Steven Madden Ltd (SHOO) 2008 Q4 法說會逐字稿

Good day, and thank you for standing by.

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.

Instructions will be given at that time.

As a reminder, today's call is being recorded.

I would now like to turn the conference over to your host, Ms.

Jean Fontana of ICR.

Please go ahead, m'aam.

Thank you.

Good morning everyone, and thank you for joining this discussion of Steven Madden, Ltd.'s fourth quarter and full year 2008 earnings 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 meaning of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements Involve known and unknown risks and uncertainties and other unknown factors that could the actual results of the company to be materially different from their 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 could not be relied upon as current after today.

I would now like to turn the call over to Ed Rosenfeld, Chairman and CEO of Steven Madden.

Thanks, Jean.

Good morning, and thank you for joining us today.

On today's call, I will review the company's results for the fourth quarter and full year 2008 and provide our outlook for 2009.

We are pleased to have met our expectations for the fourth quarter despite the challenging economic environment.

Net sales for the fourth quarter rose 16%, while EPS increased to $0.40 from $0.23 in last year's Q4.

We believe that in this environment, consumers increasingly find value in our product.

Not just based on price, but on the fact that we consistently deliver trend right merchandise at a fair value.

Getting value and purchases is more important to consumers than it has been in years, especially when it comes to fashion, and our core Steven Madden brand is well positioned to benefit from this trend.

Steve and our talented design team continue to create an excellent assortment of footwear capturing the latest trends and enabling us to stay top of mind with our customers.

Furthermore, with our test and react strategy we ensure we that we optimize our wholesale assortment by putting in the best selling styles from our retail stores.

While we are pleased with our recent performance and very excited about all of the developments in our Company in 2008, we recognize that we are operating in a challenging environment and will carefully control inventory, operating expenses and capital expenditures as we focus on driving strong cash flow in 2009.

Now, turning to the performance for the fourth quarter.

Consolidated net sales increased 16% in the quarter to $119.1 million, led by a 24% increase in our wholesale business, our net sales were $79.1 million in the quarter compared to $63.5 million in the prior year.

The increase in wholesale sales was primarily driven by strong gains in our Steven Madden Women's, Madden Girl and Steven wholesale footwear divisions as well as the Daniel M.

Friedman accessories division.

Net sales in the core Steven Madden Women's segment increased 30% in the quarter to $32.9 million from $25.3 million a year ago.

Casual boots drove the business, especially flat suede boots.

We are particularly pleased with our strong increase in sales from Nordstrom in the quarter.

In Steven by Steve Madden, net sales were $4.6 million, up 63% from $2.8 million in last year's fourth quarter.

Casual boots the strongest selling category in Steven as well, including outstanding performance of demi wedge leather boots.

As in Steve Madden, we recorded substantial increase with Nordstrom in our Steven business.

Madden Girl continued its stand our performance with net sales growing 76% to $10.4 million versus $5.9 million in the prior year.

Retailers and consumers alike continue to respond to Madden Girl's trend right styling and great price value proposition.

The Men's business, on the other hand, remains challenging.

Net sales in Steven Madden Men's were $7.9 million versus $12 million if the year ago period.

Casual styles continue to be particularly disappointing.

For spring, our revamped design team has introduced a new collection targeted towards a younger consumer, and we are encouraged by the positive response we have received from retailers.

In fact, in Q1, we are shipping a selection of the new styles to specialty retailers including Journeys and Underground Station that do not carry our product in 2008.

Turning to two of our smaller owned brands, Stevies and Steven Madden's Fix, Stevies had net sales of $600,000 versus $500,000 a year ago, and Steve Madden's Fix recorded net sales of $1.1 million in the quarter compared to $400,000 last year.

In regard to licensed brands, we completed the transition of our Candie's business to a first cost model in the quarter.

Net sales in Candies totaled $0.8 million in the quarter versus $1.5 million a year ago as the majority of the Candies business was done first cost through our Adesso-Madden division where revenue is recorded on the other income line.

