Steven Madden Ltd (SHOO) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Steven Madden, Ltd. first quarter 2003 earnings conference call sponsored by F.D. Morgan-Walke. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. To register for a question, the participant should press star one and to withdraw the question, the participant should press pound. Any reproduction of this call, in full or in part, is not permitted without prior expressed written authorization from the company. As a reminder, ladies and gentlemen, this conference is being recorded. I would now like to introduce your host for today's conference. It's [Kara O'Brien] of F.D. Morgan-Walke. Please go ahead.

Thank you and good morning, everyone, and thank you for joining this discussion of Steven Madden, Ltd.'s first quarter results. By now you should have received a copy of the press release but, if you have not, please call our offices at 212-850-5600 and we will fax one out to you immediately.

Before we begin, I would like to remind you that statements in this conference call that are not statements of historical or current fact constitute forward-looking statements within the meanings 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 with 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 reports and registration statements filed with the SEC. Also, please refer to the earning's 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's date.

I'd now like to turn the call over to Jamie Karson, Chief Executive Officer at Steven Madden, Ltd. Jamie, go ahead, please.

Thanks, Kara. Good morning and thank you for joining us to review Steven Madden, Ltd.'s results for the first quarter that ended March 31, 2003, and to also discuss the company's near-term prospects. With me to discuss the business are Richard Olicker, our President and Chief Operating Officer, and Arvind Dharia, our Chief Financial Officer.

We are extremely pleased with the strength and balance of our first quarter and are very pleased to begin the year on such a positive note. We have continued to perform by methodically executing our business strategy, strengthening our brands and increasing our market share. In a conservative retail environment, our unique production and replenishment strategy continued to provide us with the ability to maximize opportunities in season setting us apart from our peers. The execution of this strategy enabled us to achieve an 18.2 percent increase in total sales in our combined wholesale and retail operating divisions. This performance was also extremely well balanced. Our wholesale grew 20.4 percent to $57.6m and our retail business grew 12.4 percent to $21.1m. We are also pleased to report retail comp store gains of 4 percent over the first quarter of 2002. These accumulative achievements generated earnings per share of 36 cents versus 30 cents in the first quarter of 2002, which is 2 cents above both our internal expectations and the analyst's estimate.

Furthermore, the company was able to effectively leverage it's infrastructure while continuing to drive business and nurture new brands. This is reflected by a decrease in our operating expenses as a percent of net sales by 40 basis points to 31 percent from 31.4 percent, as well as the 20.6 percent increase in operating income.

Finally, we remain in excellent financial health. We ended the quarter with approximately $71.4m in cash, cash equivalents and investment securities, no long or short-term debt and total stockholder's equity of $136.5m, providing an enormously strong foundation from which to build the future growth of our company.

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

Thanks, Jamie. I'd like to review what happened in the quarter. Net sales increased 18.2 percent to $78.7m versus $66.6m in the first quarter of 2002. Net income increased 23 percent to $5m versus $4.1m last year. Diluted earnings per share increased 20 percent to 36 cents per share as compared to 30 cents per share in the same period of 2002. This exceeded, as Jamie said, both our internal plan and analyst's expectations and was achieved through better than expected sales gains and the operating leverage that resulted from maintaining a stable operating expense structure.

Gross margin for the first quarter was 39.3 percent versus 39.8 percent last year, a decrease of 50 basis points. This was primarily attributable to greater promotional activity required to clear all inventories at retail and the realization of customary markdowns taken in the first quarter. Our retail division, which generates higher gross margins than wholesale, represented 27 percent of our total versus 28 percent of the total in the first quarter of 2002.

Let's review what happened in each division during the quarter. For the company's Wholesale Division, which is comprised of five brands, Steve Madden Women, Steve Madden Men, l.e.i., Stevie's and David Arron and Steven's, revenues increased 20.4 percent to $57.6m versus $47.8m last year. It's important to note that Union Bay, our sixth wholesale brand targeting young men, will begin shipments in the third quarter and will, therefore, not be reflected in the results until later this year.

Revenues from Steve Madden Women's Wholesale increased 26.2 percent to $28.9m in the first quarter of 2003 versus $22.9m in 2002. Driven by a balance of classifications ranging from our wildly popular Hi-Jo boot to wood-bottom sandals.

l.e.i. sales increased to 28.4 percent to $14.9m from $11.6m in 2002. Significant increases were achieved at Kohl's and Sears, as well as Goody's.

