Steven Madden Ltd (SHOO) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Steven Madden Limited conference call.

At this time, all participants are in a listen-only mode.

Later we'll conduct a question-and-answer session.

(OPERATOR INSTRUCTIONS) 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 Cara O'Brien of Financial Dynamics.

Please go ahead.

Thank you operator.

Good morning, everyone, and thank you for joining us this discussion of Steven Madden Limited's first quarter results.

Before we begin, I would like to remind you that statements in this conference call that are not statements of historical or current facts constitute forward-looking statements within the meanings 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.

I would now like to turn the call over to Mr.

Ed Rosenfeld, interim CEO of Steven Madden Limited.

Please go ahead.

Thanks, Cara.

Good morning and thank you for joining us today.

On today's call, I will review the Company's results for the first quarter ended March 31st, 2008 and provide an update on our outlook for the remainder of the year.

Our performance in the first quarter continued to reflect the effects of weak consumer spending that we experienced in the second half of last year.

However, given the challenging economic environment we are pleased with the sellthrough of our merchandise and the general strength of our brands.

Further, we did see some improvement in our results in the first quarter compared to the second half of 2007.

We are beginning to gain a certain degree of momentum and we believe our overall business is well-positioned in the current environment with very strong product.

Our design teams consistently focus on creating fresh and unique styles that appeal to our wholesale customers and consumers across all our brands.

As creative and design chief, Steve continues to drive the designs for our footwear, accessories and other merchandise.

We are pleased with the positive reactions we are currently receiving regarding our product.

While we are mindful of the continuing challenge in economic environment we feel very good about the merchandise we currently have in stores as well that we have coming over the next few months.

Before I turn to a review of our financial results, I want to note that at the end of the first quarter we completed our modified Dutch auction tender.

As you may remember, this Dutch auction was announced at the completion of our strategic review period in February.

We accepted 2.6 million shares of common stock for purchase at a price of $17 per share, totaling $44.2 million.

These shares represented approximately 12.9% of the outstanding shares of the Company.

We are pleased to have been able to return significant capital to our shareholders as we maintain our ongoing focus on maximizing long-term shareholder value.

Now let's turn to our financial results for the quarter.

Consolidated net sales in the first quarter were $100.5 million versus $106.7 million a year ago.

Our top line results reflected decline in wholesale sales due primarily to decreases in our Candies and Stevies divisions while retail sales grew modestly due to sales from new stores.

Gross margin for the quarter increased to 40% this year from 39.6% last year, as an increase in margins in the wholesale division was only partially offset by a decline in the retail division.

The Company reported higher operating expense largely due to a onetime pretax charge of $4.9 million related to the resignation of the Company's former CEO.

We also experienced operating expense deleveraging due to lower sales as well as decline in commission income from the private-label business, with the net result being a decline in operating margins from 14.7% last year to 7.7% this year, excluding the onetime charge.

Diluted EPS for the quarter was $0.10 per share including the onetime charge which, after-tax, equated to $0.15 per share.

Excluding the onetime charge, adjusted EPS for the quarter was $0.25 per share on 20.3 million diluted weighted average shares outstanding, compared to 43% per share on 22 million diluted weighted average shares outstanding in the prior year.

Now on to the performance of each of our divisions.

I would like to first talk about our wholesale division which was comprised of eight segments in the quarter.

Steve Madden Women's, Steve Madden Men's, Steven by Steve Madden, Madden Girl, Stevies, Candies, Steve Madden's Fix, and Daniel M.

Freedman.

Net sales in the Steve Madden WoMen's Wholesale segment were $31.8 million versus $32.6 million in last year's first quarter.

While we are never happy with a sales decline, our results represented a marked improvement over the performance of this segment in the back half of 2007 as flat sandals, wedges, gladiators and boots performed well in a very challenging retail environment.

Net sales in Steve Madden Men's were $8.4 million in the quarter versus $9.5 million a year ago.

Continuing with our recent trend driving mocs and dress shoes performed well while sport fusion looks were disappointing.

Net sales in Steven by Steve Madden were $3.7 million in Q1m up 10% from $3.4 million a year ago.

As in Steve Madden, our product successes included flat sandals and boots.

We are seeing business begin to move in a more positive direction.

Our performance in Women's in both Steve Madden and Steven has improved relative to what we were seeing in 2007.

We are pleased with the products being developed by our design teams for both of these brands.

Madden Girl, which is one of our newer more moderately priced diffusion brands, continued to perform exceptionally well as we further expanded the brand in the first quarter.