If we include both the landed wholesale and first cost business in the quarter, total income from the Candies business increase by over $2 million compared to last year's fourth -- last year's Q4.

Fabulosity, our new licensed brand distributed exclusively at JC Penney had net sales of $1.2 million in the first quarter of shipment.

Currently, the assortment is offered in 250 doors, and we are pleased with the performance so far, particularly in the dress shoe category.

Moving on to accessories, the Daniel M.

Friedman business grew 30% in the quarter to $19.4 million from $14.9 million a year ago.

Handbags continue to drive growth while the performance of belts improved.

At our retail division, net sales in the quarter were $40 million, a 2% increase over last year's net sales from $39.3 million.

Comp store sales declined 0.5%.

Stores opened for all of 2008 generated $628 in sales per square foot.

We closed two stores in the quarter bringing our total at the end of the year to 97 stores, including our internet store.

We continue to view the internet as a major opportunity to drive sales growth.

Other income, the company's commission and licensing fee income net of expenses increased 12%, to $3.2 million in the quarter versus $2.9 million last year.

Our Adesso-Madden first cost division grew 19% to $2.6 million from $2.2 million in last year's Q4 due primarily to the transition of the Candies business at Kohl's to a first cost model as well as the introduction of LEI at Wal-Mart.

Initial shipments of LEI went out in December, and we will be in 2,400 Wal-Mart doors with LEI products by next month.

Initials sell throughs there have been strong.

License income for the quarter $600,000 versus $700,000 a year ago.

Gross margin for the quarter increased to 40.4%, from 37.9% in the comparable period last year, reflecting margin improvements in both the wholesale and retail segments.

Wholesale gross margin increased 510 basis points to 31.9% from 26.8% in the same period last year, benefiting from significantly lower mark down allowances due to the strong sell through of our product at retail.

Gross margin in the retail division was 57.1%, up from 55.9% last year as stronger merchandise and better inventory management resulted in fewer closeouts than Q4 2007.

Operating expenses as a percentage of sales declined 120 basis points compared to the prior year's fourth quarter, reflecting leverage on the increased sales.

The year-over-year improvement in the SG&A ratio had two mitigating factors.

First, we posted a $1.3 million reserve associated with the expected loss on two store locations we plan to sublet, and second, in last year's fourth quarter, operating expense benefited from a $2 million reversal of bonuses accrued in the first three quarters of 2007, and we did not record a similar bonus reversal in the fourth quarter of 2008.

Operating income increased 76% to $12.2 million, or 10.3% of sales compared to $7 million or 6.8% of sales last year.

Diluted EPS for the quarter $0.40 a share, an $18.1 million diluted weighted average shares outstanding compared to $0.23 a share on $20.4 million diluted weighted average shares outstanding in the prior year period.

Now I'd like to briefly touch on our full year results.

Net sales for the full year increased 6% to $457 million.

Wholesale sales increased 7% to $331.4 million, and sales for the retail division increased 4%, to $125.6 million.

Comp store sales were flat for the year.

Commission and licensing income net of expenses declined 22% to $14.3 million, reflecting a 23% decrease in commission income at our Adesso-Madden division, a 19% decrease in license and royalty income.

Gross margin improved to 49 point -- excuse me, 40.9% in fiscal 2008 from 40.2% in fiscal 2007 and operating expenses as a percent of sales, excluding non-recurring items, increased by 120 basis points.

Net income totaled $28 million or $1.51 per share for the year, compared to $35.7 million or $1.68 per diluted share in fiscal 2007.

Fiscal 2008 results include a one time charge of $4.9 million pretax or $0.16 per diluted share, resulting from the resignation of the company's former Chief Executive Officer.

Fiscal 2007 results include a one time benefit of $2.9 million or $0.13 per diluted share resulting from tax savings related to prior periods, partially offset by a one time charge for prior year customs duties of $1.2 million pretax or $0.03 per diluted share.

