Steven Madden Ltd (SHOO) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Steve Madden conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. Any reproduction of this call, in whole or in part, is not permitted without prior express written authorization of the company. (OPERATOR INSTRUCTIONS)

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

Thank you. Good morning and thank you for joining this discussion of Steven Madden Limited Third 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 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.

And now, I'd like to turn the call over to Jamie Karson, Chairman and CEO of Steven Madden, Ltd. Jamie.

Okay, thanks, Leigh. Good morning, and thank you for joining us as we review Steven Madden Limited's results for the third quarter ended September 30, 2007. With me to discuss the business is Ed Rosenfeld, our Executive Vice President of Strategic Planning and Finance.

Before I give a brief overview of the quarter and our outlook for the year, I would like to note that, as most of you are aware, we recently announced that the company's Board of Directors is evaluating strategic alternatives to enhance shareholder value. That said, we cannot provide any additional information regarding this initiative beyond what was issued in the Press Release on October 19th. The purpose of this call is to discuss our third quarter results and we appreciate your understanding that we will not be commenting on the progress of our strategic alternatives review during this call, either in our formal remarks or during the question and answer session.

Now, turning to our performance during the quarter. While we experienced a very challenging retail environment during the quarter that negatively impacted our results, we nevertheless achieved sales and net income in line with our revised guidance. We experienced a softer selling environment at retail throughout the quarter resulting from an overall absence of big fashion footwear trends and weaker consumer spending.

Sales in both Steve Madden Women's and Steven by Steve Madden were down year over year. Steve Madden Men's was also down slightly for the quarter. With that said, we are pleased with the continued success of Madden Girl, as it achieved solid results this quarter. Due to Madden Girl's popularity among its target consumer, sales for this brand are up 24% this year to date. Through the power of our brand, we have also been able to successfully expand into new merchandise categories beyond footwear in the past year.

We are excited by the performance of our Steve Madden and Steven by Steve Madden branded handbags, as well as Steve Madden dresses, as those merchandise lines continued to exceed expectations during the quarter. In addition, we were able to sustain solid sales results in our Daniel M. Friedman division while improving profitability compared to last year's third quarter. Importantly, despite the more promotional environment, we were able to maintain our gross margin on a year-over-year basis through efficient management of our inventory.

We further expanded the Steve Madden footprint through the opening of four new stores during the quarter. As we extend our store presence in high-traffic markets and build our online offering, we continue to view our retail division as a strong avenue to reinforce our brand image, test new merchandise, and drive growth.

Before I turn the call over to Ed to review our third quarter results and business outlook in more detail, I'd like to take a moment to discuss some highlights heading into the fourth quarter. As we announced last quarter, we introduced our new line of fashion sneakers, branded as Steve Madden's Fix at the August Shoe Show in Las Vegas and it has received positive reaction from our wholesale customers. We will introduce the product in our own stores over the next month, with initial shipments to Nordstrom in December and expanded distribution to additional retailers early next year.

In addition, we are pleased that we are seeing an improvement in the sales performance of our boot offering as we are experiencing cooler weather patterns. Our design teams, led by Steve, continue to develop trend-right merchandise that elevates each of our brands. The creativity and speed of our Madden design team enables us to reach the markets quickly with merchandise that caters to the desires of the target consumer for all of our brands.

In sum, while we expect the difficult macro-environment will continue to effect our business near-term, our brand equity and business model remain strong and will be the basis and foundation for our continued growth over the long term. In addition, we remain proud of our pristine balance sheet and our strong financial position, which enabled us to return $29.2 million to our shareholders in the third quarter, bringing our total for the year to $50.1 million.

Last year was a highly successful year for our business, and the significant steps we took to expand our business have played a key role in enabling us to address a more challenging environment this year. The diversification of our business model into new merchandise categories beyond footwear, while remaining focused on our core business, has also placed the company in a stronger position for the future. We continue to prudently and efficiently manage our business through periods of growth, as well as change. And, while we have a more conservative outlook heading into the holiday season, we remain excited about the strength of our brand and the commitment and dedication of our people and, therefore, we remain bullish about the long-term opportunities for our business.

Now, I'm going to turn the call over to Ed.