Madden Girl net sales were $10.4 million, up 17% from $8.9 million in the first quarter last year, reflecting both growth within existing doors as well as expanded distribution, including approximately 75 new Macy's stores.

As I mentioned, performance in the Stevies and Candies divisions was disappointing.

Stevies net sales were $1.2 million in the quarter versus $3.4 million a year ago while net sales in Candies were $4.9 million versus $8.6 million in the comparable period.

We are also continuing to build our newest brand, Steve Madden's Fix.

As you can appreciate in this environment we are taking a measured approach in expansion of this new brand.

For its first full quarter, Steve Madden's Fix had net sales of $800,000.

At the end of the quarter Fix was in 225 doors in retailers including Nordstrom, Macy's and Belk.

We are expanding distribution with existing accounts as well as adding new accounts in Q2 and we expect to ship Fix to over 500 doors this quarter.

Our last wholesale division, the Daniel M.

Freedman accessories business, realized improved sales in handbags in the first quarter offset by a decline in belts.

The division generated net sales of $14.5 million in Q1 versus $14.9 million in last year's first quarter.

We are particularly pleased with the performance of our Steve Madden and Steven handbags.

The success we are seeing continues to demonstrate our ability to expand our core namesake brands into categories beyond footwear.

(inaudible) handbags also turned in strong results for the quarter.

Taking all this together, overall sales for the Wholesale division were $75.6 million compared to $82.3 million a year ago.

This reflects the weaker economic environment, but also improved performance in several key segments.

Overall Wholesale gross margin increased from 36.2% last year to 37.4% this year, due primarily to higher margins in Daniel M.

Friedman versus the comparable period as a result of a mixed shift to more branded goods and less private-label.

Moving on to our Retail division, we opened one new store in the quarter and closed two underperforming stores to end the quarter with 100 stores in operation.

Stores open for the full 12 months ended March 31, generated $636 in sales per square foot and first quarter at retail division sales were $25 million up 3% from $24.4 million in last year's first quarter due to sales from new stores.

Comp store sales decreased 3.7% in the quarter.

Gross margin in the Retail division declined to 47.8% this year from 50.9% last year primarily due to the liquidation of slow-moving inventory.

Moving to Other Income, the Company's commissioned and licensing fee income net of expenses was $3.4 million in the quarter versus $5.4 million last year.

As expected, our large private-label customers scaled back orders due to the tough retail environment.

And as a result our Adesso-Madden First Cost division experienced a decline with income net of expenses of $2.3 million in Q1 versus $4.3 million in first quarter of last year.

Licensing income for the quarter was $1 million versus $1.1 million a year ago.

With respect to the balance sheet, we continue to maintain a debt-free balance sheet and ended the quarter with $56 million in cash, cash equivalents and marketable securities.

Total inventory at the end of the quarter was $26.4 million and our inventory turn for the last 12 months was 8.1 times.

Accounts receivables (inaudible) factor were $52.4 million reflecting average collection of 51 days.

CapEx for the quarter was $2.3 million.

As I mentioned earlier, we repurchased 2.6 million shares of common stock at $17 a share for a total cost of $44.2 million.

Stockholders equity as of March 31st was $175.2 million.

Looking forward, we remain confident in the strength of our diversified business model and the Company's ability to generate long-term growth.

To briefly touch on a few of our ongoing strategic initiatives, we are pleased that our new distribution agreement in Asia has gotten off to a solid start this year.

Our partner in Asia has opened flagship stores in Hong Kong and Tokyo, and will open in Beijing by the middle of June.

We continue to believe there is tremendous growth potential for our brand in this market as well as other international markets.

We also look forward to opening two important Steve Madden stores in Manhattan over the next few months, including a flagship on 58th Street and Lexington Avenue, and to continue to grow our e-commerce business which we believe to be an area, where we are ahead of many of our competitors.

In addition, we remain excited about evaluating avenues to further diversify our business into additional merchandise categories beyond footwear.

We are mindful of the challenging economic environment and on maintaining our prudent approach to managing our business.

However, we will continue to implement initiatives designed to grow the Company over the long term.

Before I turn the call over for your questions, I would like to quickly review our outlook for the balance of the year.

As we noted in our release, we are maintaining our sales and earnings guidance for the full year.

Based on trends to date this year and current visibility, we continue to expect net sales for the year will be flat to an increase of 2% compared to fiscal 2007.

Diluted EPS will range between $1.55 and $1.65, excluding the impact of the onetime charge we recognized in first quarter.

Including the impact of the onetime charge.