Excluding these one time items, fiscal 2008 net income totaled $31 million or $1.67 per diluted share compared to fiscal 2007 net income of $33.6 million or $1.58 per diluted share.

With respect to the balance sheet, we continue to have a strong financial foundation with $124.8 million in cash and marketable securities and $30.2 million in advances payable to the factory at December 31 for net cash of $94.6 million as of the end of the year.

Total inventory at the end of Q4 was $31.6 million versus $27.2 million a year ago.

Our inventory turn over the last 12 months 8.1 times.

A 16% increase in inventory was primarily due to early receipts of merchandise, particularly boots for both our retail stores and wholesale accounts as we wanted to capitalize on the continued demand in this category.

On the wholesale side, we also decided to carry additional inventory in Madden Girl to support the growth of the business given the strong sell through versus just matching inventory with bookings last year.

Accounts receivable and due from factor were $39.9 million end of the year, reflecting average collection 47 days.

CapEx for the quarter was $2.1 million and stockholders equity as of December 31 was $206.2 million.

Turning to our guidance, for fiscal 2009, we expect sales to decline 6% to 8% which is partially due to the shift of our Candies business to the first cost model where revenue will be recorded in other income line.

Excluding the impact of this shift, sales are expected to decline 3% to 5% for the year.

Diluted EPS is expected to be in the range of $1.40 to $1.55.

We are planning capital expenditures to be under $5 million in 2009 as compared to $8.3 million in 2008, and we plan to open 2 to 3 stores and to close 8 and 13 locations in 2009.

In conclusion, we are pleased with the finish to 2008, our positioning for 2009 and our many growth opportunities for when consumers feel good about sending again.

We believe that the strong image of our brands, combined with our unmatched ability to create the right product at accessible price points gives us a solid competitive advantage in the current environment.

Also, our three new licenses, expanded internet business, category extensions via both our in house accessories business and our licensing program and continued potential for international expansion offer us a lot of opportunity for growth and should position us to reach our mid teen operating margin target over the next three to five years.

Now I would be happy to answer any questions that you may have.

Thank you, sir.

Today's question and answer session will be conducted electronically.

(Operator Instructions) We will take our first question from Mr.

Jeff Van Sinderen with B.

Riley.

Please go ahead, sir, your line is open.

Mr.

Van Sinderen, your line is open.

Due to no response, we will move to our next question.

Our next question comes from Mr.

Sam Poser with Sterne, Agee.

Please go ahead, your line is open.

Good morning, Ed.

Good morning, Sam.

Just a couple of questions.

One, can you give us the inventory by wholesale and retail?

I don't know if you gave both, if you split it or not.

Sure.

Retail was up from $12.5 million a year ago to $15.4 million this year, and wholesale, $14.7 million a year ago, up to $16.2 million this year.

If I could just talk about that for a moment.

I'm sorry, 14 from --?

14.7 to 16.2, Q4 '08 in wholesale.

Thanks.

So you can see that the majority of the increase came from retail, about $2.9 million from a $4.3 million overall increase came from retail.

And that was really driven by our -- a conscious decision on our part to change the flow of receipts versus a a year ago.

We really felt that we missed out on sales in January last year due to not having enough inventory, particularly in the boot category.

With boots strong again, we decided that this year we were going to bring in more receipts in December and January and fewer receipts in February and March, and this a strategy that we feel has paid off.

Our quarter to date through today, or through yesterday, our comps in the retail stores are up 8% year-over-year, based in large part on bringing this inventory, particularly the boots in, so we feel pretty good about that.

And on the wholesale side, there are really two factors.

One was a change in order patterns from our customers versus a year ago.

Our orders for January were up and orders -- year-over-year, and orders for February were down, and we attribute this again to the strength of boots this year.

People wanted to bring in additional boots, but when customers want to bring in boots in first quarter, they are going to obviously want to bring them in January as opposed to February.

So our year end inventory was higher in order to support that increased January business.

That's the first factor.

