Steve Madden - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

For the transition period from ____________________ to _____________________

Commission File Number 0-23702

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

As of August 4, 2010, the latest practicable date, there were 27,673,699 shares of common stock, $.0001 par value, outstanding.

STEVEN MADDEN, LTD.

FORM 10-Q

QUARTERLY REPORT

 June 30, 2010

 

(in thousands)

 

(unaudited)

(in thousands, except per share data)

 

(unaudited)

(in thousands)

 

 

STEVEN MADDEN, LTD. AND SUBSIDIARIES

June 30, 2010

($ in thousands except share and per share data)

Note A – Basis of Reporting

The accompanying unaudited condensed consolidated financial statements of Steven Madden, Ltd. and subsidiaries (the “Company”) have been prepared in accordance with the generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the financial position of the Company and the results of its operations and cash flows for the periods presented. The results of its op erations for the three- and six-month periods ended June 30, 2010 are not necessarily indicative of the operating results for the full year. It is suggested that these financial statements be read in conjunction with the financial statements and related disclosures for the year ended December 31, 2009 included in the Annual Report of Steven Madden, Ltd. on Form 10-K filed with the SEC on March 12, 2010.

Note B – Stock Split

On March 24, 2010, the Board of Directors declared a 3-for-2 stock split of the Company’s outstanding shares of common stock, to be effected in the form of a stock dividend on the Company’s outstanding common stock. Stockholders of record at the close of business on April 20, 2010 received one additional share of Steven Madden, Ltd. common stock for every two shares of common stock owned on this date. The additional shares were distributed on May 3, 2010. Stockholders received cash in lieu of any fractional shares of common stock they otherwise would have received in connection with the dividend. All share and per share data provided herein gives effect to this stock split, applied retroactively.

Note C – Recently Adopted Accounting Standards

In January 2010, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance which expands disclosure requirements relating to fair value measurements. The guidance adds requirements for disclosing amounts of and reasons for significant transfers into and out of Levels 1 and 2 and requires gross rather than net disclosures about purchases, sales, issuance and settlements relating to Level 3 measurements. The guidance also provides clarification that fair value measurement disclosures are required for each class of assets and liabilities. Disclosures about the valuation techniques and inputs used to measure fair value for measurements that fall in either Level 2 or Level 3 are also required. The Company adopted the provisions of the guidance as of March 31, 2010, except for disclosure about purchases, sa les, issuance and settlements in the roll forward of activity in Level 3 fair value measurement, which is effective for fiscal years beginning after December 15, 2010. Disclosures are not required for earlier periods presented for comparative purposes. The new guidance affects disclosures only and, therefore, the adoption had no impact on the Company’s results of operation or financial position.

A new accounting pronouncement amending the consolidation guidance relating to variable interest entities (“VIE”) became effective for the Company on January 1, 2010. The new guidance replaces the current quantitative model for determining the primary beneficiary of a VIE with a qualitative approach that considers which entity has the power to direct activities that most significantly impact the VIE’s performance and whether the entity has an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The adoption of the accounting pronouncement had no material impact on the Company’s Condensed Consolidated Financial Statements.

Note D – Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

 

Note D – Use of Estimates (continued)

 

Note E – Due To and From Factor

 

The Company has a collection agency agreement with Rosenthal & Rosenthal, Inc. (“Rosenthal”). Under the agreement, the Company can request advances from Rosenthal of up to 85% of aggregate receivables factored by Rosenthal. The agreement provides the Company with a credit facility in the amount of $30,000, having a sub-limit of $15,000 on the aggregate face amount of letters of credit, at an interest rate that, at the Company’s election, is tied to either the prime rate or LIBOR.

Note F – Note Receivable – Related Party

On June 25, 2007, the Company made a loan to Steve Madden, its Creative and Design Chief and a principal stockholder of the Company, in the amount of $3,000, in order for Mr. Madden to satisfy a personal tax obligation resulting from the exercise of options that were due to expire and retain the underlying Company common stock, which he pledged to the Company as collateral to secure the loan. Mr. Madden executed a secured promissory note in favor of the Company bearing interest at an annual rate of 8% which was due on the earlier of the date Mr. Madden ceases to be employed by the Company or December 31, 2007. An amendment to the note dated December 19, 2007 extended the due date to March 31, 2009, and a second amendment dated April 1, 2009 changed the interest rate to 6% and extended the due date of both principal and interest to June 30, 2015. As of June 30, 2010, $733 of interest has accrued on the note and has been reflected on the Company’s Condensed Consolidated Financial Statements. Due to the 3-for-2 stock split effected on May 3, 2010 (see Note B above) the number of shares securing the loan increased from 510,000 shares to 765,000 shares. Based upon the increase in the market value of the Company’s common stock since the inception of the loan, on July 12, 2010, the Company determined to release from its security interest 555,000 shares of the Company’s common stock, retaining 210,000 shares with a total market value on that date of $6,798, as collateral for the loan.

