Steven Madden Ltd (SHOO) 2012 Q1 法說會逐字稿

Good day everyone, and welcome to the Steven Madden, Limited first quarter fiscal 2012 earnings conference call.

Today's call is being recorded.

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

Please go ahead.

Thank you.

Good morning everyone.

Thank you for joining us today for the discussion of Steven Madden's first quarter 2012 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 meanings 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 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 not 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 Steven Madden.

Thanks, Jean.

Good morning everyone, and thank you for joining us today,as we review our first quarter results and discuss our outlook for the remainder of the year.

We got off to a great start to 2012.

Net sales increased 60.5% in the quarter compared to the first quarter of last year.

Diluted EPS grew 19.5% versus Q1 2011.

Before I get into the details of the financial performance, I want to first touch on a few highlights from the quarter.

First, we had another outstanding quarter in our core Steven Madden women's wholesale footwear business.

As always the foundation of our success here was outstanding product.

Our ability to consistently hit the trends is a direct result of the combination of our outstanding creative team, led by Steve and his team, once again delivered an on trend merchandise assortment, with particular strength in casuals and sandals.

As a result our Steven Madden womens wholesale footwear business increased over 20% the quarter, bringing our sales growth for the 12 months ended March 31st 2012 to 18% compared to the prior year in this business.

Strength in the Steven Madden product assortment also resulted in excellent performance in our retail business.

We recorded our seventh consecutive quarter of double-digit comparable store sales gains, and our trailing four-quarter operating margin retail reached 12.9%.

In addition, we had two important new store openings in the quarter.

First we opened our seventh outlet store in Opry Mills Outlet Center in Nashville Tennessee, we continue to be very pleased with consumer response to our new outlet concept.

And then most exciting, in March we opened a new flagship store on Fifth Avenue in New York between 42nd and 43rd Street.

This store is an outstanding showcase for the brand in a premiere location.

Since it opened it has been the number one store in the chain in sales.

Another highlight in the quarter was the acceleration of our Steven Madden handbag business.

Net sales in Steven Madden bags more than doubled from Q1 of 2011.

We saw increased shipments and improved sell-throughs at key customers like Macy's, Dillards, Belks, and Lord & Taylor, just this month Nordstrom picked up the line for the first time.

We effect to begin shipping Steven Madden handbags to Nordstrom in Q3.

Finally, we also continue to expand our business internationally.

We recorded another quarter of greater than 50% year-over-year sales growth outside of the United States.

We also entered an important new territory, the United Kingdom, under our new partnership with The Dune Group, we tested Steven Madden in eight doors of House of Fraser.

Sell-throughs were outstanding and Steve Madden has now been expanded to 27 doors of House of Fraser, as well as Topshop on Oxford Street for Fall.

Also, for Fall Madden Girl will be in 30 doors of House of Fraser, and 60 doors of Debenhams.

As discussed on the last call we also took direct ownership of our business in an international territory for the first time in the quarter,through our acquisition of SM Canada.

The integration of this business is going smoothly, and we continue to be very excited about our growth prospects in this market.

We already have three leases signed for new Steven Madden retail stores in Canada, which will bring our total in the market to ten locations.

Putting that all together, we believe the overarching take-away for this quarter's results is the strength of our flagship Steve Madden brand.

The brand is experiencing outstanding growth across channels, categories, and geographies.

22 years after Steve founded the Company we believe the Steve Madden brand is stronger than ever.

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

Consolidated net sales in Q1 grew 60.5% over the prior year period to $266 million.

We exclude net sales from Topline, Cejon and SM Canada, organic net sales rose 17.9% on a consolidated basis.

Wholesale net sales in the quarter rose 70.5% to $228.9 million, compared to $134.3 million in the first quarter of last year.

Excluding Topline, Cejon and SM Canada organic wholesale net sales increased 18.7%.

Wholesale footwear net sales were $191.5 million, up 76.6% compared to Q1 2011.

Excluding sales from Topline and SM Canada, organic net sales growth was 19.8%.

Driven by strong gains in our Adesso-Madden private label business and in Steve Madden's women's.

Wholesale accessories net sales were $37.4 million, a 45.1% increase over the prior-year period.