Then second factor was a decision that we made to carry a little bit of inventory in Madden Girl to support the growth of our business with Macy's there.

As you know, historically, that's been a cut to order business, it remains a cut to order business, but in order to grow with Macy's, we need to carry a little bit of inventory.

So we have taken some inventory out of a couple of key proven styles there in order to grow with that account.

Keep in mind that at the end of the year '08, we were in 300 Macy's stores with Madden Girl.

A year prior to that, we were in only 80 Macy's stores with Madden Girl.

Okay, thank you.

Then within your guidance, when you're looking out, it sounds like business is pretty decent right now, you said that January is up in both cases, both wholesale and retail and then much of where February is, but I guess comp in quarter to date, up 8% is pretty strong.

When you're looking at your guidance down on 3 to 5, ex the Candies move, is that because of lack of visibility towards the back half of the year?

Is that order -- it is the way the order flow looks through May or June where you are right now?

Well, I think that on a year-over-year basis, we are assuming the back half is going to be a little bit worse than the first half.

We are shaping up a little bit better than that for first half, but we have seen a softening of orders.

Obviously, I don't need to tell you what is going on out in the world, and you have got most of our big wholesale customers talking about planning their businesses down 10% overall.

We don't feel like we are going to be down 10% because of our strong recent performance, but we do think it's reasonable to assume that we are going to be down year-over-year.

And then, have you seen improvement in the reaction to the men's business, the men's product or for the back half, because that one's a little further out?

Yes, we are seeing some glimmers of hope there.

As you know, we got back in to Journeys and Underground Station, we are going to be in -- we are now in about 300 Journeys and 100 Underground Stations, which are important accounts for us, and I think that's due to the improvement we made to the product and some of the younger looking product that was introduced on the casual side, some of the boots.

So we feel that we are starting to see some encouraging signs in men's.

Of course the other side of that is that the men's business itself overall remains very, very challenging right now.

Okay.

One last thing, again, back to the guidance, when we are looking at it by category, you're going to get growth.

Where are you seeing the major slow downs within the guidance by category here?

Because you do have some new categories as well.

You have the new one with Fabulosity, so where are you seeing the weakness within the guidance?

If we were to look at it by division or category?

I think you have to assume that most of our wholesale divisions are going to be down modestly year-over-year, with the exception of Madden Girl.

Existing wholesale divisions should be down year-over-year.

Okay.

Thanks, Ed.

We will take our next question from Mr.

Jeff Mintz with Wedbush.

Please go ahead sir, your line is open.

Thanks, good morning Ed.

Good morning.

Could we talk a little bit about operating expenses for 2009 and in particular, you talked about the $1.3 million reserve to close the two stores.

Can you talk a little bit about what the costs might begin to close the additional stores in 2009?

Yes.

For most part, the remaining store closures, there is not going be cash expense associated with them.

These are stores that we either have a kickout provision in the lease or we've come to the end of the lease.

So there may be some -- with regard to the stores where we are exercising the kickout, there may be a non-cash charge, a loss on disposal of fixed assets, but in terms of cash charges, we don't anticipate much.

Okay.

And then kind of looking a t the operating expenses overall, is that something you can keep in line on a dollar basis with 2008 as you look at slightly lower revenues and kind of belt tightening in general in this environment?

Yes, I think flat '08 operating expenses is a reasonable target.

Okay, great.

And then on the inventory, kind of where do you expect that to be as we go through the year here?

Are you targeting inventory to be kind of flat to down in line with sales, or do you anticipate taking a little bit more aggressive position on that?

I think when you get to the end of Q1, we are going to be modestly higher, low to mid single digits higher than a year ago in retail, and we are going to be below year ago in wholesale, and I think that's consistent with our plan for the balance of the year.

Okay, great.

And then finally.

can you talk a little bit about what you are seeing in terms of pricing your product out there?

How much pressure are you getting from wholesale -- from your retail accounts to kind of move prices down and try and be even -- obviously, you guys do well on pricing, but to be perhaps even tighter on pricing in this environment?