Earnings per diluted share are expected to range between $1.39 and $1.49.

These diluted EPS ranges include the benefit from the Dutch auction tender offer share repurchase we completed at the end of first quarter.

While we are taking a cautious approach to our outlook, we are seeing some initial improvement in footwear trends that we believe may benefit us as we move into the latter half of 2008.

As I stated at the beginning of our call, we believe we are solidly positioned in the current environment; and we are pleased with the product that is being turned out by Steve and our design teams.

We are encouraged by the positive consumer response to our merchandise to date this year as well as the strength of our brands in the market.

We continue to position our business to achieve long-term growth, reach our overarching objective of becoming a global multicategory fashion brand and, of course, maximize value for our shareholders.

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

(OPERATOR INSTRUCTIONS) Scott Krasik of CL King.

Good job.

Where are you guys with Penneys right now?

Are you actually selling them anything?

We are doing some private labels for them but we don't have a brand in Penneys right now.

(multiple speakers)

Is there a plan?

Excuse me.

We do a little bit with Stevies.

I mean, is there a plan there I know [Rule] didn't work out, but --?

Yes.

Right now we are focused on building the private-label.

We've been kicking around some ideas for a brand for them and we have been talking to them pretty regularly about doing something.

So hopefully we will have something to report by the end of the year.

And then Candies, obviously, is a problem here.

With Kohl's starting to think about or getting frustrated with you guys and looking to do stuff themselves or --?

Right now Kohl's is still giving us 100% of the business.

We have orders through the end of third and some orders for fourth already with 100% of the Candies business, but we're certainly frustrated with our performance in Candies.

We are disappointed about the way that has gone over the last few quarters.

So we are making some changes here.

In fact we just this week put a whole new team on Candies.

We've got the team that has had such great success building our private-label business for Target, it's taking over that business.

They've done a great job in building a very big and successful Target business.

So we are excited about getting them involved with Candies and hoping to get that moving in the right direction.

That's good.

And then maybe just talk about people are saying that April sort of picked up a little bit from March; and is that what gives you some confidence for the outlook or is it increased at-once orders?

What's giving you the confidence that you see for the rest of the year?

As you know what we've been struggling with or were struggling with was a lack of fashion trends in the market.

That has actually gotten considerably better.

Now there are a number of things that have emerged.

Flat sandals are doing very well, wedges.

Gladiators are good.

There are a number of categories that we are encouraged by and in particular at Steve Madden we feel very good about a product right now.

We think our product is probably better than it's been in about 18 months.

And we're seeing, as you said, some pickup in April, but also in our own retail stores.

But in the department stores we are very very pleased with the sellthroughs we are getting, especially considering the very challenging retail environment right now.

So we feel like we are starting to see some momentum.

Of course that being said, there are some very significant head winds with the consumer, but we do feel good about our product and how we are positioned right now.

Do you think since footwear started to turn down more quickly than some other categories in 2007 that in some way you can outperform retail in general in '08?

Well you may see it rebound more quickly because in footwear were struggling with the trend issue before we were struggling with the consumer issue.

So we hope that we will see footwear turn before everything else.

Thanks.

Good lot.

Jeff Van Sinderen of B.

Riley.

Good morning.

As far as your SG&A, was just looking through that and it seems it was a little higher than we expected.

Was there anything else unusual in SG&A this quarter aside from the charge?

No but maybe I will just walk you through what the increases were.

We were up, if you exclude the charge for the former CEO, the SG&A was up $3.7 million.

And almost all of that or $3.4 million came from retail.

We've had about $1.6 million -- this is versus the prior year -- $1.6 million of additional expense related to the new stores.

Keep in mind we opened seven new stores in the back half last year and another store, one store in the first quarter of this year.

Marketing was up about $500,000 in retail.

Most of that was on the Internet.

We have been experimenting with some new affiliate marketing programs on the Internet.

There was $800,000 of additional expense related to Compo which was the e-commerce business that we acquired.

Remember, we acquired that in May of last year.

So in first quarter it was $800,000 of additional expenses about a quarter of which is just the amortization of intangibles with the acquisition and then there's an additional $500,000 or so in retail of new hires, some of which you've heard me talk about before, an upgrade to high-speed Internet.

We were a dial-up a year ago in the stores, legal expenses and depreciation.

So that is, really, the bulk of it is in retail.

There was $300,000 of additional expense in wholesale which is coming from DMF or Daniel M Friedman, and that's mostly coming just from bonus accrual.

They did not accrue bonuses in the first year of last -- first quarter of last year so this is really a timing issue.

