Steven Madden Ltd (SHOO) 2011 Q3 法說會逐字稿

Good day, everyone, and welcome to today's Steve Madden third-quarter 2011 earnings conference call.

Today's call is being recorded.

For opening remarks and introductions, I would now like to turn the call over to Ms.

Jean Fontana of ICR.

Please go ahead.

Thank you.

Good morning, everyone.

Thank you for joining us today for the discussion of Steve Madden's third-quarter 2011 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 risks and uncertainties, and other unknown facts that could cause actual results of the Company to differ materially from 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, as 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 today's 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 are pleased to have delivered the highest sales and earnings in our Company's history in the third quarter of 2011.

Q3 net sales increased 70.5% to $313.9 million.

And Q3 diluted EPS was up 35.9% to $0.74 compared to $0.54 in the prior year's third quarter.

This strong third-quarter performance was driven by ongoing momentum in our core business, as well as by our new brands, categories, and geographies, as we continue to execute on our growth strategies.

Later on, I will take you through the details of our third quarter financial results, but first I'd like to provide an update on our progress in the quarter on the 6 strategic initiatives that we outlined at the beginning of the year.

Our number 1 initiative was to maintain the momentum in our core business.

Q3 was a success on that count, as our core Steve Madden women's brand continued to gain market share, ringing up another quarter of strong growth in both wholesale and retail, in both domestic and international markets.

We believe our flagship brand is stronger than ever, and we are pleased to see that in Piper Jaffray's Fall 2011 survey of upper income teams, Steve Madden ranked number 1 among women, when asked their favorite footwear brand, ahead of brands like Nike, Ugg, Vans and Converse.

Our 2nd initiative was to develop our new brands.

We got meaningful contributions from a number of our newer brands in the quarter, particularly Big Buddha, Madden, Olsenboye and Betsey Johnson, as we continue to add new doors for each of these brands, and expand the assortment within existing doors.

Q3 was also our first full quarter with the brands acquired in the Topline acquisition, including Report, Report Signature, and R2 by Report.

The Report family of brands contributed over $13 million in net sales in the quarter.

Our 3rd strategic initiative was to continue to drive improvements in our retail segment.

We delivered a 13.2% comparable store sales gain in Q3, on top of a 15.7% increase last year, for our fifth consecutive quarter of double-digit same-store sales gains.

Our trailing 12-month operating margin in retail is now 11%, up from less than 3% in the prior 12-month period.

In addition to the much improved performance in our full-price stores, we continue to be pleased with the early results in our outlet stores.

We have 5 outlets currently, and will open 1 more by the end of the year.

Initiative number 4 was expanding our e-commerce business.

Sales on www.SteveMadden.com accelerated in Q3, increasing 29% versus the comparable period last year, and that momentum has continued thus far in Q4.

On a trailing 12-month basis, net sales on www.SteveMadden.com are now in excess of $25 million.

We also continue to see outstanding growth in our wholesale sales to online retailers, like Zappos and Amazon.

The fifth initiative we outlined was expanding our business outside of the footwear category, both through our in-house accessories platform, and through our licensing business.

In third quarter, our wholesale accessories business grew 125% versus the year-ago period, including a $32.6 million net sales contribution from Cejon acquired in May, combined with a 15.5% growth in the existing business.

Strong organic growth was driven by double-digit increases in each of our core handbag brands -- Big Buddha, Steve Madden and Betsey Johnson.

We continue to grow our licensing business as well.

Licensing royalty income, net of expenses, was up from $1 million last year to $2.3 million this year, driven mainly by the Betsey Johnson licensing business, where we saw continued strength in jewelry, and had an outstanding launch of the watch category.

Finally, our last initiative was growing our international business.

In third quarter, our international business grew 36%, bringing our trailing 12-month international net sales to approximately $48 million.

We continue to see strong growth out of China, as well as excellent results out of Dubai, which we launched earlier this year.

We also launched in India in the quarter, with our partner there, Reliance Brands.

So far, the brand reception has been very positive, and we plan to have 5 stores in India by the end of the year.

And in fourth quarter, we will launch in South Africa, where we recently reached an agreement to partner with House of Busby.