Thanks, Jamie. Consolidated net sales in the quarter were $103.4 million (sic -- see press release) versus $123.2 million a year ago. As Jamie mentioned, a challenging retail environment and a lack of big trends compared to the prior year, resulted in top line declines in both the wholesale and retail division. Despite the difficult market conditions, gross margin was approximately flat, at 41.3% compared to 41.4% last year, as the decline in the wholesale division was offset by an increase in the retail segment.

The company also experienced operating expense deleveraging due to lower sales. And the net result was a decline in operating margin from 17.7% last year to 12.4% this year excluding a one-time charge of $1.2 million related to a provision for prior-year customs duties in this year's third quarter.

Diluted EPS for the quarter was $0.52 a share including a one-time gain of $0.13 per share resulting from tax savings related to prior periods, and a one-time charge of $0.03 per share related to the provision for prior-year customs duties. Excluding these items, adjusted EPS for the quarter was $0.42 per share on $21.2 million diluted weighted average shares outstanding compared to $0.57 per share on $22.1 million diluted weighted average shares outstanding in the prior year.

Now I'll talk about the performance of each of our divisions. First, our wholesale division, which is comprised of seven main segments in the quarter: Steve Madden Women's, Steve Madden Men's, Steven by Steve Madden, Madden Girl, Stevies, Candies, and Daniel M. Friedman. Both Steve Madden Women's Wholesale and Steven by Steve Madden were impacted by the lack of fashion trends in the marketplace and neither segment had a big item that drove significant volume in the quarter.

Net sales for Steve Madden Women's were $35 million versus $39.7 million in last year's third quarter, while net sales for Steven declined to $4.1 million this year from $6.6 million last year. Net sales in Steve Madden Men's were $15.3 million in the quarter, versus $15.8 million a year ago. Driving mocs and dress shoes continue to drive the business here while sport casuals remain disappointing.

Madden Girl was a bright spot in the quarter with net sales of $8 million, up 9% from $7.3 million in last year's third quarter. Stevies and Candies also recorded top line increases in the quarter. But we experienced a difficult selling environment at retail for these brands in the quarter and, therefore, expect both segments to be down in fourth quarter. Net sales for Stevies were $3.5 million versus $2.3 million last year. And net sales for Candies were $6.9 million versus $4.9 million a year ago.

Other brands contributed $500,000 in the quarter compared with $2.4 million in the prior year and we had sales contributions from brands that have since been discontinued, mostly significantly Rule.

Our wholesale accessories business, Daniel M. Friedman & Associates, generated net sales of $12.7 million in the quarter, which was even with last year's third quarter. Betseyville handbags were a standout for this segment, while belt sales continued to be tough.

Taking all of this together, overall wholesale sales were $86 million compared to $91.8 million a year ago. Overall, wholesale gross margin decreased from 37.9% last year to 36.2% this year due primarily to higher allowances as a percentage of gross sales due to weaker sell-throughs.

Moving on to our retail division, third quarter sales were $27.4 million versus $31.5 million in last year's third quarter. Comp store sales decreased 15% in the quarter. Gross margin was up, however, from 51.7% in third quarter last year, to 57.4% in third quarter this year, driven primarily by freight savings and fewer markdowns and closeouts.

We added four new stores in the quarter and as of September 30th, we had 100 stores in operation. Stores open for the full twelve months ended September 30th generated $669 in sales per square foot.

Moving to other income, the company's commission and licensing fee income, net of expenses, increased to $4.3 million from $3.9 million in last year's third quarter. Commission income, net of expenses from the Adesso-Madden first cost division, was $3.6 million in the quarter compared to $3.1 million in the year-ago period. Royalty income from licensing was $770,000, up from $730,000 last year.

With respect to the balance sheet, we continue to maintain a debt-free balance sheet and ended the quarter with $79.2 million in cash, cash equivalence, and marketable securities. Total inventory at the end of the quarter was $36.3 million, and our inventory turns the last 12 months was 7.8 times, up from 7.3 times a year ago.

