Megan Crudele - ICR LLC Derek Browe - Steven Madden Ltd. Edward R. Rosenfeld - Steven Madden Ltd..

Camilo Lyon - Canaccord Genuity, Inc. Erinn E. Murphy - Piper Jaffray & Co. Jeff Van Sinderen - B. Riley & Co. LLC Corinna Gayle Van Der Ghinst - Citigroup Global Markets, Inc. Scott D. Krasik - The Buckingham Research Group, Inc. Steven L. Marotta - C.L. King & Associates, Inc..

Good day everyone and welcome to the Steve Madden's Second Quarter 2017 Earnings Conference Call. Today's conference is being recorded. For opening remarks, I'll turn the conference over to Megan Crudele. Megan, please go ahead..

Thank you. Good morning everyone. Thank you for joining us today for the discussion of Steve Madden's second quarter 2017 earnings results.

Before we begin, I'd like to remind you that statements made on this call that are not statements of historical facts constitute forward-looking statements under the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve risks and uncertainties and other unknown factors that could cause actual results to differ materially from historical facts or any future results expressed or implied in the forward-looking statements.

These statements contained herein are also subject to the risks and uncertainties as described from time-to-time in the company's report and registration statements filed with the SEC. Please refer to the company's earnings release for information on the factors that could cause actual results to differ.

Finally, please note that any forward-looking statement used on today's call cannot be relied upon as current after today's date. Hosting the call today are Ed Rosenfeld, Chairman and CEO of Steve Madden; and Derek Browe, Director of Finance and Investor Relations. I'll now turn the call over to Derek..

Thanks, Megan, and good morning everyone. Before turning the call over to Ed, I'd like to note that the financial results presented below are on an adjusted basis unless otherwise noted. Please refer to our press release for a reconciliation of GAAP to non-GAAP financial measures..

Thanks Derek. Good morning everyone and thank you for joining us to review Steve Madden's second quarter 2017 results. We had another outstanding quarter at Steve Madden with Q2 net sales growing 15% and diluted EPS increasing 24% compared to the prior year.

Our wholesale footwear business was the standout with double-digit organic sales growth in the quarter, an impressive feat in light of industry headwinds and shrinking open-to-buy budgets at many of our key wholesale customers. Once again our core Steve Madden Women's division was the primary growth driver.

Steve and his design team created hit items across a range of categories, most notably pool slides and sneakers, which enabled the brand to take significant market share in a tough retail environment.

In addition to the tremendous growth in Women's we also recorded double-digit percentage sales growth in Steve Madden Men's and Steve Madden Kids, demonstrating the overall strength and momentum of our flagship brand. Our newest acquisition, Schwartz & Benjamin, contributed a little less than $21 million in net sales in Q2.

Integration continues to move ahead on schedule and we remain confident that Schwartz & Benjamin is on track to make a meaningful profit contribution in 2018. In our wholesale accessories segment, net sales were approximately flat compared to last year.

Our branded handbag business was the highlight in this segment, with the second consecutive quarter of robust growth in both Steve Madden and Betsey Johnson handbags. We believe both businesses are benefiting from stronger product assortments.

In Steve Madden, we have better aligned the bags with the Steve Madden shoes in terms of styling and trend direction, and we feel our handbag collection is as trend-right and on-brand as it's been in years.

In Betsey Johnson, we have broadened the assortment to include not only the Kitsch product that we've had so much success with historically, but also more bags with contemporary styling and customers are responding favorably to the new offering.

We currently expect each of these businesses to be up double-digits on a percentage basis in net sales for fiscal 2017.

Unfortunately, in Q2 the growth in our branded handbags was offset by sales declines in private label handbags, which is primarily timing related and should rebound in Q3, as well as in sunglasses and other fashion accessories, particularly neck wear, where trends are soft.

In retail, we delivered a 2.2% comparable store sales increase, on top of a 5.4% same store increase in last year's second quarter. As in Q1, we were less promotional and also less aggressive in communicating promotions in our full price stores and on stevemadden.com. And gross margin in those channels increased versus the prior year.

However, we were more promotional in our outlet stores which helped drive an improved comp in the outlet channel, but also offset the gross margin increase from our full price channels. Finally, I'd like to highlight our continued progress on expanding our business outside the United States.