Note G – Marketable Securities

Marketable securities consist primarily of corporate and U.S. government and federal agency bonds with maturities greater than three months and up to six years at the time of purchase as well as marketable equity securities. These securities, which are classified as available-for-sale, are carried at fair value, with unrealized gains and losses, net of any tax effect, reported in stockholders’ equity as accumulated other comprehensive income (loss). These securities are classified as current and non-current marketable securities based upon their maturities. Amortization of premiums and discounts is included in interest income. For the three- and six-month periods ended June 30, 2010, the amortization of bond premiums totals $269 and $502, respectively, compared to $35 and $167 for the comparable periods in 2009. The values of the se securities may fluctuate as a result of changes in market interest rates and credit risk.

 

 

Notes to Condensed Consolidated Financial Statements - Unaudited

June 30, 2010

($ in thousands except share and per share data)

Note H – Fair Value Measurement

 

The Company adopted the provisions of FASB ASC 820-10, “Fair Value Measurements and Disclosures” (“ASC 820-10”) for financial assets and liabilities effective January 1, 2008, and adopted ASC 820-10 for non-financial assets and non-financial liabilities effective January 1, 2009. ASC 820-10 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. ASC 820-10 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.

 

A brief description of those three levels is as follows:

The Company’s financial assets subject to fair value measurements as of June 30, 2010 are as follows:

 

 

During the six months ended June 30, 2010, the Company had no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3). No gains or losses resulting from the fair value measurement of financial assets were included in the Company’s earnings. The Company has recorded a contingent consideration as a result of the February 10, 2010 acquisition of Big Buddha, Inc. (see Note R). The contingent consideration may be paid to the seller of Big Buddha based on the financial performance of Big Buddha for each of the twelve-month periods ending on March 31, 2011, 2012 and 2013. The fair value of the contingent payments was estimated using the present value of management’s projections of the financial results of Big Buddha during the earn-out period.

 

Notes to Condensed Consolidated Financial Statements - Unaudited

June 30, 2010

($ in thousands except share and per share data)

Note H – Fair Value Measurement (continued)

 

In April 2009, the FASB issued additional guidance for estimating fair value in accordance with ASC Topic 820. The additional guidance addresses determining fair value when the volume and level of activity for an asset or liability have significantly decreased and identifying transactions that are not orderly. The adoption of this guidance did not have a material effect on the Company’s Condensed Consolidated Financial Statements.

The Company adopted the provisions of FASB ASC 825-10, “Financial Instruments” (“ASC 825-10”) on January 1, 2008. ASC 825-10 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. ASC 825-10 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that chose different measurement attributes for similar assets and liabilities. The Company has elected not to measure any eligible items at fair value.

 

Note I – Fair Value of Financial Instruments

The carrying value of certain financial instruments such as accounts receivable, due from factors and accounts payable, approximate their fair values due to their short-term nature of their underlying terms. The fair values of the financial instruments and investments are determined by reference to market data and other valuation techniques, as appropriate. Fair value of the note receivable approximates its carrying value based upon its interest rate, which approximates current market interest rates.

 

Note J – Inventories

Inventories, which consist of finished goods on hand and in transit, are stated at the lower of cost (first-in, first-out method) or market.

 

Note K – Revenue Recognition

The Company recognizes revenue from wholesale sales when products are shipped pursuant to its standard terms, which are freight on board (FOB) warehouse, or when products are delivered to the consolidators as per the terms of the customers’ purchase order. Sales reductions for anticipated discounts, allowances and other deductions are recognized during the period when sales are recorded. Customers retain the right to return/credit of the product for poor quality or improper or short shipments, which have historically been immaterial. Retail sales are recognized when the payment is received from customers and are recorded net of returns. The Company also generates commission income acting as a buying agent by arranging to manufacture private label shoes to the specifications of its clients. The Company’s commission revenue i ncludes partial recovery of its design, product and development costs for the services provided to certain suppliers in connection with the Company’s private label business. Commission revenue and product and development cost recoveries are recognized as earned when title of the product transfers from the manufacturer to the customer and are reported on a net basis after deducting related operating expenses.

