Steven Madden Ltd (SHOO) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Steven Madden Ltd. conference call sponsored by Financial Dynamics. (OPERATOR INSTRUCTIONS).

Any reproduction of this call in whole or in part is not permitted without prior expressed 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 for today's conference, Ms. Cara O'Brien of Financial Dynamics.

Please go ahead.

Good morning everyone.

And thank you for joining this discussion of Steven Madden Ltd.'s fourth quarter and full year results.

By now you should've received a copy of the press release.

But if you have not, please call our offices at 212-850-5776 and we will send one out to you immediately.

Before I begin I would like to remind you that statements made in this conference call that are not statements of historical or current fact 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 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 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 would now like to turn the call over to Jamie Karson, Chairman and Chief Executive Officer of Steven Madden Ltd.

Jamie, go-ahead please.

Good morning and thank you for joining us review the Steven Madden Ltd.'s results for the fourth quarter and full year ended December 31, 2004.

With me to discuss the business are Richard Olicker, our President and Chief Operating Officer, and Arvind Dharia, our Chief Financial Officer.

2004 marked a year of investments and challenges for Steven Madden Ltd. on many fronts.

On the one hand we undertook a variety of measures requiring additional spending to improve the long-term viability of our business.

In response to changes in customer demand we implemented a transition into broader footwork categories, including dress and tailored items.

Our ability to listen to our customers, understand their needs and use our test and react model to quickly and immediately satisfy those needs enabled us to accomplish this product shift.

We increased advertising to target our customers, promote our brands and elevate their visibility.

In this way we worked to enhance and grow the Steve Madden brand.

We invested in key personnel to support our new or existing divisions, such as Steve Madden Men's, Stevies and Candie's.

And we integrated our newer brands, Candie's and UNIONBAY, into our diversified portfolio.

Finally, we added an Independent Director to our Board, increasing the number of Independent Directors to 5 to assist as in our endeavors.

On the other hand, we experienced certain challenges to our business.

Our shift in product was initially met with conservative buying patterns from wholesale customers.

We faced tough industry dynamics, including heavy pricing pressure and a very demanding markdown environment.

Throughout the year certain wholesale divisions experienced soft sales as well as high markdown levels, particularly acute in our l.e.i. and Stevies divisions.

These costly investments and challenges had a greater than anticipated impact on our overall business.

As the year progressed, we worked diligently to manage our business so that we would meet our annual expectations despite these factors.

Our efforts enabled us to meet our previously announced expectations for annual topline improvement and bottom line results.

In addition to the costly factors I just outline that impacted us in 2004, we made progress in key areas of our business by taking positive steps that are a part of our long-term goals for the Company.

We expanded our profitable retail business by opening 10 stores.

We extended our international reach by beginning distribution in Australia.

We productively used our cash to repurchase a total of 545,100 shares, for an aggregate of 9.7 million.

And we maintained our sound balance sheet with 80 million in cash, cash equivalents and investment securities, no debt and total stockholders equity of approximately 165 million.

Overall in 2004 our business was impacted by many factors, but throughout it all we maintained the strong court elements of our business, brand equity by being the fashion leader in our segment, a tested proven and resilient business model, one of the strongest design teams in the footwear industry, and financial stability reflected in our positive operating track record spanning nearly 15 years, and our solid balance sheet.

These fundamental qualities of our business have supported us over the years, and will continue to be our foundation as we look to the future.

Now Richard will discuss the financial results for the quarter and year in detail.

And then I will conclude with our outlook and the status of our long-term initiatives.

Let's begin with an overview of our financial performance on the quarter.

Net sales for the fourth quarter ended December 31, '04 increased 19 percent to 84.5 million compared with 71.1 million in the fourth quarter of 2003.

Net income was 374,000 versus 2.6 million in the fourth quarter of '03.

Diluted earnings per share was 3 cents compared with 18 cents per share in the fourth quarter of '03.

And these results were in line with our previously announced guidance from October.

Gross margin for the quarter was 32.2 percent versus 38.2 percent last year, primarily reflecting the liquidation of slower moving inventory, the support of our wholesale customers initiatives to clear product at retail, and an overall higher cost of goods sold.

I'll discuss our plan for improving our gross margin performance in a few moments when we look at the total year.

During the quarter operating expenses as a percentage of net sales decreased 80 basis points from the comparable quarter in 2003.

Now I would like to review what happened in each division during this fourth quarter.

Revenues for the wholesale division, which is comprised of 7 brands, Steve Madden Women's, Steve Madden Men's, l.e.i., Steven, Stevies, Candie's and UNIONBAY increased 20 percent to 50.6 million from 42.2 million in the fourth quarter of 2003.

