Steven Madden Ltd (SHOO) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to the Steve Madden, Ltd.

fourth quarter 2009 earnings conference call.

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

For opening remarks and introductions, I would like to turn the call over to your host, Mr.

Joe Teklits of ICR.

Please go ahead, sir.

Thanks.

Good morning, everyone.

Thanks for joining us for this discussion of Steve Madden's fourth quarter and full year 2009 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 facts that could cause actual results to be materially different from historical results or any future results expressed or implied by such forward-looking statements.

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 today's earnings release for more information on risks, 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 Joe.

Good morning and thank you for joining us today.

I will begin with with a review of the company's results for the fourth quarter and full year 2009 and then provide our outlook for 2010.

2009 marked an exceptional year for Steve Madden.

We delivered 10% top line growth and 63% EPS growth excluding nonrecurring items.

And reached our mid-teen operating margin goal well ahead of our 2012 target.

We also embarked on several exciting new business ventures that represent meaningful growth opportunities for our company.

In November, we signed agreement with Mary Kate and Ashley Olsen's Dualstar Entertainment to design and market a collection of footwear and accessories for Olsenboye, a new brand carried exclusively by JCPenney.

As of this month, our Olsenboye product is in about 600 JCPenney doors and the initial response from consumers has been very positive.

Top sellers so far include a lace-up boot and two dress shoes.

Also in November, we launched a new brand for men called Madden.

In Madden, we are using different materials, primarily PEU to offer fashionable product for men at more moderate prices than Steve Madden men's.

Average retail price points in Madden are $50 to $60.

Distribution will include specialty retailers, such as Underground Station and Journeys, as well as family channel retailers such as DSW and Famous Footwear.

We expect Madden the be a significant growth vehicle in 2010.

In July, we completed the acquisition of SML Brands, now called Madden Zone; a designer and marketer of accessories, primarily handbags to mass merchants and mid-tier retailers.

The Madden Zone acquisitions is already paying off with increased accessories business at retailers like Wal-Mart, Kohl's and JCPenney.

Just two weeks ago, we completed another handbag acquisition.

We bought Big Buddha, a designer and marketer of fashion-forward bags distributed to specialty retailers, better department stores, and online retailers.

Big Buddha is a hot young brand generating a lot of buzz in the industry.

It got off to a great start under the Steve Madden umbrella with a very successful show in Vegas last week.

We also signed two new licensing agreements for new product categories for the Steve Madden brand.

One with Koral Industries for Steve Madden apparel and another with Lucas International for Steve Madden jewelry.

We believe that both of these partners possess the expertise and as well as the understanding of the Steve Madden vision that will enable us to successfully extend the brand into these two new categories.

The apparel line hit stores the end of this month, while the jewelry scheduled to ship in August.

Finally, just last week we announced a partnership with New York-based shoe brand UES and unveiled the first joint effort with UES' fall 2010 collection.

UES makes high-end sneakers and other casual footwear and will be sold in luxury retailers and specialty boutiques.

As you can see, it's been a busy year at Steve Madden, and we feel we have added a number of important building blocks for continued growth in 2010 and beyond.

Before I turn to our fourth quarter financial results, I would first like to announce due to the increasing number of brands in our portfolio, we will no longer be breaking out revenue by brand.

But we will provide sales results for each footwear and accessories wholesale businesses as well as our retail business.

We ended the year on a great note, having generated 17% sales growth and 83% EPS growth for the fourth quarter.

We believe that our ability to deliver consistent performance, even in a difficult environment, speaks to industry-leading design and operational capabilities.

Steve and his team remain on target with fashion trends in our core business, enabling us to maintain our position as a market share leader in this space.

Consolidated net sales increased 17% in the quarter to $139.5 million.

Total Wholesale net sales rose 24% to $98.4 million in the fourth quarter compared to $79.1 million in the prior year fourth quarter.

Wholesale footwear sales rose 30% to $77.8 million, from $59.7 million in the fourth quarter of last year.

The increase in Wholesale footwear sales was primarily driven by strong gains in our Steve Madden women's, Madden Girl, Steven Madden men's and Steven divisions, as well as the addition of sales from our international business and from our new Elizabeth and James business.

The boot category was the main product driver, particularly western, casual flat, and over-the-knee styles.

Sales in the wholesale accessories division rose 6% to $20.6 million, from $19.4 million in the fourth quarter of 2008.

The increase was driven by the addition of Madden Zone, as well as strong growth in Steve Madden handbags.

This was partially offset by a decline in the Betsey Johnson and Betseyville businesses.

Turning to our retail division, net sales totaled $41.1 million in the fourth quarter of 2009, as compared to $40 million, for the fourth quarter of last year.

Same store sales increased 7%.

