The Daily Magic Formula Stock for 03/13/2008 is Steven Madden Ltd. According to the Magic Formula Investing Web Site, the ebit yield is 25% and the EBIT ROIC is 50-75 %.
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Steven Madden, Ltd. (together with its subsidiaries, the "Company") designs, sources, markets and retails fashion-forward footwear for women, men and children. In addition, the Company designs, sources, markets and retails name brand and private label fashion handbags and accessories through its Daniel M. Friedman Division. The Company distributes products through its retail stores, its e-commerce website, department and specialty stores throughout the United States and Canada and through special distribution arrangements in Europe, Central and South America, Australia and Indonesia. The Company's product line includes a broad range of updated styles which are designed to establish or capitalize on market trends, complemented by core products. The Company has established a reputation for its creative designs, popular styles and quality products at accessible price points.
The Company's business is comprised of three (3) distinct segments (wholesale, retail and first cost divisions). The Wholesale Division includes six (6) core brands: Steve Madden(R), Steve Madden Mens, Candie's(R), SMNY/Madden Girl, Steven(R) and Stevies(R). In addition, the Daniel M. Friedman Wholesale Division, through license agreements, includes the Ellen Tracy, Betsey Johnson and Tracy Reese brands. Steven Madden Retail, Inc., the Company's wholly-owned retail subsidiary, operates Steve Madden(R) and Steven(R) retail stores as well as the Company's e-commerce website. The Company's wholly-owned subsidiary, Adesso-Madden, Inc., acts as a buying agent for footwear products under private labels for many of the country's large mass merchandisers. The Company also licenses its Steve Madden(R) and Steven(R) trademarks for several accessory and apparel categories.
Steven Madden, Ltd. was incorporated as a New York corporation on July 9, 1990 and reincorporated under the same name in Delaware in November 1998. The Company completed its initial public offering in December 1993 and its shares of Common Stock currently trade on The NASDAQ Global Market under the symbol "SHOO".
The Company maintains its principal executive offices at 52-16 Barnett Avenue, Long Island City, NY 11104, telephone number (718) 446-1800.
The Company's website is http://www.stevemadden.com. The Company makes available, free of charge, on its website its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, any amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and its Proxy Statement for its Annual Meeting as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (the "Commission"). The Company will provide paper copies of such filings free of charge upon request.
Madden Women's Wholesale Division
The Steve Madden(R) Women's Wholesale Division ("Madden Women's") designs, produces, sources and markets the Company's Steve Madden(R) brand to major department stores, better specialty stores and independently owned boutiques throughout the United States. The Steve Madden(R) brand has become a leading life-style brand in the fashion conscious marketplace. To serve its customers (primarily women ages 16 to 35), Madden Women's creates and markets fashion forward footwear designed to appeal to customers seeking exciting, new footwear designs at affordable prices.
As the Company's largest division, Madden Women's accounted for $150.3 million of net sales in the year ended December 31, 2006, or approximately 32% of the Company's total net sales. Many new products for Madden Women's are test marketed at the Company's retail stores. Within a few days, the Company can determine if the test product appeals to customers. This enables the Company to use its flexible sourcing model to rapidly respond to changing trends which the Company believes is essential for success in the fashion arena.
Madden Mens Wholesale Division
The Steve Madden Mens Wholesale Division ("Madden Mens") designs, produces, sources and markets a full collection of directional men's shoes through major department stores, better specialty stores and independent shoe stores throughout the United States. Price points range from $70 to $100 at retail, targeted at men ages 20 to 40 years old. Madden Mens accounted for $62.6 million of net sales in the year ended December 31, 2006, or approximately 13% of the Company's total net sales. Madden Mens, which is primarily produced in China, maintains open stock inventory positions in select patterns to serve the replenishment programs of its wholesale customers.
Candie's Wholesale Division
Pursuant to the Company's license agreement with Candie's, Inc.,
("Candie's"), the Company designs, produces, sources and markets Candie's(R)
branded footwear for women and children worldwide through the Company's Candie's Wholesale Division ("Candie's Wholesale"). Candie's Wholesale generated net sales of $27.1 million for the year ended December 31, 2006, or approximately 6% of the Company's total net sales.
On December 6, 2004, the license agreement with Candie's was amended to reflect Candie's decision to name Kohl's Corporation ("Kohl's") as the exclusive provider of a new line of Candie's apparel. Pursuant to the amendment, commencing on January 1, 2007, the Company no longer has the exclusive right to market Candie's(R) branded footwear and is permitted to sell Candie's(R) branded footwear only to Kohl's. Under the terms of the amendment, Candie's has guaranteed that the Company will achieve minimum sales levels with Kohl's during the term of the agreement, which runs through December 31, 2010. In the event such minimum sales levels are not achieved, Candie's is required to compensate the Company in an amount based on a percentage of the sales shortfall. For the year ended December 31, 2006, the minimum sales level was met.
SM New York / Madden Girl - Wholesale Division
The SM New York Wholesale Division ("SMNY/Madden Girl") designs, produces, sources and markets a full collection of directional young women's shoes. In order to consolidate brand identity, the SMNY(TM) brand will transition to "Madden Girl" beginning with the spring 2007 offerings. SMNY/Madden Girl is geared for young women ages 13 to 20 and is an "opening price point" brand that is currently being sold at department stores, mid-tier retailers and specialty stores. SMNY/Madden Girl accounted for $24.5 million of net sales in the year ended December 31, 2006 or approximately 5% of the Company's total net sales.
