Steven Madden Ltd (SHOO) 2012 Q3 法說會逐字稿

Good day, everyone.

Welcome to the Steve Madden Limited third-quarter fiscal 2012 earnings conference call.

Today's call is being recorded.

For opening 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 Steve Madden's third-quarter 2012 earnings results.

Before we begin, I would like to remind you that statements made in this conference call that are not statements of historical 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 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 on 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, everyone, and thank you for joining us today as we review our third-quarter results and discuss our outlook for the remainder of the year.

Third-quarter 2012 was a record quarter for Steve Madden as we delivered the highest quarterly sales and earnings in our Company's history.

Net sales increased 13.7% compared to the third quarter of last year with double-digit gains in both wholesale and retail.

Gross margin expanded 190 basis points in the quarter and diluted EPS was $0.86 per share including charges related to the bankruptcy of Bakers Footwear Group, which negatively impacted EPS by $0.08.

This compares to diluted EPS of $0.74 in the third quarter last year.

Before I get into the details of the financial performance, I would first like to touch on some of the highlights in the quarter.

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

Steve and his design team created an outstanding fall product line that has resonated with retailers and consumers alike.

Booties, particularly military looks and fashion sneakers were standouts in the quarter.

Embellishment was also important with studs and rhinestones performing well across various product categories.

The on trend product offering drove robust increases with key customers like Nordstrom, Dillards, and Lord and Taylor.

Overall, net sales in the Steve Madden women's wholesale business grew 15% in the quarter compared to last year.

And the outstanding sellthrough of the product at retail enabled us to reduce markdown allowance to the department stores which in turn drove 150 basis point year-over-year improvement in gross margin in Steve Madden women's wholesale in the quarter.

The trend right merchandise assortment in our Steve Madden women's brand also resulted in strong performance in our retail business.

Comparable store sales rose 8.6% in the quarter on top of a 13.2% comp increase in the prior year's third quarter.

Comp store traffic was flat last year but the strong product offering enabled us to convert a higher percentage of the customers walking through the door.

Turning to accessories, our Steve Madden handbag division continues to be the fastest growing area in the Company.

For the third straight quarter, net sales in Steve Madden bags more than doubled from the comparable period in the prior year.

In addition to continued growth at key customers like Macy's, we launched Steve Madden handbags in Nordstrom in the quarter.

We shipped 25 doors in Nordstrom and have been thrilled with the initial sellthroughs particularly on fringe and studded looks.

Finally, we also continued to expand our business internationally.

Year-over-year sales growth outside of the US once again increased more than 50% during the quarter.

SM Canada, acquired earlier this year, continues to perform ahead of expectations in both wholesale and retail.

We also saw some robust gains with our partners in Latin America, particularly Chile, Peru, and Colombia and in Europe.

Despite the challenging economic environment in Europe, our partner, Macintosh, delivered a strong year-over-year increase in the Benelux territory and had a successful launch -- wholesale launch of the brand in the quarter in France, Germany, and Scandinavia.

Dune, a new partner that launched in the United Kingdom in spring, also continues to do well with the brand.

Steve Madden is now in 25 doors in House of Fraser and Madden Girl is in 30 doors of House of Fraser and 60 Debenhams.

Both brands are expected to see increased doors and expanded assortment within existing doors in the UK in spring 2013.

Overall, third quarter was another demonstration of the power of our flagship brand, Steve Madden.

The brand experienced strong growth across channels, categories, and geographies and we are confident that the Steve Madden brand will continue to act as a an engine of profitable growth as we move ahead.

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

Consolidated net sales in Q3 grew 13.7% over the prior-year period to $356.9 million including double-digit gains in both wholesale and retail.

Wholesale net sales in the quarter rose 12% to $311.5 million, compared to $278.3 million in the third quarter of last year.

Within wholesale, footwear net sales were $228.7 million, up 8.3% compared to Q3 2011.

The growth was driven primarily by the strength of the Steve Madden women's business as well as the benefit from the acquisition of SM Canada.

Wholesale accessories net sales were $82.8 million, a 23.6% increase over Q3 2011.

This was driven by the exceptional growth in Steve Madden handbags as well as strong gains in Big Buddha, Betsey Johnson, and private label handbags and a solid increase in belts.

Turning to retail, we had another strong quarter with net sales up 27.2% to $45.3 million.

Comparable-store sales grew 8.6% on top of a 13.2% increase in the prior year.

Fashion sneakers were outstanding and booties and tailored shoes were also strong performers.