Sales of Stevie's, our children's brand, decreased 11.8 percent to $3m versus $3.4m in 2002. The decline was partly anticipated when [Mel Disco], the lease operator of the Federated Department Store Children's Department and a division of Foot Star, experienced temporary credit issues related to it's K-Mart business. This led to shipping delays and some cancellations. Also, Kids-R-Us concentrated more spring 2003 open-to-buy on it's own private label offerings than it had in 2002. Overall, we believe that when the economy softens and the family budget is squeezed, the children's fashion footwear business is most vulnerable to competition from the discount mass merchants that dominate market share in children's footwear. We are working on a strategy to respond, proactively, to these conditions.

David Aaron, including the Steven collection, posted sales at $2.5m, equally those achieved in 2002. We are in the midst of repositioning this business under the Steven label, where we will enjoy marketing leverage as a Steve Madden division. As part of this repositioning, we are targeting more profitable department store accounts such as Nordstrom, Marshall Fields and Dillards.

Sales of Madden Men increased 12 percent to $8.3m in the first quarter of 2003 versus $7.5m in 2002. Madden Men's is not widely accepted by a broad age spectrum and multi-cultural demographic. At the end of March, Men's was in over 2500 doors and 49 of our own retail stores. The brand continues to increase it's market share penetration in the Young Men's segment with our strategic retail partners. The first quarter's performance is in line with our current outlook and expectation from a moderate growth in Men's as we update core product offering and add fresh new product.

Moving on to our retail division, as of March 31, 2003, there were 82 stores in operation, including our Internet store. Revenues increased 12.4 percent to $21.1m versus $18.8m in 2002. During the quarter, retail was 27 percent of the total business versus 28 percent of the total last year. The company opened two stores in the first quarter, both in Houston, Texas. We have two stores planned for opening later in the current quarter, moving toward our goal of opening eight to 10 stores in 2003.

At the end of the quarter, there were 71 comp stores versus 63 last year. As Jamie said, same store sales rose 4 percent, a performance we are really very pleased with in light of the inclement weather in the Northeast, the war in Iraq and the disadvantage of the calendar shift whereby Easter and spring breaks fell later than last year. This strong performance was achieved through leveraging our market-leading position with the hot Hi-Jo booties as well as a timely transition to spring merchandise, executing our strategy of getting fresh product into our stores early and replenishing in season.

Moving to our other income line, in the first quarter the company's other income line increased 36 percent to $1.7m versus $1.2m during the same period last year. The other income line includes the commission income from our private label division, Adesso-Madden, and trademark royalties earned from our licenses. Private label income increased 22.3 percent to $1.1m versus $914,000 last year. Driving the increase was continued growth from the discount sector and brand reinforcement within this sector, particularly at Wal-Mart, Target and Sears. Growth classifications included sandals and wedges. Licensing income was $572,000 versus $330,000 for the same period last year, an increase of 73.3 percent. At present, we have six licenses covering six product categories. We are committed to broadening our brand beyond the footwear classification into finding suitable transactions and arrangements that will serve to leverage our unique identity into broader product categories.

Turning to the operations side for a moment, early in the quarter, we moved to a larger and modernized third-party distribution facility in Southern California. In conjunction with this move, we implemented a new warehousing operating system. These upgrades will make use of the latest available technologies, prepare us for handling our anticipated future growth and provide us with superior inventory management capability.

Finally, from a marketing perspective, it was a strong quarter for brand reinforcement, recognition and visibility. The company continued to utilize trade print media in support of Steve Madden and Steve Madden Men. For the second consecutive year, we sponsored the Pro-Am Jam Snow Boarding Event in Vernon, New Jersey, and together with other sponsors, such as JVC, we encouraged visitors to sample our product, gave away shoes and built our scheduled mailing list.

We enjoyed terrific editorial coverage and product placement in the first quarter, appearing among other places, in the launch issue of "Teen Vogue", "Us Weekly", "Lucky", "Teen People", "Cosmo", "Glamour" and "Rolling Stone". DJs on MTV could be found wearing our shoes and crediting us while they hosted Fashionably Loud Miami during spring break. We enjoy great visibility with our sponsorships of the Miss U.S.A. competition, the Sundance Film Festival and our association with the Grammy Awards and the Oscars.

To further help launch Spring, we embarked on an expanded mall advertising campaign where are Spring Fantasy print ad was featured, targeting key retail partners, including Nordstrom, Macy's, Bloomingdale's, and Filenes.

