Steven Madden Ltd (SHOO) 2015 Q2 法說會逐字稿

Good day, and welcome to the Steven Madden second quarter 2015 earnings conference call.

Today's conference is being recorded.

At this time I turn the conference over to your host, Jean Fontana of ICR, please go ahead ma'am.

Thank you, good morning everyone.

Thank you for joining us today for the discussion of Steven Madden's second quarter 2015 earnings results.

Before we begin I would like to remind you that statements made on this conference call that are not statements of historical fact 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 factors 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.

These statements contained herein are also subject to other risks and uncertainties, as described from time to time in the Company's reports and registration statements filed with SEC.

Also please refer to the earnings release for information on risk factors that could cause actual results to differ.

Finally, please note that any forward-looking statement used on 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 everyone, and thank you for joining us to review Steve Madden's second quarter 2015 results.

With me to discuss the business is Derek Browe, the Company's Director of Finance and Investor Relations.

We are pleased with our results in the second quarter, as sales and earnings came in ahead of plan.

The overachievement to plan was driven by exceptional performance in our retail segment, where comparable store sales increased 18.5% for the quarter.

Our wholesale accessories business also delivered strong results, with sales increasing 15.6% compared to the prior-year period.

And in our wholesale footwear business, while sales excluding acquisitions were down as expected, the rate of decline improved compared to Q1, and most importantly the sell-throughs to the consumer at our retail partners were significantly better than last year.

Overall we continue to be pleased with the stronger fashion footwear trends we are seeing in comparison to last year, and Steve and his design team have done an outstanding job of capitalizing on those trends and creating a product assortment that is really resonating with consumers.

During the second quarter customers responded favorably to our new products across a number of categories, including dress shoes, sandals, and sneakers.

This was most evident in our retail segment, which has come roaring back after a tough 2014.

The 18.5% same store sales gain in Q2 included robust gains in full price stores, outlet stores, and eCommerce.

And we also delivered strong gross margin improvement in retail, as the on trend assortment enabled us to drive sales with less promotional activity.

As I mentioned earlier, the improved trends in merchandise assortment also drove better sell-through in our wholesale business, which should in turn lead to improved performance in that segment, as we move throughout the year and into 2016.

In our accessories business we had our second quarter in a row of mid-teen sales growth.

The handbag category drove the growth with double-digit percentage gains in Betsey Johnson, Steve Madden, Madden Girl, and private label bags.

Another bright spot in Q2 was our international business, which increased 25% in net sales compared to the year-ago period.

We are particularly pleased with what we are seeing in Mexico where the acquisition integration is on schedule, and financial performance for the first half was ahead of plan.

Seven months into the acquisition, we are even more excited than we were at closing about the growth opportunities for our brands and business in this market.

Our other owned international market, Canada, is also performing well.

Similar to what we experienced in the US, we had a strong comp store sales gain in retail, and improved sell-through performance in wholesale in Canada in second quarter.

We also launched Steven Madden.

CA in April, which has significantly exceeded expectations thus far.

In terms of other international markets where we operate through distributors, we had strong gains with our distribution partner Dune in the UK, and with Landmark in the UAE.

In summary, while the lingering effects of a tough 2014 impacted us in the first half of 2015, we are pleased with the underlying trends in our business, and are confident that the Company is building momentum.

We remain on track to return to year-over-year EPS growth in Q3, and to achieve our sales and earnings targets for the full year 2015.

Now let me turn it over to Derek to review the financial results in more detail.

Thanks Ed.

Good morning everyone.

Turning to our financial results for the second quarter, consolidated net sales grew 9.4% to $323.6 million, compared to prior-year net sales of $295.7 million.

During the quarter we saw strong double-digit growth in both our wholesale accessories and retail businesses, and mid-single digit growth in our wholesale footwear business driven by our recent acquisitions.

Our wholesale net sales in the quarter increased 6.8% to $266.7 million.

Wholesale footwear net sales increased 4.1% to $200.3 million.

Excluding sales from acquisitions, sales for the wholesale footwear segment were down 5.6%.

While wholesale footwear sales, excluding acquisitions, were below last year, we saw improved sell through over last year across a range of product categories.