We opened three Steve Madden full price stores during the quarter and have opened an additional three full priced stores, one outlet store, and a Betsey Johnson e-commerce store so far in Q4.

We now expect to end the year with 109 Company-operated stores including three Internet stores.

Bricks and mortar doors opened for the 12 months ended September 30, 2012 generated $904 in sales per square foot.

Turning to other income, our commission and licensing income net of expenses was $3.9 million in Q3 versus $5.6 million in last year's third quarter.

First cost commission income net of expenses was $2.2 million in the quarter, down from $3.3 million in last year's third quarter.

This quarter's figure includes a $0.9 million charge for bad debt related to the Bakers bankruptcy.

Including the charge and the reduction in business with Bakers compared to the prior year, first cost commission income net of expenses was up year-over-year.

Licensing royalty income net of expenses of $1.7 million in the quarter compared to $2.3 million in the third quarter of 2011.

Royalty income was essentially flat in the quarter compared to the comparable period in the prior year but expenses increased due primarily to increased market expenditures for the Betsey Johnson brand including the expense associated with producing the Betsey Johnson fashion show.

Consolidated gross margin for the quarter was 36.8% as compared to 34.9% in last year's third quarter.

Wholesale gross margin expanded to 33.3% versus 31.9% last year, reflecting year-over-year improvement in both the wholesale footwear and wholesale accessories businesses.

Gross margin in the retail division was 60.7%, up from 58.4% in the third quarter of 2011 driven primarily by the benefit from the higher margin SM Canada retail business as well as reduced promotional activity.

Operating expenses were $73.6 million in the third quarter or 20.6% of net sales compared to $64.6 million or 20.6% of net sales a year ago.

Operating expenses as a percentage of sales were flat to last year as a result of leverage on higher sales in both wholesale and retail offset by an increase mix at retail, which has higher operating expenses as a percentage of sales than the wholesale business.

Operating income for the third quarter of 2012 was $56.4 million or 15.8% of net sales.

Operating income included a $5.1 million impairment charge and a $0.9 million charge for bad debt, both related to the Bakers' bankruptcy.

Excluding these charges, operating income was $62.4 million or 17.5% of net sales compared to $50.5 million or 16.1% of net sales in last year's third quarter.

The effective tax rate in the quarter was 35.4% compared to 39% in the third quarter of last year due to the reinvestment indefinitely of a proportion of earnings from the Company's foreign operations in such foreign operations.

We expect the tax rate in Q4 to be in line with this quarter at approximately 35.5%.

In 2013, the effective tax rate is excited to return to historical levels.

Net income for Q3 was $37.9 million or $0.86 per diluted share.

Net income included the charges related to the Bakers' bankruptcy that I discussed earlier, which on an after-tax basis negatively impacts net income by $3.7 million or $0.08 per diluted share.

Net income in the third quarter of 2011 was $31.9 million or $0.74 per diluted share.

Turning to our balance sheet, as of September 30, 2012, we had $154.4 million in cash and marketable securities and no debt.

We ended the third quarter with inventory of $84 million, up 9.1% compared to the same time last year.

Our consolidated inventory turn for the last 12 months was 10.6 times, up from 9.5 times for the prior year.

CapEx for the quarter was $7.6 million.

Now turning to guidance.

For fiscal 2012, we now expect net sales to increase 25% to 26% compared to fiscal 2011.

Diluted EPS on a GAAP basis is now expected to be in the range of $2.64 to $2.69.

This guidance includes the $0.08 in charges related to the Bakers' bankruptcy that we recorded in third quarter which were not included in the previous guidance of $2.67 to $2.77.

Excluding the third-quarter charges, we have narrowed both sales and EPS guidance to the top half of the previous provided range.

In conclusion, third quarter was a record quarter for Steve Madden.

We delivered strong sales growth and as promised, achieved year-over-year gross margin improvement in the quarter in both wholesale and retail and we are well-positioned as we move forward.

With our brands and our business model stronger than ever, we believe we have the necessary ingredients to continue to drive sales and earnings growth for the balance of 2012 and in the years ahead.

Thanks for listening and now I'd like to turn it over to the operator for questions.

(Operator Instructions).

Camilla Lyon, Canaccord Genuity.

Jane Thorn Leeson, KeyBanc.

Congratulations on a great quarter.

I just had a couple of questions.

How -- my first one was what are you seeing in your tourist markets as it compares to how you described it last quarter, where you said it was sort of down on the downturn?

Interestingly we saw some improvement in the tourist markets in Q3.

