Steven Madden, Ltd.
Q2 2012 Earnings Call Transcript

Published: 26 Jul 2012

[Operator:]

Please standby as we are about to begin. Good day, everyone. And welcome to the Steve Madden Limited Second Quarter Fiscal 2012 Earnings Conference Call. Today's call is being recorded. For opening remarks and introduction, I would like to turn the call over to Jean Fontana of ICR. Please go ahead, ma’am.

[Jean Fontana:]

Thank you. Good morning, everyone. Thank you for joining us today for the discussion of Steve Madden's second 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 or current facts, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks and uncertainties and other unknown facts, that could cause actual results of the company to differ materially from historical results, or any future results expressed or implied by 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 statement filed with the SEC. Also please refer to the earnings release for more information on risk factors that could cause actual results to differ. Finally, please note that any forward-looking statements used in today's call cannot be relied upon as current after this date. I would now like to turn the call over to Ed Rosenfeld, Chairman and CEO of Steve Madden.

[Ed Rosenfeld:]

Thanks Jean. Good morning, everyone. And thank you for joining us today, as we review our second quarter results and discuss our outlook for the remainder of the year. Second quarter of 2012 was in some respects a more challenging quarter than we have seen in some time. The overall retail environment soften somewhat during the quarter and fashion footwear in particular was challenged by weakness in the sandal category. Nevertheless, we delivered strong financial results with net sales increasing 38% from the prior year to $288.7 million and net income up 13.1% to 26.9 million or $0.61 per diluted share. We believe this solid performance in the face of a challenging environment is a testament to the power of our brands, talent of Steve and his design team, and the enduring strength of our business model. Importantly, we also continue to make progress in each of the four major growth areas we outlined at the beginning of the year

[Operator:]

Thank you, sir. (Operator Instructions) And we will go first to Jeff Van Sinderen with B. Riley. Please standby for that question.

[Jeff Van Sinderen:]

Hello.

[Operator:]

Your line is open, sir.

[Jeff Van Sinderen:]

Okay. Ed, can you hear me?

[Ed Rosenfeld:]

Yeah. Good morning, Jeff.

[Jeff Van Sinderen:]

Okay. Good morning. Okay. So maybe you can just talk a little bit more about the sandal business, what you think was triggering the weakness there? And then, if you can just kind of give us a sense of how much of your business in total was sandals in Q2? And then, if there’s any sort of carryover affect going into Q3 from sandals, maybe we can start with that?

[Ed Rosenfeld:]

Sure. So, sandals as a whole in both wholesale and retail except somewhere between or made up somewhere between 35% and 40% of our women's shoe business in the second quarter, that was down from last year when it was between 40% and 45% of the women shoe business. And it was a challenging category this year, particularly the flat sandals did not perform the way that we had hoped and one of the tricky things about this year was that we got, guess what you could call sort of a false positive read early in the season because sandals did sell very well early. We had nice selling of sandals in first quarter. And in retrospect, I think what happened there was that, there was unseasonably warm weather. The weather turned very nice early this year and there were not a lot -- was not a lot of supply of sandals on the floor at that time, so there was some demand created by the warm weather, not a lot of supply and so the sandals that were on the floor sold quite well. But as we got into the season, it turned out that was not really the trend. Closed-up casuals performed much, much better, things like ballerinas and oxfords and smoking slippers, et cetera. And so we were forced to be more promotional in a sandal category and we and everybody also. I don’t think this was a Steve Madden’s specific problem. This was an industrywide issue for people in the fashion footwear area. But we were -- we did -- we were -- we did have to be more promotional in that category. In terms of Q3 and beyond, in wholesale, we are really done with sandals. We still have, there is still going to be, the wholesale -- within wholesale sandal categories is virtually not exiting in Q3. In retail, it’s still going to be about, let’s say 20%, 22% of our sales in, again women's shoes in the retail stores. But we feel pretty good that we’ve moved through that inventory. We are on schedule to be out of it, when we want to be out of it and we are not looking for any meaningful impact in Q3.

[Jeff Van Sinderen:]

Okay. And then maybe you can just update us on your latest thoughts on the outlook for the boot business as we think about the second half?

