean Fontana of ICR.

Jean Fontana

Thank you for joining this discussion of Steve Madden Limited’s second 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

Good morning and thank you for joining us today. I will begin with a review of Steve Madden's earnings results for the second quarter ended June 30, 2009, and then provide you with an updated outlook for the full year 2009.

Despite the ongoing economic challenges, we continued to deliver solid sales and earnings growth in the second quarter. Net sales for the quarter rose 6.5% to $116.5 million, while diluted EPS increased 55% to $0.66 from $0.43 in last year's Q2.

In the current economic climate, with consumers so careful about their purchases, it is more important than ever both to be fashion right and to provide great value and we feel we are delivering on both counts. Our outstanding creative team, led by Steve, continues to create fashion-forward, trend-right product which we offer at attractive price points, making for a great price/value proposition for our customers.

Now, turning to the financial results for the second quarter, net sales increased 6.5% in the quarter, to $116.5 million. As a reminder, as in last quarter, net sales did not reflect sales from our Candie's 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. In last year's second quarter the Candie's division contributed $4.2 million to net sales.

However, net sales did reflect $5.2 million from the international segment, which was transitioned to a wholesale model from a first-cost model. And last year's second quarter net sales did not include revenue from our international business.

Therefore, the shift in these two businesses resulted in a net benefit of $1.0 million to net sales compared to the prior year. Excluding these transitions, net sales would have risen 5.9% in the second quarter.

Net sales in our wholesale business rose 11% to $88.2 million in the second quarter compared to $79.4 million in the second quarter of last year. The increase in wholesale sales was primarily driven by strong gains in our Steve Madden Women's, Kid's, and Madden Girl wholesale footwear segments.

Net sales in the core Steve Madden Women's segment increased 21% in the quarter to $36.2 million from $32.0 million a year ago. Flat sandals, particularly thongs, were the strongest selling category. Wedges also performed well.

Madden Girl also continued to a growth driver with net sales up 8% to $13.8 million in the second quarter of 2009 versus $12.8 million in the second quarter of 2008. This brand continues to perform at retail and we expect growth to remain strong through the back half.

Sales in our Kid's division totaled $2.0 million as compared to $800,000 in the second quarter of last year, driven primarily by gains with Just's and Nordstrom. We are particularly pleased by the growth in our Steve Madden branded Kid's business at Nordstrom, which drove nearly one-half of the total increase.

In Steven by Steve Madden, net sales totaled $5.1 million versus $5.5 million in last year's second quarter. Based on our current order file and trends with Nordstrom and Bloomingdales, we expect to return to year-over-year growth in Steven in Q3.

Net sales in Steve Madden Men's were $10.2 million versus $10.9 million in the year-ago period. Our Men's has been a struggle for some time. We believe that we are on the right track with this division and are making progress with improved sell-throughs at key accounts like Nordstrom and Dillard's.

Turning to our licensed brands, the Fabulosity business generated $800,000 in sales for the second quarter. We have decided, in conjunction with J.C. Penney, to shift this business to the first-cost model starting in the third quarter. Fabulosity is currently in 250 doors but based on the transition to first-cost, J.C. Penney is expanding the line to 600 doors for the fall.

And finally, our newest wholesale footwear brand is Elizabeth and James, which generated $800,000 in net sales in its first quarter of shipments. We are very excited about the launch so far. The brand is receiving tremendous buzz and the response from both retailers and consumers has exceeded our expectations.

In our wholesale accessories business second quarter net sales were $14.0 million as compared to $14.6 million in the second quarter a year ago. Excluding the discontinued license, Tracy Reese, from the year-ago period, net sales in the division were up 3% in the quarter.

We recorded strong gains with Steve Madden and Steven handbags, which were partially offset by a decline with private label handbags. With our acquisition of SML brands earlier this month, we now believe we have the team in place to get our private label handbag business back on track.

In our retail division, net sales in the second quarter were $28.3 million as compared to $29.9 million for the second quarter of last year.

Same store sales decreased 5.4% due to lower average unit retails.

