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Steven Madden, Ltd. (NASDAQ:SHOO)

Canaccord Genuity 32nd Annual Growth Conference

August 14, 2012 1:30 PM ET

Executives

Ed Rosenfeld – Chairman and CEO

Analysts

Camilo Lyon – Canaccord Genuity

Camilo Lyon

All right, let’s get started here. Good afternoon everyone, my name is Camilo Lyon and I’m the Footwear and Apparel Analyst here at Canaccord Genuity. It’s my great pleasure to introduce to you the Chairman and CEO of Steve Madden, Ed Rosenfeld.

Steve Madden is a leading fashion, footwear, and accessories company with multiple growth avenues that touch nearly every income demographic. The company has made a series of strategic acquisitions over the last two years that we believe will serve as the future growth engines of the company, not the least of which is the acquisition of the Betsey Johnson brand.

In addition, Steve Madden has a burgeoning international business that is growing in excess of 50% annually, yet only represents about 6% of sales. So with that I will turn it over to Ed to give you a little bit more detail around the company and its prospects, thanks.

Ed Rosenfeld

Well thanks, Camilo, and thanks to all you for joining us today. What I’d like to do this afternoon is take you through what we see as the key investment highlights for our business.

I’ll talk to you about our strong and diversified brand portfolio, which allows us to reach a broad consumer audience of women, men, and children wherever they shop. I’ll talk to you about our business model, which has become increasingly diversified over the last several years as we’ve expanded into new brands, new channels, new categories and new geographies.

I’ll touch on our unique capability in footwear and accessories and tell you how it is that we believe we’ve been able to get the fashion right so consistently, season after season. I’ll show you how all this has translated into exceptional financial performance over the last several years, as well as a pristine balance sheet.

And finally, I’ll take you through the host of growth opportunities, which we believe will enable us to continue to drive top and bottom line gains in the years to come.

So when you think about value drivers at Steve Madden, the very first thing that comes to mind is the strength and power of our flagship brand, Steve Madden. Steve Madden has the leading market share in its department in the department stores, that share is currently over 23% of the junior department. If you add our- the other brands that we own, Madden Girl and Report, we’re up over 30% of the junior department in the department stores.

And even if we expand the universe to all fashion footwear brands in the department stores, Steve Madden ranks behind only Ugg, retail and private labels in total, and Coach, so pretty good company.

In addition to a leading market share, Steve Madden also has a leading mind share. In this survey of upper income teens, when girls were asked their favorite footwear brand, Steve Madden ranked number one ahead of brands even, ahead even of Nike. So we feel that we have a pretty strong engine at the core of our company in the Steve Madden brand.

But what we’ve also done, is assembled a diversified portfolio of other brands that allow us to reach customers shopping at all tiers of distribution, from mass all the way up to luxury. I think this chart really illustrates how we use our owned and licensed brands to sell everybody from Wal-Mart at the top, all the way up to Neiman Marcus, excuse me, Wal-Mart at the bottom all the way up to Neiman Marcus at the top and virtually everybody in between.

Now let’s touch briefly on our business model. Wholesale accounts for 85% of our net sales and the balance of our sales come from our company-owned retail stores. We currently have 96 company-owned retail stores including two e-commerce stores.

We also have two businesses that have recorded other income on the income statement, so they don’t contribute to the top line but they do contribute to operating income, those being our first-cost business, where we act as a buying agent in procuring private-label footwear for various retailers and our licensing business where we collect royalty income for the use of our brand names on various products.

As I mentioned earlier, over the last several years, we have been working to diversify each of our principle segments. You can see that back in 2005, our wholesale business was comprised 100% of footwear sold in the US. Today, approximately 28% of our business is done in accessories and in our growing international business.

Similarly, in retail, we were 96% bricks and mortar, only 4% e-commerce back in 2005, whereas today we’re up almost to 20% e-commerce in our direct-to-consumer channel. Our success in all of these brands, channels and businesses is predicated on our unique ability to create trend-right footwear and accessories and deliver them to market in a timely fashion.

