Steven Madden Ltd (SHOO) 2008 Q2 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 expressed 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 Ltd.

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 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 are that 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 Ed Rosenfeld, Interim CEO, of Steven Madden Ltd.

Ed.

Thanks, Leigh.

Good morning and thank you for joining us today.

In today's call I'll review the Company's results for the second quarter ended June 30th, 2008, and provide an update on our outlook for the remainder of the year.

While our performance in the second quarter once again reflected the ongoing weakness of the economy, we continued to build on our momentum from earlier in the year.

In particular, the results in our Madden Girl and Daniel M.

Friedman divisions were bright spots as both experienced strong sales growth versus last year.

While results of other brands such as Steve Madden Women's and Steven continued to be more affected by the challenging environment, we are getting to-- we are beginning to see improvement in these divisions as well.

Overall we are very pleased with our current position in the market.

Our merchandise is resonating very positively with our wholesale customers as well as consumers.

We recognize the challenges faced in the industry.

However, we are pleased with our current merchandise as well as new merchandise being introduced for the upcoming selling seasons.

In addition, we have seen promising new footwear trends emerging over the past few months.

As always, Steve and our design teams have been working hard to be in front of these trends across all of our brands in order to bring to market fresh and unique products that appeal to consumers.

Overall, we believe our business is healthier and better positioned to capture opportunities going forward.

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

Consolidated net sales increased 1% in the quarter to $109.3 million from $108.3 million a year ago.

Both our wholesale and retail divisions recorded topline increases of approximately 1%.

Gross margin for the quarter was 41.7% versus 42% last year, as the declining margin in the retail division was partially offset by an increase in the wholesale segment.

As expected we also experienced operating expense deleveraging as well as the decline of commission income from the private label business, the net result being a decline in operating margin from 16.2% last year to 11.1% this year.

Diluted EPS for the quarter was $0.43 per share on $17.8 million diluted weighted average shares outstanding compared to $0.49 per share on $21.6 million diluted weighted average shares outstanding in the prior year.

Now onto the performance of each of our divisions.

I'd like to first talk about our wholesale division, which is 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.

Friedman.

Net sales in the Steve Madden Women's wholesale segment were $30 million versus $33.1 million in last year's second quarter.

While sell-in was lower than last year due to the challenging retail environment our product was trend right and performed well on the floor.

Based on our robust sell-throughs and strong product we have seen an improvement in orders from our wholesale customers and expect to return to topline growth in this division in the third quarter.

Net sales in Steve Madden Men's were $10.9 million in the quarter versus $14.2 million a year ago.

This business remains challenging.

Continuing with our recent trend, driving mark performance was strong and dress shoes were fair but sport looks were disappointing.

Net sales in Steven by Steve Madden were $5.5 million in the second quarter compared to $5.8 million a year ago.

Due to the exceptionally rainy weather in China, three items in the Steven collection had mold issues which prevented us from delivering these goods in the quarter.

If not for this problem we would have recorded topline growth in Steven during the quarter.

As in Steve Madden Women's, flat sandals were the best performers particularly Gladiators.

Both our Women's and Steven divisions are now much better positioned than they were a year ago and we expect solid performance from these divisions going forward.

Madden Girl continued its standout performance in Q2.

Net sales were $12.8 million, up 94% from $6.6 million in the second quarter last year.

Customers are responding to the outstanding styling and solid price value proposition of our Madden Girl footwear.

This very positive customer response is in turn driving better than expected results for this division.

As expected, sales in the Stevies and Candies divisions were down versus the prior year.

Stevies net sales were $800,000 in the quarter versus $1.7 million a year ago.

While net sales in Candies were $4.2 million versus $5.1 million in the comparable period.

As discussed on the last call, we have transitioned the Candies business to our Adesso-Madden team and starting in late Q4, Candies will become a First Cost business.

We believe this change will have a positive impact on the division and we continue to target Q4 for improvement in both Stevies and Candies.

Last, wholesale footwear segment is our newest brand, Steve Madden's Fix.

We continue to take a measured approach and expansion of this new brand given the challenging retail environment.

In the second quarter Steve Madden's Fix had net sales of $600,000.

By the end of the quarter Fix was in over 750 doors including better department stores such as Nordstrom and Macy's as well as specialty stores such as Finish Line and Journeys.

Given the uncertain economic environment, we believe that this slow but steady approach is prudent for a new line.

Moving on to accessories.

The Daniel M.

Friedman business had net sales of $14.6 million in the quarter, up 23% from $11.8 million in last year's second quarter.

