Steven Madden Ltd (SHOO) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Steven Madden LTD 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. As a reminder, ladies and gentlemen, this conference is being recorded.

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

Good morning and thank you for joining this discussion of Steven Madden Limited's fourth quarter and full year 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 known 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. I'd now like to turn the call over to Jamie Karson, Chairman and CEO of Steven Madden Limited.

Thanks, Leigh. Good morning. Thank you for joining us as we review Steven Madden Limited's results for the fourth quarter and the full year ended December 31, 2007. With me to discuss the business is Ed Rosenfeld, Executive Vice President of Strategic Planning and Finance.

Before I give an overview of our performance for 2007, I would like to note that as we announced in a separate release this morning, the company's strategic review committee and its board of directors have completed their review of strategic alternatives to enhance shareholder value. The board thoroughly evaluated a variety of alternatives as part of the review process and determined that the best method of maximizing value for our shareholders at this time is to complete a modified Dutch auction tender offer. The board considered a number of alternatives including a sale of the company and concluded that current market conditions, the company's financial position and stock valuation make this an opportune time to launch a self-tender. As a result, the company will be completing a modified Dutch auction tender offer to repurchase up to 2.6 million of our outstanding shares at a price between $16.50 and $20. Officers, directors, and other insiders are not tendering shares. As noted in our release, the tender offer will commence tomorrow and will expire unless extended at midnight on March 18th, 2008.

Now turning to the performance for the year, as previously reported, we experienced the effects of weak consumer spending in the second half of the year and particularly during the holiday season. As we've discussed on recent calls, we have also been faced throughout the year with the continued absence of major fashion footwear trends. Importantly, despite the difficult environment in 2007, we continue to execute on the strategic initiatives that we believe will further strengthen our business, reinforce the power of our brand and position us for long-term growth.

First, we maintained our strong focus on our core footwear business at both wholesale and retail. It was a challenging year in our wholesale division as a result of the lack of a major footwear trend, a weak retail environment, and the discontinuation of three brands that were not carried over from the prior year: Rule, l.e.i., and Jump. However, we made solid progress on expanding the demographics of our customer base. Madden Girl, which is one of our newer, more moderately priced diffusion brands, continue to perform well and generated sales growth for the year.

In addition, we launched the line of fashion forward sneakers called Steve Madden's Fix, and this new line has generated a very strong customer response. All of our design teams led by Steve continued to create fresh and unique styles that resonate with and excite customers and enhance our brand equity. Further, we continue to identify opportunities that allow to us successfully tap into new footwear categories.

While we also experienced headwinds at our retail business, we were able to continue to successfully open stores in key markets where we have an existing strong customer base. For the year, we opened seven stores and closed two underperforming locations. Second, we continue to introduce new product as part of our effort to diversify our business model. In our Daniel M. Friedman accessories division, we were very pleased with the customer response to our Steve Madden and Steven handbags, further validating that our customers accept and love our namesake brands in other merchandise categories beyond footwear. Additionally, our accessories division has successfully nurtured and built innovative design teams for all of its businesses, particularly in Betsy Johnson. We also signed a new hosiery license this year and we continue to explore additional licenses that complement our brand portfolio and can contribute to the successful expansion of our product portfolio.

In addition to the growth we achieved in Daniel Friedman and the expansion of our license business, we continue to identify opportunities in the international market. As most of you know we have distribution agreements in a number of countries such as Canada, Mexico, Israel, Turkey, Australia and Dubai. During the year, we signed a new distribution agreement for Asia and we believe there's tremendous growth potential for our brand in that market. Finally, we continue to use our capital efficiently to support our growth. During the year, we acquired our outsourced e-commerce solutions provider which enabled us to incorporate our important and thriving e-commerce business into our internal operations.

While we are not satisfied with our results, we remain confident in our proven business model which has enabled us to be successful in a changing and dynamic fashion environment. While 2007 was not as robust as 2006, if we look back three years, we have grown sales at 8% and diluted EPS at 40% on a compounded annual basis since 2004. We have a very strong foundation in place that positions us for sustained growth as economic and business trends improve.