It's not a lot of pressure from our wholesale accounts.

I mean, we are ourselves very focused on value right now.

But again, value for us doesn't always mean competing on price, it means having trend right styling with good quality at a reasonable price point, and that's what we are really focusing on, and we think the customer is very focused on value and perceived value right now, and that's one of the reasons that we really drove the under $100 boots in the fall ,and we had a lot of success with that.

Okay.

Great, thank you very much, good luck.

(Operator Instructions) Our next question comes from the Mr.

Jeff Van Sinderen from B.

Riley.

Please go ahead sir, your line is open.

Can you guys hear me?

Hey, Jeff.

Okay.

So one question I had was just looking in to the second half of this year and thinking about the strength you guys have had in boots, which has really been seemingly phenomenal.

Just wondering if you are thinking that boots ease on a year-over-year basis in the second half of this year, and if so, is there anything that you are looking at in terms of the category or what have you that could replace the strength in boots?

I think that it's shaping up to be -- we believe it's going to be another good boot season.

We did some late in season testing of new boots here that we got good reads on.

But that's part of the reason that we assumed in our guidance that back half, at least relative to the year ago period, will be slightly weaker than the front half due to the tougher comparisons with the boots.

Okay.

Fair enough.

And then I know you mentioned, I know you are focused on cash flow and you are trying to control expenses.

Just wondering how we should think about your approach to expenses this year?

Are there any specific areas that you are looking at cutting?

Things of that nature?

Sure.

We have implemented a number of cost savings initiatives already.

We have let go of approximately 25 people in corporate headquarters, we have negotiated some savings, ocean freight, air freight, UPS savings, we have gotten a couple of rent reductions on some of our stores, about three or four stores that were up for renewal.

So when you put that all that together, that could be $2 million to $2.5 million of savings in '09.

More on a annual base, not going to get -- capture the full benefit in '09.

Okay.

Those are the main things that we are work ing on.

Okay.

And then anything to update us on in terms of sourcing?

Are you guys seeing any price eases anywhere there there, or is it pretty much status quo?

Yes.

I guess that's one of the silver linings in all of this bad news, is that prices are getting a little bit better from the factories, it really varies from product to product and factory to factory.

But in some cases we are seeing price decreases of 5% to 10%, out of China.

Good to hear, thanks very much and good luck.

Thanks.

We will take our next call from Heather Boksen with Sidoti and Company.

Please go ahead.

Good morning guys.

I guess the first question regarding the fourth quarter in the gross margin in wholesale.

Any brands particularly stronger gross margin or weaker that you could call out?

The increases were pretty much across the board, and again, the real driving factor was the reduction in markdown allowances.

Our going in margin was basically flat to the year before, but the give back was so much less.

We had nice increases in Madden Women's, we had an increase in Steven, Candies, et cetera.

And I guess looking ahead to spring, obviously, a lot of the guys you sell to are hurting, but your sell through still remains pretty strong.

What kind of feedback are you guys getting from them with regards to markdowns?

Well right now, we continue to lead the pack in terms of sell through, so there is no real change there.

Okay, and with regards to the inventory position, I guess boots being more expensive, what's the inventory look like maybe on a pairs basis?

I would have to get back to you on that.

I don't know that off the top of my head.

Okay, and the cash position at the end of the year, what's the plans for all that cash?

Sure, maybe we should spend a moment on the cash, because there is something a little bit unusual here.

We are a factored company, and historically, we have never used our factor as a financing vehicle, so we have never borrowed from the factor against our receivables, and we did do that in Q4, and that's one of the reasons you saw the cash balance increase dramatically, and so we could just spend a moment on why we did that.

Our factor is GMAC, and during the fourth quarter, there was some uncertainty surrounding GMAC and at the time, they had not yet qualified for bank holding status and there was some speculation that they might file for bankruptcy.

We are factor in agreement worked with them at the time, we were selling our receivables to GMAC at the time we invoiced our customers and then not collecting, then GMAC would pay us once they collected the receivable from the customer.

