Steven Madden Ltd (SHOO) 2009 Q3 法說會逐字稿

Good day, everyone and welcome to the Steve Madden Ltd Third Quarter 2009 earnings conference call.

Today's call is being recorded.

For opening remarks and introductions, I would now like to turn the call over to Jean Fontana of ICR.

Please go ahead, Ms.

Fontana.

Thank you, good morning, everyone, and thank you for joining this discussion of Steve Madden's third quarter 2009 earnings results.

Before we begin, I would like to remind you that statements in this conference call that are not statements of historic 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 facts that could cause actual results of the Company to be materially different from the historical results or 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 their 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 cannot be relied upon as current after this date.

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

Thanks, Jean.

Good morning, and thank you for joining us today.

We'll begin with a review of Steve Madden's earnings results for the third quarter ended September 30, 2009, and then review our outlook for the full year 2009.

We delivered a record quarter in the third quarter of 2009 with sales totaling $140.1 million , a 9% increase over the third quarter of 2008, and EPS of $0.97, up 57% versus last year.

Steve and his design team capitalized on a strong boot season this fall with exceptional trend-right product and desirable price points,

We saw strong sell through at retail, and our test and react strategy and speed to market enabled us to drive additional business and exceed our sales expectations.

In addition, we are very pleased to be well ahead of our target date in achieving our mid-teen operating margin goal.

15 months ago in August 2008, we had a trailing 12 month operating margin of 9.6%.

We announced our goal at that time to achieve mid-teen operating margin by 2012.

As of the third quarter 2009, our trailing 12-month operating margin is 14.5%, and we now expect operating margin for the full year 2009 to be above 15%.

We are also excited about our new two licensing arrangements, one in which we are the licensor, and one in which we are the licensee.

First, we announced last week that we signed an agreement with Corral Industries, to design and market a women's fashion apparel line for the Steve Madden brand.

The line is scheduled to debut in spring 2010 in better department stores and select specialty retailers.

In Corral, we feel we have found the Ideal partner to work with Steve to translate his design esthetic and vision for the Steve Madden brand into apparel.

Second, yesterday we announced that we have signed an exclusive licensing agreement, with Dual Star Entertainment Group to design, manufacture and distribute a collection of footwear and accessories for the Olson Boy brand.

Olson Boy is a new brand created by Mary Kay Olson and Ashley Olson that will be distributed exclusively to JCPenney.

Merchandise will be found in select JC Penney stores and on jcp.com starting in holiday 2009 with a full launch set for spring 2010.

This deal solidifies our position with JCPenney and adds a brand with great potential to both our footwear and accessories brand portfolios.

Now turning to the financial results for the third quarter.

Consolidated net sales increased 9% in the quarter to $140.1 million.

Net sales in our wholesale business rose 15% to $112 million in the third quarter compared to $97.3 million in the third quarter of last year.

The increase in wholesale sales was primarily driven by strong gains in our Madden Girl, Steven by Steve Madden, Steve Madden women's and Steve Madden men's wholesale footwear segments.

Our new brand Elizabeth & James as well as the recently acquired Madden Zone formally SML Brands also contributed to the top line growth.

Net sales in the core Steve Madden women's segment increase 3% in the quarter to $41.9 million from $40.7 million a year ago.

Growth was driven by strong boot sales as well as solid performance in dress shoes.

Madden Girl continued it's great momentum with net sales rising 34% to $20.3 million in the third quarter of 2009 versus $15.1 million in the third quarter of 2008.

Madden Girl's sales in the quarter benefited from a big increase in business with DSW.

Our Steven by Steve Madden brand also had an outstanding quarter with a year-over-year sales increase of 70% from $4.7 million last year to $8 million this year, driven by a significant increase in shipments to Steven's largest customer, Nordstrom, Casual boots were the major product driver for Steven.

Net sales in Steve Madden men's increased 8% to $11.6 million versus $10.8 million in the third quarter 2008.

This represents the first quarter of growth in our men's business since the third quarter of 2006, and we are extremely pleased to have turned the corner.