Our first 2 stores in South Africa are expected to open in the next few weeks.

As you can see, third quarter saw us execute across our increasingly diversified business, and we look forward to continuing to report back to you in future quarters on our progress with these initiatives.

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

Consolidated net sales for the quarter grew 70.5% over the prior year to $313.9 million.

If we exclude net sales from Topline and Cejon, both acquired in May, as well as the Target and Olsenboye footwear businesses, which were not included in the sales line last year, organic net sales growth was 11.7% on a consolidated basis.

Wholesale net sales in Q3 grew 81.8% to $278.3 million compared to $153.1 million in the third quarter of last year.

Excluding Topline, Cejon, Target and Olsenboye, organic wholesale net sales growth was 11.1% based on double-digit organic growth in both wholesale footwear and wholesale accessories.

Wholesale footwear net sales were $211.2 million, a 71.4% gain versus Q3 2010.

In addition to the inclusion of sales from Topline, Target and Olsenboye, the net sales gain was driven by strong gains in international and Steve Madden women's, as well as by sales from the new Betsey Johnson footwear business.

Wholesale accessories' net sales were $67 million, a 124.9% increase, driven by the inclusion of sales from Cejon, as well as strong growth in all core handbag brands, including Big Buddha, Steven Madden, and Betsey Johnson.

As I mentioned earlier, organic sales growth in wholesale accessories was 15.5%.

Turning to retail, net sales in that segment were up 14.7% to $35.6 million in the third quarter.

Comparable-store sales increased 13.2% for the quarter, and doors opened for the 12 months ended September 30, 2011 generated $792 in sales per square foot, up from $710 in sales per square foot a year ago.

We opened 1 full-price store and closed 2 stores in the quarter, ending Q3 with 82 Company-owned retail locations, including the Company's internet store.

Turning to other income, our commission and licensing income, net of expenses, was $5.6 million in Q3 versus $6.6 million in last year's third quarter.

First Cost commission income, net of expenses, was $3.3 million in the quarter, down from $5.6 million in last year's third quarter, due primarily to the transition of the Target private-label and Olsenboye footwear businesses to a wholesale model and into the top line.

Licensing royalty income, net of expenses, was $2.3 million in the quarter, compared to $1 million in the third quarter of 2010.

Growth was driven mainly by the inclusion of royalty income from the Betsey Johnson brand, which we acquired in October of 2010.

Consolidated gross margin for the quarter was 34.9%, as compared to 42.1% in last year's third quarter.

The decline was due to a decrease in the wholesale gross margin to 31.9% from 38.8% in the same period last year.

As expected, wholesale gross margin was negatively impacted by 3 shifts in sales mix -- 1, the inclusion of sales from newly acquired Topline and Cejon; 2, the inclusion of our Target private-label and Olsenboye footwear businesses in the sales line; and 3, the strong growth of the international business.

Combined, these factors diluted wholesale gross margin by approximately 680 basis points.

Gross margin in the retail division expanded in the quarter to 58.4% compared to 58.1% in the third quarter of 2010, due to less promotional activity.

Operating expenses were $64.6 million in the third quarter, or 20.6% of net sales, compared to $46.7 million or 25.4% of net sales a year ago, a 480-basis-point improvement due to leverage on increased sales, as well as the increased mix of wholesale, which has lower operating expenses as a percentage of sales than retail.

Operating income for the third quarter of 2011 increased to $50.5 million or 16.1% of net sales, compared to $37.4 million or 20.3% of net sales in last year's third quarter.

Net income increased 39.3% to $31.9 million or $0.74 per diluted share compared to $22.9 million or $0.54 per diluted share in the prior year's third quarter, adjusted for the 3-for-2 stock split in May.

Turning to our balance sheet, as of September 30, 2011, we had $111.8 million in cash and marketable securities, and no debt.

We ended the third quarter with inventory of $77 million versus $44.5 million at the same time last year.

Of the $32.6 million increase in inventory, $25.8 million was Topline and Cejon inventory, and $2.2 million was associated with new businesses including Betsey Johnson, Olsenboye and Superga.