In addition to the more favorable retail environment, the increase was driven by strong product assortment and increase in AUR's versus last year.

Doors open for the 12 months ended December 31, 2009, generated $640 in sales per square foot.

We opened one store in Chicago during the quarter, ending the year with 89 company-owned retail locations including our internet store.

Turning to other income, our Adesso-Madden first cost business had commissioned income net of expenses of $3.4 million in the fourth quarter of 2009 versus $2.6 million in the fourth quarter of 2008; a 28% increase driven by growth with Kohl's and JCPenney.

Licensing royalty income for the quarter was $500,000 as compared to $600,000 in the fourth quarter of 2008.

Gross margin for the quarter increased to 44.1%, from 40.4% in the comparable period last year, reflecting margin improvements in the wholesale and retail segments.

Wholesale gross margin increased 600 basis points to 37.9% from 31.9% in the same period last year.

Benefiting primarily from one -- fewer closeouts as a result of strong product and disciplined inventory management and two -- higher initial mark-ups due to better sourcing.

Gross margin in the retail division rose 160 basis points to 58.7%, up from 57.1% last year, due primarily to higher IMU's and less discounting.

Operating expenses as a percentage of sales declined 100 basis points to 31.8% as compared to 32.8% in the prior year's fourth quarter, reflecting leverage on the increased sales partially offset by reserves for store closures in first quarter 2010.

Operating income increased 71.7%, to $21 million, or 15% of sales, from $12.2 million or 10.3% of sales in the fourth quarter of last year.

Diluted EPS for the quarter was $0.73 per share on 18.6 million diluted weighted average shares outstanding, compared to $0.40 per share on 18.1 million diluted weighted average outstanding in the prior year; an 83% increase.

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

Net sales for the full year increased 10% to $503.6 million.

Gross margin improved 200 basis points to 42.9% in the fiscal 2009, as compared to 40.9% in fiscal 2008.

Operating margin improved to 15.7% in fiscal 2009 from 9.8% in fiscal 2008.

Net income totaled $50.1 million, or $2.73 per diluted share for the year, as compared to $28 million, or $1.51 per diluted share in fiscal 2008.

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

Excluding this one-time item, fiscal 2008 net income totaled $31 million, or $1.67 per diluted share.

Turning to our balance sheet, we continue to have a strong financial foundation with $155 million in cash and marketable securities and no debt.

Total inventory at the end of Q4, was 30.5 million, versus 31.6 million a year ago, a 4% decline.

Our inventory turn over the last 12 months, was 9.8 times as compared to 8.6 times one year ago.

Accounts receivable and due from factor were 58.6 million at the end of the year, reflecting average collection of 54 days versus 55 days last year.

(Inaudible) for the quarter was $1 million and stockholders' equity as of December 31 was $267.8 million.

Turning to our guidance for fiscal 2010, we expect net sales to increase 11% to 13% over 2009.

Excluding the transition of one of our mass merchant customers from a buying agency model to a selling agency model, net sales are expected to grow 7% to 9%.

Diluted EPS is expected to be in the range of $3.10 to $3.30.

With year-over-year EPS growth weighted towards the first quarter, given this represents the quarter with the easiest comparisons to last year.

We are planning capital expenditures to be approximately $4 million to $5 million in 2010, compared to $3.4 million last year.

We plan to open one to three stores and to close six to nine locations.

In conclusion, we are proud to have delivered record financial results in 2009.

We see great opportunity to continue to grow sales and earnings in the years ahead.

We've established a new goal of doubling EPS in five years.

We have great momentum in our core business and remain positioned for continued growth there as we maintain our market leadership by delivering trend right product at affordable price points.

And as I touched upon earlier, we have a number of new initiatives in place, which are poised to add incremental sales and earnings to the company.

First, we look forward to capitalizing on the new brands we have recently added, as well as adding additional brands.

Rather through acquisition like Big Buddha, through license like Olsenboye or whether we create them ourselves like Madden.

Second, we plan to remain focused on driving increased profitability at our retail division.

We've now delivered four consecutive quarters of improved profitability in the retail segment.

We will look for continued improvement in 2010.

Stevemadden.com is, of course, the fastest growing part of our retail business.

And our third priority will be continuing to grow that business, as well as our wholesale business to online retailers.

Next, growth outside of footwear will continue to be important, both through our in-house accessories arm and via our licensing program.

And finally, international growth remains a key priority as we target expansion in the existing territories like Asia and the Middle East and explore new partnerships in countries like Russia and India.

Putting all this together, we believe we see a clear path to our goal of doubling EPS by 2014 and creating significant value for our shareholders over the long-term.

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

(Operator Instructions) Our first question comes from Jeff Van Sinderen with B.

Riley Company.

Please go ahead, sir.

Good morning.

