A financial analysis of Skechers U.S.A., Inc. and

Steven Madden, Ltd. and Subsidiaries

Patti Mansbach, Claire Lin, Anna Dai

This page exists so it will print pretty

Overview

Both companies Skechers U.S.A. Inc. (NYSE:SKX) and Steve Madden, Ltd and its

subsidiaries. (NASDAQ:SHOO) are in the apparel footwear and accessories industry, which

belongs to the consumer goods sector. The market capital of the industry is $18 billion.The

leaders of the industry are Nike Inc., Titan Company Limited, and Belle International Holdings

Limited. Skechers U.S.A. Inc (Skechers) is a company with market capital of $1.71 billion. The

company designs lifestyle footwear for men, women, children, and performance footwear for

men, women and children under several lines. In addition to Skechers-branded lines, it also sells

street-focused footwear lines for men, women, and children. Skechers sells its products through

department and specialty stores, athletic, independent retailers as well as Internet retailers. Its

footwear products are also available on its official website. Skechers believes that there are no

direct competitors because it competes with other branded products within their product category

as well as private label products sold by retailers. From 2010 - 2012, Skechers experienced a

sharp decline in sales which has resulted in a negative net income in 2011 and a very small net

income in 2012. As of February 15, 2013, Skechers has 116 concept stores, 179 outlet stores

domestically, and 36 concepts stores and 18 outlet stores internationally.

Steven Madden, Ltd. and its subsidiaries (Steven Madden) has market capital of $2.64

billion also has established a reputation for its creativity in popular styles at affordable styles. It

designs, sells, and markets footwear for women, men, and children as well as handbags and

accessories. In addition to footwear, handbags and accessories, it also licenses its trademark as

well. The company products are marketed through online retailers, department stores, its official

website, specialty stores and luxury retail stores. Steven Madden has developed a special product

distribution arrangement in Asia Europe, the Middle East, Mexico, Australia, South Africa,

South America and India. The Company operates in five segments: Wholesale Footwear,

Wholesale Accessories, Retail, First Cost and Licensing. The firm competes with specialty shoe

and accessory companies. According to Steven Madden 2012 annual report, it points out that the

recent economic downturn decreased consumer demands, but slowly shows the recovery of the

market. From 2010 to 2012 Steven Madden showed substantial revenue growth in both

Wholesale and Retail segments. However, a continued weak economic environment could have

negative impacts on company’s future sales.

Based on the 2012 annual report of both companies, Skechers has 37,959,000 shares

outstanding, which are less than Steven Madden, who has 46,127,000 shares outstanding. Thus,

by comparing the two companies, Skechers is a smaller company who has market capital of

$1.71 billion than Steven Madden who has a market capital of $2.64 billion. The market-to-book

(P/B) ratio for Skechers is 1.1 with the stock price at $33.62 whereas; Steven Madden’s market-

to-book ratio is 2.17 with stock price at $38.96. Market-to-book ratio means that every dollar of

tangible assets. Therefore, Skchers’ P/B ratio means that for every $1 of its tangible asset, there

is $1.1 of market value, and for Steven Madden the ratio denotes that every $1 of its tangible

asset, there is $2.17 of market value. Both companies’ P/B ratios are appropriately reflected on

the balance sheet. Steven Madden has higher P/B ratio because it is a bigger company and plus it

has high ROE that explains its higher P/B ratio.

Inventory/leases/goodwill/other

On both Skechers’ and Steven Madden’s financial statements, neither explicitly state

what method of inventory they are using in regards to FIFO vs. LIFO. Though, if they reported

using LIFO then they would have to provide information about a LIFO reserve. Seeing that there

is none such information, it is best to assume that both companies are using the FIFO method for

calculating their cost of goods sold.

Also for both companies, neither of the financial statements report on paying lease

obligations on stores that are no longer in use. In addition, in 2012 Skechers reported closing

only one underperforming store and Steven Madden reported closing only four underperforming

stores. Hence, in the global context of these two international companies their lease expense

write offs would be rather insignificant. Something that is interesting to note is that both

companies’ leases have rent escalation clauses that compensate for increasing operating costs

and real estate taxes over the base year. This means that they can do straight line depreciation

when accounting for the amortization of their leases. For Skechers the rent expenses for, 2012,

2011, and 2010 were approx. $89 million, $85 million and $75 million, respectively. For Steven

Madden the rent expenses for 2012, 2011, and 2010 were approx. $33 million, $25 million and

$21 million respectively.

Something that would need to be possibly adjusted for is goodwill/intangible assets. For

Skechers in 2012, 2011, and 2010 make up for approx. $3.2 million, $4.1 million, and $7.4

million respectively. This would make the ROA for 2012 and 2010 adjust to 10.49% and %0.71

respectively. Because 2011 was not profitable, it would be arbitrary to adjust that year’s ROA.

For Steven Madden in 2012, 2011, and 2010 goodwill and intangible assets make up approx.