Excluding the acquisitions and new businesses, inventory was up 10.1% compared to the same period last year.

CapEx for the quarter was $6.3 million.

Now let's turn to guidance.

For fiscal 2011, we now expect consolidated net sales to increase 49% to 50% compared to fiscal 2010.

Overall, 2011 gross margin will be down due to mix shifts related to -- 1, the acquisitions of Topline and Cejon; 2, the inclusion of the Target private label and Olsenboye footwear businesses in the sales line; 3, the growth of the international business; and 4, the growth of the private label accessories business.

Overall, these mix shifts are expected to dilute gross margin by approximately 640 basis points this year.

Excluding these mix shifts, however, we now expect gross margin for the year will be 50 basis points to 100 basis points higher than the prior year.

So, we currently expect consolidated gross margin for 2011 to be approximately 540 basis points to 590 basis points lower than 2010.

Diluted EPS for 2011 is now expected to be in the range of $2.20 to $2.25 compared to previous guidance of diluted EPS in the range of $2.15 to $2.20.

And now I'd like to turn it over for any questions that you may have.

(Operator Instructions) Oliver Chen with Citi.

We did have a question related to the new capability you have with sourcing.

What are you thinking with regards to the timing of that implementing that sourcing that you -- capability through Topline?

And then the second question is related to your inventories.

Your inventory's [XC]acquisitions were up 10%.

How do you feel about that in relation to the holiday and how business is trending?

Sure, well in terms of the first part of the question.

We are already placing shoes on a direct basis through the Topline organization.

Again, we are starting with our private label footwear, Material Girl, Olsenboye, and we're going to get ramped up with Madden Girl, here shortly.

And we're very pleased with the -- with how that's going.

I think that's sort of moving along right on schedule.

We are still targeting getting to about 10% to 15% of our legacy Steve Madden production going direct through the -- by the middle of next year.

And again over time, we would like to get that to 50% or 60% of our production but that's a multi-year project.

In terms of the inventory, we think that the 10% is right in line with how we have been growing organically.

In fact, I think that we expect our fourth quarter organic growth to be a little bit north of that.

So, we feel very comfortable with that inventory in terms of what we are seeing in terms of our sales forecast.

Thank you, and the final question or thoughts.

We were just curious about what is your thinking on the next year in terms of the quarterly gross margin?

Should -- is it accurate to kind of think about a positive -- return to a positive gross margin on the year-on-year basis for the back half?

Yes, I don't want to talk too much about next year because we are still working through our budgets and we are going to -- on the next call is when we will speak about our guidance for next year.

But, conceptually you're right, there is still going to be a drag in the first half from the Topline and Cejon acquisitions.

But there should be some opportunity to return to year-over-year improvement in the back half.

Thank you very much.

Jeff Van Sinderen with B.

Riley.

Hi good morning.

It seems like you are leveraging OpEx, and just wondering should we expect leverage of operating expenses to continue going forward given the mix shift?

What level of operating margin are you targeting over the next year or so?

And then what do you feel is feasible for operating margin longer term?

Yes, in terms of the operating expenses you have seen some nice leverage that we have been able to get there.

We do believe that, to the extent that we can continue to drive sales gains, that we are going to be able to continue to get operating expense leverage.

In terms of the operating margin target, we have stayed away from talking about that in a lot of detail because it's so sensitive to where these businesses are recorded.

Whether target shows up in the top line or the other income line.

But based on the current accounting for all these businesses, I think that long-term we think that, these -- we can get back into the high teens, although that is not next year.

Okay, fair enough.

And then overall, is there anything different this year in terms of how you're thinking about your promotional cadence at your own retail stores and what you're hearing from your retail partners and how -- in terms of how they're handling orders or planning their business for holiday?

Anything changing now or is it pretty much status quo?

I would say it's pretty much status quo.

Certainly through Q3, we have been able to, in our own retail stores, be a little bit less promotional this year than we were a year ago.

And you have seen that reflected in the improved gross margin performance there.

But headed into fourth quarter, I think that we think, it's going to be fairly similar to the level of promotions last year, and no meaningful change in the cadence.

Okay, fair enough.