Stores opened for the latest 12 months generated $627 in sales per square foot. We did not open any stores in the second quarter and closed two, bringing our total at the end of the second quarter to 92 stores, including our Internet store. We plan to open one more store in 2009 and close two.

Other income, the company's commissioned and licensing fee income net of expenses, was $7.4 million in the second quarter versus $3.2 million in the second quarter of last year.

Our Adesso-Madden first-cost business had commissioned income net of expenses of $6.4 million as compared to $2.5 million in last year's Q2. The main drivers of the increase were first, our Candie's business at Kohl's, followed by l.e.i. at Walmart. We also experienced solid gains in our private label business at Target.

Licensing royalty income for the quarter was $900,000 versus $700,000 in the second quarter of 2008.

Gross margin for the second quarter increased to 42.6% from 41.7% in the comparable period last year, driven by margin improvement in our wholesale segment. Wholesale gross margin increased 210 basis points to 36.8% from 34.7% 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 80 basis points.

Gross margin in the retail division was 60.4% as compared to 60.3% in the second quarter of last year. The benefit of freight savings was mostly offset by increased promotional activity in our stores due to the tough retail environment.

Operating expenses as a percent of sales for the second quarter of 2009 were 32.2% versus 33.5% in the same period of the prior year. The 130 basis point year-over-year decline was driven by cost control initiatives, primarily payroll cuts, as well as sales leverage.

Operating income for the second quarter of 2009 increased to $19.4 million, or 16.6% of net sales, compared to $12.1 million, or 11.1% of net sales in last year's second quarter.

Net income was $12.1 million, or $0.66 per diluted share compared to $7.6 million, or $0.43 per diluted share in the prior-year second quarter.

For the first six months of 2009, net sales were $223.9 million compared to $209.9 million in fiscal 2008. Operating margin was 13.3% as compared to 7.1% in the first six months of 2008, and net income totaled $18.7 million, or $1.03 per diluted share, as compared to $9.7 million, or $0.51 per diluted share last year.

Net income for the first quarter of 2008 included a charge totaling $3.0 million post-tax, or $0.16 per diluted share, related to the resignation of the company's former CEO.

Turning to our balance sheet, we maintained our strong financial foundation with $111.6 million in cash and marketable securities. We ended the second quarter with lean and current inventory totaling $29.0 million versus $35.3 million in the second quarter of last year. Our inventory turn over the last 12 months was 8.6x, up from 8.1x a year ago.

Accounts receivable and due from factor were $57.9 million at the end of the quarter, reflecting average collection in 52 days versus 57 days last year.

FX for the quarter was $500,000 and stockholders' equity as of June 30, 2009, was $229.3 million.

Turning to our guidance, for fiscal 2009, we now expect net sales to increase 2% to 4% compared to 2008. Diluted EPS for fiscal 2009 is now expected to be in the range of $2.05 to $2.15.

In conclusion, we were pleased with our second quarter results, particularly in light of the challenging environment. We believe our business model, including our test and react strategy and our industry-leading speed to market, continues to set us apart from the competition. We were pleased to experience growth in our own brands, as well as from our new licensed brands, and to have delivered our fourth consecutive quarter of year-over-year operating margin improvement.

As we look ahead, we will look to build on the momentum in our business, while continuing to manage inventory and expenses tightly. Despite the economic headwinds, we feel we are well positioned to continue to drive shareholder value for the long term.

And now I would be happy to answer an questions that you may have.

Question-and-Answer Session

Operator

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

Scott Krasik - C.L. King & Associates

Can you break out some of the big numbers from the Adesso-Madden business, Candie's, l.e.i., Target?

Edward R. Rosenfeld

Sure. The Candie's business added about $1.5 million in the quarter, l.e.i. was about $1.1 million to $1.2 million, and then the existing Target business, which is obviously the biggest piece of the private label business historically, was up about 20% as well.

So those three components really drove the big increase there.

Scott Krasik - C.L. King & Associates

And in terms of l.e.i., does $1.1 million reflect the full number of doors or is that a much bigger number, generally, for the fall than the spring?