Finally, on the corner of 34th Street and 7th Avenue, across from Macy's Herald Square and our 34th Street store, the Steve Madden billboard rose before some of the most concentrated retail foot traffic in the world. The company was also recognized during the February WSA trade show, when "Footwear Plus" magazine honored the company and Steve with a "Plus" award in the Women's Streetware category. It was a particular honor to win this "Plus" award as it is retailers who select the winning companies and it is the second consecutive year in which the company has received this recognition.

With respect to our overall financial condition, we've maintained a pristine balance sheet which speaks volumes to the health and viability of our company. As of March 31, 2003, our cash, cash equivalents and investment securities was $71.4m. Inventories were at $24m, up from $15.6m last year. It is noteworthy, from a inventory standpoint, that in our 2002 first quarter inventories were extremely lean, in fact, they were lower than in 2001. This year, the Easter calendar shift necessitated owning greater quantities of inventory going into April. Also, last year, Men's carried almost no stock position. This year, Men's open-stock inventory was in place throughout the first quarter to support replenishment needs. Additionally, we were supporting three new store openings in two large divisions, which demand longer lead-time and increased inventories to support their growth.

Our inventory turn was 11 times for the trailing 12-month period. Accounts receivable was $36.1m. Working capital was at $94m. Total shareholder's equity was $136,500,000. Cash flow per share was $5.55 per share. Book value was $10.62. We have no long or short-term debt. Our total diluted shares outstanding was 13,872,000 shares.

Now, let me turn the call back to Jamie, who will provide some closing remarks.

Thanks, Rich. This is a great foundation upon which to build. Our plan for future growth envisions a coordinated methodical approach to growing the business and leveraging the strength of our brands. We are evaluating several opportunities to expand the Steve Madden brand into other complimentary categories, such as women's and men's jeans, apparel and cosmetics, all in an effort to evolve into a truly lifestyle brand and experience for our customers. We are carefully weighing our options, mindful of the importance of selecting the right partners in developing the right strategic opportunities in order to be successful in this endeavor.

We are also evaluating several opportunities to nurture and slowly build the very new international segment of our business. Again, we are taking a methodical approach to this endeavor as we are presented with many different opportunities. We are excited by the prospects of selling our products in other parts of the world. In February, we announced that we entered into an exclusive distribution agreement with Feet, a former Sketchers distributor, for distribution of Steve Madden footwear in certain countries in Europe. Our distribution partner in Europe reports terrific early response to the lines, which will be introduced in select doors this fall.

Most importantly, we have, and will continue to nurture and grow, our existing brands by designing and building the coolest, most fashion-forward shoes and by further developing product lines to fill our multiple channels of distribution. We will utilize our cash to support and grow these businesses and, contemporaneously with that, we will develop a plan regarding the creation of further shareholder value.

In conclusion, the first quarter was an outstanding period for Steven Madden, Ltd. The dedication to the business model that sets us apart and the methodical execution of our growth strategies serve to strengthen our brands, increase our market share and enable us to deliver another quarter of consistent performance and growth over the prior year period. Despite the strength of the first quarter performance, it is important to note that external market conditions remain very challenging due to the weak economy, a highly promotional environment and soft consumer confidence levels. Although this calls for a degree of caution regarding the remainder of the year, the company is confident in it's business fundamentals and growth strategies and is, therefore, optimistic about the ability to meet it's previously stated goals for the year. Based on the current level of visibility, the company reaffirms it's expectation for annual earnings per diluted share of $1.58 to $1.63, driven, primarily, by a mid-single digit net sales increase. In short, we are cautiously optimistic as we move forward in a challenging retail environment.

I hope that this call has been informative. Thank you for your time and your interest. Now, I'll turn the call back to the operator to take any of your business questions.

Ladies and gentlemen, we will now begin the question and answer session. If you have a question, you will need to press the star and one. Your questions will be taken in the order they are received. If your question has already been answered, you may remove yourself from the queue by pressing the pound key. Also, if you are using a speaker phone, please pickup the handset before pressing the buttons. One moment, please, for the first question.

Our first question comes from Michael Ryan with Sidoti and Company. Please state your question.

Hi, guys. Congratulations on a nice quarter. First question, I just want to - - can you quantify at all how much the Hi-Jo boot played into the growth into the Women's line and how that might factor any growth going forward?

Michael, we don't break out sales by product category, no less, sales by particular item. It was significant. It was a terrific contributor. I think the take-away is that we know how to react to something that's working in season.

As far as the gross margin, are you still looking for 40 percent gross margin for the year? Is that a realistic expectation?

Yes, Michael, 40 percent is a realistic approach.

