Steven Madden Ltd (SHOO) 2007 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Steve Madden Limited conference call. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will follow at this time. Any reproduction of this call in whole or in part is not allowed without prior express written authorization of the company. And as a reminder ladies and gentleman, this conference call is being recorded.

I'd now like to introduce your host for today's conference, Miss Leigh Parrish of Financial Dynamics. Please go ahead.

Good morning, and thank you for joining this discussion of Steven Madden Limited second quarter results. Before we begin I'd like to remind you that statements in this conference call that are not statements of historical or current 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 from historical results or other results expressed or implied by forward-looking statements. The statements contained herein are also subject generally to other risks and uncertainties described from time to time by the company's reports and registration statements filed by the SEC. Also please refer to the earnings release for more information of 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. Now I'd like to turn the call to Jamie Karson, Chairman and CEO of Steven Madden Limited.

Thanks, Lee. Good morning and thank you for joining us as we review Steven Madden Limited's results for the second quarter, ended June 30, 2007. With me to discuss the business is Ed Rosenfeld, our Executive Vice President of Strategic Planning and Finance The second quarter proved to be challenging as we experienced a more difficult sales environment during the period. Our top line results were impacted by the absence of major fashion trends in the market such as the peep toe shoe which helped drive results in last year's second quarter, as well as the discontinuation of Rule, L.e.i., and Jump. Three product lines we did not carry into this year. We experienced weakness in Candies, and Steven Madden men's Sport Fusion product, as well as belts and Betsey Johnson handbags in our Daniel Friedman segment, all of which impacted our wholesale division sales and gross margin.

In our retail division, we were very pleased to have significantly improved our gross margin despite the pressure on sales which enabled us to maintain overall gross margin for the quarter on a year-over-year basis. Further, we maintained our commitment to affectively managing our business and were able to reduce operating expenses versus the prior year. While we experienced softer sales in select merchandise categories, we did experience sales growth in our Stevies, Madden Girl and Steve by Steve Madden brands. We continue to focus on the diversification of our business model and the expansion of the Steve Madden brand into merchandise categories beyond footwear. Our Steve Madden and Steven by Steve Madden branded handbags performing solidly in the second quarter. And our Steve Madden dressed carried a selling price of approximately $150 continued to exceed expectations.

We have also maintained our strong financial position and effectively managed our balance sheet. We continue to carefully manage our business overall with a diligent focus on improving efficiencies as well as strong inventory and expense management. Signifying our confidence in the company and our long-term prospects, we also announced today that the board has authorized an additional increase in our stock repurchase program to a total of $75 million.

Before I turn the call over to Ed to review our second quarter results and business outlook in more detail, I'd like to take a moment to discuss a few recent events and highlights from the shoe show. Our design team, led by Steve, continues to focus on creating fashion forward merchandise that excites our customers and fits their lifestyle. Importantly, each brand has its own distinctive look and feel which expands our reach to touch various consumer demographics. We're confident in our design team's ability to deliver fashion footwear to marketplace quickly. And according we are looking forward to a number of exciting product opportunities in the back half of the year. At the WSA shoe show in Las Vegas, which was well attended, we received exceptionally positive feedback regarding our new merchandise particularly in Steve Madden's women's division. In addition we are pleased to have launched Steve Madden's Fix, a new line of sneakers for women and men. We are thrilled with the initial response and expect it to hit stores in the first quarter of 2008.

Earlier this quarter we announced the acquisition of Compo enhancements, our exclusive e-commerce solutions provider, and the appointment of it's founder, Jeff Silverman as President of Steve Madden Limited. We are very pleased to have Jeff and the Compo team join our organization and we very much look forward to their contributions as we move forward. In sum, while the overall retail environment was very challenging during the quarter, we remained highland focused on effectively managing our business. We were successful in maintaining our gross margin in reducing operating expense dollars year-over-year. We are cautious in our near term outlook given the recent sales environment. However we have a strong foundation in place that has been established through our superior brand equity and diversified business model and as a result we are remain optimistic about achieving our back half guidance. We are excited about our designs and the opportunities ahead as we enter the fall selling season. Moreover, we remain well positioned to achieve our objects of becoming a leading lifestyle branded company and enhancing shareholder value over the long-term. And with that now, I'd like to turn the call over to Ed who will discuss the financial results of the quarter in more detail and provide more specific outlook for the remainder of the year.

