Steven Madden Ltd (SHOO) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Steve Madden Limited conference call sponsored by F.D. Morgen-Walke. At this time all participants are in 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 particulars star one. To withdraw your question you should press the pound key. Any reproduction of the call in whole or in part is not permitted without prior express written authorization of the company and as a reminder, ladies and gentlemen, this conference is being recorded. I would now like to introduce your host of today's conference, Ms. Cara O'Brien of F.D. Morgen Walke. Please go ahead.

Thank you, Operator. Good morning everyone and thank you for joining this discussion of Steve Madden Limited second quarter results. By now you should have received a copy of the press release if you have please call our offices at (212)850-5000 and we will send one out to you immediately. Statements in this conference call that are not statements of current or historical facts constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and uncertainties and other unknown factors that could cause the actual results of the company to be materially different than the historical results or from any future results expressed or implied by such forward-looking statements. The statements contained herein are also subject and relate to do 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 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's date. I'd now like to turn the call the over to Jamie Karson, Chief Executive Officer of Steve Madden Limited. Jamie, please go ahead, please.

Thanks Cara. Good morning everyone and thank you for I don't think us to review Steve Madden Limited operated results for the second quarter ended June 30, 2003. With me to review our business are Richard Olicker, president and COO and Arvind Dharia, our Chief Financial Officer. Let me begin by saying that we are pleased with our second quarter performance. Despite a continuation of economic weakness in one of the most challenging spring selling seasons in memory the continued successful execution of our business strategy enabled us to increase profitability by 9.8% and meet analyst expectations. Even though our top line came under pressure given certain conditions most notably cool and rainy spring weather and the sustained promotional environment we are proud that we successfully maintained the substantial sales and market share gains that we worked hard to establish last year. Moreover it is noteworthy that in terms of comparison purposes we were up against a record performance in the second quarter of 2002 when we generated an extraordinary 47.9% increase in total net sales. In addition to holding on to our market share, we also achieved strong increases in our other income line which rose 36% and is comprised of increased commission revenues from our Adesso Madden business, an increased licensing royalty revenues. Our success on the licensing front coupled with our ability to effectively leverage our operating expenses as we held the line on costs even while staining the business and nurturing our newest brands is reflected in the operating margin improvement we recorded this quarter. And taken together all of these achievements help drive a 9.8% increase in net income to 5.8 million versus 5.3 million last year and EPS of 41 cents in the quarter versus 38 cents last year. Again, we are very pleased with these results given the environment in which we are operating.

Finally, we remain in excellent financial health. At quarter end we had approximately 69.4 million in cash, cash equivalent and investment securities on the BS, no long-term or short term debt and total stockholders equity of 145 million. Providing flexibility in a strong foundation from which to build the future growth and diversification of our company.

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

Thanks, Jamie. Let me now detail our results for the second quarter, starting with our overall financial performance. Total net sales, were 85.7 million versus 88.1 million in the second quarter of 2002. As Jamie mentioned it is important to note that last year's second quarter was a blockbuster sales period in which we achieved total net sales increase of 47.9%. Net income increased 9.8% to 5.8 million versus 5.3 million in the same period last year. EPS increased 7.9% to 41 cents per share on 14,040,000 diluted share out established standing as compared to 38 cents per share on 13,792,000 diluted shares outstanding in the comparable period to of 2002. Our bottom line results were achieved through increases in licensing royalty revenue, increases in commission income generated from Adesso Madden, increased interest income, improved gross profit margin and the operating leverage that resulted from sufficiently managing our cost structure. GM increased to 37.7% versus 37.4% last year. Margin improvements were achieved in both our wholesale and retail segments and our retail division which generates higher GM than wholesale represented a slightly larger percentage of our overall business in the second quarter. Retail represented 26% of the total versus 25% in the second quarter last year. During the quarter the company was able to manage its expense structure in keeping with its top line performance, effectively leveraging its infrastructure while continuing to sustain our business and nurture our newest brands, UnionBay for Young Men, Candies for Women and Children and the conversion of the David Aaron business into Steven for Women. This is reflected by the ten basis point decrease in our operating expenses as a percent of sales to 29%.

Let me now review what happened in each division during the quarter. The company's wholesale division was comprised of five contributing brands, Steve Madden Women's, Steve Madden Men's, Lei, Stevies, and the David Aaron division now including Stevens footwear. Wholesale revenues for the quarter were 63.3 million versus 65.7 million last year. It is worth noting that this decline which I will review further as we go through the wholesale division details, came on top of an exceptional 66.5% increase in whole sale revenues in the comparable period last year. As we have articulated on the last two conference calls, part of our strategy for 2003 is to hold the exceptional market share gain we achieved in 2002.