In Q2, as in Q1, our international business recorded double-digit percentage sales growth compared to the prior year. We also took an important step to position the company for future international expansion, with the consummation of a new joint venture agreement in China.

In May, we signed a definitive agreement with C.banner International Holdings, to form a JV, which will be owned 50% by us and 50% by C.banner, which is one of the largest retailers of women's footwear in China. The JV will be opening its first department store shop-in-shop and launching on Tmall this month.

We expect to be live with stevemadden.cn by the end of September and have 15 to 20 shop-in-shops open by the end of the year. While this joint venture will focus exclusively on Mainland China, we're also in discussions with potential joint venture partners for Taiwan, Macau, Singapore and Malaysia.

We hope to have joint ventures in place for those regions by Q4 of this year. With respect to our outlook for the balance of this year, while we are very pleased with the momentum that we've seen in our business so far this year, we are taking a prudent approach to planning our business for the back half.

Industry sentiment around the boot and bootie category continues to be very cautious, with many key wholesale customers bringing in boots and booties later and planning the category down for the season overall.

In addition, in the back half, we begin to cycle much tougher comparisons in our Steve Madden Women's wholesale footwear business, which was the leading driver of growth for the company in the first half.

And of course the overall retail environment continues to be challenging, with many of our wholesale customers experiencing sales declines and planning their businesses conservatively.

That said, we continue to feel very good about the strength of our brands and our product assortments and remain confident that we are well positioned to continue outperforming the competition.

With that, I'll now turn it over to Derek to review our financial results for the quarter in more detail and provide you with our updated sales and earnings guidance for the year..

Thanks, Ed. Our consolidated net sales increased 15% to $374.1 million, compared to prior year net sales of $325.4 million. When we exclude the impact from the Schwartz & Benjamin acquisition which contributed $20.7 million in net sales, our consolidated net sales increased 8.6%. Wholesale footwear net sales increased 21.8% to $238.1 million.

Excluding the impact of Schwartz & Benjamin, wholesale footwear net sales increased 11.2% led by the strength in our core Steve Madden Women's business across a broad range of styles. Supporting the growth in Steve Madden's Women's business was growth throughout most of the remainder of the portfolio, most notably in Men's, Kids, and private label.

In wholesale accessories, net sales were relatively flat compared to last year at $67.5 million. As Ed mentioned, we were pleased with the continued momentum in our branded handbag business, which grew during the quarter.

However, this growth was offset by declines in private label handbags due to timing and weakness with our fashion accessories and sunglasses. In our retail segment, net sales increased 9.6% to $68.5 million. Our same-store sales increased 2.2% on top of a 5.4% increase last year.

Traffic and conversion were both up, while AUR was down due to the strong selling of lower-price point products like pool slides. During the second quarter, we opened one full-price store in the U.S., one full-price store in Canada, and one outlet store location, and converted one U.S. full-price store to an outlet location.

We ended the quarter with 193 company-operated retail stores, including 55 outlets and four ecommerce sites.

Turning to other income, our licensing royalty income net of expenses was $0.9 million in the quarter compared to $1.9 million in last year's second quarter, while first cost commission income net of expenses was $1.3 million compared to $0.9 million last year.

Consolidated gross margin expanded 20 basis points to 37.4%, compared to 37.2% in the prior year. Wholesale gross margin increased to 31.7% for the quarter, compared to 31.1% in the prior year quarter.

The 60 basis point improvement was driven by the wholesale footwear segment, which benefited from strong margin improvement in Steve Madden Women's resulting from both higher initial margins and reduced markdown allowances from strong sell-through.

The increase in our wholesale gross margin was partially offset by the impact of the lower margin Schwartz & Benjamin acquisition, as well as margin decline in our accessories segment as we aggressively moved through underperforming inventory in neckwear and sunglasses.

Retail gross margin of 62.6% was relatively in line with the prior year margin of 62.8%. As Ed mentioned, the slight decline was driven by lower margins in our outlets. Margin in our full price stores and ecommerce business were up versus the prior year.

Operating expenses for the quarter increased to $98.9 million, or 26.4% of net sales compared to operating expenses of $88 million, or 27% of net sales in the same period last year.