OK. And the retail, wholesale mix, do you expect that to stay consistent, about 72, 73 percent for wholesale?

Yes. You go to year-end estimates for wholesale division, 70 percent, and retail division, 30 percent.

OK. Can you comment at all on how - - you guys had really good same store sales numbers in the quarter, can you comment on how April has fared?

April has been challenging, but we don't release absolute numbers by month and we have a long quarter to go. We're up to the challenge, in our opinion.

OK. Are you still considering any serious considerations about some share buy-backs?

We're always considering it. We're weighing that against other uses of our cash and we're cautiously optimistic about how to use our cash in the context of a buy-back. Yes, we're always looking at that as a possibility.

OK. Great. That's it. Thanks.

Your next question comes from [John Zalitus] with Buckingham Research. Please state your question.

Good morning. I was wondering if you could comment on the initial response to the Union Bay line relative to your plan?

John, we introduced the line, as you know, at the February show at WSA and we were only two or three weeks into the license. At that time, the assortment mix in the line was very limited, but the reaction to our ability to take it and move it to where it needed to be in terms of assortment mix and, also, channels of distribution, was received with terrific eagerness and excitement. Since the February show, we augmented that line that was available to us after just a few weeks in February and we've received much greater response. This is going to take some time to build. We've never promised that it was going to be a very large contributor tomorrow. Again, most of what Union Bay represents will be realized in 2004.

OK. Great. Can you comment on whether or not you're seeing a brown show trend and whether that's a positive or a negative for your business?

It's hard to say. What we focus on is making sure we're on trend. Once we determine that we're in a brown show trend, that's when the sneaker trend starts. Our job is to, really, make sure we don't miss a trend and we're at the forefront of it, not worrying about too much, from a percentage standpoint, where is the trend and is our business on a proportional basis, equal to where that trend is leading us. We don't really comment and we don't really, internally, feel as though that's the way we plan ourselves. Where we go is where the market leads us.

OK. On the jeans, apparel and cosmetics as possible license opportunities, any timeframe, when we could expect to see some of those? Could it be a 2003 event?

We're speaking with several different parties. Yes, 2003, is it possible? Yes, it's possible. I can't guarantee that it is going to be 2003, but we're certainly looking at various alternatives. It might not be a license. It may be a license. It may take the form of a joint venture. We're working on different things.

OK. Finally, on the cash that you have on the balance sheet, you already talked a little bit about share buy-back, any other plans to utilize that cash?

We're constantly looking at various opportunities to grow the business. Without commenting specifically on what, the $71m that we had at the end of the quarter provides us with a strong base to do things, such as acquisitions or licenses or whatever, and so we are looking at various things.

OK. Great. I hope you guys can keep it up. We'll talk next quarter.

Once again, if you would like to ask a question, please press the star and one on your phone at this time. Your next question comes from Sam Poser with Mosaic Research. Please state your question.

Good morning. Congratulations. Could you just restate the inventory positions for me, please?

The inventories are at $24m versus $15.6m last year. In my script, I addressed the issues.

I know that. I just missed the numbers at the beginning. The question I have for you is that, you were somewhat surprised, I would say, by the performance of the Women's business?

In a good way.

In a good way. In your forecasting, you're not thinking you're going to maintain anything near that?

Not in our plan, but this is something that, again, when you have an opportunity in season and you're reacting, it goes off plan. I think what you're seeing here is a reflection of some of the strengths that we recognized in late fourth quarter and capitalized in, in first.

So, are you seeing anything that's brewing right now that shows signs of life going forward for the rest of the year?

We're always seeing things brewing. The extent to which we are able to capitalize on them, we think we do it better than anybody else, but the scale of it is very hard to determine.

What are the hottest of the new things? What's sort of surprising you, the way that boot came on and so on?

That boot, I think it's going to be very hard to replicate that kind of success with that kind of retail price point and that kind of, let's say, exclusivity on the marketplace. There are five or six things that are working right now and, in the context of this conference call, I'm not going to disclose them.

All right. And you're sticking with 40 percent on the margin? Somebody already asked that, but I'm just clarifying again.

Yes, 40 percent on the gross margin.

Thanks. Have a great day.

Once again, please take this final opportunity to bring forward any questions you have for our management team today by pressing the star and one. There are no further questions. Please continue with any closing comments.

Thank you for participating in the call and we look forward to speaking with you after the end of next quarter.

Ladies and gentlemen, that does conclude our conference call for today. You may all disconnect and thank you for participating.