Accounts receivable and due from factor were $58.8 million reflecting an average collection of 53 days compared to 52 days a year ago. CapEx for the quarter was $3.3 million. We spent $29.2 million on share of purchase in the quarter. And stockholders equity, as of September 30th, was $210 million.

Now, on to the outlook for the balance of the year. As previously announced, based on trends to date this year, the company expects net sales for the year to decline between 9% and 11% compared to 2006. The company continues to expect full-year earnings will be between $1.60 and $1.70 per diluted share, including the one-time items recorded in the third quarter that I mentioned earlier. Excluding these items, the company expects adjusted full-year earnings per diluted share to range between $1.50 and $1.60.

And now I'd be happy to answer any questions you may have.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Scott Krasik of C.L. King. Please go ahead.

Hey guys. Gross margin in wholesale is actually a little bit better than I was modeling, certainly better than the trend's been sequentially so far this year. Do you expect that sort of lower decline to continue? And then, how are you thinking about wholesale gross margins in the first half of next year?

In fourth quarter we think we can be flat in wholesale gross margin. Keep in mind, that the comparisons in the back half here are a little easier because of the poor gross margin performance that we had in Danny Friedman in the back half of 2006.

Yeah.

So, that's one of the reasons that you saw relative improvement in Q3 and we'll expect to continue to see that in Q4. We're not going to talk about 2008 on this call. Our budgeting process is underway. That will be completed in four to six weeks and so we'll talk about 2008 on next quarter's call.

So, maybe qualitatively, you could talk about it because the first half of the year it was down significantly from 2006, so the comparisons should reflect that, right?

That's right.

And, just to remind us, in the first quarter, it was Daniel Friedman weak gross margin and sandals?

Boots -- boots caused some gross margin deterioration in first quarter last year.

Okay, so it was boots and Daniel Friedman, then?

Yeah. I just wanted to make one clarification. Jamie alerted me that I quoted the sales for Q3 -- total sales -- incorrectly. It's $113.4 million, not $103.4 million.

Oh, good. Okay, and then just sort of talk a little bit about your competitive position in the industry. When talking to people in department stores, it seems like some of your "junior" competitors are performing a little bit better than you guys, as they have throughout the quarter. Where do you think maybe you missed it? I think, you guys maybe went a little bit too basic, flat, not dressy up enough. Maybe talk a little about that.

Yeah, we still feel very good about our competitive position. I think that we feel that the overall -- our grid has been very, very challenged. We don't feel that we're doing worse than our competitors. Early in the year, certainly, perhaps if we had more vulcanized footwear that would have been better. But right now, actually, we feel we're performing, of late, better than our competitors. We really seen a nice uptick in boots over the last couple of weeks and the sell-throughs have really improved at our wholesale customers. And what we're hearing from them is that overall the boot category remains very tough, but our boots are performing better than our peers, and we really think we got the styling right there.

Okay. And then, what are you hearing in terms of sell-in for spring? Is it still too early for you guys on that where you haven't booked everything for spring yet?

Yeah, we'll really know more about that in December.

I'm sorry?

It's really going to be until -- not until December that we really have a good picture on that.

Okay. And then, just lastly, the inventory number you gave, can you break that out between wholesale and retail and how that relates to each from a year ago?

Sure, wholesale was down from $22.2 million to $20.3 million this year. So that's down about 9%, which is in line with our sales forecast. Retail is up from $13.5 million last year to $16 million this year. So, there are really two factors there. One is the new stores -- keep in mind, we do have eight new stores in the back half-year. And, two, because of the poor sales performance in Q3, we did have some excess inventory at the end of Q3. We've already made arrangements to close that out and the financial impact of that closeout has been reflected in the guidance we've provided.

Okay, I appreciate that. Thank you.

Yep.

Thank you. Our next question comes from Jeff Van Sinderen of B. Riley. Please go ahead.

Good morning. I guess my first question, just to clarify, as you're looking at your booking trends for the current quarter, it sounds like you're saying that it appears that the more conservative unit-volume plan will result in fewer markdown dollars versus the quarter you just reported. Is that right?

No.

Okay.

No, I think -- that's not the case, no.

Okay, because I thought you said your wholesale gross margins you thought would be flat?

Relative to a year ago. Keep in mind that a year ago our gross margins in third were 37.9% and then 31.5% in fourth.