Thanks, Jamie. Consolidated net sales in the quarter were $108.3 million, verses $129.5 million a year ago. As Jamie mentioned, a challenging retail environment and lack of big trends compared to the prior year resulted in top line declines in both wholesale and retail division. Despite the difficult margin divisions, gross margin was approximately flat at 42% compared to 42.1% last year. Decline in wholesale division was offset by increase in retail segment. The company reduced operating expenses from $36.1 million in last year's second quarter to $33.6 million this year. Based on the lower sales, operating expenses as a percentage of sales increased from 27.8% last year to 31% this year. Net income for the quarter was $10.5 million compared with $12.7 million in the prior year. EPS for the quarter was $0.49 per share on 21.6 million diluted weighted average shares outstanding. Compared to $0.58 on 22 million diluted weighted average shares outstanding a year ago.

Now I'll talk about the performance of each of our divisions. First our wholesale divisions comprised of 8 segments in the quarter. Steve Madden Womens, Steve Madden Men's, Steven by Steve Madden, Madden Girl, Stevies, Candies, Natural Comfort, and Daniel M. Friedman. Net sales in the Steve Madden Women's wholesale segment were $33.1 million versus $34.8 million in last year second quarter. While the company enjoyed success with flat sandals, and canvas wedges, there was no trend as significant as the peep toe trend a year ago. Net sales in Steve Madden Men's were $14.2 million in the quarter versus $18.1 million a year ago. The sport casual business continues to be weak, while (inaudible) and dress shoes are gaining momentum. Importantly the Foot Locker test we discussed on the last call has been expanded from 150 to 500 doors. And as a result we currently expect to return to year-over-year top line growth in men's in the third quarter.

Net sales in Steven by Steve Madden were $5.8 million in Q2, up 8% from $5.4 million a year ago. Sales gain was driven by an increase in Nordstrom, which is Steven's largest customer. Product highlights in Steven included ballet flats, canvas wedges and mid heel dress shoes. Madden Girl net sales were $6.6 million up 2% from $6.5 million in the second quarter last year. Some Madden Girl shipments were moved up from second quarter into first quarter this year which resulted in dramatic year-over-year growth in Q1 and much more modest growth in Q2. When taken together, Madden Girl net sales grew 33% in the first half. Net sales in Stevies were $1.7 million in the quarter more than double sales of approximately $800,000 a year ago. Our kids business continues to be a bright spot as we again recorded increased sales with both Stevies and Steve Madden brand children's product.

Candies net sales were $5.1 million versus $9.1 million a year ago. We had a very tough spring season at Candies, where we had too much dress product, which did not perform well and not enough casuals. As we discussed on last quarter's call, Steve was very involved with the fall product and we have a much more balanced assortment this season. After a decline in the first half, our order file for the back half in Candies is up meaningfully over last year. Our last wholesale footwear division, Natural Comfort, did approximately $300,000 in sales in Q2 compares to 200,000 last year.

Our wholesale accessories business, Daniel M. Friedman & Associates generated net sales of $11.8 million in the quarter, versus $17.3 million in last year's second quarter. This decline was expected and resulted from lower sales of belts and Betsey Johnson handbags. Taking all this together, overall wholesale sales were $78.6 million compared to $96.2 million a year ago. Should be noted that last year's second quarter sales included $4 million in net sales, from Rule, l.e.i., and Jump. Three brands we did not go forward with in 2007. Overall the wholesale gross margin decreased from 38% last year to 34.2% this year, due primarily to lower margins in Candies and Daniel M. Friedman.

Moving onto our retail division. Second quarter sales were $29.6 million versus $33.3 million in last year's second quarter. Some stores sales decreased 13% in the quarter to primarily to a lack of big fashion trend and decline in average unit retails. Gross profit dollars were up however, based on an increase in gross margins, from 54% in the second quarter last year, to 62.4% in the second quarter this year. The gross margin increase was driven primarily by freight savings and fewer mark downs and closeouts. At the end of the quarter we had 96 stores in operation and stores opened for full 12 months ended June 30, generated $696 in sales per square foot.