In wholesale accessories, net sales grew 15.6% to $66.4 million in Q2, compared to $57.4 million in the prior-year period.

As Ed mentioned, handbags drove the growth with strong increases in both branded and private label bags.

In our retail division, net sales increased 23.9% to $56.9 million.

The positive comp trend accelerated in the second quarter, leading to a comparable store sales increase of 18.5%.

During the quarter we opened one full price store and four outlet locations, and closed two full price locations.

As Ed mentioned, we also launched Steve Madden.

CA in Canada.

We ended the quarter with 161 company operated retail stores, including 36 outlets and four eCommerce stores.

Turning to other income, our commission and licensing income net of expenses was $3.1 million in the quarter, versus $3.2 million in last year's second quarter.

Growth in the licensing royalty income net of expenses nearly offset the decline of first cost commission.

On gross margin, our consolidated gross margin in the quarter was 35.9% compared to 36.2% in the prior year.

As expected, wholesale gross margin was down to 29.8% versus 31.3% last year.

We expect wholesale gross margins to return to year-over-year improvements in Q3.

Gross margin in the retail division increased to 64.5% compared to 62.8% as a result of less promotional activity as compared to the prior year.

Operating expenses for the quarter were $82.5 million or 25.5% of net sales, compared to $69.9 million or 23.6% of net sales in the same period last year.

The increase in operating expenses as a percentage of net sales is primarily the result of deleverage on lower organic wholesale sales, as well as the impact of acquisitions.

Operating income for the quarter totaled $36.8 million or 11.4% of net sales, compared to last year's second quarter operating income of $40.3 million or 13.6% of net sales.

Our effective tax rate for the quarter was 33.9%, and net income for the quarter was $24.5 million, or $0.40 per share diluted compared to $28 million, or $0.44 per share diluted in the second quarter of 2014.

Our balance sheet remains strong.

As of June 30th, 2015, we had $189.6 million of cash and marketable securities and no debt.

Inventory at the end of the quarter was $112.4 million.

Excluding inventory associated with our recent acquisitions, inventory totaled $95.7 million, compared to $87.3 million in the prior year.

Consolidated inventory turn for the last 12 months ended June 30th, 2015 excluding acquired businesses was 10.3 times.

Our CapEx for the quarter was $4.8 million.

We continue to use our balance sheet to drive shareholder value through the return of capital to shareholders.

During the quarter we repurchased approximately 547,000 shares, for approximately $21.4 million, and did so at an average price of $39.09.

Year-to-date we have repurchased over 2 million shares for approximately $74.2 million.

Now turning to guidance, for fiscal 2015 we continue to expect that net sales will increase 7% to 9% over net sales in 2014, and diluted EPS will be in the range of $1.85 to $1.95.

We expect Q3 diluted EPS to increase mid to high single digits versus last year.

Please note that the breakdown of earnings in the back half between Q3 and Q4 is expected to be similar to historical years prior to 2014.

2014 Q3 made up an unusually large share of back half earnings because of deceleration and performance in Q4.

Now I'd like to turn it over to the operator for questions.

Thank you, sir.

(Operator Instructions).

And our first question will come from Camilo Lyon with Canaccord Genuity.

Thanks, good morning guys.

How are you?

Good morning.

Good morning.

Very nice job here, guys.

Ed, just in looking back at, I think, the time that you've been at the Company, I think this is the highest comp that you've experienced in almost a decade, maybe even longer.

Could you just tell us a little bit about what's going on there, and a little bit more on the fashion side, and maybe why, if there's anything that you're seeing that gives you a little bit more caution as you look to the back half, given that you did not raise guidance for the full year?

Sure.

Yes, well, we're pretty excited about what we're seeing in the retail segment.

Obviously we're coming off a challenging year in 2014, but I don't think any of us expected to rebound quite this sharply or this quickly.

And it's really a function of having a lot of very strong products.

This is a product assortment that has really resonated with consumers across a range of categories.

So it's not all about a couple items or one category.

We're seeing really broad-based strength, and particularly in second quarter very strong performance in opened up dress shoes, excellent performance with our fashion sneakers, and also very strong sandal performance.

And then as we've gone into the first part of third quarter we've got some nice early hits on booties as well.

So we continue to feel good about what we're seeing in retail.