The Company licenses its trademarks for use in connection with the manufacturing, marketing and sale of cold weather accessories, sunglasses, eyewear, outerwear, bedding, hosiery, women’s fashion apparel and jewelry. The license agreements require the licensee to pay the Company a royalty and, in substantially all of the agreements, an advertising fee based on the higher of a minimum or a net sales percentage as defined in the various agreements. Licensing revenue is recognized on the basis of net sales reported by the licensees, or the minimum guaranteed royalties, if higher. In substantially all of the Company’s license agreements, the minimum guaranteed royalty is earned and payable in advance on a quarterly basis, and offset against earned royalties at the end of each quarter. Under the terms of retail selling agreement s, most of the Company’s international distributors are required to pay the Company a royalty based on a percentage of net sales, in addition to a commission based on a percentage of the purchases of the Company’s products. For the Company’s international distributors, licensing income is recognized when earned and commissions are recognized when title of the product transfers to the customer.

Note L – Taxes Collected From Customers

 

Note M – Sales Deductions

 

 

Note N – Cost of Sales

 

Note O – Income Taxes

 

Note P – Net Income Per Share of Common Stock

Basic income per share is based on the weighted average number of shares of common stock outstanding during the period. Diluted income per share reflects: a) the potential dilution assuming shares of common stock were issued upon the exercise of outstanding in-the-money options and the proceeds thereof were used to purchase treasury stock at the average market price during the period, and b) the vesting of granted nonvested restricted stock awards for which the assumed proceeds upon grant are deemed to be the amount of compensation cost attributable to future services and are not yet recognized using the treasury stock method, to the extent dilutive. For both the three- and six-month periods ended June 30, 2010, options to purchase 236,000 shares of the Company’s common stock have been excluded from the calculation because i nclusion of such shares would be anti-dilutive as compared with options to purchase 155,000 shares of the Company’s common stock that have been excluded from the calculation for the three and six months ended June 30, 2009.

 

Total equity-based compensation for the three and six months ended June 30 is as follows:

 

Cash proceeds and intrinsic values related to total stock options exercised during both the three- and six-month periods ended June 30, 2010 and 2009 are as follows:

 

 

Notes to Condensed Consolidated Financial Statements - Unaudited

June 30, 2010

($ in thousands except share and per share data)

Note Q – Stock-Based Compensation (continued)

 

During the three and six months ended June 30, 2010, approximately 233,000 options with a weighted average exercise price of $14.32 and approximately 265,000 options with a weighted average exercise price of $14.04 vested, respectively. During the three and six months ended June 30, 2009, approximately 75,000 options with a weighted average exercise price of $12.38 and approximately 99,000 options with a weighted average exercise price of $12.20 vested, respectively. As of June 30, 2010, there were 1,500,000 unvested options with a total of $10,506 of unrecognized compensation cost and an average vesting period of 3.6 years. As of June 30, 2009, there were 1,202,000 unvested options with a total of $5,372 of unrecognized compensation cost and an average vesting period of 3.6 years.

The Company estimates the fair value of options granted using the Black-Scholes option-pricing model, which requires several assumptions. The expected term of the options represents the estimated period of time until exercise and is based on the historical experience of similar awards. Expected volatility is based on the historical volatility of the Company’s stock. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. With the exception of a special dividend paid in November of 2005 and 2006, the Company historically has not paid dividends and thus the expected dividend rate is assumed to be zero. The following weighted average assumptions were used for stock options granted:

 

Activity relating to stock options granted under the Company’s plans and outside the plans during the six months ended June 30, 2010 is as follows:

Note Q – Stock-Based Compensation (continued)

 

The following table summarizes restricted stock activity during the six months ended June 30, 2010 and 2009:

 

 

Note R – Acquisition

 

Notes to Condensed Consolidated Financial Statements - Unaudited

June 30, 2010

($ in thousands except share and per share data)

 

The purchase price and related allocation are preliminary and may be revised as a result of adjustments made to the purchase price as additional information regarding assets and liabilities require. Contingent consideration classified as a liability will be remeasured at fair value at each reporting date, until the contingency is resolved, with changes recognized in earnings. The goodwill related to this transaction is expected to be deductible for tax purposes over 15 years.

 

The Company incurred approximately $430 in acquisition related costs applicable to the Big Buddha transaction during the period ended June 30, 2010. These expenses are included in operating expenses in the Company’s Condensed Consolidated Statements of Income.

 

The results of operations of Big Buddha have been included in the Company’s Condensed Consolidated Statements of Income from the date of the acquisition. Unaudited pro forma information related to this acquisition is not included, as the impact of this transaction is not material to the Company’s consolidated results.