Moving to other income, the company's commission and licensing fee income, net of expenses, doubled to $5.7 million from $2.8 million last year's second quarter. Our (inaudible) continued it's outstanding performance, with commission income net of expenses increased 122% to $4.7 million in the quarter compared to $2.1 million in the second quarter of last year. Licensing income was also up for the quarter. Generated an increase of 39% to $1 million from $700,000 in the second quarter last year. With respect to the balance sheet, we continued to maintain a debt free balance sheet and ended the quarter with $93.9 million in cash, cash equivalence, and marketable securities. Total inventory at the end of the quarter was $35.2 million down from $43.1 million at the end of the second quarter last year. Our inventory turn for the last 12 months was 8 times, up from 7.8 times a year ago. Accounts receivable were $51.8 million reflecting average collection in 52 days, an improvement from 54 days a year ago. Capital expenditures were $2.4 million for the quarter and stockholders equity as of June 30th, was $226.8 million.

Now onto the outlook for the balance of the year. Based on our first half results and current visibility into sales trends, we now anticipate that net sales for the year will decline in the range of 2 to 4% versus 2006. However, we continue to anticipate our earnings per diluted share for the year will range between $2 and $2.10. We are maintaining our earnings guidance as a result of better than anticipated gross margin trends, increased income from Private Label business and continued focus on managing operating expenses. As always we continue to focus on producing distinct designs that embody the Steve Madden lifestyle. We are committed to achieving sustainable growth as we exploit core footwear business and expand our newer merchandise categories to drive results for the company and our shareholders. Now I'd be happy to answer any questions you may have.

Thank you. (OPERATOR INSTRUCTIONS). Our first question is coming from Scott Krasik of CL King. Please go ahead.

Hi guys.

Good morning.

Congratulations on operating on a tough environment. The first question I have, Ed, talk about the sustainability, gross margins of retail, this is significantly better than you've done, other than the fourth quarter on a historical basis, talk about, you know where you see those going.

Sure, well you're right it was a pretty dramatic year-over-year increase in gross margin there and one of the very important pieces there are the freight savings. There's about 300 to 400 basis points of permanent freight savings that we've got. We negotiated better rates and we're saving on freight both from the factory to the warehouse and from the warehouse to the store. Those are permanent savings that you know, we don't expect to have go the other way. We start to anniversary those in fourth quarter. So you should see another nice impact from that in third.

Okay.

Then the other big piece itself that is fewer closeouts, fewer mark doesn't and job outs. That's really the inventory control efforts that we've been putting into place. We were disappointed with the 13% comp stores decline in second, but keep in mind we went into the quarter with 30% less inventory in retail. In that context the sales performance is not as disappointing and you see why we were able to improve the gross margin there.

And your inventory position now in the third quarter? Is it down again?

It's down again, not down as substantially. We're down 18% overall company and in retail it's 15% lower than a year ago.

Okay, good and you mentioned your out $4 million in sales from the three brands you didn't continue. Talk about some of the other negative factors in the second half of the year you'll be anniversarying again. I know Daniel Friedman had it tough second half last year, women's boots was difficult.

Sure, I'm glad you asked that. When you talk about, if we talk about EPS first, how we were down in the first half and why we expect to be up in the second half, I think it's helpful, first to talk about Rule and Danny Friedman. There were some unusually things that happened last year that skewed the profitablilty towards the first half and away from second half. Rule had a nice contribution in the first half and was being wound down in the second half. And Danny Friedman had an extraordinary performance in the first half when Betsey Johnson was very, very hot. And then a very poor performance in second half, as that slowed down. So between those two businesses, in first half of 06, there was a $0.22 EPS contribution, just from Rule and Danny Friedman in first half of 06. So this year, we got obviously nothing from Rule and about $0.05 from Danny Friedman. There was a $0.17 loss in the first half from those two businesses. Incidentally, the company's EPS was down $0.15 in the first half. The entire decline can be attributed to those two businesses. Now when you move in the second half, those businesses after, in the second half of 06, after contributing $0.22 in the first half, they contributed a loss of $0.04 in the second half of 06. If we get that same $0.05 from Danny Friedman with got in first half and second half, actually get a benefit of $0.09 versus a year ago in back half, you know of $0.17 in first. Yeah. And then, compounding that, when you talk about, you mentioned the boots, boots, very poor performance in boots last year and it really impacted our gross margin, particularly in Steve Madden women's in the fourth quarter. I don't have the numbers specifically of what the loss on boots was, but we believe that we can do probably 600 to 700 basis points better in gross margin in the Steve madden's Womens, wholesale division in fourth quarter. About a $30 million business, so right there you're talking about $2 million in gross profit. So that's another $0.06 or so right there.