Excluding Cejon organic wholesale accessories growth was 14.1%, driven by strong gains in Steven Madden and Betsey Johnson handbags.

Turning to our retail division, we saw continued momentum with net sales up 17.6% to $37 million in the first quarter.

Comparable store sales grew 11.9% on top of a 12% increase in the first quarter of last year.

The comp was driven by big percentage gains in casuals and sandals, as well as a solid increase in boots and booties, despite that category making up a smaller percentage of the mix compared to Q1 2011.

Increases in both traffic and conversion offset a modest decline in AUR.

Doors opened for the 12 months ended March 31st, 2012 generated $824 in sales per square foot.

And eCommerce was also a stand out once again, increasing 24% in the quarter.

Turning to Other Income, our commission in licensing income net of expenses was $4.5 million in Q1 versus $4.6 million in last year's first quarter.

First cost commission income net of expenses was $2.3 million in the quarter, down from $2.7 million in last year's first quarter, due to declines with First Cost customers, Bakers, and Charlotte Russe.

Licensing royalty income net of expenses increased 13.4% in the quarter to $2.1 million, compared to $1.9 million in the first quarter of 2011, driven by a strong increase in royalty income from the Betsey Johnson licensing portfolio.

Consolidated gross margin for the quarter was 36.1% as compared to 41.7% in last year's first quarter.

The decline was due to a decrease in the wholesale gross margin to 32.3% from 37.9% in the same period last year.

The wholesale decline was due to shifts in sales mix as a result of one, the acquisition of Topline, and two the significant increase in Adesso-Madden private label wholesale business in the quarter, particularly with Target.

Combined these two factors diluted wholesale gross margin by approximately 640 basis points.

Excluding these mix shifts wholesale gross margin was up approximately 80 basis points.

Gross margin in the retail division was 60.1%, up from 58.1% in the first quarter of 2011, with improvement in both full priced and outlet stores.

This was the tenth consecutive quarter of year-over-year gross margin expansion in retail.

Operating expenses were $65.2 million in thefirst quarter or 24.5% of net sales, compared to $46.2 million or 27.9% of net sales a year ago.

The 340 basis point year-over-year improvement was driven by leverage on increased sales, as well as an increased mix of wholesale which has lower operating expenses as a percentage of sales than retail.

Operating income for the first quarter of 2012 increased 28.8% to $35.4 million, or 13.3% of net sales, compared to $27.5 million, or 16.6% of net sales in last year's first quarter.

Net income was $21.9 million, or $0.50 per diluted share, compared to $17.9 million, or $0.42 per diluted share in the prior year's first quarter.

Turning to our balance sheet as of March 31st, 2012, we had $165 million in cash and marketable securities and no debt.

We ended the first quarter with inventory of $53.3 million versus $33.8 million in the first quarter of last year.

Excluding inventory for the acquired businesses, and new business, Superga, inventory was up 14.7%compared to the same period last year.

Our consolidated inventory turns for the last 12 months was 10.6 times compared to 9.5 times in the prior year.

CapEx for the quarter was $3.3 million.

Now turning to guidance.

For fiscal 2012 we currently expect net sales to increase 24% to 26% compared to fiscal 2011,up from our previous guidance of a 21% to 23% increase.

Diluted EPS for 2012 is now expected to be in the reaping of $2.62 to $2.72.

This pairs to previous guidance of diluted EPS in the range of $2.60 to $2.70.

In summary we are pleased to have started the year off on a strong note.

Momentum in our business continues, and we remain confident in our ability to drive sales and earnings growth over the balance of 2012 and beyond.

Thanks for listening.

and now I would like to turn it over to the operator for questions.

Thank you.

(Operator Instructions).

Our first question comes from Oliver Chen with Citi.

Speak to your feelings on the wholesale gross margin, regarding the back half should we still think about an inflection, are you encouraged there?

I am sorry.

You just came in in the middle there.

Are you asking about the wholesale gross margin in the back half?

Right, and also the beginning I was speaking on the wholesale revenue momentum in terms of what your EPS guidance predicates for the momentum in Q2, Q3, Q4, if it is going to continue along the double-digit track, so both wholesale sales?Thanks.

