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Steve Madden, Ltd. (NASDAQ:SHOO)

Q2 2010 Earnings Call Transcript

July 29, 2010 8:30 am ET

Executives

Jean Fontana – IR, ICR Inc.

Ed Rosenfeld – Chairman & CEO

Analysts

Claire Gallagher – CapStone Investments

Kelly Hauser – BB&T Capital Markets

Jeff Van Sinderen – B. Riley

Sam Poser – Sterne Agee

Heather Boksen – Sidoti & Company

Operator

Good day, everyone and welcome to the Steve Madden, Ltd. 2010 second quarter earnings conference call. Today’s call is being recorded.

For opening remarks and introductions, I would like to turn the call over to Ms. Jean Fontana of ICR. Please go ahead, Ms. Fontana.

Jean Fontana

Thank you. Good morning, everyone. Thank you for joining us for the discussion of Steve Madden’s second 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 to generally 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; this could cause actual results to differ. Finally, please note that any forward-looking statements in this or used in this conference 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.

Ed Rosenfeld

Thanks, Jean. Good morning and thank you for joining us today. We are very pleased to report that we delivered the highest sales and earnings results in the company's history in the second quarter.

During the quarter, consolidated net sales increased 36% to $158.7 million and net income grew to $19.8 million, a 63% increase compared to the second quarter of last year. Our performance reflects strong momentum in our core business, as well as significant contributions from our newer business ventures.

On the wholesale side, we achieved strong gains in our core Steve Madden Women's, Steven by Steve Madden, and Madden Girl wholesale footwear divisions. We also continued to see outstanding growth from our Men's business with a substantial increase in our Steve Madden Men's division, supplemented by a strong contribution from our new men's brand, Madden. International also accelerated, recording top line growth in excess of 50%, driven by big year-over-year increases with our existing partners in Asia and Canada, as well as incremental business with new partners in Israel and Australia.

Whole accessories was another bright spot with a 79% net sales increase, resulting from 18% organic growth in addition to the sales contributions from our two recent acquisitions, Madden Zone and Big Buddha. I am very pleased with these acquisitions, both of which are exceeding expectations for sales and earnings.

Meanwhile, our retail business delivered increased profitability for the sixth straight quarter, driven by a 7.4% comp store sales growth and 350 basis points of gross margin expansion. Overall, we believe that our ability to deliver outstanding growth in a still challenging retail environment demonstrates the unique capabilities of Steve and his design team; strength of our brand portfolio; benefits of our diversification by channel, product, and category; and the resiliency of our business model.

Turning to the details of our financial results for the quarter. As I said [ph], consolidated net sales for the second quarter of fiscal 2010 were $158.7 million, a 36% increase over the second quarter of 2009.

Wholesale net sales increased 46% to $129.2 million compared to $88.2 million in the second quarter of 2009, driven by gains in both our wholesale footwear and accessories divisions. Wholesale footwear net sales increased 40% in the second quarter to $104.2 million compared to $74.2 million last year. This increase was driven by solid gains across all existing wholesale footwear divisions, as well as contributions from our new men's brand, Madden, launched in the fourth quarter of 2009 and the mass-merchant business which transitioned from a buying agency model to a selling agency model this year.

Net sales in our wholesale accessories business grew 79% to $25 million in the second quarter of 2010 as compared to $14 million in the second – same quarter last year. As stated earlier, this was a combination of the addition of Madden Zone, acquired in July 2009, and Big Buddha Handbags, acquired in February 2010 with 18% organic growth, driven by the exceptional performance of Steve Madden Handbags and strong growth in private-label belts.

In our retail division, net sales increased 4% to $29.5 million versus $28.3 million in last year's second quarter, driven by a comparable store sales increase of 7.4%, offset by 10 net store closings since the beginning of second quarter last year. Comp increases, primarily driven by higher AURs, as a result of a mix shift toward wedges and dress shoes, and away from flat sandals. Sales per square foot grew to $690 at stores opened for the 12 months ended June 30th, 2010 compared to $627 in sales per square foot for stores opened for the 12 months ended June 30th, 2009.