Diva Acquisition Corp. - Steven(R) Wholesale Division
Diva Acquisition Corp. ("Steven(R)") designs, produces, sources and markets women's fashion footwear under the Steven(R) trademark through major department and better footwear specialty stores throughout the United States. Priced a tier above the Steve Madden(R) brand, Steven(R) products are designed to appeal principally to fashion conscious women, ages 26 to 45, who shop at department stores and footwear boutiques. Steven(R) generated net sales of $22.1 million for the year ended December 31, 2006, or approximately 5% of the Company's total net sales.
Stevies - Wholesale Division
The Company's Stevies(R) Wholesale Division ("Stevies(R)") designs, produces, sources and markets footwear for young girls to major department stores, such as Federated Department Stores and Belk, better specialty stores and independent boutiques throughout the United States. Stevies(R) generated net sales of $7.6 million for the year ended December 31, 2006 or approximately 2% of the Company's total net sales.
Daniel Friedman Wholesale Division
On February 7, 2006, the Company acquired all of the equity interest of privately held Daniel M. Friedman and Associates, Inc. The acquisition was completed for consideration of $18.7 million, including transaction costs. In addition, the purchase agreement provides for certain earn out payments based on financial performance through 2010. The Company's Daniel M. Friedman Wholesale Division ("Daniel M. Friedman") designs, sources and markets name brand and private label fashion handbags and accessories to major department stores, value price retailers and better specialty stores throughout the United States. Daniel M. Friedman generated net sales of $51.3 million from the date of acquisition until December 31, 2006 or approximately 11% of the Company's total net sales.
Steven Madden Retail, Inc.
As of December 31, 2006, the Company owned and operated ninety-three
(93) retail shoe stores under the Steve Madden(R) name, two (2) under the Steven(R) name and one (1) Internet store (through the www.stevemadden.com website). In 2006, the Company opened four (4) new stores and closed six (6) under-performing stores. Steve Madden stores are located in major shopping malls and in street locations across the United States. In 2006, the retail stores generated annual sales in excess of $719 per square foot. Sales are primarily from the Company's Steve Madden(R) products. Comparative store sales (sales of those stores that were open for all of 2006 and 2005) increased 4% in 2006 compared to 2005. Net sales for the Retail Division were $127.7 million for the year ended December 31, 2006, or approximately 27% of the Company's total net sales.
The Company believes that the Retail Division will continue to enhance overall sales and profitability while building equity in the Steve Madden brand. The Company plans to add eight to ten (8 to 10) new retail stores during 2007. The expansion of the Retail Division enables the Company to test and react to new products and classifications which, in turn, strengthens the product development efforts of the Steve Madden Wholesale Division.
First Cost Division
In September 1995, the Company incorporated Adesso-Madden, Inc. as a wholly owned subsidiary ("A-M"). A-M was formed to serve as a buying agent to mass-market merchants, shoe store chains and other value-priced retailers in connection with the procurement of their footwear needs. As a buying agent, A-M arranges for shoe manufacturers to produce private label shoes to its customers specifications. The Company believes that by operating in the private label, mass merchandising market, it is able to maximize additional non-branded sales opportunities. This leverages the Company's overall sourcing and design capabilities. Currently, this division serves as a buying agent for the procurement of women's, men's and children's footwear for large retailers, including Target, Wal-Mart, Mervyns, J.C. Penney and Sears. A-M receives buying agent's commissions from its customers. In addition, the Company has leveraged the strength of its Steve Madden brands and product designs resulting in a partial recovery of its design, product and development costs from its suppliers. The First Cost Division generated operating income of $11.3 million for the year ended December 31, 2006.
As of December 31, 2006, the Company licensed its Steve Madden(R) and Steven(R) trademarks for use in connection with the manufacturing, marketing and sale of cold weather accessories, sunglasses, eyewear, watches, dresses and girl's apparel. Most of the license agreements require the licensee to pay to the Company a royalty based on actual net sales, a minimum royalty in the event that specified net sales targets are not achieved and a percentage of sales for advertising the brand. Licensing income for the year ended December 31, 2006 was $2.9 million.
The Company has established a reputation for its creative designs, marketing and trendy products at affordable price points. The Company believes that its future success will substantially depend on its ability to continue to anticipate and react to changing consumer demands in a timely manner. To meet this objective, the Company has developed an unparalleled design process that allows it to recognize and act quickly to changing consumer demands. The Company's design team strives to create designs which it believes fit the Company's image, reflect current or future trends and can be manufactured in a timely and cost-effective manner. Once the initial design is complete, a prototype is developed, which is reviewed and refined prior to the commencement of initial production. Most new products are then tested in selected Steve Madden(R) retail stores. Designs that prove popular are then offered for wholesale and retail distribution nationwide. The Company believes that its design and testing process and flexible sourcing model is a significant competitive advantage allowing the Company to mitigate the risk of production costs and the distribution of less desirable designs.
Product Sourcing and Distribution
The Company sources each of its product lines separately based on the individual design, styling and quality specifications of the products in such product lines. The Company does not own or operate manufacturing facilities; rather, it sources its branded products through agents with independently owned manufacturers in China, Brazil, Italy, Mexico, Spain, Portugal and the United States. The Company has established relationships with a number of manufacturers and agents in each of these countries. Although the Company has not entered into any long-term manufacturing or supply contracts, the Company believes that a sufficient number of alternative sources exist for the manufacture of its products. The Company continually monitors the availability of the principal materials used in the Company's footwear, which are available from a number of sources, both within the United States and in foreign countries. The Company tracks inventory flow on a regular basis, monitors sell-through data and incorporates input on product demand from wholesale customers. The Company uses retailers' feedback to adjust the production or manufacture of new products in as little as five weeks, which minimizes the close out of slow moving products.
The Company distributes its products from three (3) third-party distribution warehouse centers located in California and New Jersey. By utilizing distribution facilities that specialize in distributing products to certain wholesale accounts, Steve Madden(R) retail stores and Internet fulfillment, the Company believes that its customers are better served.
