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Executives

Jean Fontana – Integrated Corporate Relations

Edward R. Rosenfeld – Interim Chief Executive Officer & Director

Analysts

Scott Krasik – BB&T Capital Markets

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

Sam Poser – Sterne, Agee & Leach

Heather Boksen – Sidoti & Company, LLC.

Susan Sansbury – Miller Tabak & Co, LLC.

Steve Madden, Ltd. (SHOO) Q1 2010 Earnings Call May 4, 2010 5:00 PM ET

Operator

Welcome to the Steve Madden 2010 first quarter earnings conference call. Today’s call is being recorded. For opening remarks and introductions I would like to turn the conference over to Ms. Jean Fontana of Integrated Corporate Relations.

Jean Fontana

Thanks for joining us for the discussion of Steve Madden’s first quarter 2010 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 facts that could cause actual results to be materially different from historical results or any future results expressed or implied by such forward-looking statements.

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 today’s earnings release for more information on risk factors that could cause actual results to differ. Finally, please note that any forward-looking statement used in this call cannot be relied upon as current after this date.

I would now like to turn the call over to Ed Rosenfeld, Chairman and CEO of Steve Madden.

Edward R. Rosenfeld

2010 is off to a great start. Consolidated net sales increased 23% in the first quarter to $131.6 million. The EPS adjusted for the three for two stock split increased 124% to $0.55 per diluted share. Importantly, the strength in our business was broad based as we achieved solid top and bottom line gains in both wholesale and retail as well as strong increases in our first cost and licensing segments. As always, the foundation of our success stems from our outstanding creative team led by Steve which is consistently delivering product that truly resonates with what has become a very diversified consumer base.

Our ability to be on top of the latest trends, effectively translate them in to footwear and accessories and quickly bring the product to market remains the key to our success. The primary driver of our sales and earnings growth in the quarter was the strong performance of our existing brands. However, we also got important contributions from some of the more recent additions to our business.

Elizabeth & James introduced in May of last year continues to grow based on strong performance at Neiman Marcus, Saks 5th Avenue, Nordstrom and others and our most recent collaboration with Mary Kate and Ashley Olsen, Oslenboye is off to an excellent start in approximately 600 doors with JC Penny. Initial sell throughs have been strong for both footwear and accessories in Olsenboye.

Our new men’s line Madden has also been met with a favorable response. In Madden we are using different materials, primarily synthetics to offer fashionable products for men at more moderate prices than Steve Madden Men’s. We continue to see this brand as a significant growth vehicle for 2010 and beyond.

Turning to accessories, our Q1 results have benefitted from solid sales and earnings contributions from our two recent acquisitions Madden Zone which we acquired in July of last year and Big Buddha which we acquired in February 2010. The Big Buddha collection continues to perform well at retail and gain distribution to additional doors within both department stores and boutiques.

Finally, we are also pleased with the favorable response to our Steve Madden apparel collection which we launched with the spring 2010 selling season. Based on the strong initial sell throughs at retail we recently added about 100 doors bringing us to 180 doors with Nordstrom, Dillards, Macys, Belk and Bon Ton. Overall, our newest initiatives all seem to be gaining traction and should contribute nicely to our overall earnings growth in 2010 and beyond.

Now, let’s turn to the financial results for the quarter. Consolidated net sales for the quarter were $131.6 million, a 23% increase over the prior year. Wholesale net sales increased 27% to $103.1 million compared to $81.3 million in the first quarter of last year. This increase was driven by strong gains in the company’s existing wholesale footwear divisions as well as contributions from our new license Elizabeth & James and our recent acquisitions Madden Zone and Big Buddha.

Wholesale footwear net sales increased 27% in the first quarter to $82.8 million compared to $65.2 million last year. Every existing wholesale footwear division grew year-over-year with double digit gains in men’s, Madden Girl, Steven by Steve Madden and kid’s. The quarter also benefitted from strong sales from the Elizabeth & James brand introduced in the second quarter of last year. In our wholesale accessories business, first quarter net sales totaled $20.3 million versus $16.1 million last year, a 26% increase. This was mostly driven by new contributions from Madden Zone and Big Buddha but also from a strong gain in belts.

Shifting over to our retail division, retail net sales increased 9% to $28.5 million versus $26.1 million last year despite a smaller store base. Comparable store sales increased 13.6% driven by our strong product assortment and the more favorable retail environment. We also continued to see an increase in AUR as a result in the strength of the boots and booties category. Stores open for the 12 months ended March 31, 2010 generated $672 in sales per square foot. We closed five store and opened one ending the first quarter with 85 company owned retail locations including our Internet store.