We were very pleased that this division, like Madden Girl and footwear, turned in strong results for the quarter.

Steven, Steve Madden and Betsyville handbags were standouts in the quarter all recording substantial year-over-year growth.

Taking all this together, overall net sales for the wholesale division were $79.4 million in the quarter, a 1% increase versus $78.6 million a year ago.

This reflects improvement in several key areas, dampened somewhat by the weaker economic environment.

Overall wholesale gross margin increased from 34.2% last year to 34.7% this year as we improved margins modestly in both wholesale footwear and accessories.

Moving onto our retail division.

We are not opening any new stores during the quarter and we closed two underperformers, ending the second quarter with 98 stores in operation.

Stores opened for the full 12-months ended June 30 generated $635 in sales per square foot, first quarter retail division sales were $29.9 million, up 1% from $29.6 million in last year's first quarter, due to sales from new stores.

Comp store sales decreased 3.3% in the quarter.

And gross margin in the retail division declined at 60.3% this year from 62.4% last year, primarily due to increased promotional activity due to the soft retail environment.

Moving to other income, the Company's commission and licensing fee income net of expenses was $3.2 million in the quarter versus $5.7 million last year.

As we discussed on last quarter's call, our large private label customers scaled back orders for the first half due to the tough retail environment.

As a result, our Adesso-Madden First Cost division experienced a decline with income net of expenses of $2.5 million in the second quarter versus $4.8 million in last year's second quarter.

Licensing income for the quarter was $700,000 versus $900,000 a year ago.

With respect to the balance sheet, we continue to maintain a pristine balance sheet with no debt and $46 million in cash, cash equivalence and marketable securities as of the end of the quarter.

Total inventory at the end of the quarter was $35.3 million and our inventory turn for the last 12 months was 8.1 times.

Accounts receivable and due from factory were $56 million reflecting average collection of 53 days.

CapEx for the quarter was $1.4 million and stockholders equity as of June 30 was $184 million.

Before I turn the call over for your questions, I'd 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.

And diluted EPS will range between $1.55 and $1.65 excluding the impact of the one-time charge resulting from the resignation of the Company's former CEO that was recognized in first quarter.

Including the impact of the one-time charge, earnings per diluted share are expected to range between $1.39 and $1.49.

While we continue to take a conservative approach to our outlook, we are seeing improvement across different segments of our business, it will begin having an impact on our results in the coming quarters.

As I stated earlier, we are very pleased with the merchandise being developed by Steve and our design teams and our products continue to be well received in the market.

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

In addition to continuing to focus on improvement and growth in our existing footwear accessories and licensed products, we are excited about evaluating avenues to further diversify our business into new brands or products.

Most notably we are announcing today, and I believe this will be crossing the wire any minute if it hasn't already, that we have signed a new license agreement with Kimora Lee Simmons and Kellwood to design, manufacture, market and distribute a collection of footwear and accessories for the Fabulosity brand.

The line will be available at JCPenney stores starting in early 2009.

We are excited that respected fashion and retail industry names are choosing to partner with us and look forward to working with Kimora Lee Simmons and JCPenney on this line.

As you can see, while we are aware of the challenging economic environment and are maintaining our prudent approach to managing our business, we are continuing to implement initiatives designed to grow the Company over the long-term.

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

(OPERATOR INSTRUCTIONS).

Our first question is coming from Scott Krasik with CL King.

Please go ahead.

Hey, Ed.

Congratulations.

Thanks.

Madden Girl was great.

It wasn't up all that much in the first quarter.

Was there a timing issue or can we expect this sort of rate of increase in the back half of the year?

Yeah.

There was a little bit of a timing issue, but really the business is just accelerating and you're going to see some pretty substantial growth in the back half as well.

I don't know that it will be 94%.

But certainly we think we can be up north of 50% in the back half.

Okay.

I mean, this is getting to be almost as big as LEI was at it's peak, almost.

I mean is that-- can it be bigger than that at this point?

Sure.

I don't see any reason why Madden Girl couldn't be a $60 million business over time.

Okay.

No.

That's great.

And then just a couple of others-- the inventory that you gave, that $35.3 million, how does that break out wholesale versus retail?

Sure.

We had $22.2 million of wholesale inventory and $13.1 million of retail.

Okay.

And planning on growing in wholesale, obviously, in the back half.

Retail, how are you planning that business?

Yeah.

Retail should grow as well.

Okay.

Good.

And then just a general question.

We heard a lot in the spring about cancellations coming from retail customers.