Edward R. Rosenfeld

No, that's 2,400 doors and in fact, just because of timing of delivery, that's a little bit bigger than it's going to be in Q3 and Q4.

Scott Krasik - C.L. King & Associates

And in terms of first-cost growth going forward, is it mostly in the handbags from the SML purchase, or are there other opportunities.

Edward R. Rosenfeld

The private label handbag is going to show up actually in the wholesale accessories so you won't see that in this line item. But we have plenty growth ahead of us with Candie's, l.e.i., and the other private labels.

We've also gotten some new programs with Sears. We're going to adding Fabulosity to this line so you should see this line continue to grow over time.

Scott Krasik - C.L. King & Associates

Madden Girl, 8% is still pretty good in this environment but that's not one of those hyper-growth numbers we've seen. Does that have anything to do with second quarter fill-ins? Should we see that accelerate again in the fall or is that just more a normalized growth at this point.

Edward R. Rosenfeld

Well, I think we are starting to anniversary some tougher comparisons and that's one of the reasons you saw the growth moderate a little bit but I think certainly in this economic climate 8% is nothing to sneeze at.

I want to point out that Madden Girl had about 700 fewer doors in Q2 of 2009 versus Q2 of 2008 because they sold a lot of those retailers that went bankrupt. Mervyn's, Goody's, Gotshaws, etc. So in light of that, I think the 8% is pretty good.

That being said, based on the order file that we have in-house right now, I think you are going to see that accelerate and we should grow faster than that in Q3.

Scott Krasik - C.L. King & Associates

If you could give us any sort of commentary on Nordstrom's. We understood that you were the top brand in Brass Plum. Is that the case? And how do you view that?

Edward R. Rosenfeld

Yes, we are very pleased with our Nordstrom anniversary. Our engineer boot was the number one item in Brass Plum, as we understand it. We also have a flat leather boot in Nordstrom under Steve Madden that's really the update to the flat suede boot that we had so much success with last year, that we've kept at regular price and we believe that's the number one regular price item in Brass Plum.

And then in Steven, we've got a demi-wedge leather boot which is not advertised and we believe that's the number one non-advertised item in its department, in women's shoes.

So we are very, very pleased there with Nordstrom anniversary.

Operator

Your next question comes from Jeff Mintz – Wedbush Morgan.

Jeff Mintz – Wedbush Morgan

Following up on Scott's question about the Adesso-Madden business, about how much do you think Fabulosity can start to add as your transition it over to that line?

Edward R. Rosenfeld

I think in the first 12 months, about $1.0 million is a reasonable target.

Jeff Mintz – Wedbush Morgan

And on the international business you indicated that that was a negative to gross margin. Can you talk a little about why you are seeing that as a negative right now, as you transition it, and what the opportunities are to improve that gross margin to the domestic level?

Edward R. Rosenfeld

Well, as long as we operate under the current model where we go through distributors in the local countries, it's always going to be a lower gross margin business.

Jeff Mintz – Wedbush Morgan

And about what's the spread on that?

Edward R. Rosenfeld

We don't break that out. But it's significantly lower.

Jeff Mintz – Wedbush Morgan

In terms of retail comps, you indicated that that was impacted by lower AUR. Are you seeing traffic levels come back up a little bit or are you still seeing negative year-over-year traffic?

Edward R. Rosenfeld

We continue to see negative year-over-year traffic. It's a challenge that we think we're going to have to continue to confront through the end of the year.

Jeff Mintz – Wedbush Morgan

I find myself surprised to be asking this question, but inventory was down significantly more than the sales levels are expected to be, and obviously your sales are outperforming a lot of the market. At this point do you feel you have enough inventory to be driving those sales or is it possible you've cut back too much?

Edward R. Rosenfeld

We feel comfortable that we have the inventory to reach our sales goals. Some of the reduction in inventory was simply timing. Last year more goods came in at the end of June as opposed to this year at the beginning of July, so the June 30 snapshot showed a lower year-over-year number.

