Steven Madden Ltd (SHOO) 2002 Q2 法說會逐字稿

Good afternoon!

And welcome to the Steve Madden, Ltd., conference call sponsored by FD Morgan Walk.

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I would like to introduce you host for today's conference, Miss Kara O'Brien, of FD Morgan Walk.

Good morning, and thank you for joining this discussion of Steve Madden, Ltd., second quarter results.

Rather, good afternoon!

By now you should have release -- received a copy of the press release.

If not, call our offices at 212-850-5776, and we will fax it out to you immediately.

Before we begin, I would like to remind you that the statements in this conference call that are not statements of historical or current facts constitute forward-looking statements within 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 with 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

or uncertainties described from time to time in the company's reports and registrations statements filed with the SEC.

Also refer to the earnings release for more information on risk factors that could cause results to differ.

Finally, please note that any forward-looking statements used in this call should not be relied on as current after today's date.

I would like to turn the call over to Jamie Karson, Chief Executive Officer of Steven Madden, Ltd.

Thanks, Kara. Good afternoon everyone, and thank you for joining us to review Steven madden, Ltd.'s operating results for the second quarter, ended June 30th, 2002.

With me to review our business, are Richard Olicker, President and Chief Operating Officer.

And Arvind Dharia, Chief Financial Officer.

Let me begin by saying we're very pleased with and proud of our second quarter, a period during which we not only exceeded our own expectations and analyst's estimates, but gain market share in all of our brands. In a conservative retail environment where retail and purchasing patterns remain broad, but without depth, our unique production and replenishment strategy continues to provide us with the ability to maximize opportunities in season, while setting us apart from the rest of the footwear industry.

The methodical execution of our business strategy enabled us to achieve an extraordinary 47.9% increase in total sales in our combined wholesale and retail operating divisions.

Wholesale revenues showed particular strength this quarter, reflecting the increase popularity and growth of other various brands.

And we're pleased to report retail comp. store gains of 5.1%, a very strong performance in light of the April calendar shift and a lackluster May.

Furthermore, the company was effectively able to leverage the infrastructure while continuing to drive business and nurture our newest brands.

And this is reflected in the significant 320 basis point decline in our operating expenses, as a percentage of sales, and corresponding 22% increase in operating incomes.

These cumulative achievements generated a 19% increase in net income to $5.3 million, versus 4.4 million last year.

And earnings per share of .38 cents in the quarter versus .34 cents last year.

Finally, we remain in excellent financial health.

At quarter end, we had 41.5 billion in cash, cash equivalents, and investment securities on the balance sheet.

No long term or short-term debt.

And total stock holder's equity of 116.4 million, versus 89 million last year.

All of which affords the company flexibility and a strong foundation from which to build future growth and diversification.

Now I'd like to turn the call over to Richard Olicker, our President and Chief Operating Officer to review the operating results in more detail.

Thanks, Jamie, and good afternoon everyone!

Let me now detail our results for the second quarter starting with our overall financial performance.

Total net sales increased 47.9% to $88.1 million versus $59.6 million in the second quarter of 2001.

Net income increased 19 % to 5.3 million versus 4.4 million in the same period last year.

Earnings per share increase 11.8 percent to .38 cents per share on 13,792,000 diluted shares outstanding, as compared to .34 cents per share on 13,063,000 shares -- diluted shares outstanding in the comparable period of 2001.

Our strong bottom line results were achieved through significant sales gains and the operating leverage that resulted from holding the line on costs.

Gross margin decreased to 37.4% versus 42.5 % last year.

The decline in margin was primarily attributable to three factors.

First, as anticipated, this spring saw retailers managing their businesses tightly, and buying closer to need.

In order to meet in-season demand as quickly as possible, we utilized our diversified sourcing capabilities to produce more goods in the US and Europe.

While these sources carry an intended higher cost of goods, they enabled us to bring our best selling styles to market quickly, gain market share, and control our inventory exposure.

Second, due to the strength of our growing wholesale segment, particularly Madden Men, our retail division, which generates higher growth margins than wholesale

represented a smaller percentage of our overall business in the second quarter. Retail represented 25% of the total versus 34% in the second quarter last year.