Looking back at the last 12 months, we generated approximately $4.4 million in operating income in our retail segment or about 3.5% of sales. This compares to an operating loss of $2.9 million in the prior 12 months ended June 30th, 2009. While we are certainly not satisfied with the 3.5% operating margin, we are pleased that we are moving in the right direction and have now shown year-over-year improvement for six quarters in a row. During the second quarter, we closed one store, ending the quarter with 84 company-owned retail locations, including our Internet store.

Turning to other income. Commission and licensing income, net of expenses, was $5.2 million in the quarter as compared to $7.4 million in last year's second quarter. As discussed in the last call, this decline was expected and is primarily a result of the transition of one of our mass-merchant customers from a buying agency model to a selling agency model, as well as unusual timing of shipments in 2009, which caused Q1 income to be unusually small and Q2 income to be unusually large last year.

Consolidated gross margin for the second quarter increased to 43.4% from 42.6% in the comparable period last year, driven by a margin improvement in both the wholesale and retail segments.

Wholesale gross margin increased 190 basis points to 38.7% from 36.8% in the same period last year, driven primarily by improvement in our wholesale accessories division, as a result of fewer markdown allowances and the addition of the higher-margin Big Buddha business.

Gross margin in the retail division was 63.9% in the second quarter of 2010 compared to 60.4% in the second quarter of last year, a 350-basis point increase, driven primarily by less promotional activity.

Operating expenses totaled $42 million in the second quarter or a 26.5% of net sales compared to $37.6 million or 32.2% of net sales a year ago. 580-basis point year-over-year improvement was primarily due to leverage on higher sales.

Operating income for the second quarter of 2010 rose to $32.1 million or 20.2% of net sales compared to $19.4 million or 16.6% of net sales in last year's second quarter. Net income was $19.8 million or $0.70 per diluted share compared to $12.1 million or $0.44 per diluted share in the prior year's second quarter.

Turning to our balance sheet, as of June 30th, 2010, we had approximately $164 million in cash and marketable securities and no debt. We ended the second quarter with inventory of $44.5 million, up from $29 million in the second quarter of last year. Inventory build was in support of projected shipments in July, which outpaced the percent increase in inventory. Our inventory turn over the last 12 months was 9.9 times, up from 8.6 times a year ago.

Accounts receivable and due from factor totaled $85.1 million at the end of the second quarter, plus an average collection of 55 days. FX for the quarter was $600,000 and total stockowners equity as of June 30th, 2010, was $307.2 million. We also spent approximately $4.6 million of our recent share repurchase authorization in the quarter, buying back approximately 141,000 shares at an average price of $32.23.

Looking ahead, we will remain focused on executing on the key growth strategies we previously outlined. First, we remain committed to maintain the momentum in our core business by continuing to deliver trend-right merchandise to our customers in a timely fashion.

Our Steve Men and Women's, Madden Girl, and Steven Wholesale divisions are the heart of our business. Maintaining fashion leadership in those brands is a key factor in the long-term success of our company and will remain our number one priority. Steve and his team have come up with a great lineup of new styles for fall that we feel very good about.

Second, we see significant growth opportunity in our newer brands. We plan continue to diversify our brand portfolio. Just in the last 12 months, we launched our new licensed brand Olsenboye at JCPenney, developed our new men's brand Madden in-house, and acquired the Big Buddha Handbag business.

And so far in Q3, we have made our first shipment in two new divisions, Material Girl and Big Buddha footwear. Material Girl is a new juniors' brand exclusive to Macy's. We've just shipped the first footwear, handbags, and belts for 200 doors. We also just made our first shipments of Big Buddha shoes, as we capitalize on the momentum of Big Buddha Handbags and the line of footwear that will be carried in specialty stores, better department stores, and shoe chains.

Third, we continue to see great opportunity to grow our business outside of footwear. Our two acquisitions, Madden Zone and Big Buddha, are both off to terrific starts under Steve Madden ownership and our Steve Madden Handbag business is experiencing outstanding growth as well.