Okay.

So, I'm saying we could be flat to the year ago's fourth quarter.

Okay, all right. So then, how should we look at the markdown dollars then, for the quarter we're in now, versus the quarter you just reported?

In Q4?

Yeah.

They're going to be higher -- the percentage of sales.

Okay. All right. And then, as far as your retail segment goes, your gross margins there were pretty strong. How are you planning comps for the current quarter? And, are you thinking that gross margins are sustainable at the level that they are, or that you just reported, all else being equal?

Well, as usual, we're not going to give comp guidance, although I will tell you, the environment remains challenging, but we do expect to do better than we have done the past couple of quarters from a comp store sales perspective. And, yes, we think we can sustain these gross margin improvements. We'd like to see retail gross margin forced up modestly from where it was a year ago.

Okay. And then, let me ask you about business in October, since comps are going to be reported soon for a lot of companies in the retail space. Just wondering if you have any thoughts on October traffic at your stores, transaction counts, things of that nature.

Well, we've seen a little bit of an uptick. Certainly as the weather got colder, particularly because we think we really have the boot category -- the product right in the boot category this year. We've seen a very nice pickup in boots. And we've seen that both in our wholesale customers -- the sell-throughs there, as well as our retail store comps. And, it's with -- doing dresses is nice because it's driving the average unit retail, which, as you know, has been down for us this year and that trend has reversed itself.

Okay, good. And then, as you look at -- I know you're not giving guidance to next year, but as you look out to spring, are there any significant new fashion trends that you guys see emerging that you can potentially exploit or does it look like we're still going to be stuck in the same sort of world of narrowness in terms of trends? And, I guess, how does your outlook for spring this year compare to the business at your anniversary?

No, there's certainly a lot of things we're working on and we've gotten some pretty positive tests recently, in some of our warm weather stores, of spring product. As you know, we don't talk about -- for obvious competitive reasons -- what we see as trends going forward. Typically, we just talk about what we're seeing currently. But, look, I think the environment is still going to be difficult, but we've got some things that we're excited about.

Okay, fair enough. Thanks very much.

Thank you. Our next question comes from Jeff Mintz of Wedbush Morgan. Please go ahead.

Thanks, good morning, guys.

Good morning.

A couple of -- just a couple of follow-up questions here. First of all, you mentioned that you were having -- or seeing kind of a difficult retail environment for the Stevies and Candies brands this quarter on sell-through. Can you talk a little bit about what that's related to? Is that a product issue or is it something more in the broader environment?

Well, Stevies -- we have been on a very nice trend, but the kids business has been very, very tough for the last few months. If you're not selling Crocks, it's a pretty tough time out there for kids. And so, we're starting to see the slow-down hit our Stevies' business there. And, in Candies, we were up in third, we had this new fall product that Kohls was excited about and we have -- it has performed better than the spring products. We've got some items that are performing well. But, overall, I think the junior footwear at Kohls is pretty challenged right now and we're still suffering from some of the inventory from spring that's been backed up. And so, they've gotten more conservative on fourth quarter orders, based on that.

Do you expect that issue to basically be resolved in fourth quarter and things to be more clean going into spring of '08 for that business?

Yeah, heading into spring, we should be more clean.

Okay, great. And then, on the men's business, it seems that the men's kind of was relatively better compared to previous quarters. Was that kind of a shift in your merchandise or was it more the trends coming more toward you, or kind of a combination of both?

To be candid, we had a much easier comparison in the back half from a year ago than we did in first half. And I think that's some of what you're seeing. The men's business remains tough.

Okay, great, thanks. And then, I think you said you're doing eight store openings in the back half, so you do have four planned for the fourth quarter?

Right.

Okay. And, finally, can you give us some sense of where you see the tax rate going kind of on a sustainable basis, since there have been a lot of gyrations over the past four our five quarters?

Yeah, going forward, you should look for it to be 40%.

Okay. Thanks very much, and good luck in the fourth quarter.

Thank you.

Thank you. Our next question comes from Mike Lippold of Craig-Hallum. Please go ahead.

Thank you, good morning, guys.

Morning, Mike.