But you're right, we are very, very clean. We were running lean on inventory and then we got a lot of reorders in second and so we ended the quarter very, very lean and very clean. But we feel we still have the appropriate levels of inventory to meet our sales goals.

Jeff Mintz – Wedbush Morgan

And obviously you model allows for faster chasing than most do.

Edward R. Rosenfeld

That's right.

Operator

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

Jeff Van Sinderen - B. Riley & Company

It sounds like your early boot reads are pretty favorable in terms of what you have. I think you mentioned Nordstrom's. And I'm just wondering how you're thinking about the boot business this year versus last year. Obviously it was great last year and do you think that there are other trends emerging that you might be able to also play on to anniversary the numbers versus last year.

Edward R. Rosenfeld

Yes, as you point out, we have pretty tough comparisons in the back half because of the strength we had in boots a year ago. But I will say I feel much better today than I did a few months ago about being able to anniversary those numbers, because of the early boot reads that we've gotten.

As I said, we've been extremely pleased with the boots in Nordstrom Anniversary. We've got boots selling in our stores very well and in addition to updates to things we did last year, we've got some new types of looks, which will command a higher price point, that are performing well. So right now we feel pretty good about being able to comp what we did last year in boots.

I want to add that booties is a category that wasn't great last year that is looking much better this year. So it's really the combination of boots and booties that we think will help to comp what we did a year ago.

Jeff Van Sinderen - B. Riley & Company

Generally, when you're talking with your major retail customers about their buying strategy for second half, and I know that's an ongoing thing for you, what are you hearing from them? What are the kind of major standouts?

Edward R. Rosenfeld

I think that they are still planning their overall businesses down, clearly. And they continue to take a fairly conservative view. And they are continuing to place their orders closer to need later in the season. And these are all things that we have been seeing really throughout 2009.

Jeff Van Sinderen - B. Riley & Company

I think you mentioned that you were feeling a little better about the men's business. Any other color you can give us on that?

Edward R. Rosenfeld

Yes, we are starting to see some progress there. Again, we never celebrate over a down 7% on the top line performance in the quarter but at the tail end of last year we were seeing these big double-digit declines every quarter and we've started to narrow that. We were down 9% in the first quarter, down 7% in the second quarter and we are targeting getting back to flat year-over-year in Q3. We think we've improved the product there and as I said, over the last month or so we've seen a very nice uptick in the sell-throughs at Nordstrom and Dillard's, which is a very good sign for us.

Operator

Your next question comes from Sam Poser - Sterne Agee.

Sam Poser - Sterne Agee

I want to follow up on the Adesso-Madden business and how we should think about that. It has worked over years at sort of fixed levels and with the addition of Fabulosity going into it, how should we think about that as a number relative to this quarter's numbers, for the balance of the year?

Edward R. Rosenfeld

It should not be as big as it was this quarter. The second quarter was a very big shipping quarter for us, for l.e.i., for Target, and for Candie's, frankly. So you are going to see that number get smaller again in the back half. I think sort of $3.5 million to $4.5 million in the next couple of quarters. $3.5 million maybe in third quarter and $4.5 million in fourth quarter are good targets.

Sam Poser - Sterne Agee

It still looks, even at the high end of your guidance that you're looking for basically a flatish back half of the year. Am I looking at that correctly?

Edward R. Rosenfeld

On the top line?

Sam Poser - Sterne Agee

Yes.

Edward R. Rosenfeld

Yes. That's about right. We think we can be up in wholesale but we are planning the retail business down.

Sam Poser - Sterne Agee

And the retail business, basically where it was in the second quarter?

Edward R. Rosenfeld

We've planned it a little bit lower than that.

Operator

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

Heather Boksen - Sidoti & Company

On the accessories side of the business, you bought the private label handbag thing, how much should we expect that to add to the business in the back half of the year at the top line?

Edward R. Rosenfeld

About $10.0 million.

Heather Boksen - Sidoti & Company

You had given the cash balance, are we still looking for additional acquisitions here, are we happy with what we have?