As far as why that might not lead us to raise guidance for the full year, I mean, let's remember that we're still primarily a wholesale business.

In 2014 retail made up about 5% of our operating income.

And we expect that to be a little higher this year, but nevertheless, it's still not a huge needle-mover to the consolidated results.

And the wholesale ship takes a little bit longer to turn than retail.

The good news is that the wholesale sell-throughs were also up dramatically in spring, and that bodes well for the future of that business.

And just remind me, when you have such strong performance in retail, is it the case that wholesale follows suit?

And does the strength that you've experienced in spring of 2015, can that continue from a wholesale perspective into future seasons, or is this just isolated to this particular season, then you start anew next year?

No, I think that frankly, the wholesale sell-throughs that we had in spring of this year, which were must improved over last year, and I think strong relative to the competition this year, those help us a little bit in fall of 2015 with orders from our wholesale customers, but they help us more in spring of 2016.

The retailers tend to look back at the performance in the prior year in the similar season.

When making plans for the following year.

So that's when we'll probably see the biggest impact of the better sell-throughs in spring 2015 wholesale.

Got it.

So there's a longer tail to the fashion trends you're experiencing.

Just the last question I have is, you mentioned you're getting good early reads on booties.

I was hoping you could dive into that a little bit more, and perhaps what you're seeing from your newer brands thus far, as you head into the fall season with Dolce Vita, Blondo, and FREEBIRD?

Sure.

Yes, in terms of booties, we've got some good reads in our retail stores, as well as in some of the department stores and independents, where we have shipped in early fall product.

I don't want to talk too much about specific trends we're seeing, because it is so early in the season.

I guess the one thing I would say about the boot and bootie category, to give you a little color, is that so far what's working is either very high or very low.

So over the knee boots are doing very well, and short ankle booties, or what we would call shooties even are doing quite well.

It's the standard tall shaft boots that are off to a slower start.

You mentioned Dolce Vita, FREEBIRD, and Blondo, and I appreciate that question, because all three of them had a very good Nordstrom anniversary sale.

Which gives us some nice encouragement about their product for this fall.

And Dolce Vita in particular really had an outstanding Nordstrom anniversary event.

They had an over the knee boot, in fact, that sold out to the pair very quickly.

It was really a smoker.

And also a shootie that performed very well in terms of sell-through.

So we're excited about what we're seeing in Dolce Vita.

Great.

Good luck with the balance of the year.

Thanks Camilo.

Thank you.

We'll move on to Jay Sole with Morgan Stanley.

Hey, good morning.

Good morning.

Good morning, Jay.

I just want to follow up on the idea of the sell through right now has been really good.

It sounds like what you're describing is last year was a tough year, maybe there was some inventory build, and a little bit maybe the reason the sell in that we see on the income statement is a little slower, because there's still some clearance of that old stuff, but since the sell-through is so good that you expect to see an acceleration of that growth rate in the wholesale footwear business, as we go out the next couple of quarters.

Can you put some numbers around the sell-through differences between last year and this year, to just kind of help us understand the magnitude?

I really can't, and frankly, it's tough to look at that for the overall business anyway, but it's dramatically better.

And we've never disclosed sell-through.

Okay.

And maybe if we can shift to inventory.

You talked a little bit in the opening comments, can you just break down a little bit more the inventory growth, what are the sources and what you expect inventory to grow as we end the 3Q and go into 4Q?

Yes, sure.

Inventory was up 29% overall, but of course we've got all the acquisitions in there, which is the primary driver of that growth.

So it was up 9.6%, if you exclude the acquisitions.

Now as you go forward, you're going to start to see the overall inventory year-over-year growth get smaller, as we start to anniversary the acquisitions.

We anniversary Dolce Vita next quarter.

Got it.

Right.

Okay.

And then just as to how that might flow through into gross margin, can you maybe just talk a little bit more about what the drivers were of gross margin this quarter, and maybe how those factors might affect 3Q and 4Q?

Sure.

Yes.

Obviously retail gross margin was up in the quarter, which we were pleased about, and we expect that we should be able to continue to drive improvement in the retail segment.

Wholesale was where we were down.

That was something that we guided to.

We've talked about that, the fact that we would be down in each of Q1 and Q2 on previous earnings calls.

