Steven Madden, Ltd.
Q3 2007 Earnings Call Transcript

Published: 5 Nov 2007

[Operator:]

Welcome to the Steve Madden conference call. (OperatorInstructions) I would now like to introduce your host for today's conference,Ms. Leigh Parrish of Financial Dynamics. Please go ahead.

[Leigh Parrish:]

Thank you. Good morning and thank you for joining thisdiscussion of Steven Madden Limited third quarter results. Before we begin, I'dlike to remind you that statements in this conference call that are notstatements of historical or current fact constitute forward-looking statementswithin the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknownrisks, uncertainties, and other unknown factors that could cause the actualresults of the company to be materially different from the historical resultsor from any future results expressed or implied by such forward-lookingstatements. The statements contained herein are also subject generallyto other risks and uncertainties that are described from time to time in thecompany's reports and registration statements filed with the SEC. Also, please refer to the earnings release for moreinformation on risk factors that could cause actual results to differ. Finally,please note that any forward-looking statements used in this call should not berelied upon as current after today's date. Now I'd like to turn the call over to Jamie Karson, Chairmanand CEO of Steven Madden, Ltd.

[Jamie Karson:]

Thanks, Leigh. Good morning, and thank you for joining us aswe review Steven Madden Limited's results for the third quarter ended September 30, 2007. With me todiscuss the business is Ed Rosenfeld, our Executive Vice President of StrategicPlanning and Finance. Before I give a brief overview of the quarter and ouroutlook for the year, I would like to note that as most of you are aware, werecently announced that the company's board of directors is evaluatingstrategic alternatives to enhance shareholder value. That said, we cannotprovide any additional information regarding this initiative beyond what wasissued in the press release on October 19th. The purpose of this call is to discuss our third quarterresults and we appreciate your understanding that we will not be commenting onthe progress of our strategic alternatives review during this call, either inour formal remarks or during the question-and-answer session. Now, turning to our performance during the quarter, while weexperienced a very challenging retail environment during the quarter thatnegatively impacted our results, we nevertheless achieved sales and net incomein line with our revised guidance. We experienced a softer selling environmentat retail throughout the quarter, resulting from an overall absence of bigfashion footwear trends and weaker consumer spending. Sales in both Steve Madden women’s and Steven by SteveMadden were down year over year; Steve Madden men's was also down slightly forthe quarter. With that said, we are pleased with the continued success ofMadden Girl, as it achieved solid results this quarter. Due to Madden Girl'spopularity among its target consumer, sales for this brand are up 24% this yearto date. Through the power of our brand, we have also been able tosuccessfully expand into new merchandise categories beyond footwear in the pastyear. We are excited by the performance of our Steve Madden and Steven by SteveMadden branded handbags, as well as Steve Madden dresses, as those merchandiselines continued to exceed expectations during the quarter. In addition, we wereable to sustain solid sales results in our Daniel M. Friedman division whileimproving profitability compared to last year's third quarter. Importantly, despite the more promotional environment, wewere able to maintain our gross margin on a year-over-year basis throughefficient management of our inventory. We further expanded the Steve Maddenfootprint through the opening of four new stores during the quarter. As we expandour store presence in high-traffic markets and build our online offering, wecontinue to view our retail division as a strong avenue to reinforce our brandimage, test new merchandise and drive growth. Before I turn the call over to Ed to review our thirdquarter results and business outlook in more detail, I'd like to take a momentto discuss some highlights heading into the fourth quarter. As we announced last quarter, we introduced our new line offashion sneakers branded as Steve Madden's Fix at the August Shoe Show in Las Vegas and it has received positive reaction from ourwholesale customers. We will introduce the product in our own stores over thenext month, with initial shipments to Nordstrom in December and expandeddistribution to additional retailers early next year. In addition, we arepleased that we are seeing an improvement in the sales performance of our bootoffering as we are experiencing cooler weather patterns. Our design teams, led by Steve, continue to developtrend-right merchandise that elevates each of our brands. The creativity andspeed of our Madden design team enables us to reach the markets quickly withmerchandise that caters to the desires of the target consumer for all of ourbrands. In sum, while we expect the difficult macro environment willcontinue to affect our business near term, our brand equity and business modelremain strong and will be the basis and foundation for our continued growthover the long term. In addition, we remain proud of our pristine balance sheetand our strong financial position, which enabled us to return $29.2 million toour shareholders in the third quarter, bringing our total for the year to $50.1million. Last year was a highly successful year for our business, andthe significant steps we took to expand our business have played a key role inenabling us to address a more challenging environment this year. Thediversification of our business model into new merchandise categories beyondfootwear, while remaining focused on our core business, has also placed thecompany in a stronger position for the future. We continue to prudently and efficiently manage our businessthrough periods of growth, as well as change. While we have a more conservativeoutlook heading into the holiday season, we remain excited about the strengthof our brand and the commitment and dedication of our people and therefore, weremain bullish about the long-term opportunities for our business. Now, I'm going to turn the call over to Ed.