Taking you through our wholesale brands individually now, fourth quarter sales of Steve Madden Women's increased 40 percent to 24.9 million from 17.8 million in the fourth quarter of 2003.

The increase was a result of increases at Federated, Nordstrom and Dillards, as well as higher sales to off-price retailers.

It was heavy and persistent promotional activity throughout the quarter, particularly related to the boot category and markdown levels to assist in the clearance of product at retail were extremely high.

Sales were assisted by positive momentum in early opened up spring patterns.

And we have quickly moved to maximize the opportunities in this category and in the casual category.

L.e.i Footwear sales were 17.3 million versus 11.3 million in the fourth quarter of '03.

Lower than planned due to reduced shipments to all of our better tiered department store customers as result of sluggish performance at retail.

Sales at Stevies, our children's brand, were 859,000 versus 1 million 5 in the comparable period last year.

The decrease is largely due to disappointing performance in boots and slipper classifications, and heavy markdowns in Stevies athletic offering.

For the Steven Shoes by Steve Madden line, sales were 3.1 million versus 3.8 million in the fourth quarter of 2003.

It is noteworthy that in the fourth quarter of '03 the division shipped product under both to David Aaron and Stevies -- Steven labels.

Also sales did increase 46 percent from the fourth quarter of '02 to the '03 period.

And our plan had been to maintain momentum and profitability of this new brand without significant door expansion, preferring instead to remain in strong existing A-level locations.

Sales at Madden Men's increased 62 percent to 11 million from 6.8 million in the fourth quarter of '03.

As we have said in the past several calls, we took steps during '04 to broaden, better balance and position Madden Men's for growth.

As competitors moved aggressively into dress looks, we refocused on jeans friendly casuals and the sported look, not only to great retail success but with a flow of new, fresh follow-up product that is keeping us leaders in this category.

Sales of UNIONBAY were 259,000 versus 27,000 in the fourth quarter of '03.

Net sales while growing continue to be challenging in light of private-label competition in the mid tier.

Rounding out our wholesale revenues, Candie's recorded net sales of 3.3 million versus 900,000 in the fourth quarter last year, which was its first quarter of shipping.

Also in December we announced an amendment to our licensing agreement to reflect Candie's Inc.'s decision to name Kohl's the exclusive provider of Candie's apparel beginning in the fall of '05.

According to the amended agreement we will continue through the end of '06 to design, manufacture and distribute Candie's footwear in a variety of specialty and department stores, including Kohl's.

Beginning in '07 Candie's footwear will be found exclusively in Kohl's locations.

We're very excited to be a part of this opportunity for Candie's to extend its product offering and expand its market presence.

Further we look forward to a long and mutually beneficial partnership with Kohl's, an ideal partner that offers us a strong distribution network which we will be -- which will be an effective vehicle for further market share gain for us.

Moving now to our retail division, retail revenues in the fourth quarter increased 17.3 percent to 33.9 million versus 28.9 million.

We ended the quarter and the year with 91 stores, including the Internet Store.

There were 81 locations in the comp base versus 77 on December 31, 2003.

And same-store sales during the quarter increased 9.5 percent, generated by stronger sales of women's dress shoes, a larger contribution from the sale of men's footwear, the early release and strong reception to early Spring sandals, and to the success of casual footwear.

The breath of the categories that contributed to our exceptional comp store performance validates the growth of the Steve Madden brand as one that has successfully involved from its once casual centric core without abandoning it.

Finally, store productivity remained high, with sales per square foot of $694.

During the quarter the other income line remained flat at 1.9 million.

This includes the commission income from our private-label division, Adesso-Madden, and earned royalties from our licenses.

Private-label income increased 25 percent to 1.3 million versus 1.1 million in the fourth quarter last year on increased sales to our largest private-label customers.

Licensing income was 562,000 versus 802,000 last year.

This reduction resulted primarily from the termination of our handbag license this year.

At the end of the year we had 5 licensees covering a variety of categories, including belts, hosiery, socks, optic and sunglasses.

Now I would like to touch on our full year results.

Revenues for the year increased 4 percent to 338.1 million versus 324.2 million in 2003.

Wholesale revenues increased 1 percent to 230.4 million versus 228.7 million in 2003.

Steve Madden Women's increased 4 percent to 114 million in revenue.

The l.e.i. brand had net sales of 38.4 million.

Steven increased 68 percent to 21 million.

Stevies contributed 9.6 million.

Madden Men's added 31.3 million.