Before I turn the call over to Ed to review our fourth quarter and full year results in more detail, I'd like to take a moment to discuss some of our areas of improvement and growth objectives for 2008. First, we believe our retail division presents strong opportunity for our business moving forward, and it will be a priority for us this year. We just opened a flagship store on Collins Avenue in Miami and we'll be opening two stores in Manhattan over the summer -- a flagship on the corner of 58th and Lexington, and a store on Broadway near Union Square. Second, we will continue to focus on the growth of our core footwear business through newer brands such as Madden Girl, which allow to us penetrate a broader mix of customers as well as through new merchandise introductions such as Steve Madden's Fix. In the coming months, we will expand our offerings of Steve Madden's Fix beyond Nordstrom into Journeys, Macy's, Dillard's and other accounts. Finally, we will leverage our strong brand equity and continue to expand our offering in other merchandise categories beyond footwear. In closing, we are taking a conservative view of fiscal 2008 given the current macro economic environment. However, we will continue to direct efforts toward initiatives across our wholesale retail business that will generate additional growth for the company in the future. And now I would like to turn the call over to Ed.

Thanks, Jamie. Consolidated net sales in the quarter were $102.7 million versus $114.1 million a year ago. Our net sales results reflected a decline in wholesale footwear sales due to a weak retail environment and a lack of fashion trend that was partially offset by increases in the accessories and retail division. Gross margin for the quarter declined from 40.8% last year to 37.9% this year as a result of increased promotional activity in both the wholesale and retail segments. The company also experienced operating expense de-leveraging due to the lower sales as well as a decline in commission income from our private label business. The net result was a decline in operating margin from 14.6% last year to 6.8% this year. Diluted EPS for the quarter was $0.23 a share on 20.4 million diluted weighted average shares outstanding compared to $0.45 a share on 22.3 million diluted weighted average shares outstanding in the prior year.

Now I will talk about the performance of each of our divisions. Net sales for the wholesale division were $63.5 million versus $76.6 million in the comparable period of 2006. This division was comprised of eight segments in the quarter. Steve Madden Women's, Steven by Steve Madden, Steve Madden Men's, Madden Girl, Stevies, Candie's, Steve Madden's Fix, and Daniel M. Friedman. Net sales for the Steve Madden Women's wholesale segment were $25.3 million in the fourth quarter 2007 compared to $31.8 million in the same period of the prior year. Net sales for Steven by Steve Madden were $2.8 million in Q4, down from $6 million in the comparable period a year ago. While the boot category was stronger in Q4 2007 than in 2006, it was not enough to offset the overall lack of fashion drivers and tough retail environment. Net sales in Steve Madden Men's were $12 million in the quarter versus $12.6 million in the prior year's fourth quarter.

In keeping with the trend over the prior year, driving mocks and dress shoes performed well while sport fusion styles were disappointing. Madden Girl was a bright spot in the quarter, generating $5.9 million in net sales, a 7% increase from $5.5 million in the fourth quarter 2006. We're pleased with the momentum we have seen in the Madden Girl division and will be looking for continued growth from this segment in 2008. As expected, our Candie's and Stevies division struggled in the quarter. Net sales for the Stevies division were $500,000 versus $2 million a year ago, while net sales in Candie's were $1.5 million versus $4.3 million in the comparable period.

We made the first shipments of our new Steve Madden's Fix brand in December. We started off with an exclusive for Nordstrom's and the initial sellthroughs there have been very strong. Fix contributed $400,000 in net sales in the quarter. Our last wholesale division, the Daniel M. Friedman accessories business, had net sales of $14.9 million in the quarter, a 14% increase from $13 million in the same period of 2006. Strong sales of handbags drove our accessories business as we experienced solid growth with Betsyville, Steve Madden, and Steven Bags. Taking all this together, overall wholesale sales were $63.5 million in the quarter versus $76.6 million a year ago. Overall, wholesale gross margin decreased from 31.5% last year to 26.8% this year, due primarily to higher markdown allowances.