But the good news is, we expect that, and that'll be the last quarter.

Q3, we can then once again return to year-over-year improvement in the wholesale gross margin.

Got it.

Okay.

Thanks so much.

Thanks, Jay.

We'll move on to Erinn Murphy with Piper Jaffrey.

Hey, good morning, this is Christof Fischer on for Erinn.

Good morning.

The question I was going to ask on kind of the overall promotional cadence in the space over the quarter, I was wondering how you guys would characterize it, and if there were any categories where you guys have seen more or less pressure than expected, or any expectations for second half of the year?

Well, I would say that there was a fair amount of fairly heavy promotional activity in the channel this quarter.

We had a couple department stores that added some additional sale events this year in comparison to last year.

I think that in part because of the disruption from the ports, there was a little bit more promotional activity.

And I think even now, we're hearing from some out there that there are slightly elevated inventories in a number of retailers.

Not our inventory, frankly.

I think that, if anything, the Steve Madden inventory in the channel is light.

But overall I think that there are some folks that think they have a little more than they'd like.

And so I think we have to expect it's going to continue to be promotional in the wholesale channel.

Okay.

Got it.

Yes.

Thanks.

That's very helpful.

And then second question I had, do you guys have any early reads or expectations on kind of Back to School sales?

I know some initial indicators showed that we may be in somewhat of a softer environment, so just curious to see if you guys had any perspective on that?

Thanks.

So far we feel pretty good with what we're seeing.

Obviously we have some pretty nice momentum in our business in terms of our retail business as well as the sell-throughs at wholesale, so we're really not seeing that softness, we have heard others talk about it.

I think there is some feeling that Back to School is going to come a little bit later this year, because of the way, I guess because Labor Day is a little bit later, but to be honest, we're not really seeing that at this point.

Okay.

Great.

I'll leave it there and turn it over.

Thanks.

Thank you.

Our next question will come from Jeff Van Sinderen with B. Riley.

Good morning.

Ed, I wonder if you maybe can talk a little bit more about what you've experienced in your own retail stores lately in terms of some of the drivers, just wondering what you've been seeing in terms of traffic, conversion, I'm assuming conversion is up.

And then maybe how we should think about your discounting plans for your own retail stores, just kind of given the backdrop you talked about with overall the environment being a little bit more promotional?

Sure.

Yes.

In second quarter we had strong increases in both traffic and conversion, and that was slightly offset by a small reduction in AUR which was caused by mix.

But very pleased to see both traffic and conversion up.

And in terms of our promotional stance, in our retail stores, we have dialed back the level of promotion a little bit, and I think that was reflected in the margin improvement that you saw in Q2, and given the strength in our business right now, we think that we can be a little bit less promotional than we've been historically, although as you point out, we're going to have to make sure that we remain competitive with what's going on with some of the other retailers out there.

Okay.

That's helpful.

And then any update you can give us on Brian Atwood?

Yes, we're still on schedule to relaunch B Brian Atwood in fourth quarter this year.

As we've previously indicated that's going to be a footwear and handbag launch, with exclusive to one retailer in the US and one retailer internationally.

I apologize but we still can't announce that yet, because that's really up to the customer when that gets announced.

But we're excited about that.

And that'll be on the floor for holiday.

Okay.

Great to hear.

Thanks very much and good luck in Q3.

Thank you.

Moving on to Jessica Schmidt with KeyBanc.

Ms. Schmidt, your line is open.

Please check your mute function.

Once again, we're unable to hear you.

Hearing no response, we'll move on to Corinna Freedman with BB&T Capital Markets.

Hi, good morning guys.

I wanted to ask a question about your handbag business, since you highlight it as a driver of the double-digit accessories growth in wholesale.

I wonder if you could unpack that a bit, tell us maybe what's working, what tiers of the channel, any trends that you're seeing there that you can call out, and any expectations you have for fall for the category?

Sure.

Yes.

I mean, we're pleased with the acceleration in sales performance that we've had in the first half there.

As we said, we've been up mid teens in wholesale accessories each of the first two quarters, and handbags of course is the driver there.

We're seeing it in various tiers, so our branded business up, our private label business is also up.