$227 million, $174 million and $81 million respectively. This would make the ROA for 2012,

2011, and 2010 adjust to 20.74%, 20.91%, and 20.67% respectively. As it is shown, Steven

Madden has a significantly higher amount of goodwill/intangible assets than Skechers.

For Skechers, another thing to note is that for 2011, they had a significant amount of

write offs for their inventory. Inventory write offs totaled approx. $10 million. This is dues to the

issues regarding their Shape Up shoes (this will be explained later on).

Trends

Success in the footwear industry depends on a company’s ability to predict future fashion

trends. According to Steven Madden, there can be no assurance that products will align with the

tastes and demands of consumers. Also, the barriers to entry are low so competition is high. In

addition, other firms such as UGG and Nine West have a lot more financial resources than both

Skechers and Steven Madden.

The best way to overcome these problems is to have a strong brand image and to have

effective advertising. The latter notion has been a problem point for Skechers in recent years.

This is due to Skechers creating their Shape Up shoes which claimed to tone the wearer’s buns,

legs, and thighs through wearing them continually. However, the scientific evidence behind this

allegation is non-existent. Therefore, this prompted many lawsuits against Skechers accusing

them of false advertising. Along with a lot of litigation fees, these Shape Up shoes caused

Skechers to lose a significant amount of revenue. From 2010 to 2012, Skechers revenue declined

22%. One thing that is interesting, is that while the Skechers financial reports mention the lost

revenue associated with the Shape Up shoes, they do not necessarily make a big deal about it.

Whether this is the company trying to present itself in the best light, or whether this is the

company not totally aware of its financial situation- it is difficult to say.

To further note on the marketing side, Steven Madden has a much more clear brand

image than Skechers. A customer for Steven Madden is easy to imagine and predict her/his

demographic. Meanwhile, this same notion is a bit more difficult to do for Skechers. The most

iconic product that Skechers sold was their Shape Up shoes; the same shoes that caused them to

experience numerous complaints alleging in false advertising. In addition in the financial reports,

Steven Madden clearly notes that it has a lot of competitors and the industry itself is rather

competitive. However, Skechers notes nothing about its competition and why it sees itself as a

threat in the industry. Therefore, it is possible to assume that Steven Madden thinks more

globally about its place in the industry as a whole and what factors will give the company a

competitive advantage.

Financially, the fashion industry is cyclical and often depends on the disposable income

of the consumers. After the 2008 crisis, sales of for these companies suffered. While the

domestic sales have slowly improved, one thing to be aware of is the sovereign debt crisis in

Europe. With Europe experiencing its own financial issues, these companies could also suffer

because they are both global companies with invested interest in the European market.

To further emphasize on globalization, both companies use overseas manufacturers

across all continents. Hence, the global economy can greatly affect the financial health of

Skechers and Steven Madden. International issues may include tariffs, labor laws, and political

changes.

Credit wise, both companies extend credit to its buyers without requiring them to provide

collateral. Skechers does this just domestically and Steven Madden does this both domestically

and internationally.

Neither company has any off balance sheet arrangements.

One thing that is interesting is that Steven Madden has a similar stock price to Skechers

(approx. $38 compared to approx.. $33). Thus, if Steven Madden is clearly the better managed

and healthier company then it can be assumed that their stock price will rise or in the very least

remain stable. Meanwhile, pricewise purchasing Skechers stock is very comparable, yet the

future for Skechers is much riskier and much more unstable.

For the future, Skecher notes that it intends to spend more on research and development.

Maybe this time making shoes that do not falsely advertise. Meanwhile, Steven Madden makes

no note on an intention to increase the amount of money they spend on research and

development.

Recommendation

Overall, it is clear that Steven Madden is the better investment as opposed to Skechers.

Skechers has had years in which their income was negative and the sales of Skechers keep

decreasing. Meanwhile, Steven Madden has experienced growth. It is interesting to see how two

companies in the same industry and arguably competing for the same market segment can have

two very different revenue trends.

One possible reason for the decreased sales revenue in Skechers is the fact that they have

experienced negative publicity in regards to their Shape Up shoes. In the notes, Skechers stated

that their Shape Ups were repeatedly scrutinized by the Federal Trade Commission and that they

had to pay a lot of legal expenses.

In regards to the common size for the balance sheet, as is shown in exhibit one, Skechers

has a slightly higher percentage of assets that are cash and cash equivalents. Yet, Skechers also

has a higher percentage of its assets tied up in inventory (which is not necessarily a very liquid

asset). Also in terms of inventory, Steven Madden has managed to continually decrease the

amount of inventory is holds while Skechers has been more all over the place. Though another

thing to take note of is that Steven Madden has a lot more assets that are goodwill and intangible

compared to Skechers. Assets like these are not very liquid and have vague definitions. On the

liabilities and equity side of the balance sheet, Skechers has a greater percentage of liabilities and

Steven Madden has a greater percentage of equity. In terms of risk, a company financed with

equity is less risky than a company financed with debt.

On the income statement side of the common size ratios in exhibit two, Skechers always

has a higher percentage of gross margin than Steven Madden. This means that the cost of goods

sold eat up a larger chunk for Steven Madden than they do for Skechers. However, Steven

Madden clearly has higher gross profit than Skechers. Though for Steven Madden one might be

wary of is that their percentage of net income in relationship to their sales has been decreasing

over the past few years. Even with these risks, Steven Madden is still in a better financial

position than Skechers. In regards to the percentage of net income to sales for Skechers, in 2011

the ratio is impossible to calculate because the company was not at all profitable.

In exhibit three there is the Dupont Analysis for the return on equity for the two

companies. Steven Madden has a significantly higher return on equity than Skechers. This is

interesting because Skechers has a higher percentage of its company financed via liabilities.

Steven Madden most likely has a higher return on equity because it has a higher net income.

Steven Madden’s ROE usually is around 20% which is general considered good. Meanwhile,

Skechers has a very small ROE and in 2011 because of the net income, it was impossible to

calculate. Another thing to note for both companies, is that even using the adjusted ROA, the

ROE always remains somewhat similar. Though in 2012, the ROA for Skechers increased

around 1% with the adjustment. Still, this means that the ROA went from around 1% to 2%.

These respective figures are both terrible and frankly worrisome.

In exhibit four there are other financial ratios and where they fall in line with the

industry. For the liquidity ratios, both companies are somewhat similar. In addition, both

companies have higher liquidity ratios than the industry average.

Something that is very interesting is that Steven Madden has a much higher inventory

turnover rate than Skechers. This means that Steven Madden is selling their merchandise faster

than Skechers (a high inventory ratio is good because it means that it is turning a non-liquid asset

like inventory into a liquid asset like cash). Still, both companies have a significantly smaller

inventory turnover ratio than the industry average.

For asset turnover, Steven Madden is yet again out performing Skechers. Still, both

companies have smaller asset turn over than the industry average.

For the solvency ratios, both companies have a smaller total debt ratio than the industry

average. This is not necessarily good because it might means that they are not borrowing enough

to properly leverage the firms. Also as a note, the times interest earned figure is clearly off and

should be disregarded. The actual figure is probably more difficult to calculate and is beyond

what was taught in the class.

In terms of profitability, Steven Madden is performing roughly on par with the industry

meanwhile Skechers is performing abysmally.

Lastly for the market ratios, once again Steven Madden is outperforming Skechers by a

significant amount. Still, both companies fall under the industry average.

In the notes on Steven Madden, they stated that while their revenue has increased the

future for this growth in the future is unknown. This they say is due to the cycle nature of fashion

and more seriously the European debt crisis.

So while Steven Madden does not always perform well in comparison to the industry, it

always out performs Skechers. The problems facing Steven Madden look like they could be

solved using more effective management techniques, meanwhile the problems or Skechers are

much more dire and frankly an investor should be very concerned about the health of the

company.

Also in terms of the future, Skechers has a higher percentage of total liabilities compared

to Steven Madden approx. 31% compared to approx. 22%. If the net sales for Skechers continue

to decline as sharply as they did, then there is the fear that Skechers will not be able to pay all of

their liabilities. This then leads to them borrowing even more to pay for their borrowings and

then Skechers will have taken on too much debt. Of course, this is all speculative. On the other

hand with Steven Madden, their sales continue to be strong and stable.

The strength of Steven Madden compared to Skechers is further highlighted in the price

to book ratios of the companies. The price to book ratios are 1.1 for Skechers and 2.17 for Steven

Madden. This means that Steven Madden is performing approximately 50% better than Skechers.

Also, this means that Steven Madden is generating more dollars per asset than Skechers-

something that is crucial to whether or not an investor should invest.

It is clear that Steven Madden shows more growth potential than Skechers. Even in their

financial statements, Steven Madden mentioned that they were trying to grow internationally and

to expand their business. Meanwhile in Skechers’ financial statements, they are just trying to

explain the possible reasons for their business decline. Across all ratios and analysis, Steven

Madden is the wiser and much more stable investment decision and would generate more

profitable returns.

Exhibit one Skechers U.S.A., Inc Common Size Balance Sheet (In thousands)

Steven Madden, LTD. and Subsidiaries Common Size Balance Sheet (In thousands)

Exhibit two Skechers U.S.A., Inc and Subsidiaries Common Size Income Statement (In thousands, except per share data)

Steven Madden, Ltd. and Subsidiaries Common Size Income Statement (In thousands, except per share data)

Exhibit three Skechers

Steven Madden

Exhibit four

The information in this project was obtained from the annual reports/manager’s analysis from the respective companies and the industry ratios were obtained from yahoo business

Works Cited Industry ratios http://biz.yahoo.com/p/321conameu.html Skechers annual report 2012 http://www.sec.gov/Archives/edgar/data/1065837/000119312513312361/d575844d10ka.htm Skechers annual report 2011 http://media.corporate-ir.net/media_files/IROL/80/80336/2011AnnualReport.pdf Steven Madden annual report 2012/2011 http://phx.corporate-ir.net/phoenix.zhtml?c=113367&p=irol-reportsannual