In addition to the growth from our in-house accessories arm, we are also bullish about the prospects for our licensing business. Our Steve Madden apparel collection, which we launched in the spring 2010 selling season, is building momentum. We are in 180 doors for fall with Nordstrom, Dillard's, Macy's, Belk, and Bon-Ton. In addition, based on the strong initial sell-throughs we experienced with Macy's, we are adding a new category for them for spring 2011, special-occasion dresses, with average retails of $90 to $200. The dresses will be carried in Macy's top 50 dress stores in spring.

The fourth area of focus is continuing to build upon the profitability gains we have achieved in our retail division. We are pleased with our recent gains, but still have a long way to go and see significant opportunity for improvement. In addition to improving the profitability of the existing full-price chain, we are also preparing to test an outlet strategy, and recently hired an experienced executive to lead this initiative. We are currently in the process of negotiating with landlords on locations and look forward to updating you on our progress in the near future.

Of course, continuing to grow stevemadden.com is a critically important piece of our overall retail strategy. The entire e-commerce channel is an important growth driver for our company, as we focus not only on growing our own online business, but also on growing our wholesale business to pure-play online retailers like Zappos and Amazon, as well as to the e-commerce sites of our brick-and-mortar retailers like nordstrom.com and macys.com. We are also hard at work on a Big Buddha e-commerce site, which is scheduled to go live in October of this year.

Finally, our international business offers tremendous growth potential. At approximately $25 million as of the last 12 months ended June 30th, 2010, or less than 5% of consolidated net sales, we are still in the very early stages of building our business outside the U.S. We are seeing very strong traction and are pleased with the acceleration of this business that started in Q2 and is continuing into Q3.

In addition to outstanding growth from existing partners like GRI in Asia, we have also signed new partnership agreements in Russia, Saudi Arabia, and Central America, and are currently in discussions with potential partners in the UAE, Benelux, and South Africa. The response to the Steve Madden brand in international markets has exceeded expectations. We expect this to become a more meaningful part of our business in coming years.

Before I turn to guidance, I would like to address concerns surrounding rising costs in China. We are currently seeing increases in our cost of goods from Southern China, averaging approximately 5%. We are working to mitigate this pressure by moving more production to the north of China where costs remain lower and to a lesser extent, by shifting some production to other countries such as Mexico. We also believe that we will be able to pass at least a portion of these price increases on to the consumer as we have done in past periods of cost inflation.

While we are cognizant of the fact that we are operating in a retail environment where the consumer is particularly focused on value, and therefore baked modest gross margin pressure from rising costs in China into our guidance for the back half.

Speaking of guidance, for the full year 2010, we now expect net sales to increase 22% to 24% compared to fiscal 2009. Diluted EPS is now expected to be in the range of $2.45 to $2.55. This reflects an increase from our previous guidance of $2.30 to $2.40.

In conclusion, we are pleased with the strong gains we have made and our record financial performance in the quarter. We see great opportunity for continued growth and improvement in our business. In the beginning of this year, we established a goal of doubling EPS in five years. We believe that the momentum we have generated this year and the growth initiatives I outlined earlier have us on track to meet that objective.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We will take our first question from Claire Gallagher with CapStone Investments.

Claire Gallagher – CapStone Investments

Hi.

Ed Rosenfeld

Hi, Claire.

Claire Gallagher – CapStone Investments

Congratulations on a great quarter.

Ed Rosenfeld

Thank you.

Claire Gallagher – CapStone Investments

So I just wanted to get an update, if you don't mind. A little bit more detail on what you are doing here with Macy's. I – could you –it was a Material Girl that you called it?

Ed Rosenfeld

Yes. Material Girl is a new brand. It's a brand created as a joint venture with Madonna and Iconix and it's an exclusive juniors' brand for Macy's. And we are the vendor for shoes, handbags, and belts and first shipments went to (inaudible) about a week ago and it's going to be about 200 doors and real – again, real junior product, much younger than Steve Madden. And they are really going after that Forever 21 customer. The retails on the shoes will be $20 to $40; boots will be up to maybe $60. And it's something we are really excited about.

Claire Gallagher – CapStone Investments

Okay. That sounds great. And then just so I heard you correctly, did you say that the Big Buddha shoes – did they already start shipping?