The Company's wholesale customers consist principally of department stores and specialty stores, including independent boutiques. Approximately 82% of its wholesale revenue is generated from department and specialty stores, including Federated Department Stores (Macy's and Bloomingdale's) Lord and Taylor, Dillard's, Nordstrom, Journeys, Limited Too and Mandees; and catalog retailers, including Victoria's Secret and Fingerhut. For the year ended December 31, 2006, Federated Department Stores accounted for approximately $60.7 million, or 17% of the Company's wholesale net sales and 13% of the Company's total net sales.
The Company sells its products principally through its Company-owned retail stores and through department stores, specialty stores and discount stores in the United States and abroad. For the year ended December 31, 2006, net sales from the Company's Retail Division and the Company's Wholesale Division accounted for approximately $127.7 million (27%) and $347.5 million (73%) of the Company's total net sales, respectively. The following paragraphs describe each of these distribution channels.
Steve Madden and Steven Retail Stores
As of December 31, 2006, the Company operated ninety-four (94) Company-owned retail stores (including one Internet store) under the Steve Madden(R) name and two (2) under the Steven(R) name. The Company believes that its retail stores will continue to enhance overall sales, profitability, and its ability to react to changing consumer trends. The stores are also a marketing tool that allows the Company to strengthen brand recognition and to showcase selected items from its full line of branded and licensed products. Furthermore, the retail stores provide the Company with a venue to test and introduce new products and merchandising strategies. Specifically, the Company often tests new designs at its Steve Madden(R) retail stores before scheduling them for mass production and wholesale distribution. In addition to these test marketing benefits, the Company has been able to leverage sales information gathered at Steve Madden(R) retail stores to assist its wholesale customers in order placement and inventory management.
A typical Steve Madden(R) store is approximately 1,400 to 1,600 square feet and is located in a mall or street location that the Company expects will attract the highest concentration of the Company's core demographic, style-conscious customer base. The Steven(R) stores have a more sophisticated design and format styles to appeal to their more mature target audience. In addition to carefully analyzing mall demographics and locations, the Company also sets profitability guidelines for each potential store site. Specifically, the Company targets well trafficked sites at which the demographics fit the Company's consumer profile and seeks new locations where the projected fixed annual rent expense stays within Company guidelines. By setting these guidelines, the Company seeks to identify stores that will contribute to the Company's overall profitability both in the near- and longer-terms.
The Company currently sells to over 9,800 doors of 58 department stores throughout the United States and Canada. The major accounts include Federated Department Stores (Macy's and Bloomingdale's), Lord and Taylor, Nordstrom and Dillard's.
The Company provides merchandising support to its department store customers which includes in-store fixtures and signage, supervision of displays and merchandising of the Company's various product lines. The Company's wholesale merchandising effort includes the creation of in-store concept shops, where a broader collection of the Company's branded products are showcased. These in-store concept shops create an environment that is consistent with the Company's image and enable the retailer to display and sell a greater volume of the Company's products per square foot of retail space. In addition, these in-store concept shops encourage longer term commitment by the retailer to the Company's products and enhance consumer brand awareness.
In addition to merchandising support, the Company's key account executives maintain weekly communications with their accounts to guide them in placing orders and to assist them in managing inventory, assortment and retail sales. The Company leverages its sell-through data gathered at its retail stores to assist department stores in allocating their open-to-buy dollars to the most popular styles in the product line and to phase out styles with weaker sell-throughs, which minimizes markdown exposure at seasons end.
Specialty Stores/Catalog Sales
The Company currently sells to specialty store locations throughout the United States. The Company's major specialty store accounts include Journeys, Mandees, Famous Footwear and DSW. The Company offers its specialty store accounts the same merchandising, sell-through and inventory tracking support offered to its department store accounts. Sales of the Company's products are also made through various catalogs, such as Victoria's Secret.
The Company operates an Internet website: www.stevemadden.com, where customers can purchase numerous styles of the Company's Steve Madden(R), Steven(R) and Steve Madden Mens footwear and accessory products.
Steve Madden(R) products are available in many countries and territories worldwide via several retail selling and distribution agreements. Under the terms of the retail selling agreements, the distributors and retailers are required to open a minimum number of stores each year and to pay the Company a fee for each pair of footwear purchased, and in many cases, an additional fixed amount per pair or an additional amount based on a percentage of sales. Under the terms of the distribution agreements, the distributor is required to purchase certain minimum amounts of Steve Madden(R) shoes. These agreements, which expire at various times through December 31, 2012, are exclusive in their specific territories which include Canada, Australia, New Zealand, Israel, UAE, Bahrain, Qatar, Oman, Indonesia, Mexico, South Africa, Turkey and several countries in Central and South America.
The fashion footwear industry is highly competitive. The Company competes with specialty shoe companies as well as companies with diversified footwear product lines. Many of these competitors, including Diesel, Kenneth Cole, Nine West, DKNY, Skechers, Nike and Guess, may have greater financial and other resources than the Company. The Company believes effective advertising and marketing, fashionable styling, high quality and value are the most important competitive factors and intends to continue to employ these elements as it develops its products.
Marketing and Sales
The Company has focused on creating an integrated brand building program to establish Steve Madden as a leading designer of fashion footwear for style-conscious young women and men. As a result, the Company developed a national advertising campaign for lifestyle and fashion magazines which was also used in regional marketing programs such as radio advertisements, television commercials, outdoor media, college event sponsorship and live online chat forums. The Company also continues to promote its website (www.stevemadden.com) where customers can purchase Steve Madden(R), Steven(R) and Steve Madden Mens products and interact with the Company.