 

Zone 88 and Shakedown Street

 

On July 8, 2009, the Company acquired certain of the assets constituting the Zone 88 and Shakedown Street (together “Zone 88”) lines of SML Brands, LLC, a subsidiary of Aimee Lynn, Inc. SML Brands designs, sources and markets primarily private label accessories and licensed brands, principally handbags, belts and small leather goods, for mass merchants and mid-tier retailers. Management believes that Zone 88 is a strategic fit for the Company. The acquisition was completed for $1,348 in cash. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates. The Company allocated $220 to current assets, $409 to the value of customer relationships, $841 to goodwill and $122 to liabilities assumed. The value of customer relation ships is being amortized over ten years. The results of operations of Zone 88 have been included in the Company’s Condensed Consolidated Statements of Income from the date of the acquisition. Unaudited pro forma information related to this acquisition is not included, as the impact of this transaction is not material to the Company’s consolidated results.

 

Notes to Condensed Consolidated Financial Statements - Unaudited

June 30, 2010

($ in thousands except share and per share data)

Note S – Goodwill and Intangible Assets

The following is a summary of the carrying amount of goodwill by segment for the six months ended June 30, 2010:

 

The following table details identifiable intangible assets as of June 30, 2010:

 

 

The estimated future amortization expense of purchased intangibles as of June 30, 2010 is as follows:

 

Note T – Comprehensive Income

Note U – Commitments, Contingencies and Other

Legal proceedings:

 

 

Note V – Operating Segment Information

The Company operates the following business segments: Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing. The Wholesale Footwear segment, through sales to department stores, mid-tier retailers and specialty stores worldwide, derives revenue from sales of branded and private label women’s, men’s, girls’ and children’s footwear. The Wholesale Accessories segment, which includes branded and private label handbags, belts and small leather goods, derives revenue from sales to department, mid-tier and specialty stores worldwide. The Retail segment, through the operation of Company owned retail stores and the Company’s website, derives revenue from sales of branded women’s, men’s and children’s footwear, accessories and licensed products. The First Cost segment represent s activities of a subsidiary which earns commissions for serving as a buying agent and as a selling agent of footwear products to mass-market merchandisers, mid-tier department stores and other retailers with respect to their purchase of footwear. In the License segment, the Company licenses its Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacturing, marketing and sale of cold weather accessories, sunglasses, eyewear, outerwear, bedding, hosiery and women’s fashion apparel and jewelry.

 

 

Note V – Operating Segment Information (continued)

 

 

Revenues by geographic area for the three- and six-month periods ended June 30, 2010 are as follows:

 

 

 

 

The following discussion of the Company’s financial condition and results of operations should be read in conjunction with the unaudited Financial Statements and Notes thereto appearing elsewhere in this Quarterly Report.

 

 

Overview:

($ in thousands, except retail sales data per square foot and earnings per share)

Steven Madden, Ltd. and its subsidiaries (the “Company”) designs, sources, markets and retails fashion-forward footwear and accessories for women, men and children. We distribute products through department stores, specialty stores, luxury retailers, national chains, mass merchants, our retail stores and our e-commerce website throughout the United States as well as through special distribution arrangements in Canada, Europe, Central and South America, Australia and Asia. Our product line includes a broad range of updated styles which are designed to establish or capitalize on market trends, complemented by core products. We have established a reputation for our creative designs, popular styles and quality products at affordable price points.

On March 24, 2010, the Board of Directors declared a 3-for-2 stock split of the Company’s outstanding shares of common stock, to be effected in the form of a stock dividend on the Company’s outstanding common stock. Stockholders of record at the close of business on April 20, 2010 received one additional share of Steven Madden Ltd. common stock for every two shares of common stock owned on this date. The additional shares were distributed on May 3, 2010. Stockholders received cash in lieu of any fractional shares of common stock they otherwise would have received in connection with the dividend. All share and per share data provided herein gives effect to this stock split, applied retroactively.

Regarding our financial results, we achieved the highest quarterly sales and earnings results in the Company’s history. Our consolidated net sales increased 36% to $158,664 in the second quarter of 2010 when compared to consolidated net sales of $116,472 achieved in the same period of last year. Net income increased 63% in the second quarter of this year to $19,799, compared with $12,144 in the same period last year. As a percentage of net sales, our net income improved to 12% in the second quarter of 2010 from 10% in the same period of last year. Diluted earnings per share for the second quarter of 2010 increased 59% to $0.70 per share on 28,303,000 diluted weighted average shares outstanding compared to $0.44 per share on 27,441,000 diluted weighted average shares outstanding in the second quarter of last year.

Our recent diversification into new brands and product lines has partially contributed to the revenue growth achieved in this quarter. Elizabeth and James, introduced in May of 2009, continues to grow its business with retailers including Neiman Marcus, Saks Fifth Avenue, Nordstrom and others. We introduced Olsenboye, our new collaboration with Mary-Kate and Ashley Olson, in the first quarter of this year. We are producing footwear and accessories under the Olsenboye brand name. Olsenboye is distributed exclusively at JC Penney. Our new men’s line, Madden, has contributed to the sales growth in our Men’s division. The Madden brand offers fashionable products for men at more moderate prices than the Steve Madden brand. In our accessories segment, our two recent acquisitions, Madden Zone, which we acquired in July of last yea r, and Big Buddha, which we acquired in February of 2010, have both contributed to the revenue growth in our accessories division.