Finally, during the second quarter, the company took action earlier than last year on slower moving styles to create immediate open-to-buy for new, hot best sellers that were identified through its test-and-react model.

These strategies have left our inventories clean and current entering into third quarter.

We have taken steps to bring greater discipline to the quantities purchased in out in-season buying process, and we expect these actions to assist in generating healthier markets in the third quarter and the back half.

During the quarter, the company was able to manage the business efficiently and very effectively, leveling infrastructure while continuing to drive our business,

and nurture our newest brand, Steven Madden Men.

This is reflected by the 320 point base decrease in operating expenses as a percent of sales to 29.1%.

Let me review what happened in each division during the quarter.

The company's wholesale division is comprised of five brands, Steve Madden Women, Steve Madden Men, l.e.i., Stevie's, and David Aaron,

and wholesale revenues increased an exceptional 66.5% to $65.7 million, versus $39.5 million last year.

As planned, strategies designed to generate sales growths in our flagship for women's brand succeeded in the second quarter as revenues for Steven Madden Women's increased 27.2% to $31.3 million.

We achieved success based on having [INAUDIBLE] balance in our assortment, which enabled us to capture sales from dress sandals to open-back Euro casuals to pointy pumps.

These complemented our core-open stock items, which comprised 16% of our total women's wholesale business.

Also door expansion with Journeys , new store openings with May Company, Nordstrom's, Carsons, Yonkers, and [INAUDIBLE] further supported growth in our flagship wholesale division.

Revenues for Steven Madden Men's increased an extraordinary 600% to $13.2 million, versus $1.9 million last year.

Madden Men continued its steady ascent in the second quarter

shipping 18 styles and 54 SKUs, and ending the quarter in over 1600 stores. We are rapidly becoming a sport casual destination brand and we're using this as a launching pad into new categories, such as active sports.

The company offers an expansive open-stock replenishment program, out of which approximately 59% of second quarter sales were [INAUDIBLE].

Driven by strong retail sales groups we are encouraged by the generous sales plans projected by Federated, May Company, Nordstrom, Marshall Fields, and all of the Jenesco Retail Divisions.

Men's is also now sold in 29 of our own Steve Madden retail stores, and the division is in the midst of rolling out its own concept shop program in time for back-to-school.

Revenues for l.e.i. increased 65.4% to $15 million

versus 9.1 million last year.

Driving growth was the opening of new doors with retailers, including the Bon Marche, [INAUDIBLE]. Stage stores, Foot Action, as well as further penetration into Kohl's, JC Penney, and Sacks group.

Product strength for the quarter included sandals, dressier look buckle treatment, and patch-work uppers.

Revenues for the Stevie's brand increased 69.8% to $3.6 million, versus $2.1 million during the second quarter of last year.

Stevie's had strong sell throughs on sandals, especially with raffia uppers, fashion [INAUDIBLE], and dress shoes.

During the quarter, Stevie's had its soft launch with [INAUDIBLE] children's department in 46 stores, with plans to add another 54 stores by year's end.

Other key stores selling the product include Limited Too, the New Journey's Kid Store, and department stores such as Nordstrom, and Filene's.

Revenues for Davis Aaron increased 45.8% to $2.7 million versus $1.9 million last year.

Key classifications that drove the business included sandals and driving mocks. In addition to growth in major department stores, such as Bloomy's, Macy's, Lord and Taylor, Berdine, and Nordstrom,

David Aaron rolled out to approximately 80 additional May Company doors during the second quarter.

Moving on to our retail division, after June 30, 2002,

there were 74 stores in operation, including our Internet store.

Retail sales in the quarter increased 11.5% to $22.4 million versus $20.1 million during the same period in 2001.

Same store sales increased 5.1%, a very strong performance in light of the April calander shift, a lackluster May, and a generally tough economic environment.

Productivity of our stores also remained strong.

Our stores generated an average of $706 per square foot with 12 months ending June 30, 2002. This industry-leading productivity was assisted in the second quarter by the implementation of our first

sales training program bringing some of the most experienced knowledge to retailing to our field associates in sales.

With respect to new store openings, the company opened a store in [INAUDIBLE], Massachusetts, in May, and one on Newbury Street in Boston in late June.

Also in the quarter, the company closed one its under-performing outlet stores.

In July, we opened two stores, one in Temple, Florida, the other in Scottsdale, Arizona.

We're scheduled to add another two before the end of the third quarter.

One in Fashion Valley, San Diego, and the other in Stonebriar, Texas.

We intend to open a total of 8 to 10 stores in 2002, and

as has been the case historically, our openings are heavily weighted to the second half of the year.

The Internet store remains the largest store with revenues for the second quarter exceeding $1,000,000.

We recently improved our site for greater clarity as a diminished click-to-purchase, and

we are constantly upgrading the contents to both keeping the interest and the shopping dollars of our Internet customers.

Moving to other income... The company's commission and licensing fee incomes increased 27.4% to $1.6 million for the quarter, this was driven by increases in commission revenue from our private label division.

The private label [INAUDIBLE] increased its revenues by 46.7%, attributing 1.2 million to the other income line, versus 822,000 in 2001.

The division continued its growth to Target and Wal-mart, each of whom now utilize our agency services for children products as well as women's products.

Other growing accounts include Fred Meyer and Bakers.

Licensing income decreased 11% to $368,000 versus $413,00 in 2001 as a result of a dissolution of royalty revenues from out [INAUDIBLE] children's licenses.

We are diligently working toward concluding new license arrangements, but are proceeding on a methodical basis in pursuit of the strongest brand building opportunities.

Turning for a moment to marketing, this continues to be integral to driving our business within our stores.

In the second quarter, these efforts included radio and ticket giveaway promotions for our Rock & Soul Concerts and Friends & Family promotion.

In addition to our retail advertising, the company had a very active marketing calander during the quarter.

The company continued its consumer magazine, including Seventeen, In Style, Teen People, Cosmo, Jane, Ym, Lucky, and Rolling Stone.

Also the campaign was expanded to outdoor media that included subway posters, bus shelters, and wild posting.

We also initiated an aggressive mall advertising campaign, tagging Federated and Nordstrom stores.

The brand continues to be very active with its grass roots efforts that included our participation in Star Radio's Annual Foundation concert in L.A. called "Fan-nation," and our appearance at [INAUDIBLE] in Dallas. This complemented a full calendar of college events, fashion shows, and charity events, which assisted in raising the visibility of Steve Madden brands.

Press and editorial coverage for the brand was extensive in the second quarter.

Fashion editors and producers in a wide variety of consumer magazines and TV featured our spring product.

In June, the company launched its third annual Rock and Soul Search. The Search included entrants from all over the country. Last year's winner, [INAUDIBLE] performed throughout the summer as the opening act for several performers.

Rock and Soul Search was concluded with a concert held this past weekend in Cleveland at the Rock 'n' Roll Hall of Fame.

With respect to our overall financial condition, we have maintained a pristine balance sheet, which speaks volumes to the health and viability of our company.

As of June 30th, 2002, our cash, cash equivalent and investment securities were $41.5 million.

Our inventory we'er at $24.8 million versus $20. million last year. Our inventory turn was eight times in a 12 months ending June 30th, 2002, versus 7-time turn for the same time last year.

The inventory turn slows slightly at the ends of every second quarter as we build our wholesale stock levels to build third quarter orders.

This was amplified this year as we accelerated receipts to avoid looming West Coast longshoreman's strike issues.

Accounts receivables was $46.2 million versus $29.4 million last year. The increase reflects a timing shift whereby more goods shipped in the latter part of the second quarter versus last year.

Working capital was at $84.1 million.

Total equity was 116.4 million, total diluted shares outstanding are $13.8 million shares.

Now I'll turn the call over to Jamie who will provide closing remarks.

Thanks, Richard!

Second quarter 2002 was an outstanding quarter, and round out a strong first half for Steven Madden, Ltd..

We are extremely encouraged by our performance year-to-date, and are very excited about the direction of our business.

As we move forward into the balance of the year, and beyond, we intend to focus not only on further strengthening our core brands, but on identifying new areas of growth and diversifying our business.