Management Information Systems (MIS) Operations
Sophisticated information systems are essential to the Company's ability to maintain its competitive position and to support continued growth. The Company operates on a dual AS/400 system which provides system support for all aspects of its business including manufacturing purchase orders, customer purchase orders, order allocations, invoicing, accounts receivable management, real time inventory management, quick response replenishment, point-of-sale support, and financial and management reporting functions. The Company has a PKMS bar coded warehousing system that is integrated with the wholesale system in order to provide accurate inventory positions and quick response size replenishment for its customers. In addition, the Company has installed an EDI system which provides a computer link between the Company and certain wholesale customers that enables both the customer and the Company to monitor purchases, shipments and invoicing. The EDI system also improves the Company's ability to respond to customer inventory requirements on a weekly basis.
Receivables Financing; Line of Credit
On July 1, 2005, the Company entered into a factoring agreement with GMAC Commercial Finance LLC ("GMAC"). The agreement, which has no specific expiration date and can be terminated by either party with sixty (60) days written notice after June 30, 2007, provides the Company with a $25 million credit facility with a $15 million sub-limit on direct borrowings. Under the terms of the agreement, the Company may request advances from the factor up to 80% of aggregate receivables purchased by the factor at an interest rate of two and one-half percent (2.5%) over the 30 day LIBOR. The Company also pays a fee equal to 0.325% of the gross invoice amount of each receivable purchased. Prior to July 1, 2005, the Company had a factoring agreement with Capital Factors, Inc. The Company sells and assigns a substantial portion of its receivables, principally without recourse, to the factor. As of December 31, 2006 and 2005, $260,000 and $555,000 of factored receivables, respectively, were sold by the Company with recourse. GMAC will maintain a lien on all of the Company's receivables and assume the credit risk for all assigned accounts approved by them with certain restrictions.
The Company's Daniel M. Friedman Division has a factoring agreement with Wells Fargo Century. Under the terms of the agreement, the Company is eligible to draw down 85% of its invoiced receivables at an interest rate equal to the prime rate. The Company pays a fee equal to 0.45% of the gross invoice amount of each receivable purchased. Wells Fargo Century will maintain a lien on all of the Daniel M. Friedman's receivables and assume the credit risk for all assigned accounts approved by them with certain restrictions. The expiration date on this agreement is June 30, 2007 with automatic one-year renewals thereafter.
Trademarks and Service Marks
The STEVE MADDEN and/or STEVE MADDEN plus Design trademarks and service marks have been registered in numerous International Classes in the United States (Int'l Cl. 25 for clothing and footwear; Int'l Cl. 18 for leather goods, such as handbags and wallets; Int'l Cl. 9 for eyewear; Int'l Cl. 14 for jewelry; Int'l Cl. 3 for cosmetics and fragrances; Int'l Cl. 20 for picture frames and furniture; Int'l Cl. 16 for paper goods; Int'l Cl. 24 for bedding; and Int'l Cl. 35 for retail store services). The Company also has pending trademark applications in the United States for the mark STEVE MADDEN and/or STEVE MADDEN (design) in numerous international classes (Class 2 for paints, Class 4 for candles, Class 6 for key chains and id bracelets, Class 11 for lamps, Class 14 for jewelry and watches, Class 18 for bags and leather goods, Class 21 for housewares, Class 26 for hair accessories, Class 27 for rugs and carpets, Class 28 for sporting goods, and Class 32 for light beverages).
On February 5, 2007, the Company employed approximately one thousand four hundred and ninety-eight (1,498) employees, of whom approximately four hundred eighty (480) work on a full-time basis and approximately one thousand and eighteen (1,018) work on a part-time basis, most of whom work in the Retail Division. The management of the Company considers relations with its employees to be good.
Jamieson A. Karson has been the Chief Executive Officer of the Company since July 1, 2001 and Chairman of the Board of Directors since July 22, 2004. Mr. Karson was the Vice Chairman of the Board of Directors of the Company from July 1, 2001 until such time that he became the Chairman of the Board of Directors. Mr. Karson has been a director of the Company since January 2, 2001. Prior to joining the Company as Chief Executive Officer, Mr. Karson practiced law for over 17 years. He was a partner in the New York City law firm of Tannenbaum Helpern Syracuse & Hirshtritt LLP from January 1, 1997 through June 30, 2001, where he served on the firm's three person Finance Committee. He was a partner at the law firm of Karson McCormick from February 1992 through December 31, 1996. Prior to that, Mr. Karson was an associate attorney at the law firm of Shea & Gould.
Jeffrey Birnbaum has been a director of the Company since June 2003. Mr. Birnbaum has been the Product Development Manager of Dolphin Footwear Company since August 1982. Dolphin is one of the Company's domestic and foreign suppliers. Mr. Birnbaum graduated from Tulane University in 1982.
Marc S. Cooper has been a director of the Company since July 2001. Mr. Cooper has served as a Managing Director of Peter J. Solomon Company in its Mergers and Acquisitions Department since May 1999. Previously, Mr. Cooper worked at Barington Capital Group from March 1992 to May 1999, where he was a founding member and Vice Chairman overseeing its investment banking operations.
Harold D. Kahn has been a director of the Company since December 2004. Mr. Kahn currently heads HDK Associates, a consulting company that advises financial and investment groups. Mr. Kahn served as the Chief Executive Officer of Macy's East from January 1994 through March 2004. Currently, Mr. Kahn also serves as a Director of The Wet Seal, Inc. and Ronco Corporation.