UNIONBAY totaled 579,000.

And Candie's contributed 15.6 million in its first full year of operation.

Our retail division revenues on the year increased 13 percent to 108 million versus 95.5 million in 2003.

We added 10 stores and closed 2 in 2004, and we ended the year with 91 locations, including the Internet Store versus 83 in 2003.

Same-store sales increased 8.2 percent for the year.

And we're very proud of our retail team for ensuring that we had the right product at the right time to meet our customers' demand.

Annual gross margins was 36.3 percent versus 38.9 percent last year.

Margin erosion at wholesale, and to a lessor extent at retail, was the essential cause for our profitability challenges.

Our plan to improve margin performance includes the following.

Moving to a cut to order inventory model for our l.e.i., Candie's and Stevies businesses.

Having little or no unsold inventory to dispose of at end of season will insure improved margins in these divisions.

Moving production to lower-priced countries of origin when feasible.

Using better inventory planning tools.

And notably the promotion of Amelia Newton to the position of EVP of Wholesale Sales.

Amelia is a Steve Madden veteran since 1996.

She came up through the ranks, beginning with customer service, and has worked in and improved almost every department within Steve Madden Women's wholesale.

As part of her new responsibilities, Amelia is charged with more closely scrutinizing and approving buying decisions in all of our wholesale division, ensuring that we only buy shoes that are sold or will be sold at acceptable margins and without markdown liability.

The other income line totaled 6.8 million versus 7.9 million in 2003.

Licensing income was 2.3 million, and Adesso-Madden contributed 4.5 million.

During 2004, as a percentage of sales, total operating expenses increased 170 basis points over 2003.

This increase was primarily a result of increased salaries connected to our retail field expansion, increased professional and legal fees partly associated with Sarbanes-Oxley expenses, increased advertising expense, and increased occupancy expenses relating to retail door expansion.

Net income for the year was 12.3 million versus 20.5 million.

And diluted earnings per share was 86 cents per share on 14,271,000 diluted weighted shares outstanding compared with $1.45 per share on 14,139,000 diluted weighted average shares outstanding in 2003.

From a marketing perspective, 2004 included our sponsorship of Beyonce in the Brides and Ladies First store, which also featured Alicia Keyes and Missie Elliott.

Beyonce has become an even greater fashion and music icon in the period since our sponsorship.

And this is a tremendous opportunity for us to associate with her and be highly visible at venues that were laser targeted to our consumer base.

Other highlights included our Midnight Maddenness event, the Scion car promotion, our sponsorship of the To Be Free Fashion Show in Los Angeles, and our sponsorship of the Paris Hilton album release party in Miami.

These highlights, in addition to our numerous and continuous retail store promotion events and our distinctive prints and outdoor campaign, speak to the strength and focus of our public relations and marketing team.

Based on the enormous brand recognition that they have generated, we intend to continue to support these initiatives and explore new ones in 2005.

Turning now to our debt free balance sheet.

At year end our cash, our cash equivalents and marketable securities were 80 million.

Inventories were 34.4 million, 10.5 million higher than last year.

Inventory increases were a result of the following.

Increases of 3.6 million in retail inventories to support increased comp sales and the opening of 8 new stores net, as well as to support our first quarter 2005 store openings which did not occur in the '04 period.

Increases of 2.4 million in men's in support of their growing open stock program and in support of their improving sales curve.

Increases in Candie's inventory of 2 million over last year when the business was just getting underway.

Increases of 2.1 million in Steve Madden Women's primarily representing receipts of early spring arrivals to freshen our wholesale assortment mixes earlier than last year.

And increases of 1 million in Steven.

Our inventory turned 7.4 times during the 2004.

Factored in accounts receivable was $37 million.

Working capital was at 101.4 million.

Total stockholder equity was 164.7 million.

Our book value was $12.85 per share based on the number of shares outstanding as of December 31, '04.

This is up from $12.05 per share last year.

The totaled diluted weighted average shares outstanding totaled 14.2 million during year.

I have finished the balance sheet remarks, but before turning the call back to Jamie, I would like to get ahead of some of the questions that we anticipate regarding the announcement yesterday of the Federated May Company deal.

First, this is not a consummated transaction, and without having any indication from either company about how they will be operating their footwear department, it is very early to tell what kind of impact it might have on our business.

But Steve Madden Ltd. has enjoyed long and mutually beneficial relationships with both Federated and May.

And we expect to work together to find ways to do more diverse and more profitable business together.