Operating income for the quarter totaled $43.1 million, or 11.5% of net sales, compared to last year's second quarter operating income of $35.9 million, or 11% of net sales. Our effective tax rate for the quarter was 32%, compared to 31.8% in the same period last year.

Finally, net income for the quarter was $29.7 million, or $0.51 per diluted share, compared to $24.7 million, or $0.41 per diluted share in the second quarter of 2016. In addition to our healthy operating results, we are also pleased that our balance sheet remains strong as we continue to navigate through the challenging environment.

As of June 30, 2017 we had $198.6 million in cash, cash equivalents, and marketable securities, and no debt. Inventory levels at the end of Q2 were well controlled. Excluding Schwartz & Benjamin, inventory decreased 3.6% to $112.2 million, compared to $116.4 million in the prior year. Including Schwartz & Benjamin, inventory was $121.2 million.

Our consolidated inventory turns for the last 12 months ended June 30, 2017 was 8.2 times. CapEx in the quarter was $4.4 million and during the quarter we repurchased approximately 821,000 shares for approximately $30.8 million, which includes shares acquired through the net settlement of employee stock awards.

Turning to guidance, given the strong performance in the first half, for the full year 2017, we now expect that net sales growth will be 9% to 11%. Additionally, we now expect that diluted EPS for the year will be in the range of $2.03 to $2.09 on a GAAP basis.

Excluding one-time expenses related to the acquisition of Schwartz & Benjamin, as well as the Payless bankruptcy, which are outlined further in the press release, we now expect the diluted EPS will be in the range of $2.18 to $2.24. Now, I'd like to turn it over to the operator for questions..

Thank you. And we'll go first today to Camilo Lyon with Canaccord Genuity..

Morning, guys. How are you? Great quarter..

Thanks, Camilo. Good morning..

I wanted just to understand a little bit how you're viewing the back half in relation to what was a very strong spring and summer season for you.

And maybe you can help us understand a little bit about how that relates to your increased guidance and what you're expecting for the fall/winter season and then we can delve into that in more specific terms with respect to boots and booties and what you're seeing from the trend front..

Sure. As we said in the prepared remarks, we continue to feel very good about the momentum that we have in our brands, particularly Steve Madden, and we feel very good about our product assortments, but we do expect the business growth in the back half to slow versus the first half.

That's something that we've said very consistently all year from the Q4 2016 call when we put out our initial guidance. We've been very consistent about saying that it was going to be a more front half weighted year and there's really, I think, two main reasons for that. The biggest is the one that you called out, which is boots and booties.

Obviously boots and booties is not a big category in spring, but a very significant category in fall and that is a category where the sentiment in the industry is very cautious and we are planning that category down.

The guidance incorporates roughly a 10% decline in the boot and bootie category in the back half and obviously if you look at for instance the Steve Madden Women's wholesale business, boots and booties are about half the business in the back half. So that's a significant category.

And then the other thing that we'll point out in addition to that is that Steve Madden Women's wholesale footwear really has been the big driver of both sales and earnings growth for us in first half and while the momentum continues to be very good there, we do go up against much tougher comparisons in the back half.

That business was up, I think it was about 17% in sales in back half last year and also had very strong gross margin. So for those two reasons, we do expect the business or the growth year-over-year to slow in back half..

Great. Thanks for that color. And then maybe we can shift topics a little bit to how are you thinking about the contribution from Schwartz & Benjamin this year? I think before you had planned that business to be a break-even business.

Is there any change to that and then secondarily, how do you view or how is the progress around ramping up your Asia distributor?.

Sure. So with respect to Schwartz & Benjamin, we're off to a good start there. The integration is right on schedule. They basically finished closing down their back office operation which was in Peabody, Massachusetts. They have sales and design in New York, but that they previously ran the back office and the warehouse out of Massachusetts.

We have consolidated that into our existing infrastructure, moved them into third-party warehouses that we utilize in New Jersey and California and also consolidated their finance and other back office functions into our headquarters here in New York. In terms of the actual performance of the business, they're doing well.

Kate Spade had a very strong Nordstrom Anniversary Sale and based on what we're seeing so far in the business, we have increased our forecast modestly for the year, whereas we had them at break-even before, I think now we're expecting modest accretion but I want to caution people when we say modest, we're talking about a penny or two, so nothing earth-shattering, but we're off to a good start there and as we said, we expect that to be a more meaningful contributor in 2018.

With respect to Asia, as we mentioned in the earlier remarks, we're very excited about the JV that we've signed in China. We're going to be starting to conduct business later this month with our first shop-in-shop as well as opening on Tmall and we expect to have 15 to 20 department store shop-in-shops open by the end of the year.

So we're moving full steam ahead there, very excited about that, and we're also talking to potential other joint venture partners for other parts of Asia, which include Taiwan, Macau, Singapore and Malaysia and with any luck, we'll have joint venture arrangements service those regions done by the end of this year..

Sounds great. And remind me, was there any sales distributed to the guidance for the Asia piece ramping up this year? I don't believe that there were..

That's very modest, I mean, I think we've put in maybe $2 million or something..

Got it. Okay. Perfect. And then just the last one for me if you could. Any sort of updates on how you're growing the Amazon relationship? You've been very quick and early to embrace them as a strong channel partner of yours and it seems like that relationship continues to be a burgeoning one. Any updates there would be very helpful..

Yes, it continues to be a real point of emphasis here.

We continue to see very strong growth there both in the wholesale business which makes up the majority of our business, but also in what they call the hybrid model, where we put shoes that are not in our wholesale line but that we carry in our Steve Madden stores or on stevemadden.com up on Amazon and then fulfill them to the customers ourselves.

So each of those two businesses is showing very nice growth. One thing we're pleased about on the wholesale side is that we're seeing some nice success in building some of the businesses other than Steve Madden Women's.

We got off to a very strong start with Steve Madden Women's, that remains of course, the biggest and most important opportunity for us, but one of our goals this year was just try to replicate that success in some of our other brands and categories and we're seeing some nice traction there. So, we're pleased about that..

Sounds great. Good luck with the next quarter, guys. Take care..

Thanks, Camilo..

We'll take our next question from Erinn Murphy with Piper Jaffray..

Great, thanks. Good morning, and nice work on the year to date momentum. Ed, I guess, I wanted to go back to the second half guidance. You mentioned that boots were planned down 10%.

Is that pre-book volumes or is that how you're planning the entire season inclusive of what your reorder assumptions are? And then, I guess just secondly on the guidance, any help between third and fourth quarter in terms of how we should be building, I guess, sales in the back half, just given some other vendors have talked about shipments out of September quarter into December.

Just given some of the caution you've already referenced with retailers out there?.

Sure. The boot assumption is our assumption for total sales throughout the season..

Okay. Got it..

And then in terms of our Q3 versus Q4, yes, I think that in terms of year over year growth, Q4 should look a little better than Q3. A big part of that is coming from the private label footwear business.

Because we do expect a significant decline in Q3 and then for that business to do better in Q4, and that's really a function of our business with Payless.

Because, our Q3 business is down substantially because of the disruption associated with the bankruptcy, but in Q4 we're planning to be pretty much back on track with Payless, and so that number will look better in Q4..

Okay.

And then just on private label, how does it look this year, excluding Payless, given that's just a disrupter for the year, in general?.

Excluding Payless, and excluding the Schwartz & Benjamin private label, it's low to mid singles..

Okay. Got it. And then, could you speak a little bit more about the Nordstrom Anniversary Sale? You alluded to it a little bit with the Kate Spade product, but just broadly mostly on the Steve Madden Women's product, it seems like you guys have much better placement there.

Can you talk about what you're learning from that sale and does that give you any more confidence into the back half with some of the early reads from there?.

Yes. It was a very successful event for us, very good both in Steve Madden and for the overall company including the other brands that we have in there. But as you point out, Steve Madden is most important. We had increased placement there, and we had a very nice increase in retail selling as well.

So I do think what we've seen there makes us incrementally more optimistic about fall. We've had success with a number of different categories in the event. Mules have been very good. We have an over-the-knee boot. We have a dress bootie. We brought in some regular priced sneakers during the event that have done very well.

So, nice range of categories working for us..

Okay. Got it. And then you mentioned on the retail side the outlet piece of your business. I know it's not significant but it was more promotional.

Is that a reaction to what you're seeing in outlets kind of overall and just traffic trends there or was that something more specific to a strategy you're implementing?.

Well, I think some of it was that we've elected to be less promotional in the full price stores and on stevemadden.com, and that's something that we talked about on last call as well and we knew that we would take a little bit of a sales hit there this year, but we thought that that was the right thing to do to protect the brand, particularly with the strength that we're seeing in wholesale.

But we still do need to move through goods, and so we're being a little bit more aggressive in the outlet stores..

Okay. Got it. I'll let someone else hop in. Thank you..

Thanks, Erinn..

We'll take our next question from Jeff Van Sinderen with B. Riley..

Good morning. And just a follow up on the outlet business. I was just wondering how we should think about the promotional cadence there.

If we should think that you'd start to pull back a little bit on that, or if that will continue in second half?.

Yes. I don't expect that to be the same kind of drag that it was on gross margin in Q2, going forward. So, I think that, if you look at the retail segment overall, we have the opportunity to have modest gross margin improvement in the back half..

Okay. Good. And then, I know you mentioned a number of things going into kind of your outlook for overall growth in the business for the second half of this year.

Just wondering – I mean, obviously there are certain things in the boot and bootie category that are considerations, but what do you see is kind of the biggest drivers of the growth for second half or for Q3?.

Well, I think our branded wholesale footwear business, while it's not going to be growing the way it did in first half, it's still going to be a nice driver of growth for us in the back half. So I think that's one thing I would point to.

I'd also point to our branded handbag business that we called out as being strong with Steve Madden and Betsey Johnson, both performing well on the handbag side. And then we'll have some growth in retail as well..

Okay. Good.

And then I know it's early on international, but just wondering how we should think about the potential growth from the China JV, by the way, congratulations on that, for next year versus this year because this I guess is sort of a transitional year, if you will?.

Yeah, thanks for that. I think that it's a little too early for us to set a sales target for 2018.

We'll try to do that for you at the end of the year once we get a couple of these shop-in-shops open, see what our Tmall business looks like, see what our initial sales on stevemadden.cn looks like, and then we'll put some plans together that have a little bit more meat on them, and we'll share them with you..

Okay. Fair enough. Thanks for taking my questions, and best of luck..

Thanks, Jeff..

We'll go next to Corinna Van Der Ghinst with Citi Research..

Hi. Good morning, guys. Thanks for taking my question. I first just wanted to....

Hi Corinna..

Hi. I wanted to follow-up on the private label business. It sounded from the prepared remarks that Derek said that the private label footwear business was actually up in the quarter. If that's right, I assume well, you said that Payless is still a headwind. So I'm just wondering where you guys are making that business up this year.

And is that the top line private label deal that you guys are doing at Amazon or something else?.

Yeah, good catch. So we were up in private label footwear in Q2, and I think the unusual thing about Q2 for this year was that the Payless business was actually about flat in Q2.

It's going to be down significantly in all the other quarters, and the reason for that is that we've had a lot of shipments that we were holding and not shipping to Payless prior to their bankruptcy. And then once they filed, we released those shipments. So, Q2 looks better than the rest of the year looks with Payless.

And then other than Payless, as I mentioned earlier, we are actually up low to mid-singles in private label excluding Schwartz & Benjamin and Payless. And the biggest driver of growth there is actually Walmart. We're seeing real nice increase with Walmart..

Okay.

And have you guys said how big that topline business could be at Amazon over time?.

We haven't, and it's very small right now, and we're just getting started. I think, hopefully, there's a nice opportunity there, but it's not meaningful to the overall business at this point..

Okay. Great. And then my second question was just on the inventories. They looked pretty lean, especially excluding the acquisition.

Can you just kind of walk us through the complexion of that? Is that wholesale and retail? And does that have anything to do with planning the boot and bootie business down lower since that's a higher ASP category? And also, do you feel like you have enough product to support your plans going into the second half guidance?.

Yeah. So I'll take the second part first. Yes. We do think that we have the inventory to do the numbers that we have outlined in the guidance. And yes, we were down in wholesale, we were about flat in retail.

We're actually up a little bit in wholesale footwear, excluding Schwartz & Benjamin, but we were down in accessories as we've really cleaned up some inventory in the Cejon and fashion accessories business. But overall, you're right. It's a clean number, but we don't think that we're under-inventoried either.

We have the inventory necessary to do the business..

Great. And then if I could just sneak in one last question. I don't think you've talked about Dolce Vita too much.

Maybe you could just talk about the contribution that you are planning for this year from that business, and also how it's kind of trending versus your expectations both at the regular Dolce Vita level and also the Diffusion brand?.

Sure. So, we're not going to provide specific numbers by brand, but it's still making a very healthy profit contribution. Obviously, far exceeding what we expected when we did the transaction. The sales have slowed this year in Dolce Vita.

I think we're close, but we're missing that kind of hit item in Dolce Vita, and so that's what we're working on, but we feel very good about the spring collection that we're actually showing this week at FFANY and hope to get that moving north again in spring 2018..

Great. Thanks so much and best of luck..

Thanks, Corinna..

We'll go next to Scott Krasik with Buckingham Research Group..

Hey, guys. Congrats on a great quarter..

Thanks, Scott..

So just some clarifications on the sales this quarter. I think you had previously talked about releasing some Payless orders when they got the debt, their financing post the bankruptcy.

So just wondering if you could parse out in terms of wholesale footwear, what the private label grew and the branded grew?.

Yeah. So excluding Schwartz & Benjamin....

Right..

....I'm assuming that's how you'd like to look at that, branded wholesale footwear was up about 14%, private label was up 6%, 6.5%..

Okay.

And then can you just sort of delve into the guidance, what your assumption is for the branded business to grow in the back half, given some of the challenges and the tougher comparison?.

Yeah. So we think branded will be, again, excluding Schwartz & Benjamin more like mid to high singles in the back half..

Okay.

Branded, sorry, just to clarify?.

Yes..

Okay.

And then any movement on the New York comps versus the overall comps or the tourist-driven comps? Have you seen that start to normalize yet?.

So in Q2, no. Q2 was again – we had a significant drag from the New York City business which was again about 1,000 basis points worse than the rest of the chain. We've seen a little light at the end of the tunnel so far in Q3. That's gotten quite a bit better. But I'd like to put together more than one month before we declare victory there..

Okay. And then your Steve Madden Women's business has been on fire, your branded business has been up significantly the last four quarters.

Should we think about that sort of peak margins in wholesale footwear right now? Or because of the acquisition and integration is there an opportunity to continue to expand gross margins in wholesale footwear?.

I do think that we're at a pretty healthy gross margin level in wholesale footwear. I don't see a ton of opportunity from here if we don't change the mix. Perhaps there is some opportunity at Schwartz & Benjamin, which we're just getting our arms around, and that's something that we'll be focused on.

Of course, that's mixing us down also, currently as we incorporate that into our overall numbers because that is a lower margin business. But in terms of the legacy business, I don't think we're at an unsustainable level, but we have to be clear eyed about the fact that there's probably not a ton of upside from here..

Oh, okay. But thanks, and not a lot of trends like this in consumer these days, so good job..

Thanks, Scott..

We'll take our next question from Steve Marotta with C. L. King & Associates..

Good morning. Ed and Derek, two quick questions.

As it pertains to the product category that's performing best or that you expect to perform best in the second half at the expense of boot and booties, what category would you pin that on? And the follow-up and related question is, what are your quantitative expectations for AURs in the second half?.

Well, I still think sneakers is the biggest growth category. And I think that definitely sneakers is eating into booties in particular. So that's how I'd answer that part. We've called out mules as being another category that's particularly important this year that really wasn't relevant last year in a major way.

And then in terms of AUR, we've been trending down based on mix. And I think that you're going to continue to see AUR declines in the back half because of the, particularly because boot and booties are down. In retail, I'd say that's maybe down 3%, something like that for Q3..

And what about in the wholesale channel?.

It's similar..

Great. Terrific. Thank you..

Thanks, Steve..

Gentlemen that will conclude our question-and-answer session. I'll turn it back to you for closing remarks..

Great. Well, thanks to all of you for joining us on the call this morning and have a great day. We look forward to speaking with you on the third quarter call. Bye, bye..

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect..