Steve Madden, Ltd. F2Q08 (Qtr End 06/30/08) Earnings Call Transcript

Aug. 5.08 | About: Steven Madden, (SHOO)

Steve Madden, Ltd. (NASDAQ:SHOO)

Q2 2008 Earnings Call

August 5, 2008 10:00 am ET

Executives

Leigh Parrish – Financial Dynamics

Edward Rosenfeld – Interim CEO

Analysts

Scott Krasik - C.L. King & Associates

Sam Poser - Sterne, Agee & Leach

Jeff Van Sinderen - B. Riley & Company

Jeff Mintz - Wedbush Morgan Securities

Heather Boksen - Sedoti & Company

Susan Sansbury – Miller Tabak & Co.

Operator

Good morning ladies and gentlemen and welcome to the Steven Madden Ltd. conference call. (Operator Instructions) I would like to introduce your host for today's conference, Ms. Leigh Parrish, of Financial Dynamics; please go ahead.

Leigh Parrish

Good morning and thank you for joining this discussion of Steven Madden Ltd. second quarter results. Before we begin I'd 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, uncertainties and other unknown factors that could cause the actual results of the company to be materially different from the 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 report and registration statements filed with the SEC.

Also please refer to the 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 should not be relied upon as current after today.

I'd now like to turn the call over to Edward Rosenfeld, Interim CEO of Steven Madden Ltd.

Edward Rosenfeld

Thanks Leigh, and thank you for joining us today. On today’s call I will review the company’s results for the second quarter ended June 30, 2008 and provide an update on our outlook for the remainder of the year.

While our performance in the second quarter once again reflected the ongoing weakness of the economy we continued to build on our momentum from earlier in the year. In particular the results in our Madden Girl and Daniel M. Friedman divisions were bright spots as both experienced strong sales growth versus last year.

While results of other brands such as Steve Madden women’s, and Steven continue to be more effected by the challenging environment we are beginning to see improvement in these divisions as well. Overall we are very pleased with our current position in the market. Our merchandise is resonating very positively with our wholesale customers as well as consumers.

We recognize the challenges facing the industry however we are pleased with our current merchandise as well as new merchandise being introduced for the upcoming selling seasons. In addition we have seen promising new footwear trends emerging over the past few months. As always Steve and our design teams have been working hard to be in front of these trends across all of our brands in order to bring to market fresh and unique products that appeal to consumers.

Overall we believe our business is healthier and better positioned to capture opportunities going forward. Now let’s turn to our financial results for the quarter.

Consolidated net sales increased 1% in the quarter to $109.3 million from $108.3 million a year ago. Both our wholesale and retail divisions recorded top line increases of approximately 1%. Gross margin for the quarter was 41.7% versus 42% last year as a decline in margin in the retail division was partially offset by an increase in the wholesale segment.

As expected we also experienced operating expense de-leveraging as well as a decline in commission income from the private label business with the net result being a decline in operating margin from 16.2% last year to 11.1% this year.

Diluted EPS for the quarter was $0.43 per share on 17.8 million diluted weighted average shares outstanding compared to $0.49 per share on 21.6 million diluted weighted average shares outstanding in the prior year.

Now on to the performance of each of our divisions. I’d like to first talk about our wholesale division which is comprised of eight segments in the quarter; Steve Madden women’s, Steve Madden men’s, Steven by Steve Madden, Madden Girl, Stevies, Candie’s, Steve Maddens Fix, and Daniel M. Friedman.

Net sales in the Steve Madden women’s wholesale segment were $30 million versus $33.1 million in last year’s second quarter. While sell-in was lower then last year due to the challenging retail environment our product was trend right and performed well on the floor. Based on our robust sell-throughs and strong product we have seen an improvement in orders from our wholesale customers and expect to return to top line growth in this division in the third quarter.

Net sales in Steve Madden men’s were $10.9 million in the quarter versus $14.2 million a year ago. This business remains challenging. Continuing with our recent trend, driving market performance was strong and dress shoes were fair and sport looks were disappointing.