Under the assumption that there is to be a rationalization of real estate yielding fewer doors, it is noteworthy that we have already effectively been undertaking the same process in our decision beginning in '03 to focus attention and to invest in our brand in the most productive doors; the doors where our customers understand our fashion and have greater acceptance of our price points.

Of course, fewer doors could potentially place a bit of a challenge on our topline, but the closure of under underperforming locations could benefit our overall efforts to improve profitability.

It is also important to note that we are the kind of powerful brand is a draw and destination for our customer.

If the concept of the joint entity is to invest in and improve the overall store experience, to brings freshness and product and edginess and excitement into the store, and to attract customers that want to associate themselves with those attributes, then that should translate into a real win for Steve Madden, because that is what our brand is all about.

Now I would like turn the call back over to Jamie who will provide some closing remarks.

As we look to 2005 we are very focused on improving profitability of various divisions, growing the business, further building and leveraging the Steve Madden brand, and enhancing shareholder value for the long term.

At the same time, we're cautious about 2005 due to the fact that we expect certain challenges to remain.

We expect a continuation of significant margin pressure on our wholesale business, as well as higher cost of goods sold, primarily coming from 2 sources.

First, due to weak boot sales in the fourth quarter, we're planning for later purchases of boots by wholesale customers in the second half of 2005.

This means that we will incur higher operating expenses related to freight costs and sourcing necessary for timely deliveries.

Second, we expect continued challenges to our l.e.i., Stevies and Candie's divisions.

In addition to wholesale pressure, we anticipate higher operating expenses associated with not only increasing occupancy expenses, but also an expanding store base.

Finally, we expect lower gross margins in our retail division, primarily due to the clearing of boot inventory in the first half of 2005.

Taking these factors into consideration, we currently expect that 2005 net sales will be flat with sales in 2004, and diluted earnings per share will be in the range of 65 to 68 cents.

While we are cautious about 2005, we're driven in our vision for Steven Madden, Ltd. to become a truly global lifestyle branded Company that maximizes long-term shareholder value.

We aim to do so by working on the following initiatives.

We intend to open 12 to retail -- we intend to open 12 to 15 retail locations this year.

In addition to Steve Madden store locations, we are looking at some real estate for our Steven brand, as we currently only have 1 Steven store.

And this brand we believe has great potential.

Our retail stores are an important piece of our operations that allow us to showcase and test our product quickly and creatively.

We continue to evaluate various year and long-term growth opportunities to further leverage and diversified the Steve Madden brand.

These opportunities include expanding into complementary categories such as apparel, handbags and watches, evaluating potential acquisitions and/or strategic alliances which would complement our existing businesses and be immediately accretive to the bottom line, and to broadening our our international presence.

We remain committed to creating value for our shareholders, while affording the Company with ample funds for the kind of growth I just mentioned.

In terms of our share repurchase program, we plan to spend a total of 35 million over the next 2 years through share repurchases and/or dividends to maximize shareholder value.

Additionally, to be certain that our shareholders' needs are addressed, we plan to add a new independent member to our Board in 2005.

With these initiatives we aim to deliver long-term growth and profitability in 2005 and beyond.

Finally, we are extremely pleased to announce that we anticipate the return of Steve Madden to the Company this spring.

As the founder and emotional inspiration behind the Steve Madden brand, he adds an invaluable dimension to the Company.

His anticipated return is news from every perspective for Steven Madden, Ltd..

And we look forward again to having the benefit of his unique vision, talent and expertise.

That said, thank you for your time and interest.

And now we'll be happy to answer the questions that you may have.

(OPERATOR INSTRUCTIONS).

Scott Krasik from C.L. King.

Richard, can you delve into the 2005 guidance a little bit more?

The way I am looking at it it looks like wholesale gross margins are going to be somewhere around 29 percent for '05?

Is that how you're looking at it?

And if you could help us understand what is going on in retail with your continued strong productivity in your retail stores, even at 12 new stores that should be about $15 million and 10 or 12 percent topline growth just in the retail.

So maybe what you're expecting for comps for the retail for '05 also?

The answer to question is you're on the right track.

We're planning for decreases in our overall wholesale division and increases at retail.

But the retail net sales growth of between 10 to 12 percent, and then a more modest comp store increase of somewhere in the low single digits.

There is also, I think you have to factor into a model some store closings, 2 on our model, at least 2 within 2005, and possibly 3.

From a gross margin standpoint on a forward-looking basis, we're looking at roughly a 29.5 percent wholesale gross margin.

It is a 50 basis points improvement on an annual basis.

We're cautious.

And we have good reason I think to be cautious based on the back half of '04.