Can you give a sense of how that affected you and do you think that's going to be an issue in the second half of the year and if so, when will those start coming?

No, we haven't experienced that.

Certainly we have experienced wholesale customers trying to keep their inventories lean and being conservative in their budget and in their planning, but we haven't experienced cancellations.

And because of the strong sell-through in our product, we're really maintaining our budgets much better than we believe most of our competitors are.

Okay.

So -- and generally I think you guys have experienced some cancellation of reorders in sort of September time frame last year.

Was that correct?

Well, we didn't get reorders (inaudible) there were some reorders that we didn't get.

I wouldn't say they were cancelled.

Okay.

Okay.

That makes sense.

And then just generally the impact from the store close-- potential store closures from Mervyn's or Bosco's or whoever else is next?

Yeah, if you put those all together we do about $2 million with that group, so it's not a big loss on the topline for us.

And we're protected as far as what we're owed.

Okay, great.

And then just lastly, I know you didn't break it out, but these write-off for store closures and remodels and severance in the quarter, do you know how much those were offhand?

Yeah, sure.

The write-off of fixed assets was $672,000 in the quarter.

The severance was approximately $300,000.

So if you put those together, it's about $0.03 in the quarter.

Okay, wow, you had a great quarter.

Okay, thanks.

Thanks.

Thank you.

Our next question is coming from Sam Poser with Sterne, Agee.

Please go ahead.

Good morning, Ed.

Can you -- I was going to add -- Scott just got me on the last one, but real quick, can you-- you talked on, in your press release that you were taking a conservative approach to managing the business.

Can you really talk about what that is, because we've been at the show and so on, I I think you were one of the busiest booth at WSA.

The response to the product seems to be quite good especially in the Steve Madden line and in the Fix line, that's what I was noticing most.

Can you talk a little bit about maybe year-over-year order of what you're seeing and is this counting on fill-in some what not?

Yeah, we never talked specifically about our backlog but I will tell you that it is up from where it was a year ago and our backlog relative to it's-- the backlog at the same time a year ago is better than it's been in quite some time.

That being said, when you ask what do we mean when we were being conservative, we're still watching the inventory carefully.

If this were a better economic environment and we had product performing as well as we do on the floor and getting the same kind of response from our wholesale customers about our new merchandise, it would probably be a little bit more aggressive with inventory, but we're still managing that pretty conservatively right now.

How are you seeing -- I mean, you did a great job of managing your gross margin in the quarter and I assume that means you didn't have the -- you didn't have the markdown money requirements that you've had in the past because you're managing your inventory well.

But as your products performing well these days, I mean, are you able to chase it down or are you just coming out with more new product more frequently?

I mean, how are you managing that?

Yeah, certainly we are chasing product when we have -- when we have a hot item, but we're also continuing with new, fresh styles.

And are you finding that when the retailers -- I mean, are the retailers' standards going up?

Are they looking for higher sell-through rates now than they were a year ago to give you fill-in orders or to step back in?

Yes.

And so can you talk about what the standard has gone from and to?

I don't want to get into specifics and it's obviously-- there's no hard and fast rule but certainly they're more conservative so you have to have a very strong sell-through to get a reorder.

And also in the past where maybe they would buy, have four items for reorder, now it's just the best two.

Got you.

And you just said that the back -- can we assume that the backlog may be higher than your guidance represents?

As you said-- well I mean you said it's better than it was a year ago and it sounds like it's better than it might have been even before that.

So can we assume that the backlog might be -- is looking better than that?

No, our guidance reflects our best estimates for the business right now and backlog is certainly a consideration there.

But you-- but keep in mind that our current guidance implies solid back half growth here over a year ago.

Okay.

And then your -- on the retail side of things, are you expecting -- are you expecting to see positive comps on the retail side for the back half?

Yes.

We're targeting low single-digits, but positive comps.

And do you think you'll see some margin turnaround there as well?

Yes.

We're going to be looking for margin improvement in the back half versus a year ago.

That's more product (inaudible).

I'm sorry?

That's more product related based on the response you're seeing to the --

Absolutely.

Okay, thanks.

Congratulations.

Thanks.

Thank you.

Our next question is coming from Jeff Van Sinderen with B.

Riley.

Please --

Let me add my congratulations as well.

As far as you can see, and I know it's still really early, but any color you can give us on early back-to-school sell-throughs.

And maybe what we should expect, how we should expect things to unfold or your view of how things will unfold for back-to-school this year?

Well, we have had some preseason sales at some of our big, better department store customers.