New York as a great example, as you recall, we talked about New York being essentially flat in Q2 in our retail stores on a comp basis.

In Q3, we were up 11% in New York.

So we saw a nice rebound and that had continued into fourth quarter prior of course to Hurricane Sandy.

Great, that sounds great.

Also how are you seeing your retailer sentiment in terms of reorders to date?

And also how weather was impacting most of the other footwear companies that have reported to date.

Has their losses actually helped your gains similar to I think what you said last year around the same time period?

Well, that's hard to determine exactly what is driving the strong performance that we are having right now, but basically we feel that we have a very, very strong product assortment for fall.

And you asked about retailer sentiment, I would say that when we talk to most of the retailers they're telling us that their overall business is fair.

It's not bad but it's not great either but virtually all these retailers are also telling us that we are outperforming the competition right now and that the sellthroughs that we are experiencing are better and the growth that we are experiencing is better than their overall department averages.

And we think that's because we've got great product, so we feel pretty good as we head into the balance of the year.

Okay, great.

Then my final question was just on sourcing, if you could give us an update on your sourcing and are you on track to get to 15% direct source this year and I guess 200 basis points by over the next three years?

Yes, we are sort of right on target with transitioning the legacy -- a portion of the legacy footwear business to the direct sourcing model through our topline office.

I would say that on new goods that we are placing right now, we're somewhere between 12% and 15% going direct.

Of course as we've talked about before, we are really focusing initially on the private label and more volume business to go direct and that's going very well.

We believe we are already starting to see the gross margin benefits with those direct sourcing -- direct source footwear.

Okay, great.

Thank you and I'll get back in queue.

Corinna Freedman, Wedbush Securities.

Hello.

I am a little displaced because of Hurricane Sandy.

So just a question about any store closures you have also related to Hurricane Sandy.

Two, if you can remind us with the renovated stores, how they comped compared to the base and how many more you have to renovate?

And thirdly, if you can tell us what you expect for gross margin improvement for the fourth quarter or just a range -- so we have a good sense of that.

That's all.

Thank you.

Sure, I believe the first question was about store closures from Hurricane Sandy.

I think we have about nine stores closed right now.

And in terms of the overall impact of the hurricane, we do think that on a relative basis it's going to impact is much more in our retail stores because of the concentration that we do have in the Northeast and particularly in New York City.

And at this point, our best guess is that we are going to lose about $1 million in sales due to the hurricane, which would translate into roughly $600,000 in gross profit in our retail division.

Wholesale is much harder to tell but we do not believe there's going to be a material impact on wholesale.

So in any event, overall you are looking at $0.01, maybe $0.02 of impact.

This second question I believe was about the remodeled stores.

Is that right?

Yes, that's right.

So this year we've remodeled I believe it's nine stores and we have been seeing on average sales productivity increase of about 20% in those remodeled stores, so we are getting a very nice return on that investment and we will be looking to do a similar number next year, maybe even a little bit more.

The third question was gross margin in Q4.

Yes, we would expect to see at least as much gross margin improvement as we had in Q3.

Frankly it should be a little bit more.

And part of that is a benefit from mix because retail is going to make up a higher percentage of the sales but we also think we are going to get apples-to-apples gross margin benefit in the wholesale business.

Okay, great.

Thank you.

Danielle McCoy, Brean Capital.

Congrats on a great quarter.

I just wanted to see how does Betseyville at JCPenney been doing?

A little update on that.

Sure, we have had Betseyville product on the floor at JCPenney for about a month and a half now.

In terms of what we did in house here, we've shipped them shoes, bags, slippers, and very recently shipped in some cold weather accessories and then our licensing partners have also shipped a number of categories including jewelry, watches, intimate apparel, and hosiery.

I would say the initial selling has been okay, not bad but not great either and I think there's a couple reasons for that.

Number one, look, JCPenney management has been very upfront about the fact that business is challenging there.

This is clearly a year of transition for them and so that has made it a little bit more challenging.

But also there is a learning curve with these new brands so when we first started with Olsenboye our first season out of the box wasn't great there either but we learned about what products work and what products didn't work in Olsenboye at JCPenney and we have had a lot of success since then.

So I think that we are analyzing very carefully which things the customers are [aspiring] to and which they aren't and we expect to see even better sellthroughs in the spring.

The good news is JCPenney continues to be very bullish on the brand and so are we.

Okay, great.

Any update on development of newer brands, Superga, how loungewear at Nordstrom's is doing?

Yes, the news on both those fronts is very good.