I would say that Betsey Johnson continues to have the best overall momentum.

That brand has really been performing great for a couple years now, and continues to do very well.

But we've seen a nice pickup in Steve Madden.

We're also driving growth in Madden Girl, which is a relatively new business for us.

The one thing I would say though, is that we've talked about some of the competitive pressures in the department stores, and the desire on the department stores to frankly devote less open to buy dollars to that contemporary PVC world in which we play, and more into their designer leather resources.

And that pressure has not abated.

So I don't think we're completely out of the woods here.

We're managing through it, and I think doing a pretty darn good job right now to deliver these numbers, but it still remains a challenging environment for this business.

Thanks.

That's very helpful.

And you didn't call it out, but I was just wondering if you could give us update on the production delays that you were seeing in Mexico.

Have those been fully resolved, and are you on track for a smoother fourth quarter versus last year?

Yes, I think we are.

We've been very focused on that this year.

We've done a number of things differently.

We got another agent on board in Mexico.

And we have also been bringing some product in a little bit earlier than we did last year.

In fact, that was a part of the increase in the organic wholesale footwear inventory, was that we brought some product in from Mexico earlier this year, to make sure that we don't have those same types of delays that we experienced last year.

Great.

Thanks.

That's helpful.

We'll move on to Taposh Bari with Goldman Sachs.

Hey guys, good morning.

Good morning.

Ed, just a high level question going back to the broader industry, do you think that the success that you're seeing both just in terms of sell-through broadly, is that reflective of the footwear environment, or do you think it's unique to your business?

I definitely think that the footwear environment has gotten better, particularly for the types of product that we do.

I think that we are an outperformer right now.

I think we're doing better than others, but it's definitely better for everybody.

Great.

And then I just wanted to ask the question of just the transition from spring/summer to fall/winter.

You've answered this in the past.

I'd like to get your updated view on how you think that this current trend of a lower ASP product clearly leading to better unit velocity, but how does that translate into the fall/winter season where historically you've been a much more boot, high ASP driven business?

Well, I think that there are a number of things that we were successful with in the spring that will carry through into fall.

Dress shoes is really a year-round category, and that's something that we had a lot of success with in spring.

The sneakers that were so good for us in spring should be a very important Back to School category.

And then as we've said in the past, I think some of the trends or in materials or treatments that we were using on products in spring, we believe translate into fall.

I don't want to talk too much about that, but one example, for instance, is fringe.

Anything that we had fringe on in the spring performed very well, and we think that's obviously something that can translate into the boot and bootie category also.

All that being said, I think you make a good point, which is that boots and booties are extremely important to the fall season, not to the spring season, and so we have to, it sort of remains to be seen what the boot and bootie year is going to look like.

We've got some good early reads but it's early, it's definitely too early to declare victory in that category.

Great.

The last one for you, Ed is just, if you can provide some context around the different channels that you operate in, specifically I guess retail versus outlet, and then any comments that you can make on what you're seeing in your New York geography, that would be helpful?

Yes.

So full price and outlet were both very strong.

If we just talk about the US, where we have both full price stores and outlet stores, they were both up high teens in the quarter in terms of comp.

And they were very comparable in terms of their comp in the quarter.

It's a good question about New York, because if we look at the geographies, the different performance by geography in our retail stores, we were double digits everywhere except for New York.

New York was up mid-single digits.

And that was by far, while not a bad comp, it was by far the weakest in the quarter, and I think that's really a function of the impact of the stronger dollar on tourism.

Makes sense.

And it sounds like the outlet channel has actually improved because I believe it has been lagging in the past.

Is that a correct observation?

If so, why do you think that's happening?

Yes, I think that it's definitely a correct observation.

And I think that, number one, the trends that are working in full price stores are translating in the outlet stores also.

And number two, I think that we've made some operational changes.

We're still learning in that channel, and I think that we've made, I know we've made some merchandising and promotional strategy changes there that seem to be really bearing fruit.

Great.

Thanks and good luck in the back half.

Thanks Taposh.

Taking our next question from Scott Krasik with Buckingham Research.

Yes, hey Ed, Derek, how you doing?

Good morning.

So can you clarify, so what you said about the third quarter, just to make sure I heard that right.

You said EPS in mid to high single digits?