So how have we been able to do that so consistently? Number one, we do believe it’s a testament to our design team. We think we’ve assembled the best design team in the industry, led of course by our founder, Steve Madden.

But in addition to that, there are a couple things about our business model that differentiate us from our competitors and help us to mitigate fashion risk. The first is our test and react model, where we test products in our retail stores and leverage selected winners into the wholesale channel.

So how does this actually work? Well, one of the things that we have that is very unique, in fact I don’t know of any other major domestic shoe company that does this, is that we have a little sample factory right in our office in our corporate headquarters in Queens.

So what that means is that Steve Madden, or one of our other designers, can have an idea for a shoe in the morning, they’ll come in, we’ll make up a sample right there in Queens by lunchtime, Steve can make corrections on it in the afternoon, and we’ll have a finished prototype by the end of the day.

If this is a product that we think could be interesting for our consumer, we’ll make up a couple of cases right there in Queens the very next day and shoot them overnight, shoot them out overnight, to selected Steve Madden stores.

We then monitor the selling very carefully, and within a week we generally have a very good idea about whether this is a product that’s a winner, we should immediately put a sample into a salesman’s hand to take to customers like Nordstrom and also place a mass-production order in Chin, or – and these are just as valuable, these tests – guess what, the customer didn’t respond to this one, let’s move on, let’s not make an inventory mistake and let’s not sell something to our consumer, to our customers, that’s not going to work for them.

This has been – this process has been really critical to our success and our ability to be trend-right over the years and then we’ve married that up with an industry-leading speed to market.

We’ve managed to shorten lead times to as short as six to eight weeks, versus an industry standard of three to four months, which enables us to work close to season and has been a real primary competitive advantage in the fast-moving trend business in which we operate.

If you need proof that this model works, you need look no further than our financial performance over the last several years. Despite the challenging retail environment and economic environment, we’ve grown net sales from $457 million in 2008 to $1,148,000,000 in the latest 12-month period and we’ve taken EBITDA from $61 million to $178 million over that same time period.

That’s a 30% compounded annual growth rate in net sales and a 36% (inaudible) in EBITDA. Net income and diluted EPS have grown at an even faster rate. You can see that EPS has gone from $0.74 in 2008 to $2.39 in the latest 12-month period. Our current guidance for the fiscal year 2012 is for EPS to be in the range of $2.67 to $2.77.

We also have a very strong financial foundation. As of the end of last quarter, we had approximately $190 million in cash, and no debt. And we turned our inventory an industry leading 10.5 times per year. That’s approximately once a quarter in retail and approximately once a month in wholesale.

So the performance over the last several years has been very strong, but how are we going to continue that momentum? Now I’d like to talk about the multiple growth opportunities which we believe will enable us to continue to drive sales and profitability gains in the back half of 2012, and in the years to come.

The first big opportunity is to continue to develop our newer brands. We’ve added nine new brands to our portfolio since 2009. Some have come through acquisition, some through license, and some are diffusion brands that we’ve created in-house.

But each of these is early in its lifecycle and has enormous opportunity before both door growth and expanded assortment within existing doors. Most recently, we launched Superga this past spring. Superga’s an Italian fashion sneaker brand for which we are the North American licensee. We’re distributed in retailers like Nordstrom, J Crew, Urban Outfitters and top independents, and the initial reaction to (audio gap).

Next brand on tap is (inaudible). We don’t even have that on the page yet. But that’s launching in JC Penny next month. It’s a diffusion brand from Betsey Johnson and we will be distributing a number of categories there.

The categories that we’ll be doing in-house are shoes, bags, cold weather accessories and sun glasses will be coming for spring and then we’ve also licensed our watches, jewelry, intimate apparel and hosiery. As I said, that will be in 600 JC Penny doors starting in September.

The second big opportunity is to continue to grow our business outside of footwear and this is the part of the business that’s actually growing the fastest right now. In the most recent quarter, our in-house accessories business was up 86% year-over-year.