And then, any color you can give us on how your business trended in October?

I know it's early in the quarter but anything there, both in your own stores and in terms of wholesale, were there any anomalies or anything unusual in October?

No, our business continues to be good in October.

So, we are pleased with how we are trending.

Okay, great to hear.

Thanks very much and good luck this quarter.

Sam Poser with Sterne Agee.

Hi.

Just, the -- how are boots doing?

You said in the last call you were thinking of boots flat to down.

Where are they now?

Within the guidance that you're giving?

Boots continue to do well.

I mean, I think that what we said on the last call was that we thought they were going to be flat as a percentage of sales.

So, up for the year and I think that continues to be what we are seeing.

We've got a lot -- we're having a lot of success with booties, the lace-up trend is good, fold over cuff boots are good, in terms of colors, cognac's, tans, there are quite a few things working for us within boots.

It's all casual boots though.

Dress boots are not as strong.

But overall, the boot and bootie category is good once again this year.

On an apples-to-apples basis, because you've got all the new businesses, could you give us some idea of how well that was -- what that increase was in the third quarter?

Apples-to-apples within a given brand, it is up mid singles.

And that range is up to, I would assume low singles to low doubles to get to mid-singles?

Depending on the brand?

Yes, that's right.

All right.

Then, you talked about the margins.

Can you give us an idea of what the -- can you give us the operating margin by each group that you have by the 3?

So, footwear, --?

Sure.

Wholesale footwear operating margin is 15%; wholesale accessories 16.4%; and retail, 6.4%.

Okay.

Thanks.

And continued success.

Scott Krasik with BB&T.

A few questions here.

It seems like your core accessories business accelerated this quarter, up double digits.

Can you talk about maybe what led to that?

And is that sustainable?

Yes.

What I said in the prepared remarks, it was great because we had all 3 of the core handbag brands really clicking.

Big Buddha, of course, has been growing very nicely and continued on that nice upward trajectory.

Steve Madden accelerated a little bit in the quarter.

I think we're -- we've got some very strong product there and the big story was that Betsey Johnson had a very nice increase.

And as you know, that's a brand that has been headed in the wrong direction over the last couple of years.

But, we did some new things in terms of the product, we launched a new gifting program that went into about 600 doors in Macy's.

We had actually been out of Macy's.

We got back into Macy's with this big gifting program.

It's performing very, very well on the floor.

We feel good that we are starting to get that business turned around.

So it's the new product matches the new price points in footwear, and you bring the price down, expand the distribution, that sort of thing?

Same strategy as footwear.

That's right.

It's mirroring what we are doing in footwear.

Okay.

And then what was the big driver of your increase in gross margin for the core, from flat up 50 to 100?

What is the driver of that?

Well, remember we were up -- earlier, what we said was flat to up 100.

And now, we are saying up 50 to up 100.

So, frankly, it is just getting further in the year and being able to narrow that range a little bit towards -- to top end of the range as we see the results come in.

Okay.

And in terms of boots, you did raise prices on some new product, I think, earlier in the quarter you had some real success with some carryover styles at $99.

What are customers gravitating towards?

Is there any pressure on demand at the higher price points?

What are consumers telling you about prices in boots this year?

Well, there is a lot of demand for some of the booties that we had a year ago at $99.

But we are also selling some of the higher priced product as well.

And overall, in the boot and bootie category, our AURs are up about 3%.

In fact, we are up a little bit more than that in boots themselves, but because booties is making up a little but higher percentage of the total boot and bootie mix, the blended is up 3%.

Okay.

And then in terms of either acquisitions and/or new licensing opportunities, maybe update us there?

Well, in terms of acquisitions, we are evaluating a few things as always.

And we continue to think that, that can be an important part of our growth strategy.

Want to be very disciplined about what we buy but we've had some success with that recently and so if we can find some other -- some deals like the ones we've done recently, then I think we still have the bandwidth to complete those.

So, we are going to, hopefully, get something done there.

And we're looking at new licenses as well.

Although there's nothing imminent.

I think that the most recent thing we signed was of course Superga, and we're really excited about that.