I wonder if you guys can talk a little bit more about licensing expansion and what new areas you are targeting that you feel hold the most potential for growth and what licensing deals we might look for in 2010?

Well, we signed a couple of new licensing deals recently and I think the biggest priority for us right now is going to be to make the licenses that we currently have as successful as possible.

So, we've got apparel, which is hitting stores basically this week, and we are very excited about that, that's probably the most significant opportunity over the long-term.

It's going to be hitting Macy's, Belks, Bon-tons and Dillard's this week, going in to about 80 doors for the initial test.

And we're really excited about that.

We've also got the new jewelry deal, which is going to go in to our stores and then hit department stores hopefully in August.

And then, before that, the most recent one was the bedding and bath deal; we've had a great launch there, a very, very successful exclusive launch with Bed, Bath and Beyond.

And so that business is going to be growing as well.

So, yes, we're going to continue to look for additional partners.

We'll explore fragrance and some of the other categories.

But, we've got a lot of new ones that we really want to focus on building and that's the priority right now.

Ok, good.

And then maybe you can talk a little bit more about your plans for international expansion in 2010 and maybe some of the initiatives that you are focused on this year?

Yes, 2009 was sort of -- we took a little bit of a pause in the international expansion.

We definitely felt the effects of the global recession, we had two distributors who filed for bankruptcy.

So we had to find new distributors in both Israel and Australia and our distributor in Turkey also had some financial difficulties.

But we think now we are poised to start growing there again; we feel very good about the partners that we have in-house right now.

We are close to signing a couple of of new partners, I think within in a couple of weeks, we're going to have a new partner for Russia and a new partner for Saudi Arabia.

We think we have a lot of growth ahead of us in international.

We have, as of today, we have about 65 free-standing stores in 80 concessions outside of the US run by our partners.

And by the end of this year, we expect to have 97 free-standing stores and 102 concessions.

So, this should be a nice year of growth for us internationally.

Okay, great.

Then can you just given us a sense of how your own company-owned retail stores are performing in early 2010, maybe how the comps and margins are trending and also anything you are working on to further refine your retail store business in 2010?

Yeah, we are really pleased about the progress that we've made in retail.

You saw that in fourth quarter, we had an up seven comp and higher gross margin from a year ago.

And that performance has only gotten even better in Q1 to date.

We are running a little bit ahead of that on the comp.

And, we have a very nice improvement in gross margin versus a year ago, based on less discounting than we were doing last year.

So, we feel really good about the progress made in retail.

Initiatives remain the same as what we've talked about.

We feel that we've made a lot of progress in getting out of the under-performing locations and that's really helping the business in and of itself.

Because we had stores that were really a drag on the overall profitability of the chain; we closed seven stores in '08, and we closed another seven stores in '09 and we're going to continue to close stores.

We're going to get out of about six to nine stores this year.

So that's an important piece of it.

We've also made some very nice upgrades to the management team.

We talked about this in the last call, but we feel we have very strong players in all the key positions now.

Those being President of Retail, President of Internet, Head Merchant, Head Planner and Head of Store Ops.

We've also implemented this new merchandising allocation and planning system that the final phase the final -- the implementation of the final phase is almost complete.

So you're going to see some impact from that in spring and the full impact in fall.

And so, when you put all that together and of course our focus on growing the internet piece, which has been really on a tear lately and obviously carries a higher operating margin than the bricks and mortar stores, we feel we are really on the right path in our company-owned retail.

Okay, and then as far as closing the stores that you feel are the under performers, where will you be at the end of 2010 with that?

Do you think you'll be out of most of the ones that you want to get out of or will there still be more to close?

I think there's going to be some closures in 2011 too.

And I would expect that after that, we would hopefully be through most of the closures.

Okay, but you're still going to add selective stores when you find great locations and so forth?

Absolutely.

Okay.

Excellent.

Thanks very much and good luck.

Thank you.

(Operator instructions) Our next question comes from the Heather Boksen with Sidoti & Company.

Please go ahead, ma'am.

Good morning.

First question, can you tell me is there anything -- what was going on with SG&A in the fourth quarter?

Just looks like it spiked up from how you were trending for the first three quarters of the year.

Yes, maybe it will be helpful if I branch to you from Q4 of '08 to Q4 of '09.

We had operating expenses of 39.1 last year in this quarter.

The first thing I would point out is that we did have about a $2 million provision in fourth, for store closings that we were going to do in -- that we have either done or are planning on doing in Q1 of 2010.

So that's probably the biggest piece.

We also have, of course, Madden Zone, which is a new division that we acquired; that was about $1 million.

International is recognized here now as opposed to the other income line, that was another $600,000.

And then Elizabeth and James, that's another $300,000.