Now, there is some growth through acquisition in there but even if we exclude our cold weather accessories acquisition that we made in May of last year, our organic net sales growth in the most recent quarter was 65% as primarily coming from the outstanding trends in our handbag business where we’re seeing strong growth in Steve Madden handbags, Betsey Johnson handbags, Big Buddha handbags as well as our private label (hand eye) business.

That’s what we do in-house. The other part of our activities outside of footwear comes in our licensing business and we currently have that $9 million in annual licensing royalty income net of expenses, so those are EBIT dollars. That’s from about $4 million just a couple of years ago and we are very actively adding new categories to our licensing portfolio.

We launched Betsey Johnson luggage earlier this year. Steve Madden loungewear launches this month as a Nordstrom exclusive. We’re launching a new fragrance from Betsey Johnson in September and we’ll be relaunching Betsey Johnson dresses for spring of 2013.

So this is a business that we feel should be generating between $15 million and $20 million of royalty income net expenses over the next few years.

Third, there is the direct consumer business, our retail business. Back in 2008, we had an operating loss in this business of $4 million but we have executed a major turnaround here. We were very proactive backing out of some bad doors, so we were actually a net store closer over the last few years.

But we have now rejuvenated this business. We’ve gone from an operating loss of $4 million to operating income of $21 million in the latest 12 months, so it’s just about a $25 million swing in EBIT and now that we’ve got the profitability of the existing – we’ve restored the profitability of the existing chain, we’re once again in expansion mode and this year we’re adding 14 full price stores, five outlets.

We acquired seven stores in Canada through the acquisition of our Canadian licensee and we’re also opening two e-commerce stores, so part of a usa.com and betsyjohnson.com. So when you put that all together, we are increasing the number of stores from 84 at the end of 2011 to 108 at the end of 2012.

And then finally, last but not least, there is international and as you can see where our net sales international are about $65 million currently, still, as Camilo pointed out, single digits as a percentage of sales, but very nice sales trends here, up over 50% in each of 2010, 2011 and in the 2012 year-to-date period, with the exception of the Canadian business that we just acquired.

We do this business all through partners in local countries and we’re getting outstanding growth with existing partners in places like the Middle East and Latin America. But we’re also actively entering new territories.

We launched in the UK in spring. We’re entering France, Germany and Scandinavia in fall and we’re also entering North Africa and some of the CIS countries this fall. So this is a business where we’re really just in our infancy, really scratching the surface of our potential here and we’ll be disappointed if we can’t triple this business over the next four to five years.

As I mentioned, we also took possession or direct ownership of our business international market for the first time back in February with the acquisition of our Canadian licensee and we’re very bullish on our prospects there.

So when you put that all together, we’re very energized and excited about our position at Steve Madden right now. We have outstanding brands and a proven business model and a whole host of meaningful growth opportunities which we believe will enable us to continue to create significant value for our shareholders over the long term.

So with that, do we have time for questions? Great.

Question-and-Answer Session

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Ed Rosenfeld

Yes, we’re pretty excited about this upcoming and booty season. As you mentioned, we’ve had a number of strong boot years in a row at Steve Madden. And we’re very pleased because the early readings are very strong.

Nordstrom anniversary sale finished up about a week ago and that’s usually a very strong early indicator of fall trends and the – we have done boots and booties from that sale were outstanding and we got great reads on tall shaft riding boots, also short booties.

We feel very good about the studs that we’ve been talking about for the last few months, so we’ve got a lot of trends there that we’re excited about and we think it’s going to be a good boot season.

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Ed Rosenfeld

Yes, I mean, I think the AURs this year, so far this year they’ve been flattish compared to last year and I think that’s our expectation is that the back half will also be flattish.

You’ve got some puts and takes there. But I think certainly some of the ornamentation, the studs, leads you to higher AURs but the fact that some of them, the shaft types are coming down on some of the boots would be lower. So when you put it all together you’re looking at sort of flattish AURs.