I think we announced, I believe it was this quarter that, we had appointed Mary Kate and Ashley Olsen as the creative directors of Superga and that we were doing this co-branding product with their designer brand called The Row.

And, we're off to a really, really good start there.

The launch for Superga is in spring '12 but we have started seeding the product to some image independents just to get some feedback.

The product is doing very, very well in some of those high end independents and it gives us a lot of confidence for the spring launch.

And in terms of the co-branding, what we are going to do -- Superga's -- the core brand is $65 canvas sneaker, and we are going to do much more expensive shoes called -- with the co-branding The Row for Superga and it will have -- it will be cashmere, Italian linen, et cetera.

And those have already been bought for spring by Barney's, Neiman's, and Bergdorf's.

So, we think we are going to be able to create a lot of buzz there and we are really excited about that new license.

I'm sorry, that's good, I was more thinking about extensions for Betsey or Steve Madden.

You launched the jewelry.

Oh, I'm sorry, licensing out, yes, okay.

So, we are working on a lot there too.

We just launched watches in Q3, for Betsey Johnson.

And had a big launch there with Macy's, Dillard's et cetera.

Then, most recently, just a couple weeks ago we launched fragrance with Inter Parfums.

And that's Betsey Johnson fragrance called Too Too, which is exclusive to Sephora.

We are off to a good start there.

Then, we have just recently signed a new license for luggage for Betsey Johnson with a group called Trunk & Trolley, that is going to be launching for fall '12; and that's on the Betsey side.

And then on the Steve Madden side, we are working with Carole Hochman on intimate apparel.

Steve's always really liked the idea of doing pajamas.

And so, we are working on doing intimate apparel for back to school 2012.

Are these -- I mean so, licensing income, could that be up $1 million next year?

Because of the --?

I hope it's up more than that.

Okay.

All right.

Excellent, thanks Ed.

Steve Marotta with CL King.

Quick question regarding the first cost business that came in at $3.3 million versus $5.6 million correct?

And that was obviously, decline was due to mostly to Target and Olsenboye?

Yes.

Of the $3.3 million, can you dissect that a little bit.

Are there any other big accounts within that $3.3 million that could also reclassify in the not too distant future?

Well, I can't really speculate about whether they would reclassify, the biggest -- the biggest remaining account in there would be Kohl's, where we do Candies and some other private labels.

They have not told us that they want to reclassify or switch to the wholesale model from the agency model, but that's always a possibility.

If you can disclose, about how much of the $3.3 million is Kohl's or of the rough percentage mix on an annual basis?

Oh, somewhere, it's maybe one-third to 40%, somewhere in there.

Okay great.

There was, and you haven't spoken about this in a while but there is Macy's switch over that was occurring this year with the Steve Madden brand, and [A] doors, and Madden Girl, and in some of the other doors.

Can you ask a little bit about that program, how that's going and if there are other accounts where there might be a dynamic similar in the foreseeable future.

Yes, at Macy's is going is quite well we have, as you know, converted into -- we now have 162, what we call table doors in Steve Madden where our merchandise is all -- or our product is all merchandised together on a couple of tables.

The increase in productivity in those doors has been exactly we had hoped for.

We are up about 20% in the doors that have been converted.

And then in the bottom doors we've been feeding in more Madden Girl.

We are also up north of 20% in Madden Girl overall at Macy's.

So, really, that strategy is working very well.

The key will be, of course, to see what happens at the end of season and see where our maintained margin with the account comes out.

In terms of other accounts, I don't really see -- there's nothing that comes to mind as accounts where we would execute a similar strategy right now.

Okay.

Lastly, when you look out to 2012, what do you see as the biggest opportunities for growth?

Again, I would like to postpone most discussion of 2012 until we are ready to put out our guidance on the next call.

But I think it continues to be some of the same drivers that we've seen this year.

It's new brands, obviously we have the impact of the acquisitions.

It's international, and it's continued improvement in retail.

Thank you -- and last question.

Do have any target about number outlet doors that you will open next year?

Again, we'll talk about that on the next --

Fair enough, absolutely, thanks Ed.

Claire Gallacher with Arrega Investments.