And we had some very nice selling there, particularly boots looking very good.

And there are a number of categories that we feel good about as we head into back-to-school or really fall.

Again, back-to-school practically speaking happens a little bit later now than it used to because it's such a buy now, wear now market.

So we haven't seen the full back-to-school selling yet,.

But so far, so good for us, particularly on the boots.

Okay.

Good.

And then in your retail business, obviously, you can't change the environment, but you're looking for increases in your comps for the second half.

Just wondering how you're getting to that and what you're focusing on in your retail business to improve margin contribution?

Sure.

Well number one it's product and we think that we have better product than we did a year ago and we've started to seeing improvement over the last few months in our comps.

We-- even this quarter, second quarter, when we were down 3.3, we had a tough April and we saw some improvement in May and June and then we've seen a little bit further improvement in July.

But there are also a number of initiatives that we're working on in retail.

We've hired -- we continue to beef up the team there, just hired a new merchandise manager in retail.

We've hired a new VP in charge of the internet and we continue to work on our -- the process, our open to buy process and refining that.

And we think we're going to have a little bit more balanced assortments going into fall and more depth and key items based on some of the things that we've been working on.

And then as we look forward, we've also -- we're also in the process of implementing this new merchandising allocation and planning system .

We're about 50% implemented there and when we get that up and running we'll-- the goal is to buy all of spring 2009 on that system and that should drive sales and margin as well on the retail

Okay.

Great.

And then I know you're just announcing the Fabulosity brand.

Wonder if you can, if you can touch on how you're approaching that brand and the launch of it?

Yeah, well, it's just something we're real excited about.

We think Fabulosity is a fantastic brand.

We're really pleased to be working with Kimora Lee Simmons, who's such a talent and a true fashion icon these days, and Penney's is really behind this in a major way so that's exciting.

The apparel has already hit the floor.

It's in I believe about approximately 600 doors and it looks great and it's performing very, very well.

And we're doing both the footwear and the accessories, which is something we're very excited about and we're going to be delivering products probably for 1/25 deliveries.

And it's just-- it's great news.

And you guys have been asking us about what we're going to do for a JCPenney for a while now, so we're pleased to have a brand to sell into that retailer.

Great to hear it.

Thanks very much and good luck.

Thanks.

Thank you.

Our next question is coming from Jeff Mintz with Wedbush.

Please go ahead.

Thanks very much.

Just a couple of follow-up questions.

First of all on the retail business, are you still looking to have about 101 stores by the end of the year?

100.

100 stores.

Okay.

And do you kind of feel like you've gotten -- you've closed the stores that you need to close now or are there potentially some additional store closings upcoming?

No.

We've said that the hundred does not include any more store closings through the balance of the year, but we have about six stores that we are -- that we'd like to close, if possible.

We're negotiating with landlords on those stores.

And to the extent we can make a deal that makes sense, we would get out of those.

Great.

And then on the Adesso-Madden business, have you kind of seen any trend change there in terms of what those customers are doing?

Obviously the environment is still tough, but has the trend shifted either up or down recently?

It's getting a little bit better.

The first half is very tough.

We just didn't get the reorders we were looking for.

And we're starting to see some improvement.

You're going to see some improvement in Q3, although we'll still be down year-over-year.

And then we would be looking to grow that business in Q4.

Okay.

Great.

And then finally on the mold issues that impacted the Steven brand, was that just one factory that was causing those issues and kind of what have you done to prevent them from happening going forward?

No.

This is a couple different factories and this is something that it's a problem that's really industry-wide this year because of the rainy season in China.

Many, many vendors had this issue.

So we've put in a new process to try to contain this.

We're spraying the product and the boxes with fungicide, we've lengthened the drying process in the factory and we've stepped up our auditing in the warehouse and product and we think we've got this under control.

Okay.

Great, thanks and good luck.

Thanks.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question is coming from Heather Boksen with Sidoti & Company.

Please go ahead.

Good morning, guys.

Most of mine have been answered just had one question regarding Madden Men's.

Wondering is there a strategy here to -- I know we every season or so we keep introducing some new sport product.

What's the strategy for getting that business back on track?

Yeah, well, you've hit the nail on the head.

That's the key is the sport piece and I think I mentioned last time that we had hired a new designer from Puma who's going to help us with the athletic piece.

There is a little bit longer lead time in that kind of product so we don't expect to see the full impact of his efforts until spring of '09.

But that's -- we just got to keep trying to improve the product.

Keep in mind, I want to point out the Men's business overall is very, very tough right now.