Yes.

And generally speaking, revenue growth for the third quarter, since you're offering up some commentary there on 3Q?

I would say mid singles.

Low to mid singles.

Low to mid singles.

Okay.

So just want to come back to that.

So you said the wholesale gross margin is going to be up, you've obviously seen sort of a recalibration of your accessories gross margins.

I mean, is that going to continue to decline the way we've seen it until we anniversary it, or do you start to see that getting better?

No I think that that's hopefully, we expect that to be the end of the declines in wholesale accessories so I think we can be flattish in Q3 versus the prior year.

So then wholesale footwear gross margin is up maybe a little bit?

Yes.

Okay.

And then to the extent that obviously you're putting more into 4Q, particularly revenue growth as well, maybe help us understand, I mean, is this just a function of the fact that your inventories are leaner than others?

Maybe help us understand why 4Q is --?

The one thing that I wanted to say about the breakdown between Q3 and Q4, and I think Derek alluded to it up front but I just wanted to put a finer point on it.

If you look at the years before last year, I think there's a -- the five years, from about 2009 through 2013, if you look at the seasonality in EPS between Q3 and Q4, it's very consistent.

Every year in that period, Q3 EPS made up between 55% and 57% of the back half earnings.

Then last year Q3 spiked up to 65% of back half earnings.

And that's just because Q4 was a pretty poor, pretty poor quarter.

So all we're doing is expecting it to be back right in line with where it's been historically prior to 2014.

Okay.

And then just a couple more.

In terms of expectations around capital deployment.

Any change there?

Obviously you bought back a lot less stock in 2Q than 1Q?

I don't think there's any change.

Derek, do you want to just address the share repurchase and our plans there?

Yes.

All things equal, we remain committed to what we've guided to towards the year of the share repurchase, which was about $100 million.

Okay.

And then just last --

Scott, I'm sorry, I'm just going to follow up on that.

You're right that we slowed down in Q2 versus Q1, but I think if you look at the first half, it's really in line with where we've been.

We indicated that we have front loaded some of the share repurchase into Q1.

That's fair.

And then just last, in terms of the acquisition environment, I mean, do you get the sense that sellers expectations are higher than they've ever been, similar, are they starting to get realistic?

It is hard to say.

Obviously we don't have full visibility into all sellers and their expectations, but I would say right now they're probably, they're definitely higher than they were a year ago, that's for sure.

Makes sense.

All right.

Thanks and good luck.

Thanks Scott.

We'll move on to Sam Poser with Sterne Agee.

Good morning.

Thank you for taking my call.

Just a few things.

I assume you're talking about the gross margin as far as growth accelerating, like up in Q3, and then up more in Q4.

Am I thinking about that right?

Yes.

The gross margin improvement should be more in Q4 than in Q3.

And then can you talk about the momentum you've seen with your, and then with your same-store sales thus far in July?

We typically don't give quarter to date comps on this call.

I can say that we continue to have nice momentum there, though.

And when you're thinking about your retail, the retail growth versus the wholesale growth for the year, I mean, you've started off with phenomenal same-store sales out of the gate.

How should we think about that I mean, as that works into the guidance for the back half?

Well, clearly retail is growing faster than wholesale right now.

And that should continue.

But as we said, the wholesale should be improving in the back half here.

And then you guided revenue growth at mid to high singles in Q3.

That's actually arguably a deceleration from your total revenue growth in Q2.

Why would that be?

I think I actually said low to mid singles.

Keep in mind that's a consolidated number that includes acquisitions, so the primary reason it is slowing down is because you start to anniversary Dolce Vita.

Yes but even in Q3 last year, you were down.

So it wasn't phenomenal.

I'm just trying to understand it.

So it's low to mid singles, and that means that you're expecting the wholesale growth to really be, are you expecting wholesale growth in the quarter given that the comps are probably going to be pretty good at retail?

Overall wholesale, yes, should be up modestly.

All right.

Well, thank you very much and continued success.

Thanks Sam.

Gentlemen, we have no further questions at this time.

Great.

Well, thanks very much for joining us on the call this morning, and we look forward to talking to you on the third quarter call.

Ladies and gentlemen, that does conclude today's conference.

We thank you for your participation.