From a retail perspective we are seeing some margin erosion, which you can see in the current figures.

And we see a continuation of that erosion to the extent that our plan called for roughly 50 percent gross profit generation out of our retail division.

And then on wholesale, can you give us some sense is l.e.i. -- do you expect the topline to deteriorate further?

And if so, is that from specific accounts, or is that just last attention devoted by you guys?

And then can you give us an idea that is going on with Candie's?

Since the exclusivity deal with Kohl's was announced, I'm sure there was some backlash from your department store guys, how has the mid tier accepted Candie's for 2005?

Let me speak to l.e.i. first.

The net sales projection is for a continuing decline on scale of what we experienced in 2004, which was roughly a 36 percent decline.

We are looking at somewhat less, but still something in the low 30s as a possible decline and a planned for decline in the l.e.i. business.

And frankly it is a contraction of channel as l.e.i. -- as the mantra has become differentiation in the department store channel, the l.e.i.'s of the world that used to have both department store and mid tier opportunity are now solely finding the opportunity at the mid tier and the chain level.

And that is one element of it.

And the other element of it is the continuing struggle l.e.i. has in proving itself as other than a solely casual supplier.

So we're feeling a little bit of a continued backlash of where -- can l.e.i. be more than a casual category vendor.

And where the shoes say, yes, they look good, but we're getting a push back at the wholesale level.

And we're planning for that push back to continue.

From a Candie's standpoint, while we have plans for slight increases over 2004, we have to acknowledge that the thing you alluded to, which is the fact that Kohl's decision beginning in '07 is something that many customers look at as a brand investment risk, meaning why would I invest in a Candie's brand today if in 2007 it is no longer will represent an opportunity for me.

Find me something else.

It actually inures to the benefit of l.e.i. in certain cases.

But it is a real factor and it has mostly reflected itself in the disappointing margins that currently exist in Candie's.

And we project to continue exist at least through the first half of '05, and then starting to improve in '06 when our initial deliveries to Kohl's begins.

But we're having to absorb the '05 front half challenge because of some of the backlash that you alluded to.

Meaning cancellations based on the fact that we have inventories that we have to liquidate that were canceled because customers were uncomfortable taking in Candie's products.

So we're working through that both feverishly trying to cancel particularly late fall merchandise in the back half of '04 as the deal got warmer.

You know, it was a December announcement.

It caught us -- you know you own what you own for fall in December.

And whenever you own that isn't sold is a problem, and it is exacerbated by late December and January deliveries that back up on you.

So it is too late to cancel at the factory.

The first time you really have a chance to do it is the reorder kind of business that was anticipated on spring.

So you're cutting on spring and you're cutting -- certainly you're not being aggressive in reorders.

I announced our strategy that included a cut to order model for Candie's, which will diminish the inventory risk and allow the margins to elevate on a natural basis as we move to a distribution that assorts itself more specifically towards Kohl's as we approach 2007.

So given those initiatives, plus the cost cutting that you have done in the brands already, why wouldn't those brands be at least as profitable or similar operating margins as last year?

You're looking at smaller business, a dramatically smaller business once again in l.e.i., a slightly increased Candie's business.

But on par they are both problematic businesses because of the front half of Candie's and the smaller business in l.e.i. don't necessarily offset one another.

Jeff Van Sinderen from B. Riley.

I wondered -- it sounded like in your -- at least in our press release you talked about the core Steve Madden Women's business.

And was that an area that was relative strength for you during the quarter, excluding boots?

And maybe you can talk a little bit more about that.

From purely on a sales level it was extremely positive, $7 million positive variances, a 40 percent increase on Steve Madden Women's wholesale.

But again it is a mixed bag.

Your selling -- the very good news is early spring.

The offset is the liquidation of fall inventory owned, particularly boots, which as you know half a dramatic impact on gross margin because of the high markdown that you have to take when you're liquidating inventory.

So the good news is that there was a strong offset.

But the bad news is that it had a margin impact.

And let me ask you, as it sounds like or it looks like you're getting some considerable traction in your men's business.

Obviously the sales figure is up pretty strong there.

Maybe you can elaborate a little bit more on that, what you are seeing happen there, and what you see in terms of the outlook for that business?

Once again there you had a 4.2 million variance to the positive, a 62 percent gain.

We have said for a month now that we saw the fourth quarter as the turning point in our men's business.

We're pretty pleased with the direction that is heading in.

We are doing it carefully.

There is an example where Federated is leading in gains for Steve Madden Men's.

We have an inventory position that we're monitoring very carefully.

It is unique to us in that it is open stock focused.