Strongest performance came in the dress shoe category, but we also saw improvement with casuals.

Sales in our kid's division totaled $2.4 million, approximately flat with the third quarter of last year.

Excluding the impact of transitioning our JCPenney kids' business to the first cost model where revenue is recorded as other income, sales in our kids' business were up 17% year-over-year, driven primarily by strong growth in our Steve Madden kids' business with the better department stores.

Elizabeth & James generated $1.9 million in net sales in the third quarter.

Strong retail sell-through of the initial shipments lead to significant reorders, enabling this brand to exceed our expectation for Q3 sales.

We are thrilled to have gotten off to such a great start with Elizabeth & James.

In our wholesale accessories business, third quarter net sales were $19.8 million as compared to $18.4 million in the same period last year.

Madden Zone, formally SML brands which we acquired in July, 2009, contributed $4.8 million in sales.

This was partially offset by a decline in our Betsey Johnson, Betseyville business in our legacy private label business.

Turning to our retail division, net sales totaled $28.2 million in the third quarter of 2009 as compared to $30.7 million for the third quarter of last year.

Same-store sales decreased 7.6%, compared to a 7.8% same-store sales increase in last year's third quarter.

The decline was driven primarily by lower average unit retails compared to last year..

The good news is that we have reversed this trend so far in Q4.

With positive comps and an increases AUR versus last year.

The door is open for the 12 months ended September 30th, 2009, generated $628 in sales per square foot.

We closed one store in the quarter and licensed out three additional stores ending the third quarter with 88 Company-owned retail locations including our internet store.

We plan to open one more store in 2009 to finish the year with 89 Company-owned stores.

Turning to other income, the Company's commission and licensing fee income net of expenses was $5.7 million in the third quarter of 2009, up 27% versus the $4.5 million recorded in the third quarter of 2008.

Our Adesso Madden first cost business had commissioned income net of expenses of $5 million as compared to $4.1 million in last year's third quarter, a 21% increase driven by our LEI business at Wal-Mart, and our Candie's business at Kohl's.

Licensing royalty income for the third quarter increased 81% to $716,000, as compared to $396,000 in the third quarter of 2008.

Gross margin for the third quarter increased to 44.0% from 41.4% in the comparable period last year as a result of margin expansion in our wholesale business, partially offset by a margin decline in our retail segment.

Wholesale gross margin increases 490 basis point s to 41.2% from 36.3% in the same period last year, driven primarily by significantly lower mark down allowances resulting from robust retail sell through.

Gross margin in the retail division was 55.2% in the third quarter of 2009 as compared to 57.4% in the third quarter of last year, due to increases promotional activity in our stores.

So far in Q4 we have managed to achieve improved comparable store sales with reduced promotional activity and are targeting a year-over-year improvement.

in gross margins for the retail division in the fourth quarter Operating expenses declined 1.7% to $39.1 million in the third quarter.

As a percent of sales operating expenses were 27.9% versus 31.0% in the same period of the prior year.

The 310 basis point year-over-year decline was due mainly to leverage on increasing sales in addition to fewer stores and a reduction in store payroll in the Company's remaining stores.

Operating income for the third quarter of 2009 increased to $28.3 million or 20.2% of net sales compared to $17.7 million or 13.8% of net sales in last year's third quarter.

Net income was $17.8 million, or $0.97 per diluted share, compared to $11.1 million or $0.62 per diluted share in the prior year's third quarter.

In the first nine months of 2009, net sales were $364 million, compared to $337.9 million for the same period of fiscal 2008, operating margin was 15.9%, as compared to 9.7% in the first nine months of 2008.

Net income totaled $36.6 million or $2 per diluted share as compared to $20.8 million, or $1.11 per diluted share last year.

Net income for the first quarter of 2008 included a charge totaling $3 million pre-tax or $0.16 per diluted share related to the resignation of the Company's former CEO.

Turning to our balance sheet.

As of September 30th, 2009, we had $125.7 million in cash and marketable securities and no debt.