Hope that covers it.

Yes, that helps a lot.

Then let me ask you as far as Steve Madden Girl which seems to be doing well, are you seeing strength there across the board in the retailers that you sell to?

Or is there any particular strength to point out?

And then, I am assuming that we should expect that business to continue to grow this year and then, also, maybe if you could just touch on some of the early improvement you are seeing in the Stephen business.

Well, Madden Girl is just doing great.

They are actually -- they're really exceeding our expectations right now.

The team has done a fantastic job and great styling with the product.

And as I alluded to on the call, we have been expanding the distribution there.

We are in about 75 new doors in Macy's for spring and we are going to be going into, probably, an additional 50 or 60 new Macy's doors for fall.

And we actually expect the growth on the topline to accelerate over the next couple of quarters from what you saw in Q1.

So we are very pleased about that.

And, Stephen, we've also gotten some improvement there.

And again we feel very good.

We actually made some changes there.

We took about half of the production out of China and moved it into Brazil and we really improved the quality there, taking the prices up a little bit and we are really building the business with Nordstrom.

And we got a very nice -- some very nice increases with Nordstrom, just based on getting good sellthrough particularly on our boots and our flat sandals in Q1.

We expect that to continue.

So we are pleased about the progress we have made in Steven.

Then as far as the retail business, it seems like your sales are pretty good there and I know you mentioned some liquidation of some product.

Is that -- I am assuming that's just due to the overall environment and then are you guys pretty much through the liquidation of the product that you felt you needed to get rid of?

And then at this point are we cleaner in the retail business and should we expect gross margins to be a little better this quarter?

How should we look at that?

Yes, you should.

We've basically cleaned, we feel we are pretty clean with inventory right now.

You could see a modest decline year-over-year in gross margin in retail this quarter, but not to the same degree that you saw it in first quarter.

Good to here.

I will let somebody else jump in.

Thanks very much and good luck.

Heather Boksen of Sidoti & Company.

With respect to the wholesale gross margin in the quarter, if you -- can you tell us what it would have then if you had backed out Danny Friedman?

If you backed out Daniel Friedman we were 37.6% versus 38.1% a year ago in wholesale footwear.

And I would point out that, if you backed out Candies from that, we were actually up over 100 basis points in wholesale footwear.

So we were up almost everywhere except for Candies in wholesale footwear.

That's very helpful.

Thank you.

And do you -- I guess would you say the markdown environment at department stores, with some of your department store accounts would you say were kind of --?

I don't know.

Is bottoming a good term for it?

Or is it easing for you guys somewhat?

Well, we really have been very pleased with our sellthroughs, as I mentioned; and we are actually seeing improvement year-over-year in our markdown allowances as a percentage of sales based on that better sellthrough.

Lastly, the source and cost coming out of China, can you quantify, I guess -- I am assuming those assumptions are in your guidance going forward and it that's correct, are you planning also on passing some of those costs along?

We are.

And as we talked about on the last call, we have seen prices going up as much as 10% out of China.

Like virtually all of our competitors, we are attempting to pass that through to the consumer.

We haven't gotten any resistance so far, certainly from our wholesales customers or from the consumer when we put the product into our own retail stores.

But baked into our guidance we have put about 100 points of basis points of gross margin pressure from that for conservatism.

Jeff Mintz of Wedbush.

Congratulations.

Couple of questions.

First of all on the trends you were talking about, can you give us any kind of a sense of trends you might be seeing for fall that might be giving you some increased confidence going into the back half of the year?

Unfortunately, for obvious competitive reasons we never like to talk about forward-looking trends.

We are happy to tell you what we see currently.

I think I have alluded to, before, to the fact that we had some very late, good late selling of boots this year and we got some very good tests there.

So we feel good about boots for the upcoming year, but there are a couple of other categories that we feel good about and I would be happy to tell you about them once we've delivered them.

Then also I feel like I'm seen a lot more of the Steve Madden brand at Nordstrom.

Can you talk a little bit about what you are doing with that brand at Nordstrom?

And is it increasing and how are you getting to that?

It's just we've had the styling right recently.

Our sellthroughs have been very, very strong in Nordstrom which has led them to give us some reorders and put more shoes in the stores.

And our business is just very good with Nordstrom right now and that is great because that is a very, very important account for us.

And on the commission line and, in particular, the Adesso-Madden and the private-label, do you expect to see continued pressure there kind of as we go through the year?

You are going to start to see that get better.

We are going to be down again in Q2, although not the same type of percentage decline as you saw in Q1.