Okay, that's helpful. And lastly, conceptually, do you guys know where your retail box is going? You have a lot of small stores right now, no direct (inaudible) among themselves, you have committed to opening stores again, are you set on a box where you think you can display, you know, Steve Madden women's, men's, dresses et cetera?

Yeah, and we're still working on that. We have new stores coming a little bit larger and we'll be able to incorporate more of the other products, but right now we've been focusing on a lot of street locations so the box sizes are not uniform. On average they're getting bigger. We are opening a store, for instance on Collins Avenue, which will be definitely north of 2000 sq feet, we're opening a store on 58 and Lex, which will be a flagship, which will be much larger than our normal box size. So we will have some of those products in some of our upcoming stores.

Congratulations, let me jump off here.

Your next question is coming from Jeff Van Sinderen of B. Riley.

Good morning, let me add my congratulations on a good job during a tough or challenging environment. Can you guys talk a little bit about your launch in sneakers? That seems to be a high point in terms of the WSA Fort Worth show. Maybe that's been received by buyers, what reaction you got and what you think the potential of that business is?

Yeah, that's something we're really excited about. It's a business we wanted to get into in a meaningful way for a while. We think it's a big opportunity for us because that fashion sneaker business makes up a big part of the footwear purchasing dollars for our customers. Our customer wears a lot of sneakers. There's no reason we can't be successful in that market. In fact we've proven it in the past with certain items that we can be very successful with sneakers. It's something we've been working on for about a year now. We've hired some of the most talented people in the industry for many of the best sneaker companies in the world. And we just launched as you said at the shoe show in Vegas, we got good response to the product. Nordstrom, Macy's, Journeys, Belk. They're all on board. The products will start shipping, I believe January 25, so first quarter of next year, it's a little early to say what our expectations for dollar volume is, but we'll certainly keep you updated on that.

Okay, and then on the boot business, I know it was a tough year last year, maybe you can just touch on how retailers are planning the boot business this year and also, is that part of the opportunity that you're seeing to improve margins in the second half of the year?

Yeah absolutely, we feel really good about boots. We've gotten some early reads on boots. Some of the best we've had in a couple of years at this time of year. We had a flat suede boot that was the number one item in the Macy's west pre-season sale and we've got some other boots that are testing well, we've got some riding boots, some tall shaft boots that we think go very well with the trend towards stresses. We're very pleased about that particularly after the very difficult boot season we had last year. And we think that really represents an opportunity for us in the back half. Particularly because we had some, a struggle with average unit retails declining in first half, it's a welcome development to have the obviously higher boots trending well. We think that's a sales and margin opportunity versus a year ago in back half.

Okay, good and can you also touch on, a little more about the apparel business in terms of what the sell throughs that are being experienced there and is that program slated to be expanded at all?

Yeah, absolutely. As we said, the dresses, we don't typically dispose sell through percentages, but they've been very strong. They've exceeded our expectations. We're up close to 300 doors right now with the dresses and that's Dillards, Macy's, Nordstrom, Karson's, Belk's. So all the key players. And thats a business that we certainly would hope to expand next year.

Good year. Thanks very much and good luck.

Thank you, your next question is from Heather Boksen of Sidoti & Company.

Good morning guys, you know with respect to the trimming you've done of the operating, the operating expenses, can you give some color as to you know, I guess, you know where those cuts are coming from and is that something you think will be sustainable?

Yeah, well, predominantly it's just uh, managing very carefully. We were down in sales so the biggest declines came in the, in the areas of the operating expenses that are variable. Sales commissions were down, factor charges, warehouse charges et cetera, and we managed the fixed costs carefully. Going forward I don't think you'll see a lot of leverage because we think we're going to return to growth on th top line, and we're also opening 7 to 8 new stores on the back half that will add operating expenses.

That actually answered my second question, store openings. Lastly of the $75 million now authorized for share repurchased, how much is used?