Okay.

Sure.

Yes.

So the organic wholesale sales we have assumed in the guidance that slows from where it has been the last couple of quarters, although we are still looking at low double-digits for the full year organic wholesale sales growth.

And in terms of the gross margin, yes, we do continue to expect that starting in Q3 we will be able to show some modest year-over-year improvement.

As a follow-up could we also ask about the gross margin in the retail division?That was an impressive performance better than we thought on a tough compare.

Where should we think about the normalized GM for this division?

Could you provide more detail on the plus-200 basis points in terms of how you were able to achieve that?

Is that something that we should, will the magnitude of that continue?

Yes.

I think that was a pretty strong performance.

We really did a nice job of reducing or minimizing markdowns and promotions to the extent we could in retail there.

I think that we have had quite a lot of gross margin expansion as I said it is ten quarters in a row now of year-over-year gross margin expansion in retail, so I think that we can continue to show some modest improvement, but I think the 200 basis points, I don't think you are going to see that level of improvement going forward.

So I think that we can show, we will show an improved gross margin for the year, but it should be probably less than 100 basis point improvement for the full year.

Okay.

Great.

Thank you.

Our next question comes from Corinna Freedman with Wedbush Securities.

Hi there, great quarter.

I just wanted to ask a question about retail, the comps are very strong at 11.9.

Can you tell us what is driving that?

Is it handbags in the stores because I noticed there were some fixtures, and then a couple of big picture questions.

Is there any fallout if any on the business of the Betsey Johnson potential bankruptcy, and lastly is there any light you can shed on what is going on with JC Penney, and where you see that business going?

Thanks.

Sure.

The first question was about the retail comp and yes, we were very, very pleased with the retail comp number that we put up in the first.

It was really a function of just a great product assortment on the shoe side.

We did have a small increase in handbags, but that is not a major driver for us as it still makes up a very small percentage of the overall mix, but we had big increases in sandals and in casuals in the store, and a really strong assortment in those two categories, and that drove a big increase in units year-over-year as I indicated earlier, we actually had a modest decline in AUR, but we made up for it with units, both traffic and converse were up nicely in our retail stores.

The second part of the question was about the Betsey Johnson, the bankruptcy of our licensee, correct?

Yes.

Yes.

So as most of you likely saw, last week one of our licensees for Betsey Johnson filed for Chapter 11.

This is the company that has the license to operate Betsey Johnson retail stores, and also to market Betsey Johnson ready-to-wear, and while this was certainly not a welcome development, we would have loved to have seen them do great, this was not totally unexpected, and frankly I think in fact it sort of vindicates our original strategy and approach in this deal.

As you will recall when we acquired the Betsey Johnson brand and related intellectual property back in 2010, at that time we had the ability had we wanted to, to also take over the retail stores for no additional consideration, but we elected not to do that, and instead gave the former owner of the brand a license back to operate the retail stores, and to do the wholesale apparel line, and unfortunately, our skepticism about this part of the business turned out to be well founded, and the business did not perform as they had hoped, and they had to file Chapter 11 last week and they have plans to liquidate.

So what does this mean for us.

Well, it means that the Betsey Johnson, most of the Betsey Johnson retail stores are likely to close, and that we will immediately need to find an alternative licensee to do the wholesale apparel, which is something that we are very far along on, and hope to have that wrapped up quickly.

Good news here is that while this particular licensee did not do as well as they had hoped, the Betsey Johnson brand itself is stronger than ever, and in fact, our wholesale sales of Betsey Johnson if you look across all categories in first quarter being all of the licensed categories and the categories that we do in-house at Steven Madden, sales of Betsey Johnson into wholesale were up over 50% for the quarter, so the brand is on a very strong upward trajectory in wholesale, despite the struggles of the retail piece.

So we still feel very good about that.

And the financial impact to us is pretty modest here.

The royalty income that we were earning from this particular licensee was less than $200,000 over the last year.

We were selling some goods to the retail stores that was probably between $4 million and $5 million of net sales last year, although we had an agreement to have a much higher discount in the first year, that being 2011, so the gross profit on those sales is only probably about $1 million, and we did not include that in our guidance this year given their struggles.