[Ed Rosenfeld:]

Thanks, Jamie.Consolidated net sales in the quarter were $103.4 million versus $123.2 milliona year ago. As Jamie mentioned, a challenging retail environment and a lack ofbig trends compared to the prior year resulted in top line declines in both thewholesale and retail division. Despite the difficult market conditions, grossmargin was approximately flat at 41.3%, compared to 41.4% last year, as thedecline in the wholesale division was offset by an increase in the retailsegment. The company also experienced operating expense deleveragingdue to lower sales. The net result was a decline in operating margin from 17.7%last year to 12.4% this year excluding a one-time charge of $1.2 millionrelated to a provision for prior-year customs duties in this year's thirdquarter. Diluted EPS for the quarter was $0.52 a share, including aone-time gain of $0.13 per share resulting from tax savings related to priorperiods, and a one-time charge of $0.03 per share related to the provision forprior-year customs duties. Excluding these items, adjusted EPS for the quarterwas $0.42 per share on $21.2 million diluted weighted average sharesoutstanding, compared to $0.57 per share on $22.1 million diluted weightedaverage shares outstanding in the prior year. Now I'll talk about the performance of each of ourdivisions. First, our wholesale division, which is comprised of seven mainsegments in the quarter

[Operator:]

Your first question comes from Scott Krasik - C.L. King.

[Scott Krasik:]

Gross margin in wholesale is actually a little bit betterthan I was modeling, certainly better than the trend has been sequentially sofar this year. Do you expect that lower decline to continue? How are youthinking about wholesale gross margins in the first half of next year?

[Ed Rosenfeld:]

In fourth quarter wethink we can be flat in wholesale gross margin. Keep in mind that thecomparisons in the back half here are a little easier because of the poor grossmargin performance that we had in Danny Friedman in the back half of 2006. Sothat's one of the reasons that you saw relative improvement in Q3 and we'llexpect to continue to see that in Q4. We're not going to talk about 2008 on this call. Ourbudgeting process is underway. That will be completed in four to six weeks andso we'll talk about 2008 on next quarter's call.

[Scott Krasik:]

Qualitatively could you talk about it? Because the firsthalf of the year it was down significantly from 2006, so the comparisons shouldreflect that, right?

[Ed Rosenfeld:]

That's right.

[Scott Krasik:]

Just remind us, in the first quarter it was Daniel Friedmanweak gross margin and sandals?

[Ed Rosenfeld:]

Boots caused somegross margin deterioration in first quarter last year.

[Scott Krasik:]

So it was boots and Daniel Friedman, then?

[Ed Rosenfeld:]

I just wanted to makeone clarification. Jamie alerted me that I quoted the total sales for Q3 incorrectly;it's $113.4 million, not $103.4 million.

[Scott Krasik:]

Talk a little bit about your competitive position in theindustry. When talking to people in department stores, it seems like some ofyour junior competitors are performing a little bit better than you guys, asthey have throughout the quarter. Where do you think maybe you missed it? Ithink you guys maybe went a little bit too basic, flat, not dressy up enough.Maybe talk a little about that.

[Ed Rosenfeld:]

We still feel very good about our competitive position and thatthe overall our grid has been very, very challenged. We don't feel that we'redoing worse than our competitors. Early in the year, certainly perhaps if wehad more footwear that would have been better, but right now actually we feelwe're performing of late, better than our competitors. We really saw a nice uptick in boots over the last couple ofweeks and the sellthroughs have really improved at our wholesale customers. Whatwe're hearing from them is that overall the boot category remains very tough,but our boots are performing better than our peers, and we really think we gotthe styling right there.

[Scott Krasik:]

What are you hearing in terms of sell-in for spring? Is itstill too early for you guys on that where you haven't booked everything forspring yet?

[Ed Rosenfeld:]

We'll really know more about that in December. It's really not going to be until Decemberthat we really have a good picture on that.

[Scott Krasik:]

Lastly, the inventory number you gave, can you break thatout between wholesale and retail and how that relates to each from a year ago?

[Ed Rosenfeld:]

Wholesale was down from $22.2 million to $20.3 million thisyear, so that's down about 9%, which is in line with our sales forecast. Retailis up from $13.5 million last year to $16 million this year. There are reallytwo factors there

[Operator:]

Your next question comes from Jeff Van Sinderen - B. Riley.

[Jeff VanSinderen:]

As you're looking at your booking trends for the currentquarter, it sounds like you're saying that it appears that the moreconservative unit volume plan will result in fewer markdown dollars versus thequarter you just reported. Is that right?

[Ed Rosenfeld:]

No. That's not thecase, no.

[Jeff VanSinderen:]

I thought you said your wholesale gross margins you thoughtwould be flat?

[Ed Rosenfeld:]

Relative to a year ago. Keep in mind that a year ago ourgross margins in third were 37.9% and then 31.5% in fourth. So I'm saying we could be flat to the year agofourth quarter.

[Jeff VanSinderen:]

How should we look at the markdown dollars then, for thequarter we're in now versus the quarter you just reported?

[Ed Rosenfeld:]

In Q4 they're goingto be higher as a percentage of sales.

[Jeff VanSinderen:]

As far as your retail segment goes, your gross margins therewere pretty strong. How are you planning comps for the current quarter? Are youthinking that gross margins are sustainable at the level that they are or thatyou just reported, all else being equal?

[Ed Rosenfeld:]

Well as usual, we're not going to give comp guidancealthough I will tell you the environment remains challenging, but we do expectto do better than we have done in the past couple of quarters from a comp storesales perspective. Yes, we think we can sustain these gross marginimprovements. We'd like to see retail gross margin in the fourth up modestlyfrom where it was a year ago.

[Jeff VanSinderen:]

Business in October, since comps are going to be reportedsoon for a lot of companies in the retail space, I am just wondering if youhave any thoughts on October traffic at your stores, transaction counts, thingsof that nature?

[Ed Rosenfeld:]

We've seen a little bit of an uptick. Certainly as theweather got colder, particularly because we think we really have the productright in the boot category this year. We've seen a very nice pickup in boots. We'veseen that both in our wholesale customers and the sellthroughs there, as wellas our retail store comps. What it is doing for us is nice because it's drivingthe average unit retail, which as you know, has been down for us this year andthat trend has reversed itself.

[Jeff VanSinderen:]

I know you're not giving guidance to next year, but as youlook out to spring, are there any significant new fashion trends that you guyssee emerging that you can potentially exploit or does it look like we're stillgoing to be stuck in the same world of narrowness in terms of trends? How doesyour outlook for spring this year compare to the business that you are anniversarying?

[Ed Rosenfeld:]

There's certainly a lot of things we're working on and we'vegotten some pretty positive tests recently in some of our warm weather storesof spring product. As you know, we don't talk about, for obvious competitivereasons, what we see as trends going forward. Typically, we just talk aboutwhat we're seeing currently. But look, I think the environment is still goingto be difficult, but we've got some things that we're excited about.

[Operator:]

Your next question comes from Jeff Mintz - Wedbush Morgan.

[Jeff Mintz:]

First of all, you mentioned that you were seeing a difficultretail environment for the Stevies and Candies brands this quarter onsellthrough. Can you talk a little bit about what that's related to? Is that aproduct issue or is it something more in the broader environment?

[Ed Rosenfeld:]

Well, Stevies, wehave been on a very nice trend, but the kids business has been very, very toughfor the last few months. If you're not selling Crocs, it's a pretty tough timeout there for kids. We're starting to see the slowdown hit our Stevies'business there. In Candies we were up in third, we had this new fall productthat Kohl’s was excited about and it has performed better than the springproducts. We've got some items that are performing well but overall, I thinkthe junior footwear at Kohl’s is pretty challenged right now and we're stillsuffering from some of the inventory from spring that's been backed up. They'vegotten more conservative on fourth quarter orders, based on that.

[Jeff Mintz:]

Do you expect thatissue to basically be resolved in fourth quarter and things be more clean goinginto spring of '08 for that business?

[Ed Rosenfeld:]

Heading into spring, we should be more clean.

[Jeff Mintz:]

On the men'sbusiness, it seems that the men's was relatively better compared to previousquarters. Was that a shift in your merchandise or was it more the trends comingmore toward you or a combination of both?

[Ed Rosenfeld:]

To be candid, we hada much easier comparison in the back half from a year ago than we did in firsthalf. I think that's some of what you'reseeing. The men's business remains tough.

[Jeff Mintz:]

I think you said you're doing eight store openings in theback half, so you do have four planned for the fourth quarter?

[Ed Rosenfeld:]

Right.

[Jeff Mintz:]

Finally, can you give us some sense of where you see the taxrate going on a sustainable basis, since there have been a lot of gyrationsover the past four our five quarters?

[Ed Rosenfeld:]

Going forward, you should look for it to be 40%.

[Jeff Mintz:]

Thanks very much, and good luck in the fourth quarter.

[Operator:]

Your next question comes from Mike Lippold - Craig-Hallum.

[Michael Lippold:]

Part of my question just got answered on the tax rate issuethere. Looking at that $0.13 one-time savings related to prior periods from thetax savings, how much of that would be related to 2007 versus previous years?

[Ed Rosenfeld:]

I think it's about$0.03 for 2007, $0.10 for prior years.

[Michael Lippold:]

My next question, can you talk a little bit about the long-terminternational opportunity you see for the brand? Will we see any increasedfocus internationally in 2008?

[Ed Rosenfeld:]

We're excited about international, we're really starting toget some traction there. For 2007, international is going to contribute about10% of the gross commission income that we recognize in Adesso-Madden. We'vejust signed up what we believe will be our biggest agreement internationally, it'sfor the Orient, it's with a group called GRI. They'll be distributing Steve Maddenproduct in China,Hong Kong, Japan,Singapore, Macau,etc. We think that could be our most meaningful agreement. This is a big group over there that's been very successful.They do Nine West, Easy Spirit, Ann Klein, Izod, among other brands and they'vecommitted to having 50 locations, which are primarily shop-in-shops, but alsoincludes freestanding stores by the end of 2009 in the Orient.

[Jeff Mintz:]

Can we see any other agreements like that in Europeor anything like that?

[Ed Rosenfeld:]

We're looking pretty seriously at a couple of partners for Europe.We're working on that right now.

[Operator:]

Yournext question comes from Heather Boksen - Sidoti.

[Heather Boksen:]

Can you comment further, I know the dress license was one ofthe highlights for you this quarter. Where do you see that going? How manydoors are you in currently with that? How many doors you think that can get to?

[Ed Rosenfeld:]

The dresses have been a real bright spot for us this year.We're in about 300 doors. There's Dillard's, Macy's, Nordstrom, Carson's,Belk, Parisian, and the sellthroughs have been very strong. Of course, it'sbeen certainly a better dress cycle than a footwear cycle this year, but we'vealso had very strong product and our licensee has done a great job with thedresses. Going forward, I think one of the big growth opportunitiesis we're talking pretty seriously about doing Madden Girl dresses for next year.Keep in mind that Steve Madden dresses are $150, $175 so Madden Girl would beat a more popular price point, perhaps $75 average retail. It's too early tosay how many doors that could be in, but that could be potentially, a biggeropportunity even than the Steve Madden dresses.

[Heather Boksen:]

That would be withthe same licensing partner, right?

[Ed Rosenfeld:]

The same partner.

[Operator:]

Your next question comes from Jason Williams - Botti Brown.

[Jason Williams:]

Could you just say again what inventory was and what thetotal AR was?

[Ed Rosenfeld:]

Inventory was $36.3 million. AR and due from factor was$58.8 million.

[Operator:]

Your next question comes from Scott Krasik - C. L. King.

[Scott Krasik:]

Are you allowed to buy stock back while the strategic reviewis going on?

[Ed Rosenfeld:]

No.

[Scott Krasik:]

Lastly on the licensing revenue, I would have thought thatit would have been up a little bit more given the dress license. Was there adecline in some of your licenses?

[Ed Rosenfeld:]

We did discontinue our old stock license. We're very closeto starting up with a new stock licensee. But that was down from last year andour coats were also down.

[Scott Krasik:]

Outerwear. That was weather-related or total sell-in wasbad, too?

[Ed Rosenfeld:]

I think it was both.

[Scott Krasik:]

On the SM Fix launch, you showed a bunch of different stylesthe last time we saw the product in August. What were the retailers mostexcited about? What should we see in your stores and in Nordstrom's?

[Ed Rosenfeld:]

There's about 20 styles and we've got them up on the Internetright now so you can see what styles we're planning on going with. But, we'repretty excited about it. We're launching that exclusively with Nordstrom tobegin. It's going to be all doors at Nordstrom. That's 12/25 deliveries andthen 1/5, we're going to go to a broader group that should include Macy's,Journey's, Carson's, Von Maur, Wild Pair, et cetera, so another 150 doors.

[Operator:]

There are no further questions. Please continue with anyclosing comments.

[Jamie Karson:]

Thank you for participating in the call and we look forwardto speaking with you on the next call.