We are currently evaluating several opportunities to expand the Steve Madden brand into other categories, such as women's and men's jeans, apparel, cosmetics, and fragrances.

We are carefully weighing our options, mindful of selecting the right partners to developing the right opportunities to expand our brands into additional categories in the near term.

We're also continuing to evaluate several opportunities to expand into international markets.

Again, we're taking a methodical approach to this endeavor as we are presented with many different opportunities.

We're excited by the prospects of selling our products, especially in Europe, asia, and other parts of the world.

As you may recall, we previously announced that we entered into an arrangement to distribute product in South Korea.

This venture, even in its early stage, is showing good results, and we believe this bodes well for similar arrangements elsewhere in the world.

And in that regard, during the past quarter, we entered into a similar agreement to distribute product in Central and South America.

We're excited about this avenue for growth and look forward to making Steve Madden a truly global brand. In closing, based on the strength of our first half results, and our optimistic outlook, we believe that fiscal 2002 will be a strong year for Steven Madden. Ltd.

We're confident we're positioned to achieve our annual earnings targets.

And in order to reflect the better-than-anticipated second quarter performance and strong sales trends, we're raising our full year earnings per share guidance to $1.33 to $1.38 from the previous $1.28 to $1.33 we provided at the end of the first quarter.

In short, we are optimistic as we move forward, and we believe that the future is bright for Steven Madden, Ltd. I hope this call has been informative. Thank you for your time and interest.

Now I'll turn the call back to the operator for your business questions.

Ladies and gentlemen, at this time, if you have a question, you need to press the 1 on your touch-tone phone.

Your questions will be taken in the order received.

If your question has already been answered, you may remove yourself from the queue by pushing the pound sign on your touch-tone phone.

And one moment please before we queue up our first participant.

Out first question from Joe [INAUDIBLE] from Wachovia Securities.

Thank you!

Good quarter, especially on the top line.

Can you -- top line, versus bottom line, focus on the gross margin a little bit.

First of all, Richard, can you give us some direction as to where the wholesale growth margin was running in the quarter versus historical, and then also you mentioned a couple of things you're going to do to kind of boost that the back half of the year, and maybe again directionally take us to where you might be able to get gross margin back to and just list off again what kind of initiatives can take to boost gross margin.

I'll take it a piece at a time, Joe.

Okay.

Let's just first say, there's room nor improvement in both wholesale and retail, without breaking out the numbers.

There's also pressure at both wholesale and retail, competitive pressures from a -- this second quarter in particular from an early promotional season, breaking around and somewhat prior to Memorial Day.

The real -- I can rehash very quickly the causes.

Firstly, in order to meet immediate retail demand, we were needing to raise domestic and European sourcing.

Retail, of course, with the robust health and growth in wholesale was a smaller percentage to the total.

We were early and aggressive, as is our strategy to mark down the slower moving styles and create open-to-buy for well performing product.

And we saw this, frankly, as an opportunity to gain market share, and we took it.

Having said all of that, I can't say that we're satisfied with our margin performance, and we have already taken steps to bring greater discipline particularly to our in-season buying processes.

And we expect that these actions will help in generating healthier margins in the third quarter and the back half.

As far as margin targets, we're comfortable with a 40% target for the third quarter.

Can you just kind of explain what you mean by more disciplined in-season buying strategy?

When you have something working in-season, the question is how much do you buy?

And by being a little bit more careful and conservative in how far you can take something that's working, I think we can improve our inventory position in terms of end-of-season, liquidation requirements.

Has there been any greater buys for the fall season up front than there was the spring season, a little more aggressiveness in terms of buys.

Perhaps slightly more aggressive, but really based on healthy back-order, not based on any guesswork.

And is Men's carrying a lower gross margin?

Yes.

Significantly?

Or does it change?

We're working on it, and it is moving in the right direction.

And you mentioned the backlog, so since you mentioned it, do you want to share?

Well, I only mentioned it in a very nondescript fashion.

As you know, we don't put terrific confidence in back order because we're a junior house.

So the back order is there, and the reservation in my mind's eye, as a reservation to buy dollars, not as a guarantee of success or

as a great confidence building, as far as sales are concerned.