In our retail segment, same store sales (sales of those stores, including the e-commerce website, that were in operation throughout the second quarters of 2010 and 2009) increased 7.4%. As of June 30, 2010, we had 84 stores in operation, compared to 92 stores as of June 30, 2009. During the twelve months ended June 30, 2010, sales per square foot improved to $690 compared to $627 achieved in the same period of 2009.

Our annualized inventory turnover improved to 9.9 times in the second quarter of 2010 from 8.6 times in the second quarter of 2009. Our accounts receivable average days outstanding was 55 days in the second quarter of 2010 compared to 52 days in the second quarter of the previous year. As of June 30, 2010, we had $163,962 in cash, cash equivalents and marketable securities, no short- or long-term debt, and total stockholders’ equity of $307,171. Working capital increased to $141,478 as of June 30, 2010, compared to $118,031 on June 30, 2009.

 

The following tables set forth certain selected financial information relating to the results of operations for the periods indicated:

 

Selected Financial Information

Three Months Ended

June 30

($ in thousands)

 

 

 

Selected Financial Information

Six Months Ended

June 30

($ in thousands)

 

 

RESULTS OF OPERATIONS

 ($ in thousands)

 

Consolidated:

 

Net sales for the three months ended June 30, 2010 increased by 36.2% to $158,664 from $116,472 for the comparable period of 2009. Our gross margin increased to 43.4% for the second quarter of 2010 from 42.6% in the same period of 2009. Operating expenses increased in the second quarter of this year to $42,025 from $37,553 in the same period last year. As a percentage of sales, operating expenses decreased to 26.5% in the second quarter of 2010 from 32.2% in the same period of last year, reflecting leverage gained from sales increases. Our commission and licensing fee income decreased to $5,229 in the second quarter of 2010 compared to $7,362 in the second quarter of 2009, primarily due to the transition of one of the Company’s mass merchant customers from a “first cost” model to a “wholesale” model that w as initiated in the first quarter of 2010. Net income for the second quarter of 2010 increased 62.8% to $19,799 compared to net income for the quarter ended June 3, 2009 of $12,144.

 

Wholesale Footwear Segment:

Net sales from the Wholesale Footwear segment accounted for $104,170 or 65.6%, and $74,204 or 63.7% of our total net sales for the second quarter of 2010 and 2009, respectively. All of our Wholesale footwear divisions experienced net sales increases in the second quarter of 2010 over the second quarter of 2009, with double-digit increases in our Madden Girl, Madden Men’s, Steven, Kids, Elizabeth and James and International divisions. Net sales in the Steve Madden Women’s Division increased primarily due to an expansion of our Dillard’s business combined with the strong performance of wedges and dress shoes during the quarter. The net sales growth in Madden Girl is due to deeper market penetration combined with the success of the dress shoe, flat sandal and boot categories. In our Steve Madden Men’s Division, the sales increase is primarily due to our new business with Journey’s combined with the strong performance of the casual shoe category during the quarter. In addition, our new men’s line, Madden, has been met with a favorable response, and has contributed to the net sales growth in the Men’s Division. In our Steven Division, net sales increased in the second quarter of 2010 primarily due to an increase in shipments to the Steven Division’s largest customer Nordstrom, combined with strong sales of wedges during the quarter. Strong selling of flats and boots resulted in a net sales increase in our Kids Division. The Elizabeth and James Division, our new brand that began shipping in the second quarter of 2009, posted another quarter of improved sales primarily to upper tier retailers such as Nordstrom, Saks and Neiman Marcus. Finally, the net sales increase in our International Division was propelled by the Division’s significant growth trend in Eastern Asia and expansion into new co untries

 

Gross profit margin in the Wholesale Footwear segment increased 30 basis points to 38.5% in the second quarter of this year from 38.2% in the same period last year, primarily due to fewer markdowns. In the second quarter of 2010, operating expenses increased to $19,693 from $17,542 in the second quarter last year. As a percentage of sales, operating expenses improved to 18.9% in the current quarter from 23.6% in the same period of last year reflecting our ability to control our fixed costs during a period of double-digit sales growth. As a result of the increases in sales and gross margin net of an increase in operating expenses, income from operations of the Wholesale segment increased 89.2% to $20,442 for the three-month period ended June 30, 2010 compared to $10,803 for the three-month period ended June 30, 2009.