Net sales in Steven by Steve Madden were $5.5 million in the second quarter compared to $5.8 million a year ago. Due to the exceptionally rainy weather in China, three items in the Steven collection had mold issues which prevented us from delivering these goods in the quarter. If not for this problem we would have recorded top line growth in Steven during the quarter.

As in Steve Madden women’s flat sandals were the best performers, particularly Gladiators. Both our women’s and Steven divisions are now in a much better position then they were a year ago and we expect solid performance from these divisions going forward.

Madden Girl continued its standout performance in Q2. Net sales were $12.8 million, up 94% from $6.6 million in the second quarter last year. Customers are responding to the outstanding styling and solid price value proposition of our Madden Girl footwear. This very positive customer response is in turn driving better then expected results for this division.

As expected sales in the Stevies and Candie’s divisions were down versus the prior year. Stevies net sales were $800,000 in the quarter versus $1.7 million a year ago while net sales in Candie’s were $4.2 million versus $5.1 million in the comparable period. As discussed on the last call we have transitioned the Candie’s business to our Adesso Madden team and starting in late Q4, Candie’s will become a first cost business.

We believe this change will have a positive impact on the division and we continue to target Q4 for improvement in both Stevies and Candie’s.

The last wholesale footwear segment is our newest brand, Steve Maddens Fix. We continue to take a measured approach in expansion of this new brand given the challenging retail environment. In the second quarter Steve Maddens Fix had net sales of $600,000. By the end of the quarter Fix was in over 750 doors including better department stores such as Nordstrom and Macy’s as well as specialty stores such as Finish Line and Journeys.

Given the uncertain economic environment we believe that this slow but steady approach is prudent of our new line. Moving on to accessories, the Daniel M. Friedman business has net sales of $14.6 million in the quarter, up 23% from $11.8 million in last year’s second quarter. We were very pleased with this division like Madden Girl in footwear turned in strong results for the quarter.

Steven, Steve Madden and Betsey Bell handbags were standouts in the quarter all recording substantial year-over-year growth. Taking all of this together overall net sales for the wholesale division were $79.4 million in the quarter a 1% increase versus $78.6 million a year ago. This reflects improvement in several key areas dampened somewhat by the weaker economic environment.

Overall wholesale gross margin increased from 34.2% last year to 34.7% this year as we improved margins modestly in both wholesale footwear and accessories.

Moving on to our retail division we did not open any new stores during the quarter and we closed two underperformers ending the second quarter with 98 stores in operation. Stores open for the full 12 months ended June 30, generated $635 in sales per square foot. First quarter retail division sales were $29.9 million up 1% from $29.6 million in last year’s first quarter due sales from new stores.

Comp store sales decreased 3.3% in the quarter. In gross margin in the retail division declined at 63.3% this year from 62.4% last year primarily due to increased promotional activity due to the soft retail environment. Moving to other income, the company’s commission and licensing fee income net of expenses was $3.2 million in the quarter versus $5.7 million last year. As we discussed on last quarter’s call our large private label customers scaled back orders for the first half due to their tough retail environment.

As a result or Adesso Madden first cost division experienced a decline with income net of expenses of $2.5 million in the second quarter versus $4.8 million in last year’s second quarter. Licensing income for the quarter was $700,000 versus $900,000 a year ago.

With respect to the balance sheet we continued to maintain a pristine balance sheet with no debt and $46 million in cash, cash equivalents and marketable securities as of the end of the quarter. Total inventory at the end of the quarter was $35.3 million and our inventory turn for the last 12 months was 8.1x. Accounts receivable and due from factor were $56 million reflecting average collection of 53 days. CapEx for the quarter was $1.4 million and stockholders equity as of June 30, was $184 million.

Before I turn the call over for your questions I’d like to quickly review our outlook for the balance of the year. As we noted in our release we are maintaining our sales and earnings guidance for the full year. Based on trends to date this year and current visibility we continue to expect net sales for the year will be flat to an increase of 2% compared to fiscal 2007 and diluted EPS will range between $1.55 and $1.65 excluding the impact of the one-time charge resulting from the resignation of the company’s former CEO that was recognized in first quarter.