So we are watching it carefully.

We're monitoring what SKUs we put into open stock.

And we're planning very carefully against our retail customers' buildup of what we need to own to replenish into their plan.

We're very happy with men's.

Men's is a projected sales increase in the greater than single digit.

I would say in the 10 to 12 percent range in 2005.

And we see growth thereafter.

The other thing we like about men's is that we're becoming really the destination for jean friendly casual type of cool footwear.

And we're also -- we also have a nice dress component.

And we have a very edgy part to it and a not so edgy part to it.

So it is better rounded than it ever has been.

And there is more pattern work to fill in where the successes are.

So we're very pleased with many things that are going on in men's.

And we think it has a very strong base for growth.

The larger picture is that the Steve Madden brand, when you combine the women's and men's conversations, is still very healthy.

It is the flagship brand.

It is really what the Company is all about.

And those divisions still remain healthy, and we believe on the right track.

And let me ask you this, looking at the expansion of your retail units, it seems that given the strength of that business -- I know you mentioned higher operating expenses which are consistent with opening new stores.

So maybe you could just frame for us how long it takes for a new store to mature, and what the typical ROI why looks like there?

I know you have a fairly high average sales per square foot.

We have a model for ROI which I can -- it is part of our presentation and I can share with you off-line.

We have a very productive model.

Our stores are small.

We don't overspend in their construction.

And we think we're tight in our gallery and operating expense levels.

What it means though is that as you shift a little bit to a greater retail versus wholesale model, your operating expense structure is going to balloon.

And that is natural and to be expected, but as long as it is driving profit it should be something that is welcome.

But also as we increase our retail store base and expand into other markets, some stores come out of the blocks flying.

Some stores it takes just a little bit of time to figure out the right merchandising mix for that market.

It takes a little bit longer.

But as a whole I would say we're pretty fast in terms of normalizing our sales curve.

Okay, good.

And then any other areas that you're looking at where you might -- I am sure you looking at everything -- but anything you can highlight where you might be able to reduce the operating expenses?

I know you have done a lot of work in terms of consolidating Candie's and l.e.i. in terms of the infrastructure.

Anything you can point to there?

Well, we are always looking at everything.

We're always looking at it.

We went through a cost cutting from a headcount standpoint round in late 2004.

We feel as though any further headcount cuts would probably hit muscle.

We're always looking at trying to do things more efficiently.

We're looking at a renegotiating our factory arrangement to bring down the factory related charges.

We're looking at trying to reduce our charge back issues by focusing personnel in that area And attacking low lying fruit, if you will, that is just being taken from us.

But if we fought harder and had a better system for attacking those kinds of charges, we could be improving our gross margin there.

From a straight SG&A standpoint though a lot of it is pretty much fixed.

And we continue to look at ways to sniff and cut around.

The Sarbanes issues are there.

It is expensive and it is something that is with us as long as we are public.

But also as far as SG&A, Richard mentioned that a lot of the expenses are fixed.

For the retail side of the business, that's particular true.

And most of the increase in SG&A we see coming from the retail side of the business, notably increases in rents, occupancy costs and salaries.

And then one thing I don't think you have touched on yet really is the licensing opportunity.

Can you update us on that in terms of where you stand there?

Sure.

We're working with several people, several parties to help us find the right partners to expand our brand into other categories, such as apparel, bags, watches perhaps.

As you know, we have a new director, and you know we're confident that with his assistance and our own hard work that our plan for expanding the brand will be realized in the not too distant future.

Heather Boxen (ph) from Sidoti.

Just first a quick housekeeping question.

Do you guys haven an operating cash flow and CapEx numbers for fiscal '04?

Operating cash flow the year 2005?

Yes.

Approximately 9 million.

And the operating cash flow?

The operating cash flow, I'm sorry.

It is operating cash flow $9 million.

And the CapEx?

CapEx for the year 2005 approximately 8.3 million.

And going back to the gross margins, I know that in addition to markdowns you mentioned overall cost of goods sold was up due to the late boot sales.

I'm estimating that is because you flew in more shoes?

Is that correct?

It is partly related to that, yes.

There's also a creeping up in actual cost of goods.

We're starting to feel price pressures, particularly in our -- in other than the Steve Madden brand.

And so you think this is something that is going to be sustained going forward?

I think it is going to be something that we have to continue to deal with.

There's also a factor of retail price pressure in the gross margin matrix, or variable, where as you broaden out your categories you run into competition that is setting retail thresholds above which, if you go, unless you're very distinctive and in very high demand, the sales are negatively affected.

