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Sahar Omrani

SHOO AT A GLANCE

P/E ► 15.6 AVG EV/EBITDA ► 9.27 AVG ROA ► 15.6% HIGH ROE ► 19.5% HIGH Debt to Equity ► 0.266 LOW Current Ratio ► 2.99 AVG Interest Coverage Ratio ► 347 HIGH

 

 

 

 

 

 

Steven Madden, Ltd. is best known for its shoes - specifically, its Steve Madden and Steven shoe lines. Though the company is smaller than most of its competitors, with only 100 self-owned stores across America, eight lines, and just one line overseas ^[1], it has worked on expanding, with a 22% income increase in 2007 that it credits to its 30% growth internationally. ^[2]

Steven Madden, Ltd. continues to add stores and new lines for department stores, in the U.S. and internationally, despite the 2008 financial crisis. In the 3rd quarter of 2008 with the opening of two new stores and a 30% increase in international sales, the company saw a 12% revenue year-on-year increase. ^[3] However, with the financial crisis startin in September of 2008, consumer spending has begun to fall (down 0.6% in November^[4]). Furthermore, department stores, SHOO's main customer, have seen their sales continue to slump, decreasing for six months straight (from July to December 2008). Department store sales decreased an additional 2.8% at the end of 2008. ^[5]

Company Overview

Steven Madden, Ltd. net income and revenue for three years ^[6]

Wholesale Divisions (63% of Total Revenue, 66% of Net Income ^[7])

Steven Madden, Ltd. is split up into three divisions ‎^[8]

Madden Womens is the most profitable segment, generating $127.8 million in 2007, approximately 30% of total net sales. Steve Madden Mens generated 12%. ^[10] Both segments target "fashion-conscious" individuals between 16 to 35. Steven products are priced a tier higher than Steve Madden’s and, being sold in higher-end department stores, are marketed as a more sophisticated line for women 26 to 40. Steven had 4% of net sales in 2007. ^[11] Steven Madden’s Fix is the athletic line of footwear and barely brought revenues with only $.4 million in 2007. Madden Girl, which is designed for teens brought in 7% and Stevies, which is designed for kids brought in 2%. ^[12]

Candie’s, Inc. generated 5% of net sales through its products for women and kids. Candie’s is sold exclusively at Kohl’s, through a contract that will last until 2010. After the contract expires, SHOO hopes to sell the product in other retail stores. ^[13] Finally, the Daniel M. Friedman Division marketed and sold $54.5 million for the year of 2007, or approximately 13% of total net sales. ^[14]

Retail and First Cost Division (37% of Total Revenue, 34% of Net Income ^[15])

The Retail Division operates the 100 retail stores, 94 under the name Steve Madden and 6 under Steven, which sell the company’s products. Along with the stores, the company has a website, www.stevemadden.com, where it sells Steve Madden and Steven products. ^[16] Sales from the stores and website decreased 7.6% in 2007 compared to 2006. The Retail Division generated about 28% of total net sales. ^[17] In 2008, the company plans on adding 3 new stores. The Retail Division also acts as a test site for the product development of the Wholesale Division because it enables the company to test reactions to new products. This gauges whether or not the products are worth selling via Wholesales. ^[18]

First Cost is the buying agent of the company. The segment obtains mass amounts of footwear from manufacturers and sells them, sans brand, to large retailers including Target and Wal-Mart. The mass merchandising market allows the company to sell the products at lower prices in order to target a different, lower-income demographic. In 2007, the division brought in $14.7 million in revenue. ^[19]

Trends and Forces

Dependence on a limited customer base hurts company revenues

Steven Madden. Ltd. sells the majority of its footwear and accessories through department stores. The main retailers are Macy's Inc. (M) , J.C. Penney (JCP) , Nordstrom (JWN) , DSW (DSW) , Kohl's (KSS) , Famous Footwear, and Dillard's (DDS) . Macy's alone accounted for 12% of total sales in 2007. ^[20] Steve Madden doesn't sell its lines to stores in long-term contracts; 84% of its sales contracts are seasonal, meaning that 84% of its sales are at risk of decreasing every season. ^[21] Contract renewal depends on the preference and financial state of department stores. When large department stores cut budgets or decide to go with other brands, SHOO's revenues fall. ^[22] Department stores faced difficulties during the credit crunch in 2007: Macy's sales decreased 2%, Lord and Taylor shut down 38% of its stores, and J.C.Penney's sales decreased 0.1%. ^[23] Thus, these department stores decreased the amount of merchandise purchased from Steven Madden in the wholesale division. In 2007, SHOO's retail revenues were down 13% and sales to the company’s customers decreased 15%, compared to a 10.5% increase in 2006. ^[24]