Superga continues to do very, very well.

Now this time of year of course, it slows up a little bit because it's a sneaker brand and it's more of a spring-summer business but the retailers are all very excited about it based on the selling that it got this year and so we are expanded doors for spring in places like Nordstrom and Bloomingdale's and J.Crew and even Neiman Marcus Cusp.

So we are really, really excited about the progress we're making with Superga and we think that business could and should double in 2013 versus where it was 2012.

In terms of the loungewear, we had a really good launch, it is an exclusive with Nordstrom in the US and Hudson Bay in Canada and for spring, we are going to be opening up the distribution to the other better department stores and we'll go from there.

Okay, great.

Good luck, guys.

Scott Krasik, BB&T Capital Markets.

Good morning.

Just a couple -- so Steve Madden women's really good quarter I think if you looked at the second quarter and tried to back into the numbers, it may have been flat or even slightly down.

Sort of what's the status of the brand?

I would've thought it was just as hot in May as it was in September, so why do you have such big swings quarter-to-quarter?

Keep in mind, we talked a lot on the last call about the weakness in sandals in spring.

It was a very tough sandal season and we certainly felt that impact in Q2 in the Steve Madden women's wholesale business.

But as we went into Q3 and we got into the fall season, our products has been received very, very well and we saw a real nice increase.

So outside of a major miss like sandals in the spring, should the Steve Madden women's business grow every season or can it grow every season?

That's certainly the goal.

Look, excuse me, Scott.

I just want to say, I think 15% is not a sustainable long-term rate for a brand that is as mature as Steve Madden, but -- in the US that is -- but certainly we expect to grow every season.

Okay, then talk about you mentioned the military boots, maybe talk about tall shafted boots and some of the other styles and what's been happening since the weather broke in October.

Yes, that's -- you've certainly hit the nail on the head in the way you phrased the question because early in the season, it was really all about booties but over the last couple weeks as the weather has turned, we've seen a real nice pickup in tall shaft boots and so we are pleased about that because we head into the critical holiday selling season we've got now booties that we believe will continue to perform but we've also got tall shaft boots coming on strong.

Okay, then just last, I think we have to wait for the Q for the specific number but the gross margin in accessories has been very strong.

Your sales continue there.

Is it okay to assume that the gross margins next year in accessories can continue to expand?

Yes, I think there's still some room in accessories for expansion next year on the gross margin definitely.

All right, thanks.

Congratulations.

Camilo Lyon, Canaccord Genuity.

I just wanted to get maybe a little clarification if you could just on the guidance.

If I remember correctly last quarter, you had a tax benefit and if you could just update us on what that is relative to the guidance you provided today just to clarify any doubts out there.

Sure, the guidance we provided last time of $2.67 to $2.77 included the tax benefit in the back half.

I believe it was about $0.08 and there's been no change to that.

So the tax benefit is just as we guided earlier and we have -- the new guidance is $2.64 to $2.69 but keep in mind that includes the $0.08 of charges from Bakers which was not in the previous guidance.

So if you add back that $0.08, you are looking at $2.72 to $2.77 or otherwise another way of putting that is the top half of the previous range of $2.67 to $2.77.

Okay, great.

That's helpful.

Then just if I remember correctly, too, you had been thinking about a fairly conservative boot business in the back half, so your commentary on the fourth quarter as it's shaping up seems to me like there's a better boot business as the weather is starting to break.

Is that fair?

And is that -- how do we contemplate that acceleration in that part of the business relative to what the current guidance implies?

Number one, we did -- we started off the year with a plan of -- that included pretty conservative boot guidance but if you recall in the last call, we had already had some very good reads from the Nordstrom anniversary sale and so we had already sort of taken up our view on boots and booties for the back half.

I still think that we feel incrementally a little bit better than we did on the last call about boots and booties and that's one of the reasons that we moved the guidance -- midpoint of the guidance up.

Got it.

Is that more of a unit-driven comfort level or is it ASPs given the studs and the embellishments or if you could just maybe provide some color on that, that would be great.

Sure, ASP/AUR is basically flat right now overall and in the boot and booties category.

We've got some puts and takes there.

I think with booties making up a higher percentage of the boot and booties mix, that brings ASP down, but as you point out, some of the embellishment, studs etc., is ASP -- is an ASP benefit and so net-net, it's basically flat.

Okay, just lastly on the Betsey Johnson International, I know that that's something that you guys just started doing last quarter.