$75 million is where we are today. We had $38 million left and the board increased it to $75 million.

All right, thanks.

Thank you your next question is from Jeff Mintz of Wedbush Morgan.

Thanks, just a follow-up on Heather's questions, were there store openings or closings in the quarter? I know you ended up with the same number.

No, there was nothing in second, in Q3, last week we opened our first store of the year which is the garment center in New York.

Okay, great and on the freight savings, I mean that's great considering the price of energy, are there possible surcharge issues if the price of oil continues to go up or is that already taken into account on your freight agreements?

There certainly could be. It's something we're watching carefully. We don't think it's going to be extremely meaningful, but it's a possibility.

Okay, and on the (inaudible) Madden business, the business more than doubled in the quarter, can we see that going forward or do you expect it to be moderate?

The growth is going to moderate there and we expect tougher comparisons in Q3. It's going to be much more modest growth.

Great, good luck.

Thanks

Thank you your next question is from Sam Poser of Sterne Agee.

Good morning. Ed, could you talk to the difference of the response to the mens and the womens business? Outside of Foot Locker additions the strength of the men's business, and then response to fixed product, mens versus womens?

Sure. I think the show was good for mens and womens, but stronger for womens. We continue to feel our way on the casual piece in mens. We got great reception, we got a very response to dress shoes with flexible bottoms in mens. The casual piece is down substantially and people are planning that conservatively on the men's side. Fixed, we got a good response to both. The womens and the mens. Interestingly different accounts. One particular account was really big on board with the womens and one big on board with the mens, but overall response was good to both. Steve Madden women's frankly was the highlight of the show. The boots, the response to the boots was great. We've got these mid healed dress shoes looking good. That something we identified in a small way in second quarter. We were really the first to the market with them so people are being aggressive with those going to the back half and so, we've got a number of things that we feel good about that women's.

Thanks. How much of the top lines may have been affected by the calendar shift at the end of quarter?

Very little are you asking about the--

How much of the possibly Q3 goods that you possibly plan to ship the last week of the month, last week of the quarter might have shifted over to Q3?

There was a shift of end of Q2 into Q3, but also a shift of Q1 into Q2 so the net effect was very small.

And then with some of your larger department store accounts, I've understood there may be inventory issues there within themselves, what's the situation with the mark down negotiations these days? Is it any hotter and heavier than it has been?

No, it's status quo. It's as it's been. You know second, in the first half, our sell throughs were lower than they were a year ago, so mark down commitments were higher. Right now our goods are trending are better, so expect we can get that back down to last year's levels.

Okay, great. Thanks.

Thank you your next question is from Angelique Dab of Nollenberger.

My question has been answered, thank you.

(OPERATOR INSTRUCTIONS) Your next question is from Elizabeth Montgomery of Cowen.

I have a general question on the environment. You mentioned sport casual was weak, I wonder if you have a sense of what might be causing that or what you attribute the weakness. Thanks.

In the first half it was a pretty strong trend toward the less expensive volcanoized footwear, so the Converse, and the Vans. We think they ate into our business. I think that's probably the number one factor.

So you don't think that the category has been overbought or there's any other major changes in the trend going on?

I wouldn't say. We're not in a high point of the cycle certainly, but I think that's the big thing was the trend towards the canvassed volcanized stuff. Okay, thank you.

Your next question is from Scott Krasik of CL King.

Just a follow-up. I know you saw a decline in Candies because the product wasn't right. Are you seeing them going out in sourcing the product themselves? How were the margins on the Candies versus historically?

No they're not going anywhere else. We're doing 100% of the Candies business. The margins were poor in the second quarter. As I mentioned earlier, the goods did not perform and we had excessive mark downs liability to Candies, or to Kohls rather. The good news is again, that Steve was very involved in the fall product. The assortment is much more balanced. Kohl's really likes the new product, very excited about it, and our orders are now up substantially after a pretty substantial decline in first half, our order are up for back half.

Your initial margins going in aren't getting squeezed?

No, that's not the issue. The issue is whether the goods sell through and the markdown money.

All right, good thanks.

(OPERATOR INSTRUCTIONS). There are no further questions, please continue with any closing remarks.

Well thank you for your time. We look forward to talking to you on the next call.

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