The recession following the 2008 Financial Crisis is reducing consumer demand

Whether it was due to a slow economy or the lack of a big item to generate sales volume, consumer spending for the company decreased in 2007. Consolidated net sales decreased from $475,163,000 in 2006 to $431,050,000 and same store sales decreased 7.6%. ^[25] The large decrease in sales resulted in the discontinuation of three lines: Rule, l.e.i. and Jump.^[26] It also resulted in the closing of a store in Kansas. ^[27]. The decrease in consumer spending forced down revenues by 9.3% by December 2007. At the same time, the NBER declared that the U.S. economy entered in a recession in December of 2007. Consumer spending continued to slow nationwide and in the first quarter of 2008 sales were down 5%. ^[28] However, according to chief executive officer Edward Rosenfeld, in the next two quarters of 2008, it got a positive response from both department stores and consumers because of its trendy addition of boots and booties. Therefore, even though the economy was still in a recession, sales increased 1% in the 2nd quarter ^[29] and 13% in the 3rd quarter. ^[30]

Following the 2008 Financial Crisis, the U.S. saw a 1.1% decrease in disposable income in August 2008 continuing with a 0.1% decrease in November; consumption decreased .6% in the same month. ^[31] Accordingly with decreased consumption, retail sales in the U.S. were down 6% in November. ^[32] Though Steven Madden has had sales increase in the 2nd and 3rd quarter of 2008 despite the recession, the further slowing of the economy will cause it to see its sales diminish.

Steve Madden is expanding - for better or worse

Steven Madden, Ltd. continues to expand by adding stores and new lines, both in the U.S. and internationally. For 2009, the company has started building three additional retail stores in the U.S. It also began the development of new lines. In November 2008, SHOO added a bed and bath line available for spring 2009 by signing an agreement with Revman International Inc.^[33] Additionally, in August 2008, Kimora Lee Simmons’ KLSI and Phat Fashions teamed with Steven Madden to design and distribute a collection of young women’s footwear, handbags, and accessories. The collection, Fabulosity, will be distributed exclusively to JC Penney retail stores starting in 2009. ^[34] The company is also growing internationally. Steve Madden acquired Diva International, Inc. in 1994 in order to distribute and sell products around the world. The international segment's income increased almost 30% in 2007^[35] According to chief executive officer Edward Rosenfeld, the company plans to continue growing internationally, especially with its new 2008 licensing agreement in Hong Kong.^[36]

Though expansion is meant to increase revenues, in the near future it also has the potential to be harmful, especially due to the 2008 Financial Crisis and falling consumer demand. Consumption patterns in the U.S. continue to fall. In September of 2008 consumption decreased .4% from the previous month, in October it decreased an additional 1% and in November it decreased .6%. ^[37]

The company claims it is rolling out Steven Madden Fix slowly given the current state of the economy. The same trend will occur for the upcoming lines, especially with department stores backed-up inventory. After the 2008 credit crunch, the industry saw 46% of businesses with backed-up inventory. ^[38] Two of the company's costumers, J.C. Penney (JCP) and Kohl's (KSS), had 17% and 67% excess inventory, respectively, causing up to 70% markdowns off the retail price.^[39] These issues, catalyzed by reductions in consumption, make it less likely that distribution contracts with SHOO will be renewed.

Competition

Steven Madden, Ltd. had a revenue of $431 million in 2007. The fashion footwear industry is highly competitive, consisting of about 100 manufactures, 1,500 wholesalers, and 30,000 retail outlets with a total retail revenue of $25 billion. ^[40] Many of the company’s competitors are better financed and have a great deal of resources. They also offer a broader range of products that go beyond footwear and accessories.