Including the impact of the one-time charge, earnings per diluted share are expected to range between $1.39 and $1.49. While we continue to take a conservative approach to our outlook we are seeing improvement across different segments of our business that will begin having an impact on our results in the coming quarters.

As I stated earlier we are very pleased with the merchandise being developed by Steve and our design teams and our products continue to be well received in the market. We remain confident in the strength of our diversified business model and the company’s ability to generate long-term growth. In addition to continuing to focus on improvement and growth in our existing footwear, accessories and licensed products we are excited about evaluating avenues to further diversify our business in to new brands or products.

Most notably we are announcing today, and I believe this will be crossing the wire any minute if it hasn’t already, that we have signed a new license agreement with Kimora Lee Simmons and Kellwood to design, manufacture, market and distribute a collection of footwear and accessories for the Fabulosity brand. The line will be available at JCPenney stores starting in early 2009. We are excited that respected fashion and retail industry names are choosing to partner with us and look forward to working with Kimora Lee Simmons and JCPenney on this line.

As you can see while we are aware of the challenging economic environment and are maintaining our prudent approach to managing our business we are continuing to implement initiatives designed to grow the company over the long-term.

Now I would be happy to answer any questions you may have.

Question-and-Answer Session

Operator

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

Scott Krasik - C.L. King & Associates

Madden Girl was great, it wasn’t up all that much in the first quarter was there a timing issue there or can we expect this sort of rate of increase in the back half of the year?

Edward Rosenfeld

Yes, there was a little bit of a timing issue but really the business is just accelerating and you’re going to see some pretty substantial growth in the back half as well. I don’t know that it will be 94% but certainly we think we can be up north of 50% in the back half.

Scott Krasik - C.L. King & Associates

This is getting to be almost as big as l.e.i. was at its peak almost. Can it be bigger then that at this point?

Edward Rosenfeld

Sure I don’t see any reason why Madden Girl couldn’t be a $60 million business over time.

Scott Krasik - C.L. King & Associates

The inventory that you gave at $35.3 million how does that breakout wholesale versus retail?

Edward Rosenfeld

We had $22.2 million of wholesale inventory and $13.1 million of retail.

Scott Krasik - C.L. King & Associates

Planning on growing in wholesale obviously in the back half, retail how are you planning that business?

Edward Rosenfeld

Retail should grow as well.

Scott Krasik - C.L. King & Associates

We heard a lot in the spring about cancellations coming from retail customers, can you give a sense of how that affected you and do you think that’s going to be an issue in the second half of the year and if so when will those start coming?

Edward Rosenfeld

No we haven’t experienced that. Certainly we’ve experienced wholesale customers trying to keep their inventories lean and being conservative in their budget and in their planning, but we haven’t experienced cancellations and because of the strong sell-through in our product, we’re really maintaining our budgets much better then we believe most of our competitors are.

Scott Krasik - C.L. King & Associates

Generally I think you experienced some cancellation of reorders in sort of September timeframe last year, was that--?

Edward Rosenfeld

We didn’t get reorders. There were some reorders that we didn’t get; I wouldn’t say they were cancelled.

Scott Krasik - C.L. King & Associates

And then just generally the impact from these potential store closures from Mervyn’s or [Boscoe’s] or whoever else is next?

Edward Rosenfeld

If you put those all together we do about $2 million with that group so it’s not a big loss on the top line for us and we’re protected as far as what we’re owed.

Scott Krasik - C.L. King & Associates

I know you didn’t break it out but these write-offs for store closures and remodels and severance in the quarter do you know how much those were off hand?

Edward Rosenfeld

The write-off of fixed assets was $672,000 in the quarter; the severance was approximately $300,000 so if you put those together it’s at $0.03 for the quarter.

Operator

Your next question comes from the line of Sam Poser - Sterne, Agee & Leach

Sam Poser - Sterne, Agee & Leach

You talked in your press release that you’re taking a conservative approach to managing the business can you really talk about what that is because we’ve been at the show and so on, I think you were one of the busiest booths at WSA, the response to the product seems to be quite good especially in the Steve Madden line and in the Fix line, that’s what I was noticing the most, can you talk about maybe year-over-year order of what you’re seeing and backlog and what not?