So there is really no issue there.

And then the last piece is that they do owe us a little over $3 million.

Most of that is related to a loan that we made to them at the time that we acquired the business, and gave them the license.

That is a secured loan.

Our security position comes behind that of the bank, and we believe that we will get some of that back but likely not all.

Okay.

But I mean we don't believe that is a material loss for the Company.

Okay.

That is helpful.

Thank you.

The third question was about JC Penney, right?

Yes.

JC Penney.

Is there any update there?

No.

There is no update, our business with them is good, Olsenboye continues to perform very well, both in shoes and bags, so we are really encouraged about that.

I think that we will be over $20 million with them between shoes and bags this year, so with had a real very quick ramp-up with that business, and we continue to talk to them about Olsenboye but also about other things, but we don't have anything to report as of yet.

Okay.

Great.

Thanks for the update.

Appreciate it.

Thanks.

Our next question comes from Scott Krasic with BB&T Capital Markets.

Hey.

Good morning, Ed.

Good morning.

Five weeks into the quarter can you give us an update on how your comps are trending in Q1?

Yes.

I mean the comps April was a slower month than what we saw in first quarter.

I think that our double-digit comp streak is likely to come to an end.

We are up about mid-single digits so far.

Okay.

Okay.

And then it is tough to say right now, but how do you feel about just general pull forward of spring demand?

Do you think customers once the weather gets warmer again that they are going to be higher, or have they bought most of their spring goods in February and March?

Oh, no.

I am not concerned.

I think that we still feel pretty good about what is going to happen in May and June, as the weather warms up for spring merchandise.

Okay.

And then I know you don't look at backlog, you don't give us backlog every quarter, but to the extent that you have some visibility into fall orders at this point, how do you feel about that in general, and what does it look like?

Yes.

We feel good about it.

I mean obviously we wouldn't have been able to guide to an up 24 to 26 if we didn't feel that we had a strong backlog and weren't running ahead of where we were a year ago.

Okay, so its important that double-digit organic growth?

That is right.

Okay.

Awesome.

Thanks Ed.

Thanks.

Our next question comes from Jeff Van Sinderen with B.

Riley.

Hi.

Good morning, and let me add my congratulations.

Ed, I wonder if you can just talk a little bit more about your direct sourcing initiatives, and the outlook for how you see that impacting gross margin I guess over the next year or two?

Sure.

Yes.

Well we still continue to move more products from the agent model to the direct sourcing model through Topline, and over time we remain confident that this is going to enable us to get better pricing and improved quality and more consistent deliveries for our merchandise.

Right now we are probably up around 10% of our legacy product is going, footwear product is going direct, as we have said we are going to try to get that up to 15% or so over the next six months, and then our five year goal or its more like a four-year goal now, because we did the deal about a year ago, is to get to 50%, perhaps 60% of our business going direct, and if we can do that, we think that is sort of a 200 basis points opportunity in gross margin over that timeframe, over that five year timeframe.

This year you are talking more about 20, 30 basis points.

Okay.

Good.

And then maybe you can just touch on your growing outlet business, and I guess anything you can sort of update us on there?

I know you have plans to open more.

Maybe I could just give us a little more flavor on kind of how the early days are going in outlets?

Yes.

We have really been pleased with the performance of the outlets, I think we are ahead of schedule there.

We believe that our four-wall contribution on outlets will exceed that of the full-price stores already in 2012.

I think initially we thought it might take us a couple of years to get there, but we think we are going to be a couple hundred basis points better in terms of four-wall contribution in the outlets this year.

As I said, we got our seventh one opened in Q1.

We have also got leases signed for an additional outlet in Ontario, California as well as Sawgrass in Florida, and we are working on two to three others that we hope to get open in the back half as well.

So we are moving very well on that front.

Okay.

Good to hear.

And then I know you mentioned Canada as an area that you feel pretty confident about.

How big do you think the Canada business can be for you?

Well, in terms of retail stores we have seven stores now, and we have identified about 20 additional locations that we would like to target over the next let's say four to five years.