• Jones Apparel Group (JNY) : $3.8 billion in total revenues in 2007. Jones Apparel is a large company that focuses on both apparel and shoes. The division that directly competes with Steven Madden, ltd. is the Nine West, Inc. division.^[41]
• Skechers U.S.A. (SKX) : $1.4 billion in total revenues in 2007. Sketchers though very profitable, focuses mainly on athletic footwear with a division in fashion wear. ^[42]
• Nike (NKE) : $16.3 billion in total revenues in 2007. Nike competes also only in the athletic footwear market. Though it only competes in one aspect, Nike has an advantage when it comes to finances because it is much wealthier. It also controls 31% of the market share of athletic footwear. ^[43]
• Guess? (GES) : $135.95 million in total revenues in 2007 due to diminishing sales. However, in 2008, due to expanding international business with a 61% increase in 2nd quarter revenues in Europe, the company's 3rd quarter total revenues skyrocketed to $515.17 million. Guess? footwear and accessories are direct competitors with Steven Madden, both targeting the same consumer base. ^[44]
• Kenneth Cole Productions (KCP) : $510.72 million in total revenues in 2007. The company has a broad range of products from apparel to shoes, thus shoes are only a part of its productions. ^[45]

^[46]

References

1. ↑ SHOO March 2008 10-K, Item 1: Business, page 1
2. ↑ SHOO March 2008 10-K, Item 1: Business, page 22
3. ↑ SHOO March 2008 10-K, Item 1: Business, page 1
4. ↑ Personal Income and Outlays
5. ↑ Retail sales drop for 6 months straight
6. ↑ [hhttp://finance.yahoo.com/q/is?s=SHOO&annual SHOO Income Statement]
7. ↑ SHOO March 2008 10-K, Item 1: Business, page 2
8. ↑ SHOO March 2008 10-K, Item 1: Business, page 2
9. ↑ SHOO March 2008 10-K, Item 1: Business, page 2
10. ↑ SHOO March 2008 10-K, Item 1: Business, page 2
11. ↑ SHOO March 2008 10-K, Item 1: Business, page 3
12. ↑ SHOO March 2008 10-K, Item 1: Business, page 2
13. ↑ SHOO March 2008 10-K, Item 1: Business, page 3
14. ↑ SHOO March 2008 10-K, Item 1: Business, page 3
15. ↑ SHOO March 2008 10-K, Item 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, page 21
16. ↑ SHOO March 2008 10-K, Item 1: Business, page 3
17. ↑ SHOO March 2008 10-K, Item 1: Business, page 3
18. ↑ SHOO March 2008 10-K, Item 1: Business, page 3
19. ↑ SHOO March 2008 10-K, Item 1: Business, page 3
20. ↑ SHOO March 2008 10-K, Item 1: Business, page 4
21. ↑ SHOO March 2008 10-K, Item 1A: Risk Factors, page 11
22. ↑ US: Steven Madden third quarter net down 13%
23. ↑ Macy's Inc.
24. ↑ US: Steven Madden third quarter net down 13%
25. ↑ SHOO March 2008 Item 7:MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
26. ↑ SHOO March 2008 Item1: Business, page 19
27. ↑ Steven Madden Ltd. Q3 2008 Transcript
28. ↑ Steven Madden ltd. F1Q08
29. ↑ Steven Madden 2nd-quarter profit declines
30. ↑ Steven Madden Ltd. Q3 2008 Transcript
31. ↑ Personal Income and Outlays
32. ↑ US: Retailers' November 2008 sales roundup
33. ↑ Steven Madden to sell bed, bath items
34. ↑ KIMORA LEE SIMMONS AND KELLWOOD COMPANY ENTER INTO LICENSE AGREEMENT WITH STEVEN MADDEN, LTD.
35. ↑ SHOO March 2008 Item1: Business, page 19
36. ↑ SHOO March 2008 Item1: Business, page 19
37. ↑ Personal Income and Outlays
38. ↑ Raw Data Report: Department Stores
39. ↑ Raw Data Report: Department Stores
40. ↑ Industry Overview: Footwear Manufacture, Wholesale, and Retail
41. ↑ Apparel Group, Inc.
42. ↑ Sketchers U.S.A, Inc.
43. ↑ Nike, Inc.
44. ↑ Guess?, Inc.
45. ↑ Kenneth Cole Productions
46. ↑ Competitors