Edward R. Rosenfeld

We are looking pretty actively at acquisitions right now. Nothing is imminent on that front in terms of consummation of a deal, but there are three targets that we're looking at pretty seriously and I think that's certainly a priority for the cash.

If we don't find something that we end up closing on then I think we'll look again at returning capital to shareholders. We want to leave our options open there, but our preference right now would be to look again at open market repurchases.

Operator

Your next question comes from Scott Krasik – CL King.

Scott Krasik – CL King

Your comment on you're planning retail down more, is that because of major negative AUR comparisons our you're expecting traffic to decline more?

Edward R. Rosenfeld

It's really just based on the trends. We did see a weakening during the quarter, in the second quarter, and it's continued in third. So the last three months, May, June, and July, have been pretty tough in retail.

And we are also planning an AUR decline. We saw a 9% AUR decline in Q2 and we're forecasting an AUR decline in Q3 of about 7%. That's really the driver.

Scott Krasik – CL King

I know you delivered some new men's product into your own stores, some of those boots that we've seen in the showroom. How are those trending? Is there any early read on those?

Edward R. Rosenfeld

Yes, we're getting some nice hits there. That's one of the encouraging signs for our men's business.

Scott Krasik – CL King

What was the operating, I assume you had an operating loss in retail this quarter.

Edward R. Rosenfeld

It was very modestly positive. It was, we made $0.5 million.

Scott Krasik – CL King

And in terms of getting to a normal level of profitability, or acceptable level of profitability, next year retail, what do you need to do?

Edward R. Rosenfeld

The first thing we're doing is, as you know, we've been proactively trying to get out of some of the underperforming doors that drag down the performance of the chain. We closed 7 stores last year. We've closed 6 in the first half of this year. We're going to close another 2 in the back half. And we'll be closing additional stores next year.

We are also going to focus on driving the e-commerce business, which is profitable and which has been growing nicely. And we've also made some expense cuts in retail, both at the store level with payroll and at retail corporate overhead, in the office out here in Long Island City.

But frankly, to get to the right level of profitability we're going to have to get the top line moving in the right direction and that's a challenge right now. We've made a number of merchandising improvements here. I think we've got a very strong team in place right now. And that's what we're going to have to eventually figure out, how to get those comp store sales gains to start leveraging the operating expenses.

Scott Krasik – CL King

So then just bigger picture, I know some of the stores in your secondary markets didn't work, but was it the right strategy to open more expensive stores in your biggest markets?

Edward R. Rosenfeld

No, it doesn't look like it right now. We have opened a few stores in New York City, and New York City is probably the weakest market in the country right now, on a year-over-year sales performance. I still think that's where Steve Madden product is understood the best and where over the long term we're going to perform the best, but over the last year or so, those markets have been tough.

Operator

Your next question is a follow-up from Sam Poser - Sterne Agee.

Sam Poser - Sterne Agee

How should we think about the gross margins for the back half? You've had nice little steady improvement, are we looking at the same kind of things? Especially in the fourth quarter, given how strong last year was.

Edward R. Rosenfeld

I still think there's opportunity in wholesale for year-over-year improvement, similar to what we've been seeing in both Q3 and Q4. Retail, you have to look for that to be more flattish in the back half because we do continue to have to be promotional in our stores.

Sam Poser - Sterne Agee

As a follow-up on the question about the cash. Given the environment and given the whole CIT thing, are you studying to continue acquisitions as well?

Edward R. Rosenfeld

Absolutely. I think that may be something that will create opportunities for us, if companies run into financing difficulties, depending on what happens with CIT.

Sam Poser - Sterne Agee

Would you look at an apparel company, would you look at [inaudible]?

Edward R. Rosenfeld

We would look at accessories companies that would fit with DMF in our existing accessories business. I think it's unlikely we would buy an apparel company, although I'll never say never.

Operator

There are no further questions in the queue.

Edward R. Rosenfeld

Thanks very much for joining us on the call and we look forward to speaking with you next quarter.

Operator

This concludes today’s conference call.

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Source: Steve Madden, Ltd. Q2 2009 Earnings Call Transcript
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