We ended the third quarter with lean and current inventory totaling $29.7 million, down from $40.7 million in the third quarter of last year.

Our inventory turn over the last 12 months was 9.5 times, up from 8.1 times a year ago.

Despite the reduction in inventory, which was in part due to shifts in timing of shipments, we feel comfortable that we have sufficient inventory levels to support our fourth quarter sales plan.

Accounts receivable and due from factor were $77.8 million at the end of third quarter reflecting average collection in 52 days versus 57 days last year.

CapEx for the quarter was $800,000 and stockholders equity as of September 30, 2009 was $249.9 million.

Turning to our guidance for fiscal 2009, we expect net sales to increase 7 to 8% compared to 2008.

Diluted EPS for fiscal 2009 is expected to be in the range of $2.55 to $2.65.

In summary, we are very pleased with the overall strength in our business.

Our unwavering focus on identifying trends and getting the right product to market quickly continues to pay dividends.

At the same time we remain disciplined about controlling expenses and managing our inventory.

We are proud that we produced a record quarter on both the top and bottom lines, during a quarter in which we recorded lower SG&A and reduced inventory from a year ago.

As we look ahead, we see significant growth opportunities for many of the brands in our diversified portfolio as well as opportunity to add to that portfolio to acquisition a new licensing agreements.

As we evaluate these alternatives, we will remain prudent about the use of our capital and will remain focused,as always, on creating long term value for our shareholders.

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

(Operator instructions).

We'll take our first question from Jeff Van Sinderen with B.

Riley.

Good morning.

First I want to say congratulations on the quarter.

Thanks, Jeff.

I guess if you guys could give a little more detail on the apparel license, what the scope of product is, price points, which retailers specifically it is going into first, and maybe how many doors, and then are you thinking about Steve's input -- Steve and his design team's input in to the product, et cetera?

Well, as you know this is something that we have been thinking about for a very, very long time, and a lot of you guys, I think wanted us to move more quickly on it, but we really wanted to find the right partner, and we dated a lot of people, but didn't get married because we didn't think we had the partner that understands the brand exactly as we do, and we think we have found that partner in Corral.

Jane [Siskin] who leads the organization really works well together with Steve.

They have been collaborating on the product.

She has got a tremendous track record as well as-- in addition to being instrumental in the development of Seven Jeans, she also has had great success with The Rock, and Elizabeth & James.

So they have been working very well together.

We've already shown the product to a number of retailers, It has gotten a great reception.

Nordstrom, Dillards's, Belk, Bon Ton, all have signed on for spring.

The first shipments are going to go out 2-15, and the retails will be, for spring, $29 to $69.

It will be get a little bit more expensive for fall on the high end.

It's a little too early to talk about door count right now, but we're very excited about this.

Okay.

Great.

And then on the other license deal you signed for Olson, can you give us a little more color on how that is going to work?

Sure.

Well, this expands our partnership with the -- with Mary Kate Olson and Ashley Olson, as you know we are doing Elizabeth and James with them.

And, they have developed this brand Olson Boy, for Penney's as an exclusive.

And Penney's is very exacted about it.

They made a big marketing push a couple of weeks ago announcing this new brand.

They are going to put it in 600 doors -- we're starting in very limited selection of doors for holiday and then going to 600 starting in spring.

And we're doing both the shoes and the accessories, so you'll see the shoes come in in the Adesso-Madden division, because we'll be doing it first cost, and then the accessories will obviously show up in DMF, and it's something that -- Penneys seems very excited about, and we're excited about.

Okay.

Great.

I know you said your retail stores have started to improve this quarter so far.

I guess what do you feel are the remaining opportunities for improvement in your retail store operations and how are you approaching initiatives there to kind of maximize the profitability of that business, and also, sort of a follow-on that, how are you thinking about the promotional cadence for holiday?

I think we have taken a lot of steps to improve retail.

Number one, we have been proactive about getting out of the under performers.

We closed seven stores in '08, We closed seven stores in '09.