 

Wholesale Accessories Segment:

Net sales generated by the Wholesale Accessories segment accounted for $25,023 or 15.8%, and $13,993 or 12.0% of total Company net sales for the second quarters of 2010 and 2009, respectively. This 78.8% increase in net sales was driven by the sales contributed from our two recent acquisitions, Madden Zone (acquired in July of 2009) and Big Buddha (acquired in February of 2010). In addition, a more than 100% increase in sales of Steve Madden Handbags was partially offset by net sales decreases in Betseyville and Steven handbag product lines.

 

Gross profit margin in the Wholesale Accessories segment increased to 39.5% in the second quarter of this year from 29.5% in the same period last year, primarily due to the significantly higher gross profit margins achieved by our new Big Buddha Division as well as an improvement in gross profit margins for Steve Madden handbags. In the second quarter of 2010, operating expenses increased to $5,445 compared to $3,380 in the prior year primarily due to the incremental costs related to our two recent acquisitions. As a percentage of sales, operating expenses improved to 21.8% in the current quarter from 24.2% in the same period of last year reflecting leverage gained from sales increases. Income from operations for the Wholesale Accessories segment increased to $4,430 for the quarter ended June 30, 2010, compared to $754 for the quarter ended June 30, 2009.

 

Retail Segment:

 

 

First Cost Segment:

 

Licensing Segment:

 

During the quarter ended June 30, 2010, net licensing income decreased to $816 from $973 in the same period of last year.

Consolidated:

 

 

Wholesale Footwear Segment:

Net sales from the Wholesale Footwear segment accounted for $186,925 or 64.4% and $139,405 or 62.3% of our total net sales for the first six months of 2010 and 2009, respectively. While all of our Wholesale footwear divisions posted net sales increases during the period ended June 30, 2010, our Madden Girl, Madden Men’s, Steven, Kids and International divisions all achieved significant double-digit increases in the period. In the Steve Madden Women’s Division, net sales increased primarily due to an expansion of our Dillard’s business combined with the strong performance of wedges and dress shoes during the period. The net sales growth in Madden Girl is due to deeper market penetration combined with the success of the dress shoe and flat sandal categories throughout the period combined with strong boot sales in the se cond quarter and the success of wedges in the first quarter of 2010. In our Steve Madden Men’s Division, the sales increase is primarily due to our new business with Journey’s combined with the strong performance of the casual shoe category during the period in addition to strong dress shoe selling during the first quarter. In addition, our new men’s line, Madden, has been met with a favorable response, and has contributed to the net sales growth in the Men’s Division. In our Steven Division, net sales increased in the second quarter of 2010 primarily due to an increase in shipments to the Steven Division’s largest customer Nordstrom, combined with strong sales of wedges during the second quarter and strong casual boot selling in the first quarter. Strong selling of flats and boots resulted in a net sales increase in our Kids Division. The Elizabeth and James Division, our new brand that began shipping in the second quarter of 2009, continued its growth trend primarily with uppe r tier retailers such as Nordstrom, Saks and Neiman Marcus. Finally, the net sales increase in our International Division was propelled by the Division’s significant growth trend in Eastern Asia and expansion into new countries.

 

 

Gross profit margin increased 160 basis points to 40.4% in the first six months of this year from 38.8% in the same period last year, primarily due to a decrease in off-price sales and markdowns. In the first six months of 2010, operating expenses increased to $38,384 from $32,482 in the same period of 2009. As a percentage of sales, operating expenses improved to 20.5% in the current quarter from 23.3% in the same period of last year reflecting leverage gained from sales increases. Income from operations for the Wholesale Segment increased 71.6% to $37,183 for the six-month period ended June 30, 2010 compared to $21,665 for the same period of 2009.

 

Wholesale Accessories Segment:

Net sales generated by the Wholesale Accessories segment accounted for $45,360 or 15.6% and $30,077 or 13.4% of total Company net sales for the six months ended June 30 of 2010 and 2009, respectively. The 51% growth in net sales in the Accessories segment is due to the sales contributed by our two recent acquisitions, Madden Zone Division (acquired in July of 2009) and Big Buddha (acquired in February of 2010). In addition, significant increases in sales of Steve Madden Handbags and private label belts were partially offset by a net sales decrease in Betseyville brand.

 

Gross profit margin in the Wholesale Accessories segment increased 920 basis points to 40.2% in the first half of this year from 31.0% in the same period last year, primarily due to the significantly higher gross profit margins achieved by our new Big Buddha Division combined with a change in the mix of products and lower markdown allowances. In the first six months of 2010, operating expenses increased to $10,728 compared to $6,510 in the first six months of 2009, primarily due to the incremental operating expenses associated with our new Madden Zone and Big Buddha divisions. Income from operations for the Wholesale Accessories segment increased to $7,485 for the six months ended June 30, 2010 compared to $2,800 for the same period of 2009.