Edward Rosenfeld

We never talked specifically about our backlog but I will tell you that it is up from where it was a year ago and our backlog relative to the backlog the same time a year ago is better than its been in quite some time. That being said when you ask what do we mean when we’re being conservative; we’re still watching the inventory carefully. If this were a better economic environment and we had product performing as well as we do on the floor, and given the same kind of response from our wholesale customers about our new merchandise we would probably be a little bit more aggressive with inventory but we’re still managing that pretty conservatively right now.

Sam Poser - Sterne, Agee & Leach

How are you seeing, you did a great job of managing your gross margin in the quarter and I assume that means you didn’t have the mark-down money requirements that you’ve had in the past, because you’re managing your inventory well, but as your products performing well these days, are you able to chase it down or are you just coming out with more new product more frequently. How are you managing that?

Edward Rosenfeld

Yes certainly we are chasing product when we have a hot item but we’re also continuing with new fresh styles.

Sam Poser - Sterne, Agee & Leach

Are you finding that when the retailers, are the retailers’ standards going up, are they looking for higher sell-through rates now then they were a year ago to give you fill-in order or to step back in?

Edward Rosenfeld

Yes.

Sam Poser - Sterne, Agee & Leach

Can you talk about what the standard has gone from and to?

Edward Rosenfeld

I don’t want to get into specifics and its obviously there’s no hard and fast rule but certainly they’re more conservative so you have to have a very strong sell-through to get a reorder and also in the past where maybe they would buy, have four items for reorder, now its just the best two.

Sam Poser - Sterne, Agee & Leach

You just said that the backlog, can we assume that the backlog may be higher then your guidance represents? You said its better then it was a year ago, and it sounds like its better then it might have been even before that so can we assume that the backlog might be, is looking better then that?

Edward Rosenfeld

Our guidance reflects our best estimates for the business right now and backlog certainly is a consideration there. But keep in mind that our current guidance implies solid back half growth here over a year ago.

Sam Poser - Sterne, Agee & Leach

On the retail side of things are you expecting to see positive comps on the retail side for the back half?

Edward Rosenfeld

Yes we’re targeting low single-digits but positive comps.

Sam Poser - Sterne, Agee & Leach

And you think you’ll see some margin turnaround there as well?

Edward Rosenfeld

Yes. We’re going to be looking for margin improvement in the back half versus a year ago.

Sam Poser - Sterne, Agee & Leach

That’s more product related based on the response you’re seeing?

Edward Rosenfeld

Absolutely.

Operator

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

Jeff Van Sinderen - B. Riley & Company

As far as you can see and I know it’s still really early, but any color you can give us on the early back to school sell-throughs and maybe what we should expect, how we should expect things to unfold or your view of how things will unfold for back to school this year.

Edward Rosenfeld

Well we have had some preseason sales in some of our big better department store customers and we had some very nice sell-in there particularly boots looking very good and there are a number of categories that we feel good about as we head into say back to school or early fall. Again back to school practically speaking happens a little bit later now then it used to because its such a buy-now-wear-now market and so we haven’t seen the full back to school selling yet but so far so good for us and particularly in the boots.

Jeff Van Sinderen - B. Riley & Company

In your retail business obviously you can’t change the environment but you’re looking for increases in your comps for the second half, just wondering how you’re getting to that and what you’re focusing on in your retail business to improve margin contribution?

Edward Rosenfeld

Number one is product and we think that we have better product then we did a year ago and we’ve started to see improvement over the last few months in our comps. Even this quarter, second quarter when we were down 3.3 and we had a tough April and we saw some improvement in May and June and then we’ve seen a little bit further improvement in July. But there are also a number of initiatives that we’re working on in retail.