So we have a price ceiling pressure on a lot of the product as we move into broader categories.

We think that that is the preferred model to a model that would not take us into the other categories and have a diminished sales trend.

I think you mentioned something earlier in the call about one of your strategies expanding into -- into sourcing in some of the lower cost countries?

Can you touch on some of that?

Yes, there's no real secrets out there in terms of sourcing, but there are decisions to be made along the way.

When we say moving sourcing to lower-priced countries we always sort of say it, when it is feasible.

We are a feed to market company, and we -- our ability to plan ahead for large volume is a challenge.

We're committed to doing more of that.

And to the extent that trying to get faster and our planning get sharper, we will be able to move volume sourcing to a lower cost countries such as China.

And even within China, southern China versus further internal you have lower cost as you move within China.

So -- but it all comes at a cost.

Usually there is a little bit of a slower overland freight time period that you have to account for.

The issue really for us is to pay attention to where we're sourcing much more carefully.

And where we do have a volume opportunity.

And where we can press China to a faster turn, we are doing that.

And it is a focus of ours in '05.

We're doing it right now.

One last quick question, and this is -- might be just be housekeeping.

I don't know if you can comment.

You said Steve Madden is going to be back in the spring of this year.

And can you explain a little bit what happened to the 41 months?

Because I'm just counting the 41 months out on my fingers, and if you went in in August 2002, I count that to be January of 2006?

Yes, without getting into all of the details regarding his release this spring, under his sentence and all of the benefits that accorded him for an early release -- he is entitled to an early release.

So as we get closer to the date we will be better able to comment more definitively.

But it is looking like the spring '05.

John Zilitis (ph) from Buckingham Research.

Just on the gross margin, I know everyone has been asking about that, but it seems like such a -- I guess that is the big question is whether you can fix -- can kind of return to historical levels of gross margin.

And with the really strong results of Steve Madden Women's in the quarter, it kind of highlights the divergence between the top line and the margin performance.

Can you just flesh out a little bit more on the planning side?

It seems -- I guess my question is, due you buy too much inventory going into the quarter?

And if so, why on the test and react model would you be in that position?

The answer is always partially yes to the over bought inventory.

And why, because you're needing to project what the uptake is going to be before you have all of the orders.

You are effectively selling on information and you're buying on expectation.

And your hope is that you don't over buy.

You have a history against which to project.

But when you run in, for example, to a boot season such as the one we just experienced, if you have a hot boot to sell there are no buyers for that boot based on in their inability to spend any money in the boot category, regardless of how great the boot is.

And then you find out about it in December or January.

So those are issues.

If you projected against prior years that may have seen a better boot season and more open to buy dollars available for late breaking items, then you would have assumed based on history that there was going to be an uptick.

So there is a reason for buying on a partial speculation, if you will, based on history.

The history has to be incorporated into what is going on in the current season, and that is where the planning comes into play, is not only we have a hot boot, and are they going to buy X numbers of pairs the way they did last year.

It is can they and will they based on what is happening in their other businesses.

So we just need to throw a broader net in making those decisions.

And if Amelia is influenced in that, based on her input and being better informed and closer to retail selling is I think going to assist us in making better buying decisions.

The other decisions that we've made are to place entire divisions on the cut to order model.

That all by itself alleviates the issue that you're raising is, well why are you buying any inventory?

You're not buying any inventory on a cut to order model that isn't already sold at an acceptable margin.

And we have put Candie's, Stevies and l.e.i. on a cut to order inventory model, which should, and I believe will, improve margins on in a natural.

So then going forward, the result of these initiatives should be a reduced volatility in quarter to quarter gross margins, is that correct?

Should be, because you're not going to have inventory exposure in these 3 divisions.

On the other hand, you've got a men's division that has a fairly significant open stock position that at some point, when the shoes that are being owned in open stock for auto replenishment to department store models -- sell a shoe, buy a shoe.

When that stops you've got to liquidate your inventory position that was bought in anticipation of replenishment.

When that happens, the liquidation generally is coming out of markdown sale, and that affects your margins because you're taking out an entire SKU, or pattern if you will, at a lower wholesale.

So you have an effect there.

So I believe that there still going to be challenges.

And we are planning cautiously, but we're doing what we can division by division to make improvements where they can be made.

So just thinking of it over the course of full year, we should start to see some of the impact of changing over to the cut to order system starting in the back half of this year?

I'm sorry, could you repeat that?

Sorry.

Looking at at the gross margin trends over the course of '05, the impact of switching over to the cut to order system should start to reduce volatility in gross margins beginning in the back half, is that correct?

I would say yes.