 

 

In the first six months of 2010, net sales from the Retail segment accounted for $57,987 or 20.0% of our total net sales compared to $54,419 or 24.3% in the same period last year. We opened two new stores, closed seven under-performing stores and licensed three stores during the twelve months ended June 30, 2010. As a result, we had 84 retail stores as of June 30, 2010 compared to 92 stores as of June 30, 2009. The 84 stores currently in operation include 79 under the Steve Madden brand, four under the Steven brand and one e-commerce website. Comparable store sales (sales of those stores, including the e-commerce website, that were open throughout the first six months of 2010 and 2009) increased 10.7% in the first six months of this year. The net sales increase was primarily due to a substantial increase in our average selling price as a result of a decrease in promotional sales and the success of wedges and dress shoes during the second quarter and strong boot sales during the first quarter of the year. The gross margin in the Retail segment increased to 60.4% in the six months ended June 30, 2010 from 54.4% in the corresponding six months of 2009 primarily due to the decrease in promotional selling. During the six months ended June 30, 2010, operating expenses decreased to $34,175 or 58.9% as a percentage of net sales, from $34,649 or 63.7% as a percentage of net sales in the same period of last year, primarily due to the eight fewer stores open in the current period. Income from operations for the Retail segment was $831 in the first six months of this year compared to a loss from operations of $5,056 for the same period in 2009.

 

The First Cost segment generated net commission income and design fees of $9,359 for the six-month period ended June 30, 2010 compared to $8,457 for the comparable period of 2009. The growth in the First Cost Division was driven by an increase in revenues from Target, Kohl’s, JC Penney and K-mart that was partially offset by the transition of one of the Company’s mass merchant customers from a “first cost” model to a “wholesale” model that was initiated in the first quarter of 2010.

 

Licensing Segment:

 

 

LIQUIDITY AND CAPITAL RESOURCES

($ in thousands)

 

On July 10, 2009, we entered into a collection agency agreement with Rosenthal & Rosenthal, Inc. (“Rosenthal”) that became effective on September 15, 2009. The agreement provides us with a credit facility in the amount of $30,000, having a sub-limit of $15,000 on the aggregate face amount of letters of credit, at an interest rate that, at our election, is tied to either the prime rate or LIBOR. The agreement can be terminated by Rosenthal at any time with 60 days’ prior written notice, or by us at any time after the expiration of the first contract year with 60 days’ prior written notice. As of June 30, 2010, we have no borrowings against the credit facility.

 

As of June 30, 2010, we had working capital of $141,478. We had cash and cash equivalents of $42,807, investments in marketable securities of $121,155 and we did not have any long term debt.

 

 

OPERATING ACTIVITIES

($ in thousands)

 

 

INVESTING ACTIVITIES

($ in thousands)

 

FINANCING ACTIVITIES

($ in thousands)

 

CONTRACTUAL OBLIGATIONS

($ in thousands)

 

Our contractual obligations as of June 30, 2010 were as follows:

 

 

At June 30, 2010, we had un-negotiated open letters of credit for the purchase of inventory of approximately $4,052.

 

We have an employment agreement with Steven Madden, our founder and Creative and Design Chief, which provides for an annual base salary of $600 subject to certain specified adjustments through December 31, 2019. The agreement also provides for annual bonuses based on EBITDA, revenue of any new business and royalty income over $2 million, plus an equity grant and a non-accountable expense allowance.

 

We have employment agreements with certain executive officers, which provide for the payment of compensation aggregating approximately $1,314 during the remaining six months of 2010, $1,713 in 2011 and $1,211 in 2012. In addition, some of the employment agreements provide for a discretionary bonus and some provide for incentive compensation based on various performance criteria as well as other benefits including stock options. Our Chief Operating Officer is entitled to deferred compensation calculated as a percentage of his base salary.

 

In connection with our acquisition of Big Buddha during the first fiscal quarter of 2010, we are subject to potential earn-out payments to the seller of Big Buddha based on the annual performance of Big Buddha through March 31, 2013.

 

 

INFLATION

 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

The Company has no off-balance sheet arrangements.

 

CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. Estimates by their nature are based on judgments and available information. Our estimates are made based upon historical factors, current circumstances and the experience and judgment of management. Assumptions and estimates are evaluated on an ongoing basis and we may employ outside experts to assist in evaluations. Therefore, actual results could materially differ from those estimates under different a ssumptions and conditions. Management believes the following critical accounting estimates are more significantly affected by judgments and estimates used in the preparation of our Condensed Consolidated Financial Statements: allowance for bad debts, returns, and customer chargebacks; inventory reserves; valuation of intangible assets; litigation reserves and cost of sales.