I think you'll see us close a similar number next year.

We've been working on putting a stronger team in place.

We now feel very good about the team we have in place with an excellent president of retail, excellent head merchant, excellent head planner and excellent head of the internet, so we feel good about that.

We have also cut expenses on the retail side, in addition to obviously having fewer stores, which leads to lower expenses in the remaining stores.

We implemented a new payroll metric which is saving us store payroll dollars.

We have also taken a chunk out of the retail corporate overhead.

So that's something we have been working on.

And then own than merchandising side, we have -- we're implementing our new merchandising allocation and planning system.

And we have got the first two phases of that complete.

Those are the planning phases, and that will impact -- you'll start to see the impact of that in Q1 of 2010, and then the allocation phase is next and that should start to impact the business in Q2 of 2010.

Okay.

Great.

Thanks very much, and good luck this quarter.

Thanks.

Our next question comes from Scott Krasik with CL King.

Hey, good morning, Ed.

Good morning.

The -- I know backlog isn't a big part of your business, but, what do you see right now in terms of looking forward to spring?

How do you think retailers are planning your business from a very early look?

It's really hard to say, as you know, we have never believed in backlog and over the last year, with retailers placing increasingly later and later and closer to season, it has become even less important as an indicator, even less of a reliable indicator.

So, it's really too early to say with the orders shaping up for spring.

I would think success begets success, that as a resource for these guy, you are probably only more important this spring than you were last spring?

Absolutely.

But that's been the case all year, and for much of the year we have been looking at backlog numbers, which don't look great, but we have always managed to catch up because the orders have come in later.

So, it has been an unreliable indicator, the backlog.

What sort of work have you done in terms of putting spring or open-toed product in to some of your warmer-weather stores, what has been working there, and if you don't want to go in to that, has the feedback been good from customers?

Yes, you are correct to assume that I'm not going to tell you what it is that is working, but we have got some product that is working well in the warm-weather doors, so we feel about it for spring.

But I will see that we also believe that boots are going tobe-- continue well into first quarter.

Okay.

And even though you had some carry overlast year, the comparison could be favorable, for boots.

We believe so.

That's great.

Pricing on product in general, we have seen some of these trends, one, two, three years, are you still going to be able to get pricing in most of your spring product?

Yes, we believe so.

On sandals last year, we actually had a year-over-year decline in ASP, so we think that there may be an opportunity, particularly as people move away from perhaps flat scandals into -- sandals on a little wedge or other styles that we can get some pricing back in that category.

So am I just thinking about this the right way, obviously next year is a ways away, but with the addition of a full year of sales from Madden Zone, the handbag sales, I guess associated with Olson Boy, you really only need low single-digit organic growth, if you will, to get to another year of at least high single-digit sales growth?

We certainly have add-on businesses, yes, I mean, I would rather sort of postpone that discussion until we put out our guidance for next year on the fourth quarter call.

Sure, but things are looking great.

All right.

Thanks, Ed.

Good luck.

Our next question come Sam Poser with Sterne Agee.

Hey, Ed.

I missed the number on the Madden Girl sales, could you just --

Yes, it was $20.3 million, which was up from $15.1 million a year ago.

Okay.

And you said that was a DSW-driven business?

Well, that's the biggest customer, and we had a very big increase there.

Our business is just fantastic with DSW and Madden Girl.

Okay.

And can you sort of walk through the strategy with the -- with your new -- with the new line, with the Madden Zone line, and exactly how you forsee that playing out over the next year?

Sure.

Madden Zone is just the name of the division.

There's no line called Madden Zone.

So what they do is they focus on the mass merchants and the mid-tier accounts.

So Wal-Mart, Target, Penneys, Kohl's, Sears, et cetera, for accessories.

And so we're doing private labels for many of those accounts, and we're also doing some of these exclusive brand licenses, like Olson Boy, like Fabulosity, et cetera.

And these guys are experts dealing with these accounts, and we think that is going to be a growth vehicle for us going forward.

Thank you.

Can you talk about the priority use for your cash on hand.