[Ed Rosenfeld:]

Yeah. That’s the good news is that, we've got very good early indications on boots and booties. As you know, the Nordstrom anniversary sale is in progress right now and we've got very good reads from that. We think our business is actually going to be up year-over-year in that sale. We feel, we’ve got very good reads on tall sharp driving boots. We also feel very good about the real short booties, what we call shooties. So far boots and booties are looking good.

[Jeff Van Sinderen:]

Okay. Great. And then, can you just remind us, I know you mentioned, going into some areas of Western Europe, as the year progresses and I know that's not a big exposure for you. But can you just give us kind of a sense as, of how much your business is Europe at this point?

[Ed Rosenfeld:]

Oh! It’s tiny. I’m talking about 1% of the total.

[Jeff Van Sinderen:]

Okay. That’s great to hear that you don’t have exposure there at this point. Okay. Thanks very much. Good luck this quarter.

[Ed Rosenfeld:]

Thanks, Jeff.

[Operator:]

And we’ll hear next from Kate McShane with Citi Research.

[Kate McShane:]

Hi. Thanks. Good morning, Ed.

[Ed Rosenfeld:]

Good morning.

[Kate McShane:]

I wonder, if you could go into a little bit more detail about what you are seeing in the mid-tier channel. I know that on the last question you talked about sandal inventories. I wondered if could talk about just inventories in general on how the reorder or just orders have been from the mid-tier channel and any additional detail on that.

[Ed Rosenfeld:]

Sure. Well, I think that this sandal issue that I talked about and to a lesser extent, it’s a fairly tough dress category, did results in fewer reorders for the spring season. And there were some people that maybe felt a little backed up with their inventory but at this point, I feel that people are moving -- all the retailers are moving through that inventory and we don't see any major impact on fall from what we saw in the sandal category.

[Kate McShane:]

Okay. Great. And in terms of other category trends again, you indicated that there are early indications of boots and booties are doing well. Can you just highlight other possible strong categories for the fall?

[Edward Rosenfeld:]

Yeah. Well, I think that the [stud] trend that that I know you’re seeing Kate is something that we feel very good about and that works on pretty much anything, we put [studs] on the selling right now. So that’s something that’s going to be important. And then fashion sneakers, I think, is also something that’s new this year that we're -- that we think is going to be very important. We’re getting great reads on that.

[Kate McShane:]

Okay. Great. Thank you.

[Operator:]

And we will go next to Scott Krasik with BB&T Capital Markets.

[Scott Krasik:]

Hey. Good morning.

[Edward Rosenfeld:]

Good morning.

[Scott Krasik:]

Couple of questions, how do you feel about, I think you had said before you thought gross margins could grow by about 100 basis points, now that we’ve anniversaried the acquisitions in Q3 or back half of the year. How do you feel about that?

[Ed Rosenfeld:]

Yeah. We still continue to feel that we can return to year-over-year gross margin improvement in the back half.

[Scott Krasik:]

You don’t want to put a number around it?

[Ed Rosenfeld:]

No change from our previous guidance. I mean, I don’t recall putting a number above but yeah we always said modest gross margin improvement.

[Scott Krasik:]

Okay. And then, most of the things you call out in the organic footwear growth seems to carry lower margins. How did Steve Madden women's do, Steve Madden mens. I know you don’t have specific about brand growth but can you talk about businesses?

[Ed Rosenfeld:]

Yeah. Well, Steve Madden women’s was essentially flat in the quarter, actually down the touch and it was for all the reasons that we just talked about, flat sandals to a lesser extent dress or top. We didn’t get the reorders that we've been accustomed to getting but the good news is that because of the positive raise that we gain on boots and looking at our order file we do expect to return to year-over-year growth in Steve Madden women's in Q3.

[Scott Krasik:]

Okay. And then in terms of your retail stores, we’ve been getting reads, maybe some of the New York stores had been hit by a lack of European tourism that toured in Las Vegas and some of the other locations. Did that affect you guys in Q2 and what’s your outlook for that in Q3 and Q4?