Moving on to our retail division, fourth quarter sales were $39.3 million, up 5% from last year's $37.5 million. Comp store sales were essentially flat in the quarter, declining 0.1% versus Q4 of 2006. Gross margin in the retail division was 55.9% versus 59.9% a year ago. The company aggressively moved to clear slow moving inventory in the quarter and increased promotional activity to compete in a very promotional holiday selling season. As of year end we had 101 stores in operation including our Internet store. During the quarter, we opened three new stores and closed two underperforming locations. For 2007, stores open for the full 12 months generated $655 in sales per square foot.

Moving to other income, the company's commission and licensing fee income net of expenses was $2.9 million this year compared to $3.8 million last year. Income net of expenses from our Adesso-Madden First Cost Division was $2.1 million versus $3.1 million a year ago. This decrease was due primarily to a reallocation of expenses from the wholesale division to Adesso-Madden. Our gross commission income from the Adesso business was down 5% as the challenging consumer and fashion trend environment that has affected our core wholesale and retail segment began to impact our private label business. Licensing income was up from $665,000 in Q4 '06 to $805,000 in fourth quarter of '07, a 21% increase.

Now I would like to briefly touch on our full year results. Net sales for the full year decreased 9% to $431.1 million. Wholesale sales declined 11% to $310.4 million and sales for the retail division decreased 5% to $120.6 million. Comp store sales were down 7.6%. Commission and licensing income was up 29% to $18.3 million driven by a 30% increase in commission income at our Adesso-Madden division, and 26% increase in licensing royalty income. Gross margin for the year declined from 41.8% last year to 40.2% this year. Operating expenses as a percent of sales increased by 360 basis points excluding a one-time charge for prior year customs duties. Annual net income excluding nonrecurring items decreased from $46.3 million in 2006 to $33.6 million in 2007. Diluted EPS excluding nonrecurring items was $1.58 compared to $2.09 in 2006.

With respect to the balance sheet, we continue to maintain a debt-free balance sheet and ended the year with $109.9 million in cash, cash equivalents and marketable securities. Total inventory at the end of the year was $27.2 million, down from $33.7 million at the end of 2006. Our inventory turn for the year was 8.1 times. Accounts receivable and due from [Bacter] were $41.2 million, reflecting average collection in 48 days. CapEx was $5.1 million for the quarter, and stockholders equity as of December 31st was $215.3 million.

Before we turn the call over for your questions, I'd like to briefly discuss our outlook for 2008. Based on current visibility, the company expects 2008 net sales will be flat to an increase of 2% compared to fiscal 2007. Earnings per diluted share will range between $1.45 and $1.55 excluding any impact from share repurchases. Due to easier comparisons in the back half of the year, the company expects sales and earnings to be more heavily weighted to the second half of 2008 relative to 2007. Now I would be happy to answer any questions you may have.

Thank you. (OPERATOR INSTRUCTIONS) One moment, please, for the first question. Our first question is coming from Scott Krasik, CL King.

Hey, guys. First question, on the boot business, it obviously turned out pretty good. I knew you went into the season thinking about filling orders on a cut to order basis, then you scrambled to fill reorders. What's the approach in 2008? Are you looking to maintain a certain margin there again?

Yes, we're going to do a little bit of both. We're really out in front of the boot business this year because we've got these great reads from the tail end of this year's boot season. So looking into next year we've gotten some -- a lot of boots that we're going to production with early. We've got a lot more orders at this time of year than we did a year ago on boots. So we are doing some on a cut to order basis but we feel good about the boot category. So we're going to own some boots as well.

Next question, at the [Fannie] show we saw a couple weeks ago, it seemed like your salespeople were actually writing orders for as far out as July. It's a little bit further out than you guys normally work, which I think is a good thing. What does that do for you guys in terms of visibility in your wholesale business for the year versus past years?

Well, it helps. The complicating factor as we talk to you right now is that there was a different show scheduled this year. There was the Fannie show, which was a new show in February, but we have not yet had the Vegas shoe show. So we'll have much better visibility after that show is complete. But we do, as you point out, have a little bit better view on late second, early third quarter orders than we've had in the past.

Are brands treating you differently because you're going to more of a normal sort of schedule?

No, we're still Steve Madden, and we're still going to fill orders in season and be able to move quickly.

Okay. Lastly, the retail comp was better than I expected, at least. Was that related to the boot sales raised your average ticket, or were units up?

Yeah, the average unit retail was up because of the boots.

How much? Do you know?

It was up relative to where it had been the rest of the year when we had been down substantially. We were actually about flat in units and average unit retail, but most of the year we were running down high single digits in the average unit retail.

Thanks, guys.

Thank you. Our next question is coming from Jeff Mintz from Wedbush.

Thanks. Couple questions here. First of all, on the fixed business, you're doing that exclusively for Nordstrom. Can you tell me when you're going to start shipping other retailers on that business?

We already have. We've already started shipping Journeys, Macy's, Dillard's, a number of other account.

So exclusive for, what, eight weeks?

A little over a month.

Okay. Great. And then just on kind of what you're seeing in terms of trends, obviously we're not seeing anything too big as far as I can tell. But I'm wondering if you're seeing anything that you think could help kind of as we head towards the middle of the year and into the fall.

You're right, we still don't see that must have fashion trend. There are categories that are performing. Obviously the boots have been good and continue to be good. Flat sandals are looking good for spring. Sexy footwear that the girls would wear to clubs is looking good. But we're still looking for that must-have item. And I don't think that that has emerged yet.

Are you seeing anything in terms of color and kind of the possibility for doing brighter colors this year?

Absolutely. That's something that looks good. We've seen a lot of that on the runway shows and we've gotten good early response to items with more color.

Great. And then just on the retail business, do you have a sense of store opening expectations for 2008? Is it going to be similar to '07 numbers?

It's going to be fewer. We've already opened one, as Jamie mentioned, on Collins Avenue in South Beach, Miami. And we've got two more store openings scheduled, both in Manhattan. One on 5th street and Lex, which will open in Q2, and then one near Union Square which will open Q3.

And is that all that you expect to do for the year?

That's all we expect for the year at this point. We've also got three closings this year. We've already closed two stores and we're expecting to close one more.

Okay. Great. Thanks very much.

Thank you. Our next question is coming from Jeff Van Sinderen from B. Riley.

Good morning. Can you talk a little bit more about what's driving the growth in Madden Girl and what the outlook is for that business, how we should expect that to evolve?

Yes. The team did a great job there. Obviously it is a younger and less mature business than, say, a Steve Madden, so there was more room to grow there, but overall I think they did a very nice job with the product, great job with boots in particular, and we may have seen a little bit of a trade-down effect as well, as the economy slowed and the consumer softened a little bit. You may have seen some people trading into the Madden Girl-type product, which, as you know, is opening price point. But we do look for that business to continue to grow. I think that should be up 10 to 15% this year, and the big growth driver there is really Macy's. We were in 80 doors with Macy's last year. We've gone to about 170 doors for spring, and we'll be looking to go to a minimum of 220 doors if not more for fall. So we're on a nice trend there, and we'll be looking for continued growth in Madden Girl.

Okay, good. And then maybe you can update us on how you're planning your retail business and I guess where -- what initiatives you're focusing on for the retail business to continue to improve profitability. I know you mentioned that as one of your major initiatives for this year.

Yes, absolutely. As I said, we're being conservative with our store opening plan this year, and if you count the two stores that we closed in fourth quarter, we have five closings. So we're really trying to pair some of the underperforming locations and really focus on the profitability of the existing chain before growing it more rapidly. The most important initiative in retail, though is that we've just recently hired a new President of retail. He's been with the company a couple weeks, a very experienced retail and footwear guy who has been the head of a couple of chains, most notably [Baddes[ Shoe and Athlete's World in Canada, which has approximately 300 stores. And most recently he was running something called [Olsen] in Canada, and he's also had experience with Champs and Foot Locker and he's just started with us. And we think he's going to make a great contribution. As you know, that was a role that had not been -- that was an open position for us for some time.

That's good news. As far as the licensing business, anything new that you're targeting there?

No, I think it's mostly focusing on the existing licenses, although we have -- we are looking at things. We've beefed up our licensing department there, and I think you're going to see us get a little bit more active in signing new licenses. I think we're now ready to look at sports wear, fragrance, cosmetics, jewelry, and some of these other categories that we've been holding back on. So hopefully we'll have some deals to announce this year.

Okay, good. Then finally, as you went through your planning process and put together guidance for this year, what is factored into the second half of the year? I know you mentioned you thought that the year would be back end loaded. Is it pretty much -- are you assuming pretty much status quo type environment? I know the comparisons get easier. Or are you assuming that -- I'm thinking that you probably are not assuming that some major trend drives the business in the second half, but maybe you can just give us a couple thoughts on that.

Yes, that's right. We're expecting -- the guidance assumes basically a status quo environment. I wanted to be clear about what we're saying when we say it's back half weighted. We're talking about relative to 2007. That's because in 2007 the earnings were unusually weighted towards the first half. In 2007 we did about $0.93 in the first half and $0.65 in the back half which is not indicative of the normal seasonality of the business. That's just that we had a better first half than a second half. So all we're saying this year is that we will return back to a normal earnings distribution more evenly distributed between first half and second half.

Got it. Okay. Thanks very much and good luck.

Thanks, Jeff.

Thank you. Our next question is coming from Heather Boksen from Sidoti & Company.

Good morning. You talked about for '08 what the wholesale division looking for growth outside of Madden Girl and Fix. Are there any other divisions that you would think year-over-year we should see some revenue growth out of?

In wholesale, the biggest one would be Danny Friedman. We really have a nice trend with our handbag business. Steven, Steve Madden, as well as Betsyville, so we'll be looking for growth there.

Okay. And also, you said you're only going to open three stores this year, I believe. Is that just a factor of the retail environment, or is that a store opening pace we should expect from you guys going forward? Are there -- has the idea been kicked around yet? At any level to maybe increase the store expansion pace?

As I said, we just hired a new president. We want to get him involved and work on the existing chain this year and then we will -- would expect that we'll be looking to accelerate the store opening pace starting in 2009.

The thing to keep in mind there is that we have previously enunciated the notion that we're going to focus our stores in the urban markets where we know we do well. So the three stores that we're talking about, one is on Collins Avenue, in south beach. One is on the corner of 58th and Lexington, and one is in Union Square. So while it's only three in number, they're tremendous locations, and we expect great things out of those new stores. And moreover, the dollar contribution from them could be as much as six or seven small stores, because these are big dollar locations.

Okay. Switching gears a little, you mentioned one of the reasons commission dollars were down was because of a reallocation of expenses. Is this something we should see a similar impact through the first three quarters of '08, too?

Is you're asking about the reallocation of expense?

Yes, was it a one-time thing, or will we see --

Keep in mind, these are not new expenses, they've just been moved from one position to another. So I think the thing to focus on is the commission income itself was only down about 5%. There was $1 million -- in the number that we report to you for Adesso-Madden, which is income net of expenses, there was $1 million shortfall, but about $750,000 of that was just a reallocation of expenses. The commission income itself is only down about $250,000.

Okay. And lastly, one housekeeping question going forward, what kind of tax rate should we be assuming? 39%.

Okay. Thanks, guys.

(OPERATOR INSTRUCTIONS) Our next question is coming from Michael [Liphold] from Craig-Hallum Capital.