John L. Madden has been a director of the Company since the Company's inception. From April 1998 through September 2003, Mr. Madden owned a branch office of Tradeway Securities Group, Inc. in Florida. From May 1996 through December 1996, Mr. Madden's consulting company, JLM Consultants, Inc., acted as a branch office of Merit Capital, Inc. for several broker-dealers. From May 1994 to May 1996, Mr. Madden served as Vice President of Investments for GKN Securities, Inc. From August 1993 to April 1994, Mr. Madden was employed by Biltmore Securities, Inc. as Managing Director and registered sales representative. Mr. Madden is the brother of Steven Madden, the Company's founder and Creative and Design Chief.
Peter Migliorini has been a director of the Company since October 1996. Mr. Migliorini has served as Sales Manager for Greschlers, Inc., a supply company located in Brooklyn, New York, since 1994. From 1987 to 1994, Mr. Migliorini served as Director of Operations for Mackroyce Group. Mr. Migliorini has previously served in a number of capacities, ranging from Assistant Buyer to Chief Planner/Coordinator, for several shoe companies, including Meldisco Shoes, Perry Shoes and Fasco Shoes.
Richard P. Randall has been a director of the Company since April 2006. Mr. Randall was the Executive Vice President and Chief Financial Officer of Direct Holdings Worldwide, LLC, the parent company of Lillian Vernon Corp. and TimeLife, from 2002 until his retirement in June 2005. Previously, Mr. Randall served as Senior Vice President and Chief Financial Officer of Coach, Inc. and the Chief Operating Officer and Chief Financial Officer of Lillian Vernon Corp. from 2000 to 2001 and 1998 to 2000, respectively. Currently, Mr. Randall serves as a Director of The Burke Rehabilitation Hospital.
Thomas H. Schwartz has been a director of the Company since May 2004. Since March 2007, Mr. Schwartz has been the Chief Executive Officer and sole owner of Summer and Forge Investors LLC, a company that invests in real estate and manages properties in which it has ownership interests. Previously, Mr. Schwartz was a Managing Director of Helmsley-Spear, Inc. from 1984 to March 2007.
Walter Yetnikoff has been a director of the Company since May 2005. Mr. Yetnikoff has served as Chief Executive Officer of Commotion Records, a company he co-founded, since 2003. From 2001 through 2003, Mr. Yetnikoff was self-employed as a researcher and writer. Mr. Yetnikoff served as President of CBS Records from 1975 to 1990 and served on the Board of Directors of CBS, Inc. from 1975 through 1988.
Pay Elements - Overview
The Company utilizes four main components of compensation:
o Base Salary
o Annual Performance-based Cash Bonuses
o Long-term Equity Incentives (consisting of stock options and restricted stock)
o Benefits and Perquisites
Pay Elements - Details
Base Salary. The Company pays base salaries to each of the Named Executive Officers to provide them with fixed pay that takes into account the Named Executive Officer's role and responsibilities, experience, expertise and individual performance. As more fully described in "--Employment Arrangements," the Company has employment agreements with each of the Named Executive Officers. You should refer to that section of this Proxy Statement for a full description of each Named Executive Officer's base salary. The Compensation Committee, as constituted at the time the parties entered into the employment agreements, reviewed and approved the salary established in each such agreement. The Compensation Committee took into account each of the employee's historic salary, value in the marketplace and performance (including at the Company and previous employment). Under their respective employment agreements, the base salaries of Messrs. Karson and Schmertz and Ms. Varela remain constant during the term of their employment agreements. Under Mr. Dharia's employment agreement, his base salary increased from $240,000 in 2005 to $425,000 in 2006 and is scheduled to increase by 2.5% in 2007 and by 5% in each of 2008 and 2009. Under Mr. Sinha's employment agreement, his base salary is subject to an annual 5% increase and if the Company's earnings before interest and taxes ("EBIT") for a 12-month period increases more than 5% over the Company's EBIT for the preceding 12-month period, then he is entitled to a 10% increase of base salary in lieu of the annual 5% increase. See "--Summary Compensation Table" and "--Employment Arrangements." Salary increases for officers are generally consistent with those of other management employees.
Annual Performance-based Cash Bonus. Each Named Executive Officer's annual performance-based cash bonus is established in their respective employment agreement. The Compensation Committee reviewed and approved the bonus provisions set in each such employment agreement at the time the parties entered into such agreements and generally provide for variable or discretionary bonuses designed to reward attainment of business goals. The amount, if any, of the annual performance-based cash bonuses of Messrs. Karson, Dharia and Schmertz is entirely within the discretion of the Board of Directors or the Compensation Committee. The Board of Directors and/or the Compensation Committee consider various criteria. Mr. Sinha's and Ms. Varela's annual performance-based cash bonuses are each tied to increases in the Company's EBIT from the preceding year. Mr. Sinha is entitled to an annual performance-based cash bonus equal to 3% of the increase in the Company's EBIT for such fiscal year over the EBIT of the immediately prior fiscal year. Ms. Varela is entitled to an annual performance-based cash bonus for each fiscal year in an amount equal to 2% of the increase in the Company's wholesale division's EBIT for such fiscal year over the Company's wholesale division's EBIT for the prior fiscal year. Each of Mr. Sinha's and Ms. Varela's annual performance-based cash bonus targets were set to drive the business of their respective divisions. See "--Employment Arrangements."