Could you maybe talk about the 13.2% comp that you reported?

Could you maybe talk about how much of that was driven by traffic versus AUR?

Yes, our AUR was up about 5% in retail in the quarter.

Our traffic was actually modestly down but we converted at a higher rate.

And that's how we were able to get to the comp.

And were there any callout during the quarter as far as performance between the months July, August, September?

Like any anomaly's or any big months versus weak months?

We actually got sequentially better, so the best month of the quarter was September.

And then, I know you're not talking too much about next year, but is there any update maybe on your sourcing costs as we're looking into 2012?

No, right now the increases have moderated somewhat.

So, we are still looking at that 5% to 8% increase out of southern China that we have been talking about all year.

I think the big unknown factor remains what happens with the currency.

To the extent that the currency floats further, then obviously that would result in increased prices for us.

Okay, I think that's all I've got.

Thanks Ed.

Sam Poser, Sterne Agee.

I've got a couple Ed.

Number 1, who is your watch license, just to wonder there?

Haskell.

It's Haskell, it's the same company that does our jewelry in Betsey Johnson.

Got you.

And then can you walk through for everybody the puts and takes on the -- on the margin situation and the changes that happened?

I know you've done this a few times in the past, but I just believe there may be some confusion out there, given the change of the -- looking at the gross margin decrease and so on.

And I know you've spoken about this on numerous occasions.

I think it might help some people that aren't as familiar.

Okay.

So, there are a few things happening this year.

Number 1, we had 2 businesses which were formally recorded as other income on the income statement which have moved into the top line.

This is our Target private label footwear business.

And our Olsenboye footwear business at JCPenney.

And both of those businesses carry a lower gross margin than our overall.

So, when they moved into the top line, that is dilutive to gross margin.

Does not impact our profit dollars at all but optically, makes our sales go up and our gross margin go down.

That impact for the full year on the consolidated gross margin of those 2 businesses is about a couple 100 basis points.

Then you've got our international business, which we do through distributors, and because it's a distributor model it also carries a lower gross margin than the rest of our businesses.

And that business is growing very rapidly.

This year, we are looking for international growth for the full year of close to 50% year-over-year.

Because as a lower gross margin growing more rapidly than the overall, that's also dilutive to gross margin.

There you're talking about another let's say, 30 basis points for the full year.

The third business that is growing more rapidly than the overall, that has a lower gross margin, is our private label accessories business, where our biggest customers are people like Wal-Mart.

So, again lower gross margin and there you're looking at another 10 basis points or 20 basis points.

So, when you put that all together, you're talking about 250 basis points of mix shift pressure from these businesses.

Then in May, we completed 2 acquisitions, which are also businesses that had lower gross margins than our overall.

The impact of those is about 400 basis points of dilution, for the full year.

So, in total we've said that the impact of all 4 of these mix shifts is about 640 basis points, for the full year.

Thank you.

And then lastly when you're looking at the acquisitions that you made, Topline, Cejon as well as -- and then, as well as the Superga license that is about to launch.

When you're thinking about let's say the kind of revenue -- rather than just talking about the longer term revenue plan there, I mean what kind of incremental revenue are you looking at let's say over the next 3 to 5 years out of those businesses?

From Topline and Cejon?

And from Superga, things just kicking off or will kick off shortly.

Sam, that's just a tough question.

There's so many moving parts there.

There's a lot of different businesses.

We've got a whole host of them.

We've got about 9 new brands since 2000 --.

Let's just take those --.

Topline is roughly a $200 million business.

Cejon is roughly a $70 million business.

And we'd like to grow those businesses.

We have not put a long term target for them out yet.

And Superga is starting from nothing but over time I think that could be a $15 million business.

15?

1, 5?

1, 5.

And is that next year 1, 5 or is that like --?

Definitely not next year, no.

Well, thank you and again continued success.

And that will conclude today's question-and-answer session.

I will turn the conference back over to you Mr.

Rosenfeld for any additional or closing remarks.

Great, well thanks very much for joining us on today's call and I look forward to talking to you on the fourth quarter call.

Ladies and gentlemen that does conclude today's conference.

We thank you for joining.