Ed Rosenfeld

Yes. We just started shipping Big Buddha shoes again within the last week or two.

Claire Gallagher – CapStone Investments

Okay, great. So you don't have any feel for how the consumer responds to that product yet?

Ed Rosenfeld

No, it's a little too early for that. But the reaction from the buyers was great.

Claire Gallagher – CapStone Investments

Okay, great. And then just very quickly, could you touch again on just the international business? I know you mentioned that you are seeing some traction in Asia and whatnot. And can you just kind of update us there on what you are seeing, what the tone is, just kind of from a consumer perspective overseas?

Ed Rosenfeld

Yes. I mean, this is really exciting, because we talked – I believe it was on the last call, a little bit about how we kind of had a year of – where we took a pause from growth in this business. Due to the global recession, we had some distributors that we had to change, et cetera, but we really feel now that we are poised to grow again and we had a – our best quarter ever in second quarter. As I said, we are up over 50% in that business.

A big driver, as you mentioned, was Asia. That business was about double this year versus last year in the second quarter; and it's going to have another big quarter in Q3, again with north of 50% growth. And we are just seeing a lot of traction there and see this as a big opportunity for us moving forward.

Claire Gallagher – CapStone Investments

Great. Well, thank you so much and good luck.

Ed Rosenfeld

Thanks, Claire.

Operator

(Operator instructions) Next, we will hear from Scott Krasik with BB&T Capital Markets.

Kelly Hauser – BB&T Capital Markets

Hi, Ed. This is Kelly calling in for Scott.

Ed Rosenfeld

Hi, Kelly.

Kelly Hauser – BB&T Capital Markets

Hi. Congratulations on a great quarter.

Ed Rosenfeld

Thank you.

Kelly Hauser – BB&T Capital Markets

My first question is about gross margins. What does your guidance assume for gross margins in the back half of the year, specifically your wholesale gross margin? If boots are good this year, but maybe not as good as they were last year, can you still maintain or get close to the gross margin from last year through other measures?

Ed Rosenfeld

Yes. I think that we may see wholesale margins down very modestly from a year ago. Keep in mind that we do have that mass-merchant business, which has moved from the other income line into the top line sales number, which does dilute the gross margin by about 100 basis points. And then we have also got modest pressure, maybe 50 basis points from the rising costs in China.

We don't believe that we are going to be down 150 basis points, by the way. We are going to offset some of that through other gains, particularly through mix shifts – positive mix shifts, as we grow some of our higher-margin businesses. But I think we could be down very modestly in wholesale. And then we think that there is an opportunity to be up in retail. And so when you put it all together, I think that we are going to continue to say what we have been saying, which is that sort of 43 and change each quarter is a good target for us for the rest of the year.

Kelly Hauser – BB&T Capital Markets

Okay, that's helpful. And I just wanted to talk about Madden Men's for a second. Has the timing or the magnitude of Madden Men's ramp-up changed with its solid early performance?

Ed Rosenfeld

Yes. I mean, I guess it's accelerated a little bit. We have been really pleased with the launch there. And we now think we can do about $15 million this year, right out of the gate. I mean, our initial estimate was $10 million, then we raised that to $10 million to $15 million, and I think now we feel pretty good about hitting that $15 million target.

Kelly Hauser – BB&T Capital Markets

Okay. Great. And my last question is – how confident are you that you can continue to grow within existing doors, given how strong it's been for you guys in the last 18 months or so? Like specifically, do you think you can still grow your product assortment within the Steve Madden brand or will you continue to grow through new brand extensions, et cetera, kind of – like the Big Buddha footwear?

Ed Rosenfeld

Yes. Well, we have opportunity to grow Steve Madden. But you are right, that is a more mature business; we already have the number one market share in our department with virtually all of our biggest customers there. Great product, we have – I think we have shown in the past that if we have great products, we can turn good and still see growth there. But you are right, there are other brands, be it Madden Girl, Big Buddha, et cetera, where we have significantly more opportunity to expand assortment and grow within the existing doors.

Kelly Hauser – BB&T Capital Markets

Okay, great. Well, congrats again. Thank you.