Second quarter revenues in our Steve Madden Women's brand decreased 3% to $30.3 million. But note that this was on top of a 27.2% increase achieved in the second quarter of '02. A slight decrease was a result of wholesale price compression emanating from the success of the inexpensive EVA flip flop classification. Also, the success of the retro athletic sneaker business in the second quarter took share from more traditional brown shoe category. Wedges which have been historically strong for us in this period did not gain traction with customers as strongly this spring. Spring itself broke very late with cool and rainy weather characterizing most of the period between April and June effectively cutting our full price selling season very short. As a result projected reorders did not material lies and prices eroding as competitors best sellers can be found at $29.99 and below. These unique footwear specific dynamics occurred in the midst of an already weak retail and economic environment. The successes for the quarter included our early identification of strong selling dress shoes which will be maximized into third quarter, and the further penetration into the urban independent store base. Steve Madden Women's wholesale has increased its independent retailers by over 50% over the same period last year to over 1,000 independent stores. This will assist in offsetting our strategy to better focus our department store businesses to the most productivity stores where we will selectively invest in hard concept shops to anchor the brand. Finally we are encourage by early fall reads on select basic and fringe items. Revenues for Steve Madden Men's were 11.5 million versus 13.2 million last year, a period in which men's increased in extraordinary 600%. Men's was adversely impacted by three primary factors. First, the lateness of the spring season reduced our sandal selling time dramatically. Second, we experienced the strong downturn in the casual business, our largest category, as competitive looks appeared in the casual space at every price point just as consumer demand and trends shifted more towards dressy and dress casual classification. Finally, department stores and the specialty channels carrying Madden men's experienced weak men's traffic through the period except when driven by storewide sale events. We anticipate that these trends may continues into the beginning of the third quarter and that sales challenges will persist. We do however anticipate a business turnaround in men's coinciding with new product introduction in the dress and updated casual categories late in the third quarter and into the fourth.

Revenues for lei increased 13.2% to 17 million versus 15 million last year. Driving growth were the continued opening of new doors with retailers, particularly in the chain store segment including Stage Doors and Maurice's. Beginning this fall, lei Footwear will also now been found in all Dayton Hudson stores. While lei experienced the same late spring weather related and fashion trend challenges as our other divisions its opening price points helped sustain its sales performance. Negative trends that began in the first quarter accelerated in our Stevies children's division where revenues decreased to 2.7 million versus 3.6 million during the second quarter last year. This came on top of a 70% gain in 2002. The period in which we enjoyed our launch with Foot Star, the Meldisco division in their leased Federated children's department. This year, however, Foot Star experienced temporary credit issues relating to its K-Mart business, which led to shipping delays and some cancellations. Also this year KidsRUs continued to and concentrate more spring 2002 to its private label offering than it had in 2002. As communicated on our first quarter call we believe that the weakness in Stevies is partially because of the weak economy as unemployment rates increase and as a result the family budget is squeezed children's fashion footwear dollar is most vulnerable to competition from the discount mass merchants that dominate market share in children's footwear. As a result retail plans are cut and buying habits become more conservative and price driven. As part of our strategy to reposition the David Aaron business into Steven, revenues were planned down and declined 30% to 1.9 million versus 2.7 million last year as we intentionally curtailed shipment of product in June. Transitioning into the Steven line for fall shipment in July where the larger budget need to do support the launch of the brand existed. All outstanding David Aaron markdown issues were settled in this period went also elected to exit certain underperforming stores as part of the transition plan. This is intended to provide Steven with a more product productive base of customers from which to launch. These stores have already been replaced with the addition of several new retailers including Dillards and Macy's West that are qualified and equipped to showcase and sell the new Steven collection. We also plan to expand into additional Nordstroms into the next quarter to Bloomingdale's, Marshall Fields and Macy's East and receive early sell-throughs on dressy wear now pumps, mules and slings. We are happy with these sell-throughs and our early reception to our Steven line and look forward to Steven being a growth contributor in this quarter and ahead.

Moving on to our retail division, as of June 30 there were 82 stores in operation versus 74 stores in operation at the end of the comparable period last year including our Internet store in both periods. Retail sales in the quarter were 22.4 million, flat to last year. Same store sales decreased 9.5%, this on top of a 5.1% increase in the last year period. This year years decline was caused by a variety of factors most noteworthy of which was the unseasonably cool and rainy weather in the northeast where our retail sales are disproportionately concentrated. Sales decreased in 20% of our northeast stores comprised fully 64% of our comp store decline. The late breaking spring reduced the salability of open tow footwear. Exacerbating weather issues was an overall footwear environment that favored inexpensive slip flops retro support classic sneakers and spring items selling at fully 39.99 and below. It is important to note that our stores sold 5% more units this year compared to last year for the same period but at average selling prices at over 1 dollar less per pair. This evidenced the continuing robust demands for our product but also acknowledges price compression in a challenging and competitive retail environment pressured further by sale tax increases in the northeast. In addition it is encouraging that story productivity remains strong. Our stores generated an average of $684 per square foot for the 12 months ended June 30, 2003.