We’ve hired, we continue to beef up the team there, and we just hired a new merchandise manager in retail. We’ve hired a new VP in charge of the internet. And we continue to work on our open to buy process and refining that and we think we’re going to have a little bit more balanced assortments going into fall and more depth in key items based on some of the things that we’ve been working on and then as we look forward we’re also in the process of implementing this new merchandising allocation and planning system. We’re about 50% implemented there and when we get that up and running, the goal is to buy all of spring 2009 on that system.

And that should drive sales and margin as well on the retail side.

Jeff Van Sinderen - B. Riley & Company

I know you’re just announcing the Fabulosity brand, wonder if you can touch on how you’re approaching that brand and the launch of it?

Edward Rosenfeld

It’s just something we’re real excited about. We think Fabulosity is a fantastic brand and we’re really pleased to be working with Kimora Lee Simmons who’s such a talent and a true fashion icon these days and Penney is really behind this in a major way so that’s exciting. The apparel has already hit the floor, it’s in I believe about approximately 600 doors and it looks great and it’s performing very, very well. We’re doing both the footwear and the accessories which is something we’re very excited about and we’re going to be delivering product probably for 01/25 deliveries and its just great news. And you have been asking us about what we’re going to do for JCPenney for awhile now so we’re pleased to have a brand to sell into that retailer.

Operator

Your next question comes from the line of Jeff Mintz - Wedbush Morgan Securities

Jeff Mintz - Wedbush Morgan Securities

On the retail business are you still looking to have about 101 stores by the end of the year?

Edward Rosenfeld

A hundred stores.

Jeff Mintz - Wedbush Morgan Securities

Do you feel like you’ve gotten, you’ve closed the stores that you need to close now or are there potentially some additional store closings upcoming?

Edward Rosenfeld

No the hundred does not include any more store closings through the balance of the year but we have about six stores that we’d like to close if possible. We’re negotiating with landlords on those stores and to the extent we can make a deal that makes sense, we would get out of those.

Jeff Mintz - Wedbush Morgan Securities

On the Adesso Madden business have you seen any trend change there in terms of what those customers are doing? Obviously the environment is still tough but has the trend shifted either up or down recently?

Edward Rosenfeld

It’s getting a little bit better. The first half was very tough. We just didn’t get the reorders we were looking for. We’re starting to see some improvement. You’re going to see some improvement in Q3 although we’ll still be down year-over-year and then we would be looking to grow that business in Q4.

Jeff Mintz - Wedbush Morgan Securities

On the mold issue that impacted the Steven brand was that just one factory that was causing those issues and what have you done to prevent that from happening going forward?

Edward Rosenfeld

This was a couple of different factories and this is something that, it’s a problem that’s really industry wide this year because of the rainy season in China. Many, many vendors had this issue so we put in a new process to try to contain this. We’re spraying the product and the boxes with fungicide. We’ve lengthened the drying process in the factory and we’ve stepped up our auditing in the warehouse of product and we think we’ve got this under control.

Operator

Your next question comes from the line of Heather Boksen - Sedoti & Company

Heather Boksen - Sedoti & Company

Regarding Madden men’s wondering is there a strategy here to, I know every season or so we keep introducing some new sport product, what’s the strategy for getting that business back on track?

Edward Rosenfeld

You’ve hit the nail on the head, that’s the key is the sport piece and I think I mentioned last time that we had hired a new designer from Puma who’s going to help us with the athletic piece. There’s a little bit longer lead time in that kind of product so you don’t expect to see the full impact of his efforts until spring of 2009. But that’s, we’ve just got to keep trying to improve the product. Keep in mind I want to point out the men’s business overall is very, very tough right now. Any time you have an economic downturn the men’s business is impacted more dramatically then women’s because on the whole men are just more likely to forgo new footwear purchases and stay in their old footwear when they’re feeling constrained financially. But nevertheless we acknowledge that we need to improve the sport product and we’re working on that.

Operator

Your next question comes from the line of Susan Sansbury – Miller Tabak & Co.

Susan Sansbury – Miller Tabak & Co.

Is there any way you can shed more frosting on this licensing agreement, what you expect the near-term opportunities as well as I take it this is a five year license as well as how big this business might be three to five years out? More importantly what do you think the initial shipment rate is going to be if you can share that?