Ed Rosenfeld

Thanks a lot.

Operator

Next, we will take Jeff Van Sinderen with B. Riley.

Jeff Van Sinderen – B. Riley

Good morning. I wonder, Ed, if you can comment on the outlet business, and I know it's still early in where you are with that, but in terms of what – how you are thinking about that business and how you are approaching it.

Ed Rosenfeld

Yes. Well, that's something that, as you know, we have been looking at for some time. We really felt that it was important to bring in someone with a lot of experience at running an outlet chain, because it is a different business from the full-price retail business that we are in.

And as you recall, we were close a while ago and didn't get our person at that time. And so that sort of slowed us down a bit. But we have – we now have found the person that we think is the right executive to run this, someone that has been very successful running a chain for one of our competitors. And so he is going to start with us in a couple of weeks here and we are currently working on negotiating leases. And the idea would be to try to start with a test of, let's say, three to five outlets, and we will see where that goes.

Jeff Van Sinderen – B. Riley

Okay. And then how do you feel about the boot business for second half versus more challenging comparisons to last year? And do you think there is anything to replace the strong boot trend that we have been seeing? I guess just anything you can say there about continuing momentum in boots?

Ed Rosenfeld

Yes. I mean, we feel very good about the boots season. We have gotten some very good early reads here. We had very good reads from the Nordstrom anniversary sale, as well as the Macy's pre-season event. And we are also running a pre-fall event in our stores called Sneak-Peak, where we have gotten some good reads on boots. So, all indications are pretty positive about the boots season. In terms of other categories, the dress category is much, much stronger this year than it was a year ago. We are selling a lot of pumps right now. And so that's been good to see as well.

Jeff Van Sinderen – B. Riley

Okay, good. And then I know you are shifting sourcing a little bit in terms of the regions that are going to be actually manufacturing the product. How are you thinking about quality? And I know you said you are shifting some to Mexico. Has the quality so far that you have been seeing held up or been flat or better or – maybe any comments on that would be helpful.

Ed Rosenfeld

Yes, I mean, we are – obviously that's something that we are very focused on. The quality from Mexico is very good. There are certain types of products that they do much better in Mexico than in China, certain boots and other sort of more rugged, distressed looks. So we have been focusing on Mexico for those types of looks. And in terms of moving production to the north of China, the key there is that you have to have bigger quantities, and when you do, you can get the right quality out of northern China.

Jeff Van Sinderen – B. Riley

Okay, great to hear. Congratulations and good luck this quarter.

Ed Rosenfeld

Thank you.

Operator

Next, we will hear from Sam Poser with Sterne Agee.

Sam Poser – Sterne Agee

Good morning, Ed. How are you?

Ed Rosenfeld

Hi, Sam.

Sam Poser – Sterne Agee

Hi. Can you give us a breakdown of the men's, of what the overall men's revenue was for the – the revenue by segment for us, please? Number one. By men's, Madden and so on.

Ed Rosenfeld

Well, we don't usually do that, as you know.

Sam Poser – Sterne Agee

You do the men's – you do give the men's, you do give the men's on the Q.

Ed Rosenfeld

The overall men's is $17.8 million. About $3.5 million of that was Madden.

Sam Poser – Sterne Agee

Okay, cool. And in your guidance assumptions – in your guidance, as far as the revenue assumptions, what is your assumption for wholesale? How do you break out the growth wholesale, retail, and then accessories? I mean, you said you expected accessories to be up 50% again next quarter, but how do you look at – how do you look at your – the assumptions for the balance of the year there?

Ed Rosenfeld

Yes, so wholesale – we put an overall number of 22% to 24%. Wholesale should be, say, 29% to 31%, somewhere in there for the full year. And retail, 2% to 4%.

Sam Poser – Sterne Agee

And that wholesale number is inclusive of that accessory growth, correct?

Ed Rosenfeld

Yes, it is. So the accessory growth is going to be faster than that, particularly because of the acquisitions. If you are just looking at wholesale footwear, you are talking about more or like 26% to 28% growth year-over-year.