[Ed Rosenfeld:]

Yeah. That’s absolutely some thing we did see. As you look at our details by geography in retail stores, we certainly did see a little bit of the downtick in the stores where we have a lot of tourist business. So we were flattish in markets like New York City, Las Vegas and LA yet we were up in the mid teens for instance in South Florida. Now, obviously there are tourist in Miami but few European tourists, more South American tourists. And so that's a little bit of a headwind but interestingly over the last few weeks that’s gotten a little bit better and the traffic trends which were negative in Q2 have turned to modest positive comp traffic so far this quarter.

[Scott Krasik:]

Okay. So comp assumptions for the back half, sort of, mid-single digits?

[Ed Rosenfeld:]

Yeah. I think we still think mid-single digit is a reasonable target.

[Scott Krasik:]

Okay. I thank you and I’m so waiting for that invitation to the Olsens’ Superga launch party.

[Ed Rosenfeld:]

We’ll have you at the next one, Scott.

[Scott Krasik:]

Thanks.

[Operator:]

Moving on, we have a question from Camilo Lyon with Canaccord Genuity.

[Camilo Lyon:]

Hey, Ed. How are you?

[Ed Rosenfeld:]

Good morning, Camilo.

[Camilo Lyon:]

I just wanted to get a little clarification on the guidance and how that relates to your view on the back half relative to where it was one quarter ago? Is there any change there?

[Ed Rosenfeld:]

Yeah. There was no change to the back half. So essentially our internal forecast for Q2 was to do roughly $0.64 and we came in, we met our sales target there but came in just shy on the gross margin. It was about 70 basis points of gross margin that we lost versus our internal forecast due again primarily to the sandal issue. And so we were about $0.03 short and we've assumed that we leave the back half flat to where it was. And so we've reduced the core guidance for the year by $0.03 and then we add in the tax benefit of $0.08 in the back half, that’s how you get to our new guidance which is $0.05 increase, which is the prior guidance.

[Camilo Lyon:]

Got it. Just stripping out everything, it was just really the impact from the second quarter margins sandal hits?

[Ed Rosenfeld:]

That’s right.

[Camilo Lyon:]

Okay. And then secondarily on -- the good reads that you’ve been seeing from the boot business at the Nordstrom anniversary sale. How does that reflect in your outlook for the back half boot business, in other words, were these positive reads better than you had anticipated?

[Ed Rosenfeld:]

Yeah. I would say, we certainly feel better than we did a couple of weeks ago. It’s little early to be making dramatic changes to our back half outlook but on the margin, we feel much better.

[Camilo Lyon:]

Got it. Understood. And then lastly, you talked about the studying and how that should play out for booties and boots in the embellishments. How do you think about ASP trends going into the back half with this kind of fashion trend seemingly become more favorable on the pricing front?

[Ed Rosenfeld:]

Yeah. I still think so far this year, we've been basically flattish in AUR and I still think that’s -- it's reasonable to look at it that way for the back half. Keep in mind that we got fair amount of price right last year. Our prices were up 4% to 5% last year. And so I think we’re going to anniversary that but I don’t see further increases over what we did last year.

[Camilo Lyon:]

Okay. And then maybe if you could just update us on about the footwear stands and what are the opportunities from a growth prospective whether it’s skew growth or channel penetration or door growth?

[Ed Rosenfeld:]

I mean, that’s the footwear we’re just really getting started. We've got tons of opportunity for door growth and tons of opportunity to expand the assortment within the existing doors. We brought in a new design directors there that we’re very excited about and feels that the shoes look great and we’re really looking to -- start to explode that business really in the back half.

[Camilo Lyon:]

Great. Good luck with everything. It sounds like you’ve got a lot of -- lot good things going so, best of luck with everything?

[Ed Rosenfeld:]

Thanks, Camilo.

[Operator:]

And we will hear next from Jane Thorn Leeson with KeyBanc.

[Jane Thorn Leeson:]

Hi. All of my questions have been answered but I just had one question on purchase for your cash usage. How do you feel about potential buybacks and also what you’re seeing in the acquisition landscape than it is today?

[Ed Rosenfeld:]

Sure. I’ll take them in reverse order. We do continue to look for additional acquisitions. Obviously, M&A is something that we've been -- pretty active over the last couple of years and we still have an appetite to do additional things with the caveat that we want to be very disciplined about making sure that we do deals that make sense and prices that make sense. And there are still a number of opportunities out there. And so we continue to work on things and look at things everyday although nothing is imminent and it will be announced in the acquisition the next week or so. In terms of share repurchase, I think that it is safe to assume that given the recent pullback in our stock in the fact that we remain confident in the future prospects of business that has moved up on priority list and that something that we’re looking much harder at.

[Jane Thorn Leeson:]

Okay. Great. And then just lastly, can you remind us about your expectations for the organic sales growth for the remainder of this year would be?

[Ed Rosenfeld:]

Yeah. I believe we said 9 to 11 organic and that numbers is still -- we're so comfortable with that number.

[Jane Thorn Leeson:]

Okay. Great. Thank you very much.

[Operator:]

And we’ll move on to our next question from Corinna Freedman with Wedbush Securities.

[Corinna Freedman:]

Hi. Good morning. Just wondering if you could tell us what your expectations are for the tax rate for the second half given the revise guidance. And I know that you -- I think I had mentioned prior that you were doing or experimenting with a mailer. I’m just wondering if there is anything you could share with us about that initiative? Thanks.

[Ed Rosenfeld:]

Yeah. The tax rate for the back half is -- should be around 35.5% somewhere in there. And then keep in mind that in 2013, it’s -- we expect it will go back to historical levels, which is closer to 39. We did do a test mailer earlier this year and results were okay, not great. I think we had some good learnings from it and it’s something that will continue to look at and figure out if you want to try again. And I think that we figured out somethings that we like about and somethings we didn’t like about it. So we’ll probably, most likely be trying something again over the next few months.

[Corinna Freedman:]

Great. Thank you.

[Operator:]

And we’ll go next to Steve Marotta with C.L. King & Associates.

[Steve Marotta:]

Good morning, Ed. Speaking the share of purchase, what’s left on your authorization currently?

[Ed Rosenfeld:]

It’s about $45 million.

[Steve Marotta:]

And you didn’t utilize any in the second quarter, correct?

[Ed Rosenfeld:]

We do not.

[Steve Marotta:]

Okay. From a costing standpoint, can you talk a little bit about average unit cost coming out the Far East right now, end of the year, we’re trying to maintain pricing this year. I had a -- what you already mentioned as price increase 4% to 5% last year but from a costing standpoint how is that shaping out?

[Ed Rosenfeld:]

Fortunately, as you know, we were all dealing with pretty significant price increases year-over-year last year. This year that has moderated quite a bit. So, there are very modest price increases coming out of China right now, I would say low single-digit. But it’s much more manageable than what we saw last year. And we don’t really -- we’re not forecasting any impact to gross margin on those price increases.

[Steve Marotta:]

Okay. Can you offer any additional third quarter to-date commentary either in markets where back to school has or potentially started in the last week or to and either from your retail doors or read through from a wholesale standpoint?

[Ed Rosenfeld:]

It’s basically, what we’ve said before. It’s quite good -- I think the most important thing is good earlier reads on boots and booties. And so -- and also the fact that so far in July, in our retail stores, the traffic trends have actually improved a little bit over where they were in June. So, I think overall we are feeling better than we did a month ago about business.

[Steve Marotta:]

Great. Lastly, your inventory is up about 34% year-over-year. I know the sales are up in a similar fashion, can you parse out a little bit pieces about that inventory?

[Ed Rosenfeld:]

Yeah. I mean there is a couple of things I will point out there. Number one, we do have this Steve Madden Canada acquisition, which is not there last years as well as the number of new businesses like Betseyville, Superga, ShoeMint et cetera. So, that’s almost $9 million of inventory right there that I would classify as sort of non-comp. When you exclude that, I think we’re up more like 21.5%, which is a number given our sales growth that I think people should be pretty comfortable with. The other thing within the 21.5% keep in mind that we’ve got a number of store openings in the back half. Although looking at 11 bricks-and-mortar stores and then one internet store for Betsey Johnson. So, it’s that inventory to support those store openings as well. And as I said, I think most importantly, we do expect that we can be up year-over-year in gross margin in Q3. So obviously, that’s an indication that we’re comfortable with the inventory level be in the Q2.

[Steve Marotta:]

Terrific. That’s helpful. Thank you much.

[Operator:]

And we’ll go to our next question from Sam Poser with Sterne, Agee.