Turning to other income our Adesso Madden segment had commission income net of expenses of $4.9 million as compared to $2.1 million in last year’s first quarter driven by strong gains in our first cost business with Target, Kohls and JC Penny. Licensing royalty income for the first quarter increased 48% to $1.3 million as compared to $800,000 in the first quarter of 2009. Consolidated gross margin for the quarter increased to 45.5% from 40.5% in the comparable period last year reflecting margin improvements in both the wholesale and retail segments.

Wholesale gross margin increased 440 basis points to 42.5% from 38.1% in the same period last year driven primarily by higher initial mark ups and more full price selling. Gross margin in the retail division was 56.7% in the first quarter of 2010 as compared to 47.8% in the first quarter of last year an 890 basis point improvement due to dramatically reduced discounting as well as higher IMUs.

Operating expenses were $41.3 million in the first quarter or 31.4% of net sales compared to $36.1 or 33.6% of net sales a year ago. The 220 basis point year-over-year improvement was due mainly to leverage on increasing sales. Operating income for the first quarter of 2010 increased 141% to $24.9 million or 18.9% of net sales compared to $10.3 million or 9.6% of net sales in last year’s first quarter. Net income was $15.4 million or $0.55 per post split diluted share compared to $6.6 million or $0.24 per post split diluted share in the prior year’s first quarter.

Turning to our balance sheet, as of March 31, 2010 we had approximately $157.4 million in cash and marketable securities and no debt. We ended the first quarter with inventory of $23.9 million down from $28.1 million in the first quarter of last year. Our inventory turn over the last 12 months was 10.4 times up from 8.1 times a year ago. Despite the reduction in inventory, which was in part due to shifts in timing of receipts and shipments, we feel comfortable that we have sufficient inventory levels to support our second quarter sales plan.

Accounts receivable and due from factor totaled $64.8 million at the end of the first quarter reflecting average collection in 55 days. Cap ex for the quarter was $700,000 and total stockholders’ equity as of March 31, 2010 was $286.1 million.

Turning to our guidance for fiscal 2010, we now expect net sales to increase from 17% to 19% compared to 2009. Diluted EPS is now expected to be in the range of $2.30 to $2.40 with year-over-year growth weighted towards the first half. This reflects an increase from our previous guidance of $2.07 to $2.20 on a split adjusted basis. In summary, our first quarter results reflect both the continued strength of our core business as well as the initial success of our various new business initiatives.

As we move ahead, our first priority as always will be to continue our track record of delivering superior product. Our ability to deliver trend right fashion forward merchandise in a timely manner is a foundation of our success and we are committed to upholding the design excellence that drivers our core business. In addition, we will focus on growing our newer brands like Elizabeth and James, Olsenboye and Big Buddha as well as continuing to evaluate additional brands to add to our increasingly diversified portfolio.

Retail will be another area with emphasis as our fifth consecutive quarter of year-over-year operating income improvement, we feel we have turned the corner in our retail division and look forward to further improvement in the balance of the year. eCommerce also remains an important part of our growth strategy. We just surpassed the $20 million mark in trailing four quarter net sales on SteveMadden.com and we will look to continue the strong growth there and in our wholesale business to online retailers.

Finally, we intend to focus on growing our international business where we are seeing strong traction and where we believe there is enormous potential for long term growth both through the existing partners in countries like China and Australia and with new partners for countries like Russia and Brazil. Putting this all together we believe we have the building blocks in place for solid top and bottom line growth over the near and long term and feel confident that we are on the path towards achieving our goal established at the beginning of this year of doubling EPS in five years.

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 – BB&T Capital Markets.

Scott Krasik – BB&T Capital Markets

There were some moving parts in the Adesso business, I think there was a piece of Wal-Mart that came out. Can you just talk about what the sort of apples-to-apples number is? It was a great number and I’m just trying to figure out what the sort of comp performance was.

Edward R. Rosenfeld

You’re right, Wal-Mart has come out of that line this year and moved in to the sales and cost of goods company. But, the big contribution from Wal-Mart really came in the second and third quarter last year. It was a pretty small number in the first of 2009 and also a small number in first of 2010 that moved in to the sales line. We did have some changes in timing though versus last year. There was some unusual seasonality in the first half of last year, some shipments got pushed out in to second quarter and if you look at our numbers last year you’ll see that the Adesso business did about three times as much in Q2 last year as Q1. That is not a typical seasonality and so this year you should see Q1 looking much more similar to Q1 level.

Scott Krasik – BB&T Capital Markets

Realistically it could be down from Q2 a year ago given the Wal-Mart shift?

Edward R. Rosenfeld

Yes, it should be.

Scott Krasik – BB&T Capital Markets

Great to see you feeling more confident about retail profitability, I mean this is a division that historically has never really made much money so what do you really think the real run rate of the profitability is on this level of sales, this store count? And, where do you see that going over the next 12 to 24 months?