We think we can make, particularly that retail business can get considerably larger.

Okay.

Good.

Alright.

Great.

Thanks very much and good luck for the rest the quarter.

Thanks, Jeff.

Our next question comes from Camilo Lyon with Canaccord Genuity.

Hey Ed.

Good morning.

Good morning.

I just wanted to get a little clarity, a little bit more clarity on the Target business.

Obviously, it was up very strongly in the quarter, and that looked to have pressured gross margins probably more than anticipated.

What kind of growth do you expect in that business going forward, and should we be thinking about commensurate pressure on gross margins from that line item?

Yes.

Well, just to back up, you are right Camilo, that the Target business, our private label business overall, but particularly the Target business was up dramatically in the quarter.

We have just had an incredible run with Target as of late, so the Adesso-Madden private label wholesale business that was $16 million last year in Q1, was over $31 million in Q1 of this year, and that was impactful to gross margin to the tune of about 130 basis points.

It was about 130 basis points dilutive.

Going forward I don't expect that same kind of north of 90% growth rate to continue, but you will see that business growing faster than the overall, and so I think that is going to pressure, continue to pressure gross margins over the balance of the year, although not to the same extent that it did in Q1.

Okay.

That is helpful.

Thanks.

And then just going back to your guidance you picked it up more color on what parts of your business are stronger and giving you the confidence to raise the guidance?

Sure.

Well, the biggest two areas where we raised on the Topline were in the private label area.

It was in the Adesso-Madden private label area, as well as the Topline private label area.

That is why you saw a bigger percentage increase on the sales line than on the bottom line.

Okay.

We also continue to feel very good.

I mean the Steven Madden women's business in wholesale is very strong.

Our Steven Madden handbags business is performing better than we anticipated, and we continue to feel very good about the direct-to-consumer channel as well.

Both bricks and mortar and internet.

Could the direct-to-consumer business serve as a gross margin offset to the private label and Topline?

It does.

That was already sort of in the guidance.

Okay.

Okay.

And then my final question is more of a longer-term question on Betsey.

Clearly that is a very potent brand right now.

It is still early days for you guys.

How do you so he that brand unfolding both domestically and internationally, as it relates to your business over the next three to five years?

What really can be the opportunity there?

Well, I think we have got a pretty special opportunity there.

We think this is one of those brand that has awareness and affinity from consumers far and away above the actual level of sales right now, so we think there is a big opportunity in a lot of categories.

Obviously a big part of that is going to be getting the apparel piece right, though.

That is the category in which this brand started, and right now it is a very, very small category for us.

So I think job one is finding this new licensee, who is going to be able to grow an apparel business, and get that back to where it needs to be, and that will also help us to grow the other categories domestically, and to grow the business internationally.

Do you think that over time it could be as big as the Steven Madden brand?

Well, we are a long way away from thinking about something like that, but if we got past there, we would be plenty happy.

Alright.

Good luck.

Thanks, Ed.

Thanks.

Our next question comes from Steve Marotta with CL King & Associates.

Good morning, Ed.

I have a question on the Steve Madden wholesale footwear being up around 20%.

Is that specific Steven Madden branded items, or is that a wholesale umbrella that includes Betsey Johnson and Big Buddha and Olsenboye, and some of the others?

That is just Steve Madden.

Okay.

Can you comment on the others grew I am assuming more rapidly coming off a smaller basis being higher growth?

Yes.

I don't have the number all in aggregate, but some of them are growing more rapidly.

But that was actually a pretty special growth rate for the biggest business so that was really the driver in the quarter.

Sure.

Which leads me to my next question, which is given your penetration already with that brand on your accounts, can you talk about where that growth came from?

Was it market share gains or are there new accounts that are sprinkled in there?

Yes.

It is really very little new accounts.

As you know we are already basically in the accounts that we want to be in with Steven Madden, and we are in virtually all of the doors that we want to be in with those accounts.

So yes, it is just getting, having great product and getting nice organic growth within those doors, and clearly there was some market share gain there.

Yes.

Big time.

And my last question from an International markets perspective, can you talk about geographies that are not currently represented, that you would expect to be represented, and also comment on the fastest growing geographies at the moment?