With respect to new store openings, we opened a store in Austin, Texas at Barton Creek Mall in May and one at the Mall of Louisiana in Baton Rouge in June. Also during the quarter the company closed two of its underperforming stores. Next week we open in South Beach on Lincoln Road and we are very optimistic about the prospects for this store in the heart of one of the most heavily traffic retail areas in the country.

The Internet store mains the largest store with revenues for the second quarter of $1 million. We've recently improved our sight for greater clarity and diminished clicks to purchase and we are constantly upgrading our content to both keep the interest and the shopping dollars of our Internet customers.

Moving to the other income, the company commission and licensing fee income line increased 36.3% to 2.1 million for the quarter driven by increases in licensing royalties and commission revenues from our private label division. Our private label division, Adesso Madden, increased its revenue 21% contributing 1,500,000 to the other income line versus 1,200,000 in 2002. The division continued its growth with Target and Wal-Mart. Licensing income increased 87% to $689,000 versus 368,000 in 2002, as a result of an increase in the wholesale sale and growing retail success of license Steve Madden products. We continue to work toward concluding new license arrangements but we are proceeding methodically in pursuit of the strongest brand building opportunity.

Turning to marketing, in the second quarter we had a busy calendar promoting our retail stores and in our consumer marketing efforts. On the retail front we hosted a Hot Live into jams broadcast out of our Third Street promenade store where Michele Vassy encouraged listeners to get their booty out of bed for a morning sale. An MTV sale was shot and aired nationwide. Our Southern California sales ran a Carnival for Two to Mexico cruise promotion. Every customer that mentioned the phrase I Love Steve Madden, now where's my $10 off got $10 off every purchase of $50 or more. In the New York region we opened our 34th Street renovated flagship to rave reviews and ran a midnight madness sale that kept our late night shoppers shopping.

The company had a very active marketing calendar during the quarter. The company continued its consumer magazine Fantasy Girl presence in books that included 17, Teen People, Cosmo, YM and Lucky. We expanded our men's print coverage to include Maxim, New York magazine, Gotham and [inaudible]. Outdoor media including bus and bus shelters, metro lights and billboards continued throughout the period. We also continued an aggressive mall advertising campaign targeting Federated, Nordstrom and selected May Company stores. We were all over the radiowaves in grassroots branding blitz. These included a ticket rate with Hot Night Concerts where the station did a live promo at our stores. Blink 102.7 promoted us on air and they actually held auditions for a nighttime DJ job in our stores on Long Island and in our 34th Street store. Z100 did a ticket get-away to a prescreening of Legally Blond Two. To help promote our new jump booty and take advantage of the New Jersey Nets playing in the NBA finals we made shoes in Net team colors for every Nets dancer to wear. We also Jason [inaudible] wife and we are sure this is the reason that Jason decided to sign with New Jersey. You're welcome, New Jersey. These are only a handful of highlights from our sales and marketing efforts all of which assisted in raising the visibility of the Steve Madden brands.

With respect to our overall financial condition we maintained a pristine BS which speaks volume to the health and viability of our company. As of June 30, 2003, our cash, cash equivalent and investment securities were 69.4 million. Inventories were at 25.3 million versus 24.8 million in the last year period. Our inventory turns was eight times in the 12 months ending June 302,003. Our inventories are in line with plan and are clean and current entering third quarter. We are pleased with our inventory management, particularly in light of having agreed to accelerate certain receipts to avoid potential SARS related delays. These were April decisions. Accounts receivable were 38.8 million versus 46.2 million last year. Working capital was at 88 million. Total equity was 145 million. Total diluted shares outstanding are 14 million. Now let me turn the call back over to Jamie who will provide some closing remarks

Thanks, Rich. In conclusion we again successfully navigated through a difficult environment despite the unseasonable weather high promotional activity and continued retail and economic weakness we maintained the extraordinary sales and market share gains from last year, we improved margin performance and we achieved a good deal of success in the licensing front. And as a result we generated solid earnings growth under very challenging operating conditions. Our ability to drive positive results during one of the worse spring selling seasons in memory is a testament to the strength and versatility of our business and our employees. Thanks to our talented people, flexible business model and strong brand equity we were able to continue to execute our corporate strategy of growing and diversifying the business. With the recent addition of the UnionBay and Candies brands to our already strong brand portfolio, there is no doubt that we have become the undisputed market leader in the junior footwear space and are one more step closer in our ongoing effort to position Steve Madden as a complete fashion lifestyle concept.