Edward R. Rosenfeld

Well, we’re pleased. If you look at the trailing four quarters we now are making a modest profit in retail and we think that if we can continue to get comp gains during the balance of the year that we could approach something like a 5% operating margin excluding any kind of charges for store closings but 5% is our target for the ongoing store base. Long term we really believe that this can be a 10% operating margin business.

Scott Krasik – BB&T Capital Markets

Then just lastly, in terms of the wholesale, it’s still a little early on visibility for boots, do you have a sense for how retailers are planning your boot business yet? How early they’re going to take from fashion products and if your thinking there has changed relative to a quarter or two ago?

Edward R. Rosenfeld

No, we still feel pretty confident about the upcoming boot season. As I talked about on the last call, we really got some very strong reads in our retail stores in Q1 with some late in season boot deliveries of new boot product and we feel pretty confident about that. That’s usually been a very good indicator of what’s going to work in the fall season and the upcoming boot season. We are going to be shipping fashion boots in starting 6/25 and then certainly more 7/25 and so far the initial orders on boots are quite strong. Again, our guidance assumes that the boot season overall isn’t quite as good this year as it was a year ago but we do feel confident about it.

Scott Krasik – BB&T Capital Markets

Did you deliver boots last year 6/25?

Edward R. Rosenfeld

In a small way.

Scott Krasik – BB&T Capital Markets

So that’s definitely going to be up and then 7/25 boot deliver seems like it is up as well?

Edward R. Rosenfeld

Yes, right now we have more orders for 7/25 boots than we did a year ago. But, keep in mind last year we had retailers who were very conservative at this time.

Operator

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

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

Can you update us on the progress in the international business? I know you mentioned that in your prepared comments a little bit and I’m just wondering what’s kind of brewing there?

Edward R. Rosenfeld

Well, we talked on the last call about how we sort of took a pause in our growth in 2009. We really felt some of the effects of the global recession, we had to change a couple of our distributors because a couple of them ran in to financial difficulties and so we had to terminate our relationships with existing partners and move on to new partners. But, we’re really through that period and we now feel that we’re again positioned for growth. We had a nice growth, about 8% in our international business in Q1 and for the balance of the year we’re looking to be double digit grower in the international piece.

We’re really excited about what we’re doing with our partner GRI in China as well as our new partner The [Lew] Group in Australia and we’re continuing to add partners as well. We actually just signed up with a group in Russia called Monarch and we’re going to start shipping product to Russia in Q3.

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

Just sort of a more recent thing, did you guys see any trend change in your company owned retail stores in April versus March with the calendar shift and all of that?

Edward R. Rosenfeld

Well, I think April was for most people a little bit weaker than March although we still had a nice comp gain and feel good about the overall trend but March was a pretty spectacular month for just about everybody.

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

Are you seeing anything in terms of acquisitions that look appealing?

Edward R. Rosenfeld

No, there’s really not a lot in the pipeline right now. We continue to be on the lookout. We remain interested in finding the right acquisition but there’s nothing that is imminent.

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

Your gross margins has a great improvement for the quarter and I am just wondering obviously you’ve given some guidance for the year but I’m just wondering how big of a part of that is gross margin increase? Is the 45.5% sustainable? How should we think about that going forward?

Edward R. Rosenfeld

Well the 45% is a pretty outstanding number. I wouldn’t expect us to continue at that level for the balance of the year. We do feel that there is opportunity for year-over-year improvement in Q2. In the back half we indicated that we think the gross margin should be down modestly year-over-year really driven in part by about 100 to 120 basis point dilution from the Wal-Mart business moving from the other income line in to the sales line. So absent that we think we could be up modestly in the back half but with that impact we should be down modestly in the back half year-over-year.

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

But that’s just a shift it really doesn’t have anything to do with the performance of your business?

Edward R. Rosenfeld

Right, that’s just geography on the income statement.

Operator

Your next question comes from Sam Poser – Sterne, Agee & Leach.

Sam Poser – Sterne, Agee & Leach

Just a little more on the gross margin, on a net basis can you give us sort of where you would see it on a full year on an apples-to-apples basis?

Edward R. Rosenfeld

Let’s just say that for the full year we think we can be up modestly from where we were a year ago even with the impact of the Wal-Mart shift.

Sam Poser – Sterne, Agee & Leach

Then when we think about the SG&A how should we think about that as well?

Edward R. Rosenfeld

Well, we’re looking at 17% to 19% sales growth so obviously there’s going to be some associated variable expenses. Obviously, the SG&A line is going to be growing but we do feel that we’re going to get leverage. I think if you think about SG&A dollar growth for the year of roughly 10% that’s a decent target.