I wonder if there's enough data to get a sense as to how that brand has been accepted in some of the international markets that you are opening up those stores?

Yes well, we've just gotten going.

Our partner, GRI in Asia opened the first store in Macau and got very good response.

I think they were pleasantly surprised and so they have got a couple more stores that are going to open by the end of the year in China.

And our partner in Dubai is also now looking to do a Betsey Johnson program based on the success that GRI had.

So we think this could be another nice growth vehicle for us but it's still fairly early.

Good.

Actually one last question.

This truly is the last one.

Could you just talk about the demand trends at the various levels of your wholesale business?

Have you seen a stronger demand trend at kind of like the lower tiered more discount stores or is the midtier department store the better department store channel performing better?

Any sort of insight there would be helpful.

Yes, we have not seen as much variation between channel as we have in certain past seasons.

I would say it's a little bit more consistent.

Frankly for us, the demand is strongest where we are selling the Steve Madden brand because that is really the strongest part of our business right now.

So anywhere we are selling that namely the better department stores, we are getting -- we are seeing very strong demand.

Great, all right.

Good luck with the fourth quarter.

Take care.

Sam Poser, Sterne, Agee.

Good morning, Ed.

Thanks for taking my question.

A couple of questions.

Does your guidance include the impact of the storm?

Of the storm?

Yes, you mentioned like the $0.02.

We are still comfortable with the guidance given the storm, let's put it that way.

We created -- we have not changed the guidance since the storm a penny or two we don't think merits a guidance change.

But we came up with the guidance before the storm, admittedly.

That was $2.64 to $2.69.

We think we could lose potentially a penny here but we don't think we need to change the number.

Okay, thanks.

And can you give us -- you finally have transitioned all these purchases and all these other things.

Can you give us the puts and takes of the gross margin in some detail?

Of the gross margin improvement?

Sure.

I think there are few things I could tell you about.

We did get a benefit in the quarter from the SM Canada business that we brought in-house earlier in the year of about 80 basis points so that was a nice impact.

The overall change in the gross margin was 190 basis points.

Other than that there was -- because we continue to grow the (inaudible) Madden business, the private label business, that actually cost us about 30 basis points of mix.

The big factor in wholesale on an apples-to-apples basis was this improvement in Steve Madden women's.

We were up 150 basis points in our biggest wholesale business and that was driven largely by reduced markdown allowances because of just very, very strong sellthrough in retail.

I think those are the big items.

What about the mix shift now that you have anniversaried the acquisitions topline and Cejon and all that other stuff and you're starting to lap that?

Yes, so now that we have anniversaried it, it is not -- there's no meaningful impact from mix there.

Has that margin improved as well?

Have the Cejon -- have those margins improved on a year-over-year basis now that you (multiple speakers)?

Actually yes, we did make some nice improvement to the topline margin in particular and that's something we're really focusing on there.

With topline right now, it's not really a sales growth game.

It's about improving the profitability of the existing business.

In some cases we want to reduce unprofitable or low-margin sales at topline.

Got you.

Lastly, how is the men's business doing?

Men's business was about flat in the quarter, actually may have been down very modestly.

The challenge there, we are doing very well with our fashion dress shoes.

The challenge is the driving mocs has been a really important part of the business over the last few years and that is a category that is just trending down right now.

And so that poses a little bit of a challenge for us.

But we brought in some new fashion products that's performing very well, some more fashion forward looks with Stud, etc.

and so that's very encouraging but we do have to find a replacement for the drivers.

And lastly looking ahead into 2013, we should see some significant gross margin improvement in the first two quarters as well, maybe not up to the 190 but still some big increases and then it will sort of all balance out at the end of next year.

Am I thinking about that correctly?

I'm not sure why you say that.

Again it goes back to the lapping, it is a part of the lapping of SM Canada, some of the things that helped here, I guess I'm trying to get the (multiple speakers)

The only thing -- SM Canada would be a benefit in the first month of the year because we acquired it in February, so you have some benefit in January of next year but that's it.

Then you probably aren't going to run into the same kind of sandal issue again.

How would you be thinking about gross margin into the first half of next year?

Let me ask it that way.

I'm not -- unfortunately we are not going to talk that next year on this call.

We'll do that on the fourth-quarter call.

Thanks, Ed, and continued success.

At this time, there are no further questions in the queue.

I would like to turn the conference back over to our host for any closing or additional remarks.

Great.

Thanks, everybody, for joining us on the call and we look forward to reporting back to you after fourth quarter.

That does conclude today's conference call.

Thank you for your participation.