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Ed Rosenfeld

Yes, sure. It’s hard to determine exactly what the impact of the shift to color denim is on footwear. I think that we all feel pretty confident that when there’s a change in the silhouette, that is if the customer goes from skinny jeans to flare or from jeans to dresses, et cetera, that that’s a big driver of footwear purchases.

It’s less clear what the color denim is doing. Certainly we’re doing some color within our line and having some nice success with that and I think in particular that’s something that we’re able to capitalize on with Betsey Johnson line. But for the most part, we don’t see it as a huge driver. Oh, go ahead.

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Ed Rosenfeld

Would we reconsider?

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Ed Rosenfeld

Oh, in Europe, yes. Yes, so basically we’re doing this in a fairly low risk and cautious way because we’re doing it through partners. And right now our partners are primarily focusing on wholesale and chop and shops as opposed to retail.

Now frankly, the risk isn’t ours in retail. There’s brand risk but there’s not capital risk for us because they build the stores, they own the stores, they own the inventory, et cetera. But right now we’re focusing on working through the partners and they’re doing wholesale.

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Ed Rosenfeld

Right.

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Ed Rosenfeld

Sure. Yes, I mean, I think that’s been a great transaction for us. We’re really excited about the momentum that we have in Betsey Johnson. We’re doing certain categories in-house.

Of course, we’re doing shoes, handbags, cold weather accessories in-house. We’re doing a little north of $30 million in Betsey Johnson right now. We’ll be disappointed if we can’t double that number over the next three years and, frankly, I hope that we can do quite a bit better than that.

But we’ve also got a very healthy licensing business there. Betsey Johnson now makes up over half of our licensing revenue and we’re somewhere around $5 million in annual licensing income and, again, that’s (audio cut off).

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Ed Rosenfeld

It’s possible. We’ll see. I don’t think we want – we want to make sure we don’t dilute the brand too much and we really do want to put the primary focus on the core Betsey Johnson brand.

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Ed Rosenfeld

Yes.

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Ed Rosenfeld

Yes, so we’re really – we really are just about to get started on Betsey Johnson international. Many of our international partners are very excited about the brand. Some, in fact, have told us they think it can be bigger than Steve Madden.

And so we’re opening our first Betsey Johnson stores at the tail end of this year with our partner in Asia GRI that’s going to open some stores in China for us.

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Ed Rosenfeld

Yes, we’re still very interested in doing acquisitions and we’re still actively looking at things and there are some interesting properties that have been available this year.

But we’ve been a little frustrated because it’s been hard to agree on valuation. The seller expectations have been a little out of whack in our view. Maybe they think that our view of valuation doesn’t make sense.

But at any rate, we haven’t been able to get together on price. And so that’s been a little bit more challenging. That’s why we haven’t gotten anything done of late after quite a bit of acquisition activity over the last couple years. Yes, sir.

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Ed Rosenfeld

The Canadian licensee?

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Ed Rosenfeld

Yes, well like I said, he was our licensee just for Steve Madden. But now that it’s in-house, we’re going to start to expand the rest of the brand portfolio in Canada and we’ll be doing Betsey Johnson and Big Buddha and everything else that we own there.

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Ed Rosenfeld

Sure.

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Ed Rosenfeld

Yes, so last year we acquired a company called Top Line and when – a primary rationale on that transaction was that Top Line had one of the premier direct sourcing operations in Asia.

And prior to that acquisition we were sourcing virtually all of our footwear through agents, whereas Top Line was doing 100% of their sourcing direct with the factories through this office of this organization that they had in Asia.

So now that we’ve acquired that capability, we’re starting to transition some of our business from the agent model to the direct sourcing model. We’re currently at probably 12% or 13% of our legacy business going direct and over the next four years or so we’re going to try to get that to roughly 50% to 60%.

And if we can do that or when we do that we believe that the opportunity – that there’s about a 200 basis point opportunity to gross margin there. So in fact, we’re already seeing some modest gross margin impact from the 12% to 13% that we’ve already moved there and we expect to see about a 40 basis point improvement in the back half here from that.

Great, well, thanks very much for joining us.

Question-and-Answer Session

[No Q&A session for this event]

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