And you mentioned acquisitions.

What would be an ideal type of acquisition, or acquisition size that you forsee as you think about it?

Well, in terms of size, we look at anything from very small to $100 million.

There's nothing that we're looking at right now that's -- that's bigger than, say, 30 or $40 million.

We have talked about that we have been pretty actively reviewing a number of acquisition opportunities.

We actually have one LOI out right now, on a deal that we hope to consummate by the end of the year, and we're reviewing a couple of other opportunities, but, we're really looking for things where we have a clear strategic rationale.

We want businesses that we believe are going to be more valuable when owned by Steve Madden than on a stand-alone basis, where there's synergy.

We want them to obviously be accretive to earnings, and to provide us with a superior return on investment than, say, buying our own stock, and we hope to get management and design talent in the process, and that's really what we're looking for.

You had spoken before, or mentioned about looking for an athletic-- , fashion athletic

Yes.

Because that would be an -- augment your current mix pretty well.

Is that still something you looking for --

Yes We're still interested in that category, and we're looking at some alternatives there.

Is that -- would one such thing will where that LOI is?

No.

I thought you might just give it away.

Good try.

Anyway, and what is -- I mean, you 12-month turn has improved dramatically from very high levels.

Yes.

Is there an optimum turn number that you look at annually or on a trailing 12.

Well, it's not going to go much higher than it is right now.

If we went any higher, we would be sacrificing sales.

And how much of your mix has changed from port-- by port of entry over the last year, China, South America, Mexico, and so on?

We have increased Mexico pretty dramatically.

Particularly because of the looks that are working right now.

There is Americana thing happening with the western boots and the engineer boots, many of which have the rugged look and the distressed leathers which is what Mexico does well.

So we have increased Mexico and we're also doing a lot out of Brazil right now.

And China, of course, remains our largest country of origin.

Great.

Thanks, Ed.

And continued success.

Thank you.

(Operator instructions).

We'll take our next question from Heather Boksen with Sidoti & Company.

Good morning, guys, just -- you said the old op margin goal was mid-teens, and obviously you are there this year.

But with all of the commission and licensing and income growth we should expect in the next couple of years from all of these new brands, what would be the new goal?

Well, we're going to talk about that on the fourth quarter call, and we'll probably outline a new goal at that time.

So I'm going to punt on that question until then.

Safe to say it's higher than the mid-teens, though?

Well, we want it to go up, that's for sure.

All right.

Thanks, guys.

We'll take a follow-up question from Scott Krasik with CL King.

Hey, Ed, you have talked for quarters about -- obviously your men's business has been struggling, but the men's category in general has been pretty bad.

The increase this quarter, was this just an example of it had gotten so low there was only one place for it to go?

Are you seeing more strength in men's across the board?

And what is your outlook for men's now going forward?

Yeah, I think the overall men's business is getting a touch better, although it is still pretty tough, but I think we did a nice job of making some progress with the products.

Our fashion dress shoes are performing very, very well, and we were talking over the last couple of quarters about how we were starting to see better sell-throughs at Nordstrom's, and Dillards and Macy's.

Started to feel a little bit better about the business.

But the dress shoes were very strong, and we have also introduced these new casuals, a lot of these skate-inspired kind of looks, and those are rolling in now, and we feel good about those.

So are you getting the performance from that center of the mall that you feel like you had been --

Yes, and we have just delivered some new shoes to Journey's, and Underground Station, these skate-inspired looks, and we feel good about them.

Okay.

Great.

We're in 430 doors with those two guys combined.

Good.

Do you have the SG&A by wholesale and retail handy?

Sure.

Wholesale SG&A $22.9 million.

Retail $16.2 million.

Okay.

Great job, again.

Thanks.

Thank you.

(Operator Instructions) And at that this point there are no further questions, I would like to turn the conference back over to Mr.

Ed Rosenfeld.

Okay, well thanks a lot for joining us on the call, and we look forward to talking to you after fourth quarter.

Thank you for your participation.

That does conclude today's conference.