And then the Big Buddha transaction costs were about $400,000.

And then beyond that it was just variable expenses because of the increased sales growth.

But in terms of -- you talked about the spike up -- I think the real -- the key thing to point out was probably the provision for store closings of $2 million, as well as the variable expenses because of the strong growth in Q4.

No, that $2 million explain as lot of it, thanks.

And, I guess with respect to 2010, with some of the moving parts, you mentioned one of the businesses switching from first cost to your regular sales.

Some of the other new initiatives, can you say, within the guidance, how are you planning or looking at commission and licensing income for 2010?

Well, the Adesso-Madden commission and licensing income should be down modestly because you have that business that the business that I spoke about that is moving from that line in to the top line, generating a little north of $3 million of other income last year.

So, on an apples-to-apples basis we will be up there.

But on a reported basis you going to see a modest decline in that line.

However, I do think the royalty income piece is going to be up based on some of the new licenses that we have.

So on a combined basis, I think we can still be up modestly on that commission and licensing fee income line.

Alright, that's helpful.

Thanks, guys.

Thank you.

(Operator instructions) Our next question comes from Mr.

Sam Poser with Sterne, Agee & Leach.

Please go ahead, sir.

Good morning, Ed.

Just a few questions.

Number one, can you talk about -- you talked about all of these new acquisitions or the new things, the Olsenboye, the Madden, SML and so on -- can you give us how you are thinking about the strength of each one of those in context to the growth that you've guided to?

Yes, sure.

I think Madden, the new men's line is certainly something that we are pretty excited about.

I would like to see us do $10 million, maybe even a little bit more right out of the gates here in year one, so that's certainly an important piece.

Olsenboye is of course, coming in on the other income line.

And I think that we'd like to do $1 million of other income.

Those are EBIT dollars in year one.

Big Buddha, you saw it did $13 million last year.

We expect that number to grow this year, although keep in mind we are not having it for quite the full 12 months.

So you might want to put in another $13 million of top line or so for Big Buddha.

And then UES, that's a very small business, I don't think -- that's something we are that builds slowly.

It's going to go to the very high-end distribution, luxury retailers, specialty boutiques.

And it's basically a start-up; although he's been in business for a couple of years.

We are just getting doing there.

So, I don't think that really warrants any kind of meaningful line item in your model.

Does that cover it?

Yes.

And then can we talk about the existing businesses and the trends that you think that are going to drive it there as well?

Are you expecting another big boot year?

What do you think the drivers from a trend perspective are going to be?

And you mentioned also earlier that you expected a lot more of the growth on the front end of the year.

Can you give us more specifics there and also what kind of gross margin on a relative basis we should be thinking about?

Okay.

We do continue to feel very good about the momentum that we have in core business; in Steve Madden, Steven, Madden Girl et cetera.

And of course, the men's business has really turned around, really pretty dramatically.

So maybe we can talk about the trends there.

On the women's side, we do expect another good boot year this year.

I think that we think it's going to be we got very nice end of season tests on new boots, so we think that it's not going to be the same types of boots necessarily that sold well this year but we believe boots are going to be strong again.

And we feel pretty good about that.

On the men's side, we've gotten a real strong -- the big story is the improvement in the casual piece of the business.

You guys have been hearing us talk for a couple years now about how dress shoes and driving mocs were performing well but the casual piece was weak.

And we introduced these new skate inspired styles and they've really performed very well for us.

So we feel good about that.

What was the last piece?

The gross margin?

Yes, actually gross margin and SG&A on a comparable basis.

I can assume the SG&A is going to be down, or it's not going to be up very much because of that $2 million.

Yes, we think we are going to get some nice SG&A leverage in 2010.

I would be looking for about a couple hundred basis points of operating expense leverage there.

The gross margin should be down modestly because of the transition of this business from the other income line, to the top line.

This is a business with a mass merchant, obviously carries a much lower gross margin.

So that's going to be --

Which business is that?

Which business is that?

The business that's currently - it's a first class business, that's currently done with a mass merchant and that mass merchant has -- typically when we do our first class business we act as a buying agent -- this is sort of a nuance, but they've said we'd like you to be a selling agent.

It really has very little impact to us.

The financial impact to us is identical, there's no additional risk, but the change is that the accounting for it is different and so it moves from other income to the top line so it's going to dilute the gross margin.

Doesn't change our operating income dollars at all, but it does dilute the gross margin by about 100 basis points.

Alright.

I think that's it.

Thanks, Ed, good luck.

Thanks, Sam.

And Mr.

Rosenfeld, there are no other questions in queue at this time, sir.

Okay, great.

Thanks very much for joining us on the call.

I look forward to speaking with you all in a couple of months.

Ladies and gentlemen, that does conclude today's conference, thank you for your participation.