Edward Rosenfeld

I really can’t, just to clarify one thing; it’s a three year license agreement with a three year renewal option. But I really can’t get into numbers. We haven’t even had our first meeting with JCPenney yet so it wouldn’t be appropriate for me to speculate on how big its going to be but as I said the apparel is in 600 doors. We would be targeting that for the shoes and the bags and we think it could be a substantial business. They are really putting a lot of marketing muscle behind this.

Operator

Your next question is a follow-up from the line of Sam Poser - Sterne, Agee & Leach

Sam Poser - Sterne, Agee & Leach

On the men’s business, outside of what you’re doing in the athletic realm there, how about in the rest of the business because the athletic business has been fairly tough these days too. Can you talk sort of directionally how you’re looking at that brand being approached and what you’re doing to get the other changes done?

Edward Rosenfeld

Well that’s the piece that’s weak unfortunately. The driving [mocs] continue to perform well. Our dress shoes are doing fine and actually we’re seeing a little bit of an uptick there. So it’s really the sport piece that even from a year ago, its down, it was 40% of the business a year ago, now its 20% and that’s really where the loss is coming from year-over-year.

Sam Poser - Sterne, Agee & Leach

You showed those shoes at [Fanney] and at WSA, how has the response been?

Edward Rosenfeld

The response has been good but they’ve got to perform on the floor. That’s what we’re looking for.

Operator

Your final question is a follow-up from the line of Scott Krasik - C.L. King & Associates

Scott Krasik - C.L. King & Associates

Obviously you’re handbag business is pretty good, I assume belts are not doing that well on fashion yet, maybe talk about that and what’s driving the increases?

Edward Rosenfeld

Belts you’re right are tougher although that business has stabilized a little bit. We’re not seeing the same kind of percentage declines that we saw for the last couple of quarters. But it’s really the handbags that are driving it. On the Betsey Johnson front it’s the Betsey Bell brand that is really growing very nicely for us. And then most importantly it’s the Steve Madden and Steven bags are both growing very nicely. Admittedly still off a relatively small base but we’ve got a nice trajectory there. We’ve been adding doors. We’ve been expanding the assortment and the products have been selling through so we’re very pleased about that.

Scott Krasik - C.L. King & Associates

So what’s the distribution for Steven and Steve Madden in bags right now? How many doors, where?

Edward Rosenfeld

Steven is in about 160 doors, Macy’s, Nordstrom, and then we’ve got two different collections in Steve Madden. We’ve got our Steve Madden what we call our club bags or clutches which are in 470 doors, all the number of better department stores, Macy’s, Belks, [Von Mauer] etc. And then we’ve got Steve Madden day bags in a similar distribution which is 230 doors right now.

Scott Krasik - C.L. King & Associates

And the thought is continuing to add doors through the year and or you’re pretty set for--?

Edward Rosenfeld

Yes we still have quite a bit of door growth opportunity here.

Scott Krasik - C.L. King & Associates

And then maybe talk about since you work so close to season, how are the price or cost inflation out of China affecting you, are you raising prices for your August/September deliveries or are you waiting to raise prices and by what amount?

Edward Rosenfeld

We already have raised prices. In fact our AURs in second quarter were up about 10% year-over-year and we haven’t received a lot of resistance to that. You’re still seeing, we’ve got costs out of China up 10% maybe a little more, you’re still seeing probably about 100 basis point gross margin impact the reason being that though we’ve raised our price 10% we’re also putting a little bit more into the shoes. We wanted to increase the quality of our shoes. But the good news is we haven’t seen resistance to the price increases.

Scott Krasik - C.L. King & Associates

Does Brazil become a bigger option or Latin America in any way?

Edward Rosenfeld

Yes, we’re doing more out of Mexico and we’re also doing a little bit more out of Brazil in the Steven division.

Operator

There appears to be no further questions at this time; I would like to turn the floor back over to Mr. Rosenfeld for any further or closing remarks.

Edward Rosenfeld

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

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