Sam Poser – Sterne, Agee & Leach

Then just the retail gross margins, you mentioned in the release there’s higher ASPs and higher initial mark ups. Can you sort of tell us how those higher ASPs came to be and then a little bit about the mark ups and how the IMUs are up? Just give us more details there?

Edward R. Rosenfeld

The AUR in retail was driven a lot by the boots and booties. Obviously boots and booties are a small part of the Q1 mix in wholesale but in retail it’s still a very meaningful component. Boots and booties are about 53% of the business, of our women’s business in retail in Q1. That was up 43% from a year ago and that was really a big factor in driving the AUR up. We actually had a double digit AUR increase in retail in Q1.

In terms of the margin, you mentioned the IMU, we did get some increase in the IMU based on sharper factory pricing out of China, better sourcing. The think that I’ll caution you about is we think that’s going to reverse itself to a large degree in the back half. As you’ve probably heard from many people in the industry that prices out of China should be up modestly in the back half. But, the biggest factor in terms of the gross margin was actually not the IMU it was less discounting.

You’ll remember that Q1 of last year was when things were at their most bleak and there was some very heavy discounting, particularly in New York City we were running some buy ones get one 90% off at the time. We obviously didn’t have to anniversary that and so we had a much stronger gross margin performance this year.

Sam Poser – Sterne, Agee & Leach

Lastly, can you give us some details on the incremental men’s business and what the current update of the potential contribution of the Madden line is?

Edward R. Rosenfeld

Well, we’re very pleased about what’s going on with men’s. Our Steve Madden business excluding the new Madden business but the existing Steve Madden business was actually our fastest growing existing wholesale footwear division. It was up about 50% year-over-year so we’re on a real nice trend there. Then, when you layer on this new business Madden, we think we have a chance to have a very, very strong overall men’s performance this year.

Madden continues to do well, we’re really following the Madden Girl play book of offering to a pretty wide universe of retailers. It’s going to go in to department stores, it’s going to go to family channel retailers like DSW, it’s going to go to specialty retailers like Journeys. We set a target on the last call of about $10 million, I think we think we’re going to do a little bit better than that, we can do anywhere between $10 and $15 in the first year under Madden.

Operator

Your next question comes from Heather Boksen – Sidoti & Company, LLC.

Heather Boksen – Sidoti & Company, LLC.

A lot of my questions were already answered but I’m just curious about your uses of cash given the way its building. I know you said it doesn’t seem like there are any acquisitions in the pipeline now so what are your thoughts on what you would do with the cash?

Edward R. Rosenfeld

Well, we have been talking quite a lot about how our priority has been to find acquisitions. We have been very pleased with the two accessories we have done, Madden Zone in July and Big Buddha in February and if we could find more like those we would do them all day. Unfortunately, as I mentioned earlier, there’s really not a lot in the pipeline right now. So as we move through the year if we don’t find the more appealing acquisition targets, I think we’re going to have to look very seriously at returning cash to shareholders. I would suspect it would be likely that we would do that by the end of the year if we don’t find any additional acquisitions.

Operator

Your next question comes from Scott Krasik – BB&T Capital Markets.

Scott Krasik – BB&T Capital Markets

You sort of answered the question on IMU but what was the ASP in wholesale?

Edward R. Rosenfeld

Wholesale, it’s different obviously for the different divisions but it was mid to high singles.

Scott Krasik – BB&T Capital Markets

Then on the retail side you’ve said that AUR was up double digits, were your transactions roughly flat or were they up as well?

Edward R. Rosenfeld

No, units were roughly flat.

Operator

Your next question comes from Susan Sansbury – Miller Tabak & Co, LLC.

Susan Sansbury – Miller Tabak & Co, LLC.

Going back to sourcing costs, do you have any insights in to what the pressure is going to be in 2011?

Edward R. Rosenfeld

I think it’s a little bit too early to say. Again, we’re sort of baking in about a 5% increase for the back half of 2010. Beyond that I think it’s very tough, it would just be speculation, it’s very tough to say. Obviously, a very large unknown factor is what’s going to happen with the currency.

Susan Sansbury – Miller Tabak & Co, LLC.

When do you expect to have some insight for sourcing pressure in 2010? After fall?

Edward R. Rosenfeld

Yes, I think we’re still about four or five months away of having a sense of that.

Operator

At this time there are no further questions. I’ll turn the conference back over for any additional or closing remarks.

Edward R. Rosenfeld

Thanks very much for joining us on the call. We look forward to speaking to you in three months.

Operator

That does conclude today’s teleconference. Thank you all for joining.

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Source: Steve Madden, Ltd. Q1 2010 Earnings Call Transcript
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