Anytime you have an economic downturn, the Men's business is impacted more dramatically than Women's because on the whole men are just more likely to forgo new footwear purchases and stay in their old footwear when they're feeling constrained financially.

But nevertheless, we acknowledge that we need to improve the sport product and we're working on that.

All right.

Thank you, guys.

Thank you.

Our next question is coming from Susan Sansbury with Miller Tabak.

Please go ahead.

Yes.

Thanks.

Is there any way you can shed more frosting on this licensing agreement, what you expect the near-term opportunities as well as, I take it this is a five-year license as well as the -- how big this business might be three to five years out?

But more importantly, what -- what do you think the initial shipment rate is going to be, if you can share that?

I really -- I mean, just to clarify one thing, it's a three-year license agreement with a three-year renewal option.

But I really can't get into numbers.

We haven't even had our first meeting with JCPenney yet, so it wouldn't be appropriate for me to speculate on how big it's going to be.

But as I said, the apparel is in 600 doors, we would be targeting that for the shoes and the bags and we think it could be a substantial business, they're really putting a lot of marketing muscle behind this.

Okay, great.

Thanks very much.

Thank you.

Our next question is a follow-up coming from Sam Poser with Sterne, Agee.

Please go ahead.

Just a quick one on the Men's business, just another follow-up.

Outside of the what you're doing in the athletic realm there, how about in the rest of the business?

Because athletic business has been fairly tough these days too.

Can you talk about sort of directionally how you're looking at that brand being approached and what you're doing to get the other changes done?

Yeah, well, that's the piece that's weak, unfortunately.

The driving marks continued to perform well.

Our dress shoes are doing fine and actually we're seeing a little bit of an uptick there.

So it's really the sport piece that even from a year ago it's down -- it was 40% of the business a year ago, now it's 20%, and that's really where the loss is coming from year-over-year.

And you're getting -- and I mean, you showed those shoes at Fanny and at WSA is their response-- how's the response been?

The response has been good but we got to -- they got to perform on the floor.

That's what we're looking for.

Okay.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question is a follow-up coming from Scott Krasik with CL King.

Please go ahead.

Thanks.

Ed, obviously your handbag business is pretty good.

I assume belts are not doing that well, a lot on fashion.

Maybe talk about that and what's driving the increases?

Yeah.

Belts, you're right, are tougher, although that business has stabilized a little bit.

We're not seeing the same kind of percentage declines that we saw for the last couple of quarters.

But it's really the handbags that are driving it.

On the Betsey Johnson front it's the Betseyville brand that is really growing very nicely for us.

And then most importantly it's the Steve Madden and Steven bags are both growing very nicely, admittedly still off a relatively small base but we've got a nice trajectory there, have been adding doors, have been expanding the assortment and the product has been selling through, so we're very pleased about that.

All right.

So what's the distribution for Steven and Steve Madden in bags right now?

How many doors and where?

Steven is in about 160 doors, Macy's, Nordstrom, and then we've got two different collections in Steve Madden.

We've got our Steve Madden, what we call or club bags or clutches which are in 470 doors, all the number of better department stores, Macy's, Belks, Von Maur, et cetera.

And then we've got Steve Madden day bags in a similar distribution which is 230 doors right now.

Okay.

And the thought is continuing to add doors through the year and -- or you're pretty set for -- ?

Yeah, no, we can still -- we still have quite a bit of door growth opportunity here.

Good.

And then just maybe talk about since you guys work so close to season, how are the price or cost inflation out of China affecting you guys?

Are you raising prices for your August/September deliveries?

Are you waiting to raise prices and by what amount?

We already have raised prices and in fact our AURs in second quarter were up about 10% year-over-year.

And we haven't received a lot of resistance to that.

You're still seeing -- we've got costs out of China up 10% maybe even a little more.

You're still seeing probably about 100 basis point gross margin impact.

The reason being that we've raised our price 10%, we're also putting a little bit more into the shoes.

We wanted to increase the quality of our shoes.

So -- but the good news is we haven't seen resistance to the price increases.

Does Brazil become a bigger option or Latin America in any way?

Yeah we're doing more out of Mexico and we've also doing-- we're also doing a little bit more out of Brazil in the Steven division.

Okay.

Great.

Thanks.

Thank you.

There appears to be no further questions at this time.

I'd like to turn the floor back over to Mr.

Rosenfeld for any further or closing remarks.

Okay well thanks very much for joining us on the call and we look forward to speaking with you on the next call.

Thank you.

That does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful day.