So the concern for us was that in a GMAC bankruptcy, we would end up in unsecured creditor to GMAC and would have a potential loss of some or all of the cash collections on those receivables.

So in fourth quarter, we began advancing the maximum amount allowable every day against our receivables from GMAC,and thereby mitigating a potential loss in a bankruptcy.

The potential loss is obviously reduced by the amount we advanced from the factor, and that amount was $30.2 million that we advanced from the factor as of the end of the year.

So our cash -- that's why our cash was $124.8 million as of the end of the year.

On a net basis after counting for the advance, we're talking about about $95 million of cash.

Now two things have happened since the end of the year.

One, GMAC qualified for bank holding status and received the government money, which obviously makes the likelihood of their going bankrupt in the near term more remote, and two, more importantly, we modified our arrangement with them such that we no longer transfer title of the receivables to GMAC until those receivables have been collected.

Therefore, if GMAC were to file, our customers -- instead of the old scenario where our customers would have owed GMAC and GMAC would have owed us, our customers would just owe us the money, and so we have reduced that exposure.

So that was a long winded explanation, but since then we've allowed receivables to pay down the advance, we no longer owe the factor any money and we're -- our cash is back down to roughly $90 million.

In terms of plans for that cash, right now we are really in capital preservation mode, given all the uncertainty in the economy and in the financing markets.

Certainly, we are looking at some small acquisitions and if something interesting came up, provided us with a great return, we would be interested.

But absent that, we are going to keep the cash in the balance sheet.

We like having the strong financial foundation in these times.

That's actually very helpful.

So we should expect that the -- when we see the March quarter to see the cash position go back kind of what it looked like last year.

Right.

All right, that's helpful.

And there should be no debt.

All right.

Thank you very much.

(Operator Instructions) We will take your next question from Sam Poser with Sterne, Agee.

Please go ahead.

Hi, I've just got a quick follow up.

What is the timing of the store closings?

It's really throughout the year.

It's going to be a couple each quarter.

And how much -- when we are looking at the retail business which seems to be comping up now, how much did those eight to 13 stores, how much can we take off the top there?

As you take low singles down on retail -- on wholesale and then take off those stores, do we get to that 6% range?

Is that the -- conceptually, am I thinking about it right?

Well, the eight stores that we are closing, for the most part are not big dollar volume stores.

I would say the average 700,000, maybe 600,000 on those stores, so you want to take those off the top as you said.

And then -- the 6%, though, sounded high.

What was that -- ?

The negative -- you said, it's negative 6 to 8, ex the Candies --

Oh, the overall guidance.

The overall guidance.

The retail guidance, though, will be higher than that.

We are talking about, let's say 1% to 3% sales growth for retail this year.

Even with the closures?

Yes.

All right.

Thanks, Ed.

We will take our next question from Susan Sansbury of Miller Tabak, please go ahead.

Yes.

Ed, can you update us on what is going on with your LEI initiative at Wal-Mart?

Yes, that's something that we are really excited about.

The first shipments went out in December, we shipped to about 600 doors and we are now expanding the business to about 2,400 doors.

We will be in 2,400 doors by the end of next month.

The initial sell throughs have been very good, and Wal-Mart is very pleased, as is Jones, as are we.

So that's something we are excited about.

I think we are going to exceed our first year budget there.

Can you refresh me on what that first year budget was?

We talked about $1.5 million to $2 million of other income in year one.

I think we can do a little better than that.

And the initial shell through is good, can you --

We never give the sell through percentages, but it's -- they've told us that it's exceeding the other brands they are selling.

Okay.

Great, appreciate it, thank you.

At this time Mr.

Rosenfeld, there are no other questions in queue.

Okay, great.

Well, thanks a lot for joining us, and we look forward to speaking with you on the next call.

That does conclude today's Steven Madden, Ltd.

conference call.

We appreciate your participation, have a wonderful day