Long-term Equity Incentives. Management and the Compensation Committee believe that equity based awards are an important factor in aligning the long-term financial interest of the officers and stockholders. The Compensation Committee continually evaluates the use of equity-based awards and intends to continue to use such awards in the future as part of designing and administering the Company's compensation program. Beginning in 2006, the Compensation Committee replaced its practice of granting equity incentives solely in the form of stock options with restricted stock awards in order to grant awards that contain both substantial incentive and retention characteristics. These awards are designed to provide emphasis on preserving stockholder values generated in recent years while providing significant incentives for continuing growth in stockholder value. All grants are issued on the date they are approved by the Compensation Committee. With respect to stock options, the exercise price is always the grant date closing market price per share. The restricted stock uses time-based vesting and vests in four or five equal annual installments beginning on the first anniversary of the grant date, provided that, with the exception to grants to Mr. Karson or as may otherwise be indicated in individual grants, no termination of service has occurred by each applicable vesting date. All shares of restricted stock granted to Mr. Karson will vest and cease to be restricted stock if the Company does not renew Mr. Karson's employment agreement or if Mr. Karson is terminated by the Company without "cause." Any dividends paid on the restricted stock are held by the Company uninvested and without interest until delivered to the holder at the end of the restricted period of the underlying shares of restricted stock that relates to such dividends.
Other Benefits and Perquisites. The Company's executive compensation program also includes other benefits and perquisites. These benefits include annual matching contributions to executive officers' 401(k) plan accounts, company-paid medical benefits, automobile allowances and life insurance coverage. The Compensation Committee annually reviews these other benefits and perquisites and makes adjustments as warranted based on competitive practices, the Company's performance and the individual's responsibilities and performance. In addition to the executive benefits and perquisites provided to other senior executives, Mr. Karson is reimbursed for, or the Company directly pays certain membership dues for social or professional organizations that Mr. Karson chooses to join. The Compensation Committee has approved these other benefits and perquisites as a reasonable component of the Company's executive officer compensation program. (See the "All Other Compensation" column and corresponding footnotes in the Summary Compensation Table.)
The Company utilizes the particular elements of compensation described above because the Company believes that it provides a well-proportioned mix of secure compensation, retention value and at-risk compensation which produces short-term and long-term performance incentives and rewards. By following this approach, the Company provides the executive a measure of security in the minimum expected level of compensation, while motivating the executive to focus on business metrics and other variables within their particular sector which will increase sales and margins and at the same time lower costs so as to produce a high level of short term and long term performance for the Company and long-term wealth creation for the executive, as well as reducing the risk of recruitment of top executive talent by competitors. The mix of metrics used for the annual performance bonuses and the Company's long-term incentive program likewise provides an appropriate balance between short-term financial performance and long-term financial and stock performance.
For Named Executive Officers, the mix of compensation is weighted heavily toward at-risk pay (annual incentives and long-term incentives). Maintaining this pay mix results fundamentally in a pay-for-performance orientation for the Company's executives, which is aligned with the Company's stated compensation philosophy of providing compensation commensurate with performance.
Pay Levels and Benchmarking
Pay levels for executives are determined based on a number of factors, including the individual's roles and responsibilities within the Company, the individual's experience and expertise, the pay levels for peers within the Company, pay levels in the marketplace for similar positions and performance of the individual and the Company as a whole. The Compensation Committee is responsible for approving pay levels for the Named Executive Officers. In determining the pay levels, the Compensation Committee considers all forms of compensation and benefits.
The Compensation Committee assesses "competitive market" compensation using a number of sources. The primary data source used in setting competitive market levels for the Named Executive Officers is the information publicly disclosed by a peer group of the Company, which will be reviewed annually and may change from year to year. The peer group of companies is Nine West Group Inc., Kenneth Cole Production, Inc., Guess?, Inc., bebe stores, inc., Brown Shoe Company, Inc., Genesco Inc., The Stride Rite Corporation and SKECHERS USA, Inc.
After consideration of the data collected on external competitive levels of compensation and internal needs, the Compensation Committee makes decisions regarding the Named Executive Officer's target total compensation opportunities based on the need to attract, motivate and retain an experienced and effective management team.
Relative to the competitive market data, the Compensation Committee generally intends that the base salary and target annual incentive compensation for each Named Executive Officer will be at the median of the competitive market.
As noted above, notwithstanding the Company's overall pay positioning objectives, pay opportunities for specific individuals vary based on a number of factors such as scope of duties, tenure, institutional knowledge and/or difficulty in recruiting a new executive. Actual total compensation in a given year will vary above or below the target compensation levels based primarily on the attainment of operating goals and the creation of stockholder value.
Compensation Committee Discretion
The Compensation Committee retains the discretion to decrease all forms of incentive payouts based on significant individual or Company performance shortfalls, with the exception the bonuses paid to Mr. Sinha and Ms. Varela, which are tied to the Company's EBIT for the preceding year pursuant to their respective employment agreements. Likewise, the Compensation Committee retains the discretion to increase payouts and/or consider special awards for significant achievements, including but not limited to superior asset management, investment or strategic accomplishments and/or consummation of acquisitions, divestitures, capital improvements to existing properties, or sales made by certain of the Company's divisions.
MANAGEMENT DISCUSSION FROM LATEST 10K
($ in thousands, except retail sales data per square foot and per share data)
For the year ended December 31, 2006, diluted earnings per share increased 127% and net income increased 141% over the prior year. The earnings growth in the year is the result of a 26% increase in net sales, an increase in gross profit margins of 5% to 42% from 37% in the prior year, an increase in net commission and licensing fee income of 100%, and a decrease in operating expenses as a percentage of net sales of 3%.
During the year, the Company made progress on its stated goal to evolve Steve Madden into a global lifestyle brand by expanding its product offerings though acquisitions and licensing agreements. On February 7, 2006, the Company acquired all of the equity interest of privately held Daniel M. Friedman and Associates, Inc. and D.M.F. International (collectively, "Daniel M. Friedman"). Founded in 1995, Daniel M. Friedman (a former licensee of the Company) is a manufacturer and distributor of name brand fashion handbags and accessories. In 2006, Daniel M. Friedman contributed net sales of approximately $51,316. The Company has recently launched two new brands. SMNY, which began shipping in the fourth quarter of 2005, contributed net sales of approximately $24,451, and is now in over 5,200 doors. In order to consolidate brand identity, the SMNY brand will transition to Madden Girl beginning with the spring 2007 collection. Natural Comfort delivered initial shipments in the second quarter of 2006. Natural Comfort is an owned brand of fashion-forward comfort footwear. On the licensing front, the Company signed four new licensing agreements during the year for "watches" under the Steve Madden and Steven by Steve Madden brands, "girls' apparel" marketed through J.C. Penney under the Stevies brand, "dresses" under the Steve Madden and Steven by Steve Madden brands and "cold weather accessories" under the Steve Madden and Steven by Steve Madden brands.
In line with prior commitments to enhance shareholders value, the Board of Directors approved a special one-time cash dividend of $1.00 per share of outstanding common stock that was paid on November 22, 2006. Combined with the $8.3 million of share repurchased in 2006, the total amount of capital returned to shareholders in 2006 amounted to approximately $29.4 million, which is in addition to the approximately $21.5 million returned to shareholders in 2005. The Company was able to provide this special dividend and repurchase of stock while still reinvesting in the business and funding management's initiatives for future growth.
The Retail Division continued its strong performance. Gross profit margin in the Retail Division increased to 54% of net sales in 2006 compared to 50% in 2005. This 400 basis point increase in gross profit was the result of more trendy product assortment, improved inventory controls and reduced freight costs resulting in a decrease of promotional activity, and the closure of six under performing stores. Same store sales (sales in stores that were in operation throughout all of 2006 and 2005) increased 4%. Store sales productivity remained high with sales per square foot of $719. The Company is planning to open eight to ten new stores in 2007.
The Company's annualized inventory turnover was 7.2 times in 2006 compared to 7.9 times in 2005, reflecting the slower turnover rate inherent in Daniel M. Friedman Division because of its replenishment business. The Company's accounts receivable average collection days increased to 59 days in 2006 compared to 57 days in 2005 because of the longer payment terms of the Daniel M. Friedman Division. As of December 31, 2006, the Company had $108,885 in cash, cash equivalents and marketable securities, no short or long-term debt, and total stockholders equity of $211,924. Working capital increased to $151,711 as of December 31, 2006, compared to $114,066 on December 31, 2005. During the year ended December 31, 2006, net cash provided by operating activities increased to $43,408 as compared to $38,138 in the same period last year.
Year Ended December 31, 2006 vs. Year Ended December 31, 2005
Total net sales for the year ended December 31, 2006 increased by 26% to $475,163 from $375,786 for the comparable period of 2005. The total increase resulted from a 37% growth in the Wholesale Division combined with a 5% growth in the Retail Division.
Gross profit margin increased to 42% for the year ended December 31, 2006 from 37% for the prior year. Both the Wholesale and the Retail Divisions achieved significant increases in their gross profit margins. The gross profit margin for the Wholesale Division increased to 37% for the year ended December 31, 2006 from 31% for the comparable period of 2005, and in the Retail Division, the gross profit margin increased to 54% as compared to 50% for the comparable period of 2005. A portion of the increased gross margin was the result of improved inventory management which resulted in fewer markdowns.
Operating expenses increased to $134,377 in the year ended December 31, 2006 from $114,185 in the same period of 2005. The increase in dollars was primarily caused by the incremental costs associated with the acquisition of Daniel M. Friedman and the addition of the SMNY/Madden Girl division, an increase in sales growth related variable expenses such as warehouse and distribution costs, and an increase in incentive based employee compensation. As a percentage of net sales, operating expenses decreased to 28% for the year ended December 31, 2006 from 31% in the same period of 2005, reflecting the Company's ability to leverage its expense structure against the increase in sales.
Income from operations was $78,298 for the year ended December 31, 2006 compared to $31,570 for the comparable period of 2005. Net income increased by 141% to $46,250 for the year ended December 31, 2006 compared to $19,200 for the year ended December 31, 2005. This increase in income was primarily due to the increase in net sales, the higher gross profit margin, a substantial increase in commission income and the contribution of the Daniel M. Friedman Division.
Net sales from the Wholesale Division accounted for $347,509 or 73%, and $254,275 or 68% of total net sales for the years ended December 31, 2006 and 2005, respectively. This increase resulted from the incremental sales contributed by the recently acquired Daniel M. Friedman and significant sales growth in Madden Womens, Madden Mens, Candie's and Steven as well as the contribution of the new brands, SMNY/Madden Girl and Natural Comfort. Gross profit margin increased to 37% of net sales for the year ended December 31, 2006 from 31% in the prior year, primarily due to a significant decrease in off-price sales and lower inventory markdowns and allowances. Operating expenses increased to $75,328 for the year ended December 31, 2006 from $59,958 in the comparable period of 2005. This increase is primarily due to an increase in direct selling expenses reflective of the 37% growth in sales, incentive bonuses and the incremental costs associated with the new brands SMNY/Madden Girl and Natural Comfort, as well as the acquisition of Daniel M. Friedman. As a percentage of net sales, operating expenses decreased to 22% for the year ended December 31, 2006 from 24% for the prior year, reflecting the Company's ability to leverage its expense structure against the increase in sales. Income from operations for the Wholesale Division increased to $57,092 for the year ended December 31, 2006 compared to $21,311 for the year ended December 31, 2005.
Net sales from the Retail Division accounted for $127,654 or 27% and $121,511 or 32% of total net sales for the years ended December 31, 2006 and 2005, respectively. The Company opened four new stores and closed six under-performing stores during the current year. As a result, the Company had 96 retail stores as of December 31, 2006 compared to 98 stores as of December 31, 2005. The 96 stores currently in operation include 93 under the Steve Madden name, two under the Steven name and one internet store. Comparable store sales (sales of those stores, including the internet store, that were open for all of 2006 and 2005) for the year ended December 31, 2006 increased 4% over the same period of 2005.
Gross profit as a percentage of net sales increased to 54% for the year ended December 31, 2006 from 50% in the comparable period of 2005, primarily due to a significant decrease in promotional sales, improved inventory controls and freight savings. Operating expenses for the Retail Division were $59,049 for the year ended December 31, 2006 and $54,227 for the comparable period of 2005. This increase was primarily due to the non-cash write off of unamortized assets associated with the remodeling of nine stores and the closing of six stores in the current period that accounted for $1,858. Income from operations for the Retail Division was $9,885 for the year ended December 31, 2006 compared to $5,426 for the same period in 2005.
First Cost Division:
The First Cost Division generated net commission income and design fees of $11,321 for year ended December 31, 2006, compared to $4,833 for the comparable period of 2005. The increase was the result of growth in the private label business and, in addition, the Company's ability to leverage the strength of its Steve Madden brands and product designs resulting in a partial recovery of its design, product and development costs through its suppliers.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Three Months Ended September 30, 2007 vs. Three Months Ended September 30, 2006
Total net sales for the three-month period ended September 30, 2007 decreased by 8% to $113,395 from $123,240 for the comparable period of 2006. Net sales in the Retail Division decreased by 13% and net sales in the Wholesale Division decreased by 6%. Gross margin in the third quarter of 2007 remained unchanged from the third quarter of 2006 at 41%, as a significant increase in the Retail Division's gross margin was offset by a decrease in the Wholesale Division. Operating expenses increased in the third quarter of this year to $38,352 or 34% of net sales, from $32,999 or 27% of net sales in the same period last year.
Commission and licensing fee income was $4,335 in the third quarter of 2007 compared to $3,850 in the third quarter of 2006. Excluding the one-time charge for prior years customs duties, operating income was $14,009 in the third quarter of this year and $12,801 after the one-time charge for prior period custom duties compared to $21,874 in the same period last year. The Company's effective tax rate decreased to 19% in the quarter ended September 30, 2007, compared to 44% in same quarter last year due to a reduction in the cumulative effective tax rate to 40% and a one-time tax benefit related to prior periods in connection with filing combined tax returns for both New York State and New York City. Exclusive of the one-time gain of $2,692 resulting from the above mentioned tax savings and the one-time charge of $1,208 related to the provision for prior year customs duties, net income was $9,600. Including these one-time items, net income decreased to $10,939 in the third quarter of this year compared to $12,647 in the same period last year. The decrease in income was primarily due to the lower consolidated net sales and the increase in operating expenses.
Net sales from the Wholesale Division accounted for $85,998 or 76%, and $91,751 or 74% of total Company net sales for the third quarter of 2007 and 2006, respectively. Net sales decreased in both the Steve Madden Womens and the Steven Divisions due to the absence of fashion trends in the marketplace and the nonexistence of a big item needed to drive significant sales volume in the Divisions. The weak performance of sport casual business resulted in a decrease of net sales in Steve Madden Mens Division. In addition, net sales for the third quarter of 2006 included approximately $3,000 in net sales from Rule which is a brand that was discontinued late in 2006. These decreases in net sales were partially offset by net sales increases in the Candies, Stevies and Madden Girl Divisions.
Gross profit margin decreased to 36% in the third quarter of this year from 38% in the same period last year, due to an increase in markdowns and allowances in the Steven Division required to liquidate retail inventory levels combined with an increase in promotional selling in the other footwear brands. In the third quarter of 2007, operating expenses increased to $21,192 from $18,511 for the same period last year. The increase was caused primarily by the provision of $1,208 for prior years custom duties and payroll costs related to additional hires for a new division. Finally, an upgrade in the Company's communication platform resulted in an increase of payments to third-party service providers. Income from operations for the Wholesale Division decreased to $10,671 for the three-month period ended September 30, 2007 compared to $16,953 for the three-month period ended September 30, 2006. Excluding the one-time charge for prior years customs duties, income from operations was $11,879.
In the third quarter of 2007 net sales from the Retail Division accounted for $27,397 or 24% of total Company net sales compared to $31,489 or 26% in the same period last year. The Company opened five new stores during the twelve months ended September 30, 2007. As a result, the Company had 100 retail stores as of September 30, 2007 compared to 95 stores as of September 30, 2006. The 100 stores currently in operation include 94 under the Steve Madden brand, five 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 third quarters of 2007 and 2006) decreased 15% in the third quarter of this year due to the lower than expected early boot sales during the back to school selling season and the absence of a significant fashion trend. The Company has pursued a number of initiatives to enhance gross margins such as reducing freight costs, close outs, store to store transfers and inventory shrinkage combined with better inventory controls. As a result, the gross margin in the Retail Division has increased to 57% in the third quarter of 2007 from 52% in the third quarter of 2006. In the third quarter of 2007, operating expenses increased to $17,160 from $14,488 in the third quarter last year due largely to the incremental increase in payroll, rent and depreciation expenses related to the addition of five new stores. In addition, an upgrade in the Company's communication platform resulted in an increase of payments to third-party service providers. Loss from operations for the Retail Division was $1,434 in the third quarter of this year compared to income from operations of $1,804 for the same period in 2006.
First Cost Division:
The First Cost Division generated net commission income and design fees of $3,564 for the three-month period ended September 30, 2007, compared to $3,117 for the comparable period of 2006. The increase was the result of the recent expansion of the Company's international business as well as the continued growth in private label business.