Part of my question just got an answered in the tax rate issue there. But, looking at that $0.13 one-time savings related to prior periods from the tax savings, how much of that would be related to 2007 versus previous years?

I think it's about $0.03 for 2007, $0.10 for prior years.

Okay, and then, my next question, can you talk a little bit about the long term international opportunity you see for the brand? And then, will we see any increased focus internationally in 2008?

Yeah, we're excited about international, we're really starting to get some traction there. For 2007, international's going to contribute about 10% of the gross commission income that we recognize in Adesso-Madden. And, we've just signed up what we believe will be our biggest agreement internationally. We -- it's for the Orient -- it's with a group called GRI. So, they'll be distributing Steve Madden product in China, Hong Kong, Japan, Singapore, Macau, etc. And, we think that could be our most meaningful agreement. This is a big group over there that's been very successful. They do Nine West, Easy Spirit, Ann Klein, Izod, among other brands. And, they've committed to having 50 locations, which are primarily shop-in-shops, but also includes freestanding stores by the end of 2009 in the Orient.

Can we see any other agreements like that in Europe or anything like that?

Yeah, we're looking pretty seriously at a couple of partners for Europe. We're working on that right now.

All right, great. Good job, Ed, thank you.

Thanks.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from Heather Boksen of Sidoti and Company. Please go ahead.

Good morning. Most of my questions have been answered. Just wondering if you can comment further on how the -- I know the dress licensee was one of the highlights for you this quarter. Where do you see that going? How many doors are you in currently with that? And, how many doors you think that can get to?

Yeah, the dresses have been a real bright spot for us this year. We're in about 300 doors. There's Dillard's, Macy's, Nordstrom, Carson's, Belks, Parisians, and they've -- the sell-throughs have been very strong. Of course, it's been certainly a better dress cycle than a footwear cycle this year. But we've also had very strong product and our licensee has done a great job with the dresses. Going forward, I think one of the big growth opportunities is, we're talking pretty seriously about doing Madden Girl dresses for next year, which would be an -- keep in mind that Steve Madden dresses are $150, $175, so Madden Girl would be at a more popular price point, perhaps $75 average unit retail -- average retail. And, it's too early to say how many doors that could be in, but that could be, potentially, a bigger opportunity even than the Steve Madden dresses.

That would be with the same licensing partner, right?

The same partner.

Okay, all right, thanks.

Um-hum.

Thank you. Our next question comes from Jason Williams of Botti Brown. Please go ahead.

Yeah, hi, thanks for taking my question. I just -- I know you gave this out and, unfortunately, I didn't write it down fast enough. Could you just say again what inventory was and what the total AR was?

Sure, inventory was $36.3 million. AR and due from factor was $58.8 million.

Great, thanks so much.

Um-hum.

(OPERATOR INSTRUCTIONS) Our next question comes from Scott Krasik with C. L. King. Please go ahead.

Thanks. I think I know the answer to this, but are you allowed to buy stock back while the strategic review is going on?

No.

Okay. And then, just lastly, on the licensing revenue. I would have thought that it would have been up a little bit more given the dress license. Was there a decline in some of your licenses?

Yeah, we did discontinue our old stock license. We're very close to starting up with a new stock licensee. But that was down from last year and our coats was also down.

Just outerwear -- and that was weather-related or total sell-in was bad, too?

I think it was both.

Okay. And then, just on the SM Fix launch, you showed sort of a bunch of different styles the last time we saw the product in August. What were the retailers most excited about? What should we see in your stores and in Nordstrom's?

Well, there's about 20 styles and you should go -- we've got them up on the internet right now. So you can see what styles we're planning on going with. But, we're pretty excited about it -- we're starting -- we're launching that exclusively with Nordstrom's to begin. It's going to be all Dort Nordstrom. And then -- that's 12/25 deliveries. And then 1/25, we're going to go to a broader group that should include Macy's, Journey's, Carson's, Von Maur, Wild Pair, etc., of another 150 doors.

Oh, good. Okay, thank you.

Thank you, there are no further questions. Please continue with any closing comments.

Thank you for participating in the call and we look forward to speaking with you on the next call, thank you.

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