Sure.

Well, in terms of fastest growing, I think the biggest opportunities this year or where we are going to get the most growth is probably Asia, the Middle East, and Latin America.

Over the long-term I think Europe is probably the biggest opportunity.

In terms of some of the new things that we are doing this year, I mentioned in the prepared remarks about our test in the UK.

That is something we are really excited about.

We are working with a group called Dune over there, and had this great test in House of Fraser, and have expanded doors there, and also got into Topshop on Oxford Street, which we think is a really important thing for the brand internationally.

We are also adding some additional territories with our existing partners.

So for instance our partner in Benelux, Macintosh, we have agreed to expand their territory to include France, Germany and Scandinavia, and they will start shipping those countries in Fall.

And then we have also added some new regions for our partner in Saudi Arabia, that is a company called [Allo Care] and we have given them North Africa and some of theCIS countries.

Those are the former Soviet Republic countries like Georgia, Kazakhstan, Belarus, et cetera.

So that is what we are doing in terms of new territories this year, and then our existing partners are also adding about 50 free standing stores, and about 50 concessions in 2012.

So that is going to generate some nice growth as well.

Excellent.

Thank you very much.

Congratulations on the quarter.

Thanks, Steve.

Our next question comes from Sam Poser with Sterne Agee.

Good morning, Ed.

Thanks for taking my question.

A few questions.

Number one, in the guidance what, when you for the full year how are you looking at the gross margin, how are you looking at the SG&A for the full year within the numbers, within the range as far as percent of total?

Yes.

It really have not changed meaningfully from what we talked about last time.

We have assumed that the gross margin is down, although less than, down less than the 200 basis points of headwinds that we have from the Topline acquisition.

So again, 200 basis points is the dilution from Topline this year or thereabouts.

We think we can be down less than that because we will be up modestly excluding Topline.

And then we think that we will also show some modest SG&A leverage this year, such that we make some of that gross margin deterioration back, and get our operating margin.

As I said last time our goal for operating margin internally is to get to flat to 2011, that would put us at the top end of our range or slightly above.

I think that we are guiding to slightly below where we ended 2011 based on the impact of Topline.

But we are pushing people to try to get to flat.

Jane Thorn Leeson with KeyBanc Capital Markets.

Thanks.

Hi Ed.

Congratulations on a good quarter.

I just had a couple of questions on mainly organic growth.

Could you talk more about the specific drivers for organic growth sales for the remainder of this year?

Sure.

Well, there are number of things happening there.

If you look at the direct-to-consumer channels, we are forecasting that we continue to grow comps, continue to in our bricks and mortar stores, we continue to drive additional sales on eCommerce, and we are also opening stores.

We are a net store opener this year for the first time in a number of years.

So that is driving the organic direct-to-consumer piece.

And then on wholesale, we have very good momentum in the core.

Steven Madden brand as well as some of these newer brands, like Betsey Johnson and Big Buddha and Olsenboye, which should drive additional growth there.

Of course the International piece continues to grow and we are getting really nice growth in our wholesale accessories business, and I think the biggest driver there is Steven Madden handbags.

That business has just taken off, as I said earlier it was up over 100% in Q1.

We are really pleased with the momentum there.

Okay.

That is helpful.

And what also outside of Betsey if you could elaborate more on Cejon, and maybe Big Buddha, the specifics around those brands?

Sure.

So Cejon of course is the acquisition that we did in May of last year, it is a cold weather accessories business.

This first half, it is a back half weighted business.

So its contribution in the first couple of quarters is not nearly as meaningful, but we had a strong back half in that business, expecting an even stronger one this year.

In terms of Big Buddha we continue to see nice momentum there.

The handbag business is growing and our shoe business is really taking off.

We think we are going to start to see some real nice percentage gains in shoes over the next couple of quarters.

Okay.

Great.

Thank you.

Very helpful.

Thanks.

This concludes today's question and answer session.

At this time I will turn the call back to management for any additional or closing remarks.

Okay.

Well thanks very much for joining us on the call, and we look forward to speaking with you after Q2.

This concludes today's conference, thank you for your participation.