Hi, gentlemen. Nice quarter. Craig-Hallum, actually. Year-end cash balance was a little higher than I estimated. Anything unique that led to a bigger cash balance?

Yes, there were some timing issues related to payables and receivables there. Keep in mind this is a seasonal high point for us in terms of cash. So after first quarter, even absent any share repurchase, you would expect to see that number swing to something more like $90 million.

Second, how much focus in the company is on the international opportunity? And connected to that, will we see any material increase in income from maybe the already signed deals or any new potential deals?

We're very focused on it, and I think our focus on the business has increased recently as we start to really see ourselves gaining traction there. As you know, we're very excited about this GRI deal. Quick update there. They've -- they're -- GRI is scheduled to have three flagship stores open for us by April 15th, those being in Beijing, Hong Kong, and Tokyo -- Beijing in time for the Olympics, which is exciting. By the end of the year, they have committing to having 45 concessions, or stores within a store for us. So we're moving along very nicely there, and I think will you start to see some meaningful income contribution, particularly towards the back half of this year.

Perfect. And depreciation for 2007? Can you give us that number?

Sure. Depreciation, $6.6 million. Amortization $1.7 million. And then loss on disposable and fixed assets, $800,000.

Perfect. Keep up the good work.

Thanks.

Thank you. Our next question is coming from Sam Poser from Sterne Agee.

Good morning. Just a quick question on -- what share count should we be assuming for next year with all this, with the tender offer going on?

Well, you tell me. We don't know where the tender offer is going to be completed, so we can't --

What was your guidance based on?

The guidance was based on no share repurchases, or the guidance excludes the impact of share repurchases, and excluding any share repurchases you could have used 20.7 million to 20.8 million, somewhere in there.

What kind of markdown liability do you still have in the first half of the year with the department stores and so on? Can we assume that you're still paying back some of that stuff?

There's no real carry-over. We went into the year the normal clean fashion with the department stores.

Okay. And then can you also talk about the pricing increases that you're seeing and any challenges you might be having? Because we've heard pretty consistently prices are going up out of China with possibly -- how you're maintaining good price-value relationship as these prices are going up?

Sure. As you pointed out, based on some of the social compliance requirements as well as the reduction in government subsidies as well as the currency revaluation, we've seen increases out of China of 10 to 15%. We are -- fortunately, everybody that makes shoes in China is feeling the same effects, so much of this is being passed through. We do feel there's going to be some impact to gross margin because we don't want to destroy the price value relationship, as you alluded to. So there's probably going to be about 100 basis points of gross margin pressure due to these increases out of China. But one of the other things that we're doing is we are just focused on improving the quality of our shoes regardless, and we're really putting a lot more into the shoe, and we will be raising the prices somewhat to reflect that. And we're also doing some of our production in other countries. We're doing some shoes out of Brazil that we can really get the quality that we want.

Does that risk entering you into a competitive zone with others and a lot of shoes are getting close to closing in on that $100 price point. How do you -- how are you balancing sort of the brand's historical position with sort of the consumer's ability to pay the higher price?

We're still -- our position relative to our competitors is staying where it's been, because you're seeing everybody increase prices somewhat to account for this increase out of China.

Okay. Well, thank you very much.

Thank you. Our next question is coming from John Curti of Principle Global Investments.

Good morning. I was wondering if you could tell was your anticipated capital spending will be for 2008?

Yes, we're looking at $11 million for '08, down somewhat from 2007 when we spent approximately $13 million.

And could you break that down between the retail stores and whatever else you're doing in terms of systems or anything else?

Yes, the retail would be about $6.6 million, and that's both the new stores that we're doing as well as a number of remodels that we have scheduled for the year. We have about $4 million of systems work. There's a new planning allocation system for retail, upgrade of our EDI system, new [sen-sale] system for retail and a new financial forecasting system, and then about $400,000 or so of other CapEx.

Thank you.

(OPERATOR INSTRUCTIONS) There are no further questions. Please continue with any closing comments.

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

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