 

Allowances for bad debts, returns and customer chargebacks. We provide reserves against our trade accounts receivables for future customer chargebacks, co-op advertising allowances, discounts, returns and other miscellaneous deductions that relate to the current period. The reserve against our non-factored trade receivables also includes estimated losses that may result from customers’ inability to pay. The amount of the reserve for bad debts, returns, discounts and compliance chargebacks are determined by analyzing aged receivables, current economic conditions, the prevailing retail environment and historical dilution levels for customers. We evaluate anticipated customer markdowns and advertising chargebacks by reviewing several performance indicators for our major custom ers. These performance indicators (which include inventory levels at the retail floors, sell through rates and gross margin levels) are analyzed by Management to estimate the amount of the anticipated customer allowance. Failure to correctly estimate the amount of the reserve could materially impact our results of operations and financial position.

 

Inventory reserves. Inventories are stated at lower of cost or market, on a first-in, first-out basis. We review inventory on a regular basis for excess and slow moving inventory. The review is based on an analysis of inventory on hand, prior sales, and expected net realizable value through future sales. The analysis includes a review of inventory quantities on hand at period-end in relation to year-to-date sales and projections for sales in the foreseeable future as well as subsequent sales. We consider quantities on hand in excess of estimated future sales to be at risk for market impairment. The net realizable value, or market value, is determined based on the estimate of sales prices of such inventory through off-price or discount store channels. The likelihood of any materia l inventory write-down is dependent primarily on the expectation of future consumer demand for our product. A misinterpretation or misunderstanding of future consumer demand for our product, the economy, or other failure to estimate correctly, in addition to abnormal weather patterns, could result in inventory valuation changes, either favorably or unfavorably, compared to the valuation determined to be appropriate as of the balance sheet date.

 

Valuation of intangible assets. ASC Topic 350, “Intangible – Goodwill and Other”, requires that goodwill and intangible assets with indefinite lives no longer be amortized, but rather be tested for impairment at least annually. This accounting guidance also requires that intangible assets with finite lives be amortized over their respective lives to their estimated residual values, and reviewed for impairment in accordance with ASC Topic 360, “Property, Plant and Equipment” (“ASC Topic 360”). In accordance with ASC Topic 360, long-lived assets, such as property, equipment, leasehold improvements and goodwill subject to amortization, are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carry ing amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.

 

Litigation reserves. Estimated amounts for litigation claims that are probable and can be reasonably estimated are recorded as liabilities in our Condensed Consolidated Financial Statements. The likelihood of a material change in these estimated reserves would be dependent on new claims as they may arise and the favorable or unfavorable events of a particular litigation. As additional information becomes available, management will assess the potential liability related to the pending litigation and revise their estimates. Such revisions in management’s estimates of a contingent liability could materially impact our results of operation and financial position.

 

Cost of sales. All costs incurred to bring finished products to our distribution center and, in the Retail segment, the costs to bring products to our stores, are included in the cost of sales line item on our Condensed Consolidated Statement of Income. These include the cost of finished products, purchase commissions, letter of credit fees, brokerage fees, material and labor and related items, sample expenses, custom duty, inbound freight, royalty payments on licensed products, labels and product packaging. All warehouse and distribution costs are included in the operating expenses line item of our Condensed Consolidated Statements of Income. We classify shipping costs to customers, if any, as operating expense. Our gross profit margins may not be comparable to other companies i n the industry because some companies may include warehouse and distribution as a component of cost of sales, while other companies report on the same basis as we do and include them in operating expenses.

 

($ in thousands)

 

We do not engage in the trading of market risk sensitive instruments in the normal course of business. Our financing arrangements are subject to variable interest rates, primarily based on the prime rate and LIBOR. The terms of our collection agency agreements with Rosenthal & Rosenthal can be found in the Liquidity and Capital Resources section under Item 2 and in Note E to the notes to the Condensed Consolidated Financial Statements included in this Quarterly Report.

 

 

 

As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures as of the end of the fiscal quarter covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were, as of the end of the fiscal quarter covered by this Quarterly Report, effective to ensure that information required to be disclosed in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

As required by Rule 13a-15(d) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated our internal controls over financial reporting to determine whether any changes occurred during the quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report.

 

($ in thousands)

Certain legal proceedings in which we are involved are discussed in Note L to our Condensed Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and in Part I Item 3 of that Annual Report. All proceedings discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 which are not indicated therein as having been dismissed remain outstanding.

 

 

The following table provides information as of June 30, 2010 with respect to the shares of common stock repurchased by the Company during the second quarter of fiscal 2010: