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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements” (as that term is defined in the federal securities laws), which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with regard to future revenue, projected 2012 results, earnings, spending, margins, cash flow, orders, expected timing of shipment of products, inventory levels, future growth or success in specific countries, categories or market sectors, continued or expected distribution to specific retailers, liquidity, capital resources and market risk, strategies and objectives and other future events. More generally, forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or simply state future results, performance or achievements, and can be identified by the use of forward looking language such as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” “project,” “will be,” “will continue,” “will result,” “could,” “may,” “might,” or any variations of such words with similar meanings. Factors that may affect our results include, but are not limited to, the risks and uncertainties discussed in Item 1A of this Annual Report on Form 10-K.
Any such forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based and could cause our actual results to differ materially from those projected in forward-looking statements. As such, we strongly caution you that these forward-looking statements are not guarantees of future performance or events. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.
part I
Overview
Steven Madden, Ltd. and its subsidiaries (collectively, the “Company”) design, source, market and sell fashion-forward name brand and private label footwear for women, men and children and name brand and private label fashion handbags and accessories. Our products are distributed through our retail stores and our e-commerce website and in department stores, specialty stores, luxury retailers, national chains and mass merchants throughout the United States. In addition, we have special distribution arrangements for the distribution of our products in Asia, Canada, Europe, the Middle East, Mexico, Australia, Central and South America and India. Our product line consists of a broad range of updated styles designed to establish or capitalize on market trends, complemented by product offerings. We have established a reputation for design creativity and our ability to offer quality products in popular styles at affordable price points.
The Company was incorporated as a New York corporation on July 9, 1990, reincorporated under the same name in Delaware in November 1998 and completed its initial public offering in December 1993. Shares of the Company’s common stock, $.0001 par value per share, currently trade on the NASDAQ Global Select Market under the symbol “SHOO”. Our principal executive offices are located at 52-16 Barnett Avenue, Long Island City, NY 11104. Our telephone number is (718) 446-1800 and our website address is http://www.stevemadden.com.
We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports and information with the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). These reports, any amendments to such reports, and our proxy statements for our stockholders’ meetings are available free of charge, on our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. We will provide paper copies of such filings free of charge upon request. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 R Street, NE, Washington, D.C. 20549. Information regarding the operation of the SEC’s Public Reference Room is available by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding us, which is available at http://www.sec.gov.
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Fiscal year December 31, 2011 marks the third consecutive year that the Company achieved record sales and earnings. Our consolidated net sales for 2011 increased 52% to a record $968.5 million from the $635.4 million achieved in 2010. Net income increased in 2011 to a record $97.2 million from $75.7 million in 2010. Diluted earnings per share for the year ended December 31, 2011 increased 26% to $2.25 per share on 43,239,000 diluted weighted average shares outstanding compared to $1.78 per share on 42,443,000 diluted weighted average shares outstanding in 2010.
During fiscal year 2011, we expanded our product offerings through two acquisitions. First, on May 20, 2011, the Company acquired all of the outstanding shares of capital stock of the closely held company, The Topline Corporation (“Topline”), from its sole stockholder (the “Topline Seller”). Founded in 1980, Topline and its subsidiaries design, manufacture, market and sell private label and branded women’s footwear primarily to department stores, specialty retailers and mass merchants. Topline has sourcing capabilities, sample making facilities and product development capabilities in China, including personnel and facilities engaged in direct sourcing. Management believes that Topline is an excellent strategic fit for the Company. The acquisition was completed for consideration of approximately $56.128 million cash, plus potential contingent payments pursuant to an earn-out agreement with the Topline Seller; less an estimated working capital adjustment due to the Company. The earn-out agreement provides for potential payments to the Topline Seller based on the financial performance of Topline for the twelve-month period ending on June 30, 2012. (See Note B to our Consolidated Financial Statements for additional information relating to the potential earn-out payments.) The fair value of the contingent payments was estimated using the present value of management’s projections of the financial results of Topline during the earn-out period. As of December 31, 2011, the Company estimates the fair value of the contingent consideration to be $6.2 million.
Then, on May 25, 2011, we acquired all of the outstanding shares of capital stock of privately held Cejon, Inc. and Cejon Accessories, Inc. from the sole stockholder of these companies, as well as all of the outstanding membership interests in New East Designs, LLC (combined with Cejon Inc. and Cejon Accessories, “Cejon”) from its members (together with the sole stockholder of Cejon, the “Cejon Sellers”). Founded in 1991, Cejon designs, markets and sells cold weather accessories, fashion scarves, wraps and other trend accessories primarily under the Cejon brand name, private labels and under the Steve Madden brand name as Cejon has been a licensee of the Company for cold weather and selected other fashion accessories since September 2006. Management expects the Cejon acquisition will further strengthen and expand the Company’s accessories platform. The acquisition was completed for consideration of approximately $29.1 million cash, plus potential contingent payments pursuant to an earn-out agreement with the Cejon Sellers. The earn-out agreement provides for potential payments to the Cejon Sellers based on the financial performance of Cejon for each of the twelve-month periods ending on June 30, 2012 through 2016, inclusive. (See Note B to our Consolidated Financial Statements for additional information relating to the potential earn-out payments.) The fair value of the contingent payments was estimated using the present value of management’s projections of the financial results of Cejon during the earn-out period. As of December 31, 2011, we estimate the fair value of the contingent consideration to be $23.5 million.
During the year ended December 31, 2011, the Company made significant progress on several previously announced strategic initiatives. One such initiative was to continue to drive improvements in the performance of our retail segment. In 2011, same store sales (sales of those stores, including the e-commerce website, that were in operation throughout 2011 and 2010) increased 13.3% and sales per square foot increased to $810 compared to sales per square foot of $742 achieved in the prior year. Income from store operations as a percentage of sales increased to 13.1% in 2011 compared to the 6.8% achieved in 2010.
A second strategic initiative for the Company was the expansion of our e-commerce business. In 2011 net sales in our e-commerce business increased 25% when compared to the prior year. The Company has also achieved progress in its initiative to grow its International business, which had net sales of $53.3 million in 2011, a 53% increase over the $34.8 million in net sales achieved by the International business in the prior year.
On May 5, 2011, the Company’s Board of Directors announced a three-for-two stock split of the Company’s outstanding shares of common stock, effected in the form of a stock dividend on the Company’s outstanding common stock. Stockholders of record at the close of business on May 20, 2011 received one additional share of Steven Madden, Ltd. common stock for every two shares of common stock owned on this date. The additional shares were distributed on May 31, 2011. Stockholders received cash in lieu of any fractional shares of common stock they otherwise would have received in connection with the dividend. All share and per share data provided herein gives effect to this stock split, applied retroactively.
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Recent Developments
Effective as of December 31, 2011, the Company and its founder and Creative and Design Chief, Steven Madden, entered into an amendment to Mr. Madden’s existing employment agreement with the Company (the “Amended Madden Agreement”). The Amended Madden Agreement, which extends the term of Mr. Madden’s employment through December 31, 2023, provides for an annual base salary of approximately $5.417 million in 2012, approximately $7.417 million in 2013, approximately $9.667 million in 2014, approximately $11.917 million in 2015 and approximately $10.698 million in 2016 and in each year thereafter through the end of the term of employment. The Amended Madden Agreement eliminates the annual cash bonuses payable to Mr. Madden based on EBITDA and the annual cash bonus in relation to new business contained in Mr. Madden’s previously existing employment agreement and provides that all future cash bonuses will be at the sole discretion of the Company’s Board of Directors. Further, the Amended Madden Agreement eliminates the annual non-accountable expense allowance of $200,000 provided to Mr. Madden under the previously existing employment agreement. Pursuant to the Amended Madden Agreement, on February 8, 2012, Mr. Madden was granted 975,371 restricted shares of the Company’s common stock valued at approximately $40 million, which will vest in equal annual installments over seven years commencing on December 31, 2017 through December 31, 2023, subject to Mr. Madden’s continued employment with the Company on each such vesting date. Further, the Amended Madden Agreement provides that Mr. Madden has the right, exercisable on certain specified dates in fiscal year 2012 only, to elect to further amend his employment agreement to receive an additional restricted stock award for a number of shares of the Company’s common stock valued at $40 million in consideration of a reduction in his annual base salary in years subsequent to 2012 as follows: approximately $4 million in 2013, approximately $6.125 million in 2014, approximately $8.25 million in 2015 and approximately $7.026 million in 2016 and in each year thereafter through the end of the term of employment. In addition to the opportunity for discretionary cash bonuses, the Amended Madden Agreement entitles Mr. Madden to an annual life insurance premium reimbursement of up to $200,000 as well as an annual stock option grant and the potential for an additional one-time stock option grant based upon achievement of certain financial performance criteria. The Amended Madden Agreement also provides for the elimination of interest accrued after December 31, 2011 on an outstanding loan in the original principal amount of $3 million made by the Company to Mr. Madden, the extension of the maturity date of such loan until December 31, 2023, and the forgiveness of 1/10th of the principal amount of the loan, together with accrued interest, annually over a ten-year period commencing on December 31, 2014 for so long as Mr. Madden continues to be employed by the Company on each such December 31st.
On February 21, 2012, the Company consummated the previously reported proposed purchase of all of the assets of Steve Madden Canada Inc., Steve Madden Retail Canada Inc., Pasa Agency Inc. and Gelati Imports Inc. (collectively, the “Canadian Sellers”), the Company’s sole distributor in Canada since 1994, comprising the Canadian Sellers’ footwear, handbags and accessories wholesale and retail businesses. The transaction was effected pursuant to an Asset Purchase Agreement entered into on January 20, 2012 which provided for a cash payment at closing of approximately $29.0 million (Canadian dollars, which converts to approximately the same in US dollars) plus potential earn-out payments of up to a maximum of $38.0 million (Canadian dollars, which converts to approximately the same in US dollars), in the aggregate, based on achievement of certain earnings targets over a five-year period.
On February 2, 2012, two individuals purporting to be stockholders of the Company commenced separate civil actions against the Company, as a nominal defendant, Steven Madden, individually, and the Company’s Board of Directors alleging shareholder derivative claims in connection with the amendment of Mr. Madden’s employment agreement and the compensation afforded Mr. Madden thereunder and seeking disgorgement of any compensation Mr. Madden received as a result of the amendment, an award of unspecified damages and a declaration that the amendments are void. See Item 3, “Legal Proceedings,” below for a description of such action.
Product Distribution Segments
Our business is comprised of five distinct segments: Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing. See Note Q to our Consolidated Financial Statements for additional information relating to our five operating segments.
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Our Wholesale Footwear segment is comprised of the following brands: Steve Madden Women’s, Madden Girl, Steve Madden Men’s, Steven, l.e.i.® (under license), Elizabeth and James® (under license), Olsenboye® (under license), Stevies, Big Buddha Shoes, Madden, Betsey Johnson shoes, Report, Superga® (under license) and includes our private label and International businesses. Our Wholesale Accessories segment includes Big Buddha, Betseyville, Betsey Johnson, Steve Madden, Steven by Steve Madden, Cejon and, through license agreements, Daisy Fuentes® and Olsenboye® accessories brands and includes our private label business. Steven Madden Retail, Inc., our wholly owned retail subsidiary, operates Steve Madden and Steven retail stores as well as our e-commerce website. There are also three stores licensed to a third party. The First Cost segment represents activities of a subsidiary that earns commissions for serving as a buying agent for footwear products under private labels and licensed brands (such as Candie’s®) for many of the country’s large mass-market merchandisers, shoe chains and other off-price retailers. Our Licensing segment is engaged in the licensing of the Steve Madden and Steven by Steve Madden marks for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery, women’s fashion apparel, jewelry and luggage. In addition, we license our recently acquired Betsey Johnson and Betseyville marks for use in connection with the manufacture, marketing and sale of apparel, jewelry, swimwear, eyewear, watches, fragrances and outerwear.
Wholesale Footwear Segment
Steve Madden Women’s. We design, source and market our Steve Madden brand to major department stores, mid-tier department stores, better specialty stores and independently owned boutiques throughout the United States. The Steve Madden brand has become a leading life-style brand in the fashion conscious marketplace. To serve our customers (primarily women ages 16 to 35), Steve Madden Women’s creates and markets fashion forward footwear designed to appeal to customers seeking exciting, new footwear designs at affordable prices. New products for Steve Madden Women’s are test marketed at Company-owned retail stores. Typically, within a few days, we can determine if the test product appeals to our customers. This enables us to use our flexible sourcing model to rapidly respond to changing trends and customer preferences, which we believe is essential for success in the fashion industry.
Madden Girl. We design, source and market a full collection of directional young women’s shoes under the Madden Girl brand. Madden Girl is geared for young women ages 13 to 20, and is an “opening price point” brand currently sold at major department stores, mid-tier retailers and specialty stores.
Steve Madden Men’s. We design, source and market a full collection of directional men’s shoes and fashion forward athletic shoes for men under the Steve Madden brand to major department stores, mid-tier department stores, better specialty stores and independent shoe stores throughout the United States as well as in our retail stores. Price points for Steve Madden Men’s products range from $70 to $100 at retail, targeted at men ages 20 to 40 years old. The division maintains open stock inventory positions in select patterns to serve the replenishment programs of its wholesale customers.
Steven. We design, source and market women’s fashion footwear under the Steven® trademark through major department and better footwear specialty stores throughout the United States as well as in our retail stores. Priced a tier above the Steve Madden brand, Steven products are designed to appeal principally to fashion conscious women, ages 25 to 45, who shop at department stores and footwear boutiques.