Looking forward, we remain committed and optimistic regarding our growth prospects. We continue to explore further avenues nor top line expansion including widening the region of our core Steve Madden brands through additional licensing opportunities as well as leveraging our try and operating expertise through exclusive agreements like those recently signed with UnionBay and Candies. By focusing on continuing to grow our core brands while nurturing our newest brands additions and expanding our distribution both domestically and internationally Steve Madden Limited to continue to benefit from a diversified and flexible approach to the market. Overall we have the sound financial position, strong brand equity and a superior business model we remain confident in our long-term prospects. Although we must knowledge that we are very cautious given surrounding external factors based on the level of visibility we have today we can reaffirm our expectation for annual earnings per diluted share of $1.58 to $1.63 driven by alloy to mid single-digit net sales increase coupled with continuing the successful strategies that enabled us to obtain its second quarter results. I hope this call has been informative. Thank you for your time and your interest and now I will turn the call back to the operator for your business questions.

Thank you. Ladies and gentlemen, at this time if you have a question you will need to press the star one on your touch-tone telephone. Your questions will be taken in order they are received. If your question has already been answered you may removed yourself from the queue by pressing the pound key. Also if you are using a speakerphone please pick up the handset before pressing the button. One moment, please, before we queue up for our questions.

We'll take our first question from Michael Ryan from Sidoti and Company.

Hi, guys. Just I guess I wanted to know as far as retail goes how your same store sales, did they start to pick up coming into June and maybe an indication of how they are doing so far in July?

Well, June is incorporated in the second quarter so you are seeing as a consolidated number there. But we can say that we did see a turn to the better in July.

Okay. As far as, did you give an inventory number that you had at the end of the quarter?

We gave the total inventory number, yes.

25.3 million, by segments [inaudible] and retail has 9.6 million.

9.6 for retail. And you are comfortable that that's in line and they are current?

That's right.

So do you see any further GM pressure going on threw out the year? I know earlier you were, your goals were 40% for the year. Is that still a target? Is that receivable?

That, the target will be [inaudible] [inaudible] 38 to 39%.

Unidentified Company Speaker Michael Ryan: Okay. And I guess as far as looking at the license revenue, are you expecting to see the same kind of increases on your other income line for the rest of the year?

We continue to work at making sure that there is a good flow in the pipeline. And while we are not prepared to commit to these kinds of percentage increases, the answer is yes, we are planning for increases in the other line item.

Unidentified Company Speaker Michael Ryan: Okay. All right. That's all I have. Thank you.

Thanks, Michael.

Thank you. Just as a reminder if you do have a question press the star one on your touch-tone telephone at this time. Our next question from Ashley [inaudible] from Clipper Capital.

I can attest to the fact that this is a really lousy spring so congratulations on a tough quarter. Turning to a BS here, your investment security, I assume because you list that under current assets that you put that up to the market value?

Current assets [inaudible] [inaudible]

So can you talk about durations and what type of interest rate risk you are exposed to? I mean if interest rates go up with an improving economy should we expect possible earnings shortcomings and BS issues?

We think this will, yes, we will [inaudible]

I'm sorry?

It's short term enough so that we could move it into greater interest bearing instruments.

So it's not something like ten years.

No. All of our, our investments have an average maturity life of somewhere about 2.5 years.

So there is a small amount of interest rate risk associated with your investment securities that could impact earnings but it's not material?

Correct.

I guess my second question, you've heard this before but what's the argument for not giving a dividend or a share buy-back with all the cash and equivalent that you have on your BS?

Well, there is, we are always looking at ways to maximize shareholder value then would include both of the things that you mentioned. And we are always optimistic about that. But we are weighing that against our needs to manage our cash for our business. So we are constantly.

Which way is the scale tilting right now as you weigh those options?

We've used our cash in the context of our business and the recent taking on the UnionBay license and the Candies license and building those businesses as well as supporting our existing businesses where is where we have spent our money. But we are constantly looking at other things, lack of share buy-back and we are examining and analyzing the possibility of perhaps a dividend. We are constantly looking at those alternatives.

Fair enough. Let me say as a shareholder I wouldn't mind seeing one. Just a final question, on the two stores that you closed, can you just talk about where they were and what the terms were of the closing?

We don't disclose the specific locations. They were underperforming locations and we don't disclose by location.

Okay. Fair enough. Good luck going forward.

Once again if you would like to ask a question at this time please press star one on your touch-tone telephone. Once again to ask a question please press star one at this time.

It looks as those there are no further questions. Please continue with any closing comments

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

Ladies and gentlemen that does conclude our conference for today. You may disconnect your lines and thank you for participating.