Sam Poser – Sterne Agee

Okay. And then you started speaking about what your learnings were from the Nordstrom sale. And you mentioned Macy's as well. On a relative basis to last year, when you are looking at the boots and what you had, I mean, what – is the performance – or – is the performance better this year than it was last year, units or rate or – and so on, between this? I heard one of those Steven boots almost disappeared quickly.

Ed Rosenfeld

Yes, yes. We had a great event with Steven or we are having a great event with Steven. Yes, I would say we are a little bit ahead of where we were a year ago.

Sam Poser – Sterne Agee

And those – what have you taken away? I mean, as I think there was a little concern in the past about the boot business. But I mean, we are hearing boots are going to be very strong again. What are you – what are you assuming for your boot business? Are you assuming growth in the guidance? I mean, it's – it looks like you must be with the numbers.

Ed Rosenfeld

Yes. And I think it's going to be – in the guidance has it basically flat to last year.

Sam Poser – Sterne Agee

Okay. And then last – and then lastly, could you give us what you – you did – you leveraged your – just your expenses quite well. How do you look at that for the back half of the year as well? I mean, you said about 43-plus on the margin line. What do we – what should – how should we think about SG&A?

Ed Rosenfeld

Well, SG&A should be a little bit higher in the back half than it was in the first half for two reasons. One, we think we are going to do more sales in the back half than we did in the first half. So there are some variable expenses. And then two, we are looking at doing a little bit more advertising and marketing than – in the back half than we did in the first half. But for the full year, we previously outlined a SG&A dollar growth of about 10%. I think now, as we have taken the sales up significantly, (inaudible) more or like 7% to 12% growth in the SG&A line.

Sam Poser – Sterne Agee

Okay, great. Well, continued success. Thanks.

Ed Rosenfeld

Thank you.

Operator

And we will take a question from Heather Boksen with Sidoti & Company.

Heather Boksen – Sidoti & Company

Good morning, Ed. Just a couple questions on the new Big Buddha shoes line. What are the price points going to be for that? Maybe if you can tell us what accounts are signed or buying it so far and how many doors it's going to be in.

Ed Rosenfeld

Sure. The retails will be 50, 60 bucks for shoes with boots going up to about 80 bucks. Similar to the bags, this is a non-leather product, it's made out of synthetics; it's a pretty casual line. And in terms of customers, we have got some of the better department stores signed up, Dillard's, Belk, et cetera. We have also got some specialty guys like Bakers; we will sell to DSW of course; and then it will be independent boutiques.

Heather Boksen – Sidoti & Company

All right. Thanks. And one more question. On the international business, about what percent of the business is it currently, and what's the goal for that?

Ed Rosenfeld

Well, it's under 5% right now, at 25 – at about $25 million. But we really think that business should be $100 million over the next four or five years.

Heather Boksen – Sidoti & Company

All right. Thanks, guys.

Operator

At this time, we will take a follow-up from Sam Poser with Sterne Agee.

Sam Poser – Sterne Agee

Thanks. Can you give a – two things. Can you give us some indication of if there is any information on your backlog, especially, I guess, more on the Madden Girl and Men's as well? Also, can you talk about the timing of those store openings of the outlets?

Ed Rosenfeld

Sure. Well, in terms of backlog, as you know, we don't ever talk about that on these calls, but – primarily because we just don't think it's a terribly reliable indicator in our business where everything moves so quickly. But I can certainly tell you that we took the backlog into account in coming up with our guidance, and certainly the backlog supports the sales guidance that we provided.

In terms of the outlet openings, I would love to get a couple opened in this year, but it really depends on whether we can find the – cut the right deals with the landlords. So – vis-à-vis fourth quarter this year or it will be in the next (inaudible).

Sam Poser – Sterne Agee

Thanks very much. And again, continued success.

Ed Rosenfeld

Thanks, Sam.

Operator

And that is all the time we have for questions today. At this time, I will turn things back over to – for our – to our presenters for any additional or closing remarks.

Ed Rosenfeld

Okay. Well, thanks so much for joining us on the call. And we look forward to speaking to you on the next call.

Operator

And that does conclude today's teleconference. Thank you all for joining.

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