So while we're comfortable with our back-order position, we don't put great credence in it as a barometer for terrific health at wholesale.

That was question number one.

I have one more question.

My model looks kind of funny with 48% sales growth in Q2, and then low kind of double digits Q3, Q4,

can you update any kind of sales guidance for us as to why the second quarter wouldn't be repeated and the two biggest parts of the business being Steven Madden Women's businesses and Men's businesses to focus in on?

The women's business, we believe we have it on track, on a growth track, but it's -- we need to be conservative with on how fast and how far.

And a lot of it comes with the reorder, not the initial.

So, and we said we're going to be a little more disciplined in the reorder inventory, so while overall we feel comfortable, let's say in the 15% range from a wholesale growth standpoint, it's going to come from a variety of places.

And, of course, driving the fastest growth will continue to be Men's.

But we insist that we see growth from all of our divisions, including Steven Madden Women's, just at a slower and healthier rate.

And part of the business will grow, compared to second quarter.

The second quarter, we only have a 25% range

Retail sales [INAUDIBLE] compared to last year's 34 percentage.

And that will grow in fourth quarter.

The margin will be close to 40% or plus.

And it's safe to assume that the retail margins in the month of June were -- I'm sorry, retail months in the comps of June were higher than the plus 5 that you reported for the quarter?

Yes.

Any trends in July you want to speak to?

You know, we don't release monthlies.

And we -- we're pleased with the trend.

But other than that, I don't think we're going to change from our quarterly release.

Good answer, good luck!

Operator: If you'd like to ask a question, please press the 1 on your touch-tone phone.

Our next question is from John [INAUDIBLE] from Buckingham Research.

Please go ahead.

Good afternoon!

Top line growth, how much of it was driven by door growth, which you mentioned a couple of times, that new doors were a part of it, versus better sell-through and more shelf space that existed, approximately?

It's a mix.

I look at it by divisions and by brand.

I don't think it's really all that informative as a total number, what's coming from door versus what's coming intrinsically.

I can tell you that it's a mix.

Door growth, line expansion, extraordinary door growth and line expansion at Men's.

And we're very pleased to hit on many cylinders on the top line.

But mostly -- I wouldn't call our door growth as the compelling and the leading reason for our top-line growth.

It's -- there's just not enough of that kind of door growth out there to generate the top line numbers.

So --

So what you're really saying is that it was the better sell-through than more shelf space existing accounts that resulted in most of the sales growth?

And a broader line assortment, yes.

And one question about the overall retail environment.

I know that people are, in general feeling cautious, but have you seen anything to make you feel more optimistic about the back half versus the first half?

We concur that it's cautious out there, and we see a continuation of the buying trends where purchases are being made closer to need.

The retail community is -- has shown that they can discipline themselves to buy in that manner, and

the vendor community has responded.

So I don't see that changing.

I think that people, knowing that their anniversary 9/11 issue, post September issues, are expecting a healthier retail environment in the third and fourth quarter.

And how do you feel about the inventory levels are at retail right now?

I can only speak to our own.

I'm hearing that they're clean, but I'm seeing a lot of promotional activity.

Great!

See you this weekend at WUSA.

Our next question is from Sarah Wallace fro Solomon Smith Barney, please go ahead.

One quick question on -- in terms of l.e.i., in light of Jones Apparel recent announcement of their acquisition of that brand.

I'm wondering if you can comment on where you are in the term of that license, and what you think the likelihood of you're renewing that license is, versus Jones taking it back or purchasing it?

We have the license until 2004, and then we have a renewal that will take us to 2006.

And, you know, regarding their --I don't believe they've actually closed yet, but regarding their pending acquisition of RSD Sport, which is the licensor of the l.e.i. mark, we are very committed to the continued success of l.e.i. for the remaining term of our agreement.

So Jones has not spoken to you about the possibility of buying back that license?

No.

Thanks very much.

Operator: If you would like to ask a question, please press the 1 on your touch-tone phone.

Our next question -- we have no further questions at this time.

Does our -- does the host have any concluding comments?

Thank you all for participating in the call.

We'll see you out in Las Vegas.

Operator: That does conclude your conference call for today.

You may disconnect.

And thank you all for participating.