[Sam Poser:]

Good morning. Good morning Ed. Just to clarify, so the organic inventory growth is around 21.5%?

[Ed Rosenfeld:]

Yeah.

[Sam Poser:]

Okay. Can you also talk about what percentage of your business was e-commerce in the quarter just some house-keeping stuff here? What was with e-commerce and international?

[Ed Rosenfeld:]

How much was e-commerce and how much is international?

[Sam Poser:]

Correct.

[Ed Rosenfeld:]

Okay.

[Sam Poser:]

On a year-over-year basis, if you want.

[Ed Rosenfeld:]

Okay. E-commerce is up 26%. International was up 51%.

[Sam Poser:]

In the percent of total?

[Ed Rosenfeld:]

I don’t have it on the top of my head.

[Sam Poser:]

All right. And then you’re about to roll in Betseyville into J.C. Penney, are you working on any other exclusive deals? You have a couple of other ones like Wild Pair that you’ve recently gotten hold of and so on. Are you looking to work with other retailers to do exclusives and if so where are you with that?

[Ed Rosenfeld:]

Yeah. Wild Pair, we are close to striking the deal for an exclusive with one big retailer. But we are not there yet. So, we can’t announce anything there.

[Sam Poser:]

Does that retailer have three letters?

[Ed Rosenfeld:]

I’ll be happy to tell you as soon as we make a deal.

[Sam Poser:]

Okay. And then I mean when your -- would you -- what your stores strategy is like with you had outlets now there. I think the outlets are probably working pretty well, the comp there, as I assume pretty good. Now, I think you roughly flapped a couple of them by now correct?

[Ed Rosenfeld:]

Yeah. We have.

[Sam Poser:]

And I mean, I loved to know how those are doing relative to the total comp. And how do you foresee the outlet growth over the next few -- going forward from here?

[Ed Rosenfeld:]

Yeah. Well, interestingly, the outlet comp was actually a little below the full price comp in second quarter and the reason for that is this tourist impact that we’ve talked about earlier, because Las Vegas and Orlando make up about 80% of the comp base and outlet or did in Q2. And those are markets that we’re challenged by the tourist issue. Overall, however, we still feel very good about the outlet business and how those stores are performing. And for all of our contribution that we’re going to get out of these stores and so we’ve got three more opening in the back half year, one in Florida, one in Texas and one in California. And we’re working on a package of about three more for early 2013. So, I think provided that we continue to perform where we are, you are going to see us, rollout five, six, seven of these year not more over the next few years.

[Sam Poser:]

Okay. Thanks. And then lastly, where do you think you are in sort of and again looking forward overtime in growth with the core Steve Madden line and let’s say the -- and the Madden girl appear or is that something that sort of just going to slowdown just like a steadier growth and more growth is going to come from the newer brand?

[Ed Rosenfeld:]

Well, I mean, when you talk about Steve Madden, we’re only talking about Steve Madden wholesale in the U.S.

[Sam Poser:]

Steve Madden Women’s wholesale, yeah, let’s call by U.S. women’s wholesale, yeah.

[Ed Rosenfeld:]

Yeah. Then the challenge is it is a more mature business than our others. Its -- we’re already in basically outdoors that we want to be in. It’s not a turn of door growth opportunity. And we have the number one market share in our department in many of those doors. That being said, we’ve been in that situation for few years now and we’ve able to bring up very nice organic sales growth in the Steve Madden women’s brand. But certainly, it is more mature. And I think that was one that we should look at as more of a low-to-mid single-digit grower over the long-term. However, that leaves -- that ignores the fact that we’re going in the handbags where our business is doubling every quarter right now. That we’re growing internationally in Steve Madden where business is up about 50% each quarter. That is still a lot of growth within that -- within the brand. But immediately, within the wholesale business in the U.S. it’s more -- it’s a relatively more mature business.

[Sam Poser:]

Thank you very much and continue success. Thanks.

[Operator:]

And there are no further questions in the queue at this time. Mr. Rosenfeld, I’d like to turn the conference back to you for any additional or closing remarks.

[Ed Rosenfeld:]

Okay. Great. Well, thanks very much for joining us on the call. We look forward to speaking with you on the next call.

[Operator:]

And again, that does conclude this call. We thank everyone for participating today.