More so in the back half, particularly where you have a Candie's that is absorbing the liquidation of some fall inventory in the front -- in the first quarter in the front half of 2005.

And you have l.e.i. from a markdown's and allowance standpoint absorbing markdowns and allowances on a year to year basis on a bigger business last year than it is going to have this year.

So it has a bigger dilution impact.

Robert Longdecker from Barrington.

In terms of 2005 guidance on the wholesale side, from a line by line basis, how many of those lines are going to be unprofitable?

You want me to take you through the wholesale division?

On a line by line basis.

Okay.

Line by line for, let's say pretax income.

Should it look at it that way?

EBIT?

Yes, that's fine.

Steve Madden wholesale -- when you say profitable or not profitable, you want me to tell you just if it is profitable?

I'm talking about 2005 plans.

Yes, I'm looking at it.

If you want to give me the numbers, sure.

We are looking at roughly a 3.5 to 4 percent EBIT percentage on Steve Madden Women's.

Something like a 2 percent, maybe a little bit higher in l.e.i.

Around a 9 percent contribution from Steven.

We are projecting a loss -- effectively a flat line, no profit contribution from the children's division.

A 7.3 percent contribution in the men's division.

We are projecting a loss of around 5 percent or so out of Candie's.

But we will know better really about Candie's when we really see what we get on back order for the back half, and it will be a very heavily influenced Kohl's issue.

But that is where our projection is for today.

Giving us the total wholesale of between 3 and 4 percent EBIT contribution.

At retail we're looking at a better contribution of about 4, maybe slightly higher.

For a total, when you add in our other income line of between 4.5 and 5 percent.

And in the latest quarter, again from a gross margin perspective, can you just run down on a line by line basis?

For the latest quarter on a gross margin perspective, yes.

I have it.

The fourth quarter gross margin by division.

Just in wholesale -- yes.

I'll give it -- you can have it in your consolidated financials anyway in a few days.

I will just give it to you.

On a percentage basis, or I have it on a dollar basis?

Percentage is probably better.

Or gross profit.

On the fourth quarter gross profit percentage in Steve Madden Women's 13.9 percent, L.e.i. 18.5 percent, Steven 20.5 percent, Stevies 21.4 percent, men's 31.7 percent, Candie's 10.3 percent, UNIONBAY, which is a little bit aberrational, 19.7 percent.

For a total wholesale gross profit of 18.8 percent.

And retail I think we said is at 52.3.

So a blend of 32.2.

Did you say Steve Madden Women's was 13.9 percent?

Yes, that's correct.

Wow.

Okay.

And can you also just talk about what operating expenses were for 2004 on the wholesale side, and what you're expecting to see for 2005?

'04 operating expenses?

Total operating expenses on '04?

Yes.

In dollar terms?

On wholesale.

Well, we don't have -- do I have a wholesale break out?

Okay, for the total wholesale SG&A we have 59.1 million on the year, and retail of 43.9.

And what do you expect that to be for 2005?

For '05 SG&A at wholesale 58.1 and retail of 50.6.

And we will now take our final question from Scott Krasik from C.L. King.

The guidance that you had given, the 65 to 68 cents, does that include the $25 million potential of stock buy backs?

Yes, it does.

So the performance -- the actual operating performance is even weaker?

There should be, what, 6 to 8 cents probably of --?

No, it's not that accretive in the first year.

It is more like 2 cents in 2005 average weighted shares.

So what price are you using?

Somewhere close to where we were before the call.

And then do you have a sense of once you start shipping Candie's to Kohl's are they going to be expecting significantly more markdown dollars because of the exclusive deal, or are they going to take some on that risk if it doesn't sell through?

Do you know how that is going to work?

You know, it is a partnership.

We know Kohl's very well.

We have had a big business with them in l.e.i. for many years through thick and thin.

And we know how to build a successful an profitable business both for us ourselves and Kohl's.

We're very comfortable moving forward on the basis of our history together.

I guess just lastly, any options issued at the end of the year for senior management?

I don't know what you mean?

At the shareholder meeting in May I believe that -- again, this is a little bit early, but we will be asking probably for very -- a very, very small amount of options which are contractual obligations of the Company under certain people's contracts.

But I believe the amount will be very, very small.

Okay.

And that is going to be -- that is done at the meeting, so that is in May?

Right.

At this point I will turn the program back over to management for any closing comments.

Thank you for your time and your questions.

And we look forward to speaking with you on the next call.

Bye.

Ladies and gentlemen, that does conclude our conference call for today.

You may all disconnect.

And thank you for participating.