And then we will be up in the back half there.

That is a business that we have -- take orders further out so we have a good sense for the back half in that business, and we think we will be up in the back half.

Is that increase coming from new customers or is it from your current customers just planning their businesses up in the second half?

These are our current customers.

We had some, a couple of our bigger customers were essentially in an overbought situation and really had scaled back orders for a quarter or two here, but they have cleaned through that and are ready to ramp up again starting Q3.

Great.

Will you just comment on the CEO search?

Obviously you can't name names, but just kind of where you think it is and any kind of a time frame where it might be completed?

We've retained an executive search firm and the search has been initiated.

I can't really speculate on timing.

The good news is that we have the luxury of taking our time here.

We don't feel we are in any rush because we feel very confident that we can manage and grow the business with the management team that we have.

We've got an experienced group here who has been together for a number of years and so we can take our time and find the right person.

(OPERATOR INSTRUCTIONS).

[Mike Leopole] of Craig-Hallum Capital.

Nice work.

Can you talk, now that Steve Madden Fix has been in the market for a quarter, can you talk about, first, how we should kind of model it over the next four quarters and then what you are seeing and what the long-term potential of the product could be?

Yes, we've gotten a good early reaction to Fix.

Obviously it is a tough time to be launching a new brand, so we are taking a measured approach as I mentioned earlier.

And we think that in this particular time launching a new brand slow and steady wins the race.

So we are going -- we did go all doors Nordstrom, but in our other accounts we've gone, we started out with selected doors in all the accounts, but we are in all the accounts that we want to be in.

We are in Nordstrom and Macy's and Belk and Dillard's as well as Journey and Finish Lines and [Delia's] and The Buckle and we are getting good response there.

I wouldn't look for big numbers this year.

I'm not going to get into specifically what we are forecasting there.

But we do feel very good about it as a long-term growth opportunity.

Then on the international front, you mentioned your relationship in Asia.

Anything else in Europe or anywhere else that we could see maybe this year?

Yes, we've just started wholesales distribution in the UK with a group called OPS.

They are the distributor for aerosols as well as a big -- they have a big private-label business in the UK.

So that is something we will be looking to build and we'll still be looking for other distribution throughout the rest of the year.

Finally do you still have a stock buyback in place from pre-strategic review?

There was $46 million left.

And we did $44.2 million in the [dutch].

So we only have a couple of million dollars although we will still be -- as the year moves on we will still be looking at share purchases as an option and certainly the Board will look at increasing the authorization again.

Sam Poser of Sterne, Agee.

Well done.

Are you looking to -- we spoke once before and I think you mentioned it, that you are maybe looking for acquisitions or other uses for the cash other than buybacks and so on to help expand the brand, maybe be it apparel and so on.

Can you talk to where you are with that and what kind of things you might be looking for?

Sure, we are always willing to look at various opportunities that we think can help improve the business and certainly now is the time where there may be some property that will come onto the market at a more attractive price, because of the dislocation of the market.

I think we would be willing to look at certain other categories, as you said, to expand our capability into other categories similar to the way we acquired Daniel and Friedman to expand our capability from footwear into accessories.

But we would also be willing to look at additional footwear brands that we could sell.

Scott asked earlier about JCPenney if we found a great brand that we could sell to JCPenney.

That's certainly something we would be interested in as well.

I missed it, but -- I missed the beginning of the call, how was the men's business for the quarter?

Men's business did $8.4 million versus $9.5 million a year ago.

And the margins there?

Margin was actually a little bit better than a year ago.

Is this a sign of a turnaround or how should we look at that going forward?

I think we are in sort of the same boat that we've been in.

We feel very good about the dress piece and the driving mocs and we are still struggling a bit with the sports piece of the business.

That is now down to only a little over 20% of our mix versus 40% a year ago.

And the key to getting the top line moving in the right direction will be to get that piece of it moving in the right direction.

We do have some new more athletic looks coming at the end of second quarter.

And we also feel very good because we just hired a new designer from PUMA who is very talented, and I think is going to really freshen up what we do in this quarter in the sports category.

Now originally you had some of the Fix products for men.

I think that [vanished].

Are you thinking possibly going back in that direction as well?

Fix is going to remain just a women's line for now.

You never know down the road, but right now it's just going to be women's.

All right.

Well, continued success.

Thank you.

Seeing no further questions I would now like to turn the floor over to management for closing remarks.

All right.

Well, thanks very much for participating on the call and I look forward to speaking with you in three months.

Thank you.

This concludes today's conference call.

You may now disconnect.