September 6, 2006
Mr. Michael Moran
Accountant Branch Chief
United States Securities and Exchange Commission
Division of Corporation Finance
Washington, D.C. 20549
Re: Steven Madden, Ltd.
Form 10-K for the fiscal year ended December 31, 2004
Filed March 16, 2005
Form 10-K for the fiscal year ended December 31, 2005
Filed March 14, 2006
Dear Mr. Moran:
This letter is in response to your letter dated August 10, 2006 to Arvind
Dharia, Chief Financial Officer of Steven Madden, Ltd. (the "Company"). We
appreciate and share in the Staff's objective to enhance the overall disclosure
in our filings.
Our response to your comment is set forth below. For your convenience, we have
also included the text of your comment.
Form 10-K for the Year Ended December 31, 2004
- ----------------------------------------------
Note K - Operating Segment Information, page F-26
- -------------------------------------------------
1. We have read your response to our comment included in our letter dated
March 30, 2006. In your response you note the following:
o Margins by brand are affected by differences in off-price
sales, markdowns and allowances;
o The net margin of a brand is affected by the maturity of the
brand;
o Mature brand margins start to decrease.
We note that all of the above support disaggregated presentation of
your brands as reportable segments. Further, with respect to the
reporting practices of other companies in the fashion and footwear
industry we believe that other companies do present separate segments
by brand and distribution channels. Furthermore, our analysis of your
company's compliance with the reporting requirements of SFAS 131 was
focused on the materials you have provided to us and the requirements
of SFAS 131. As such, other companies in your industry may be impacted
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by different facts and circumstances than yours. Based upon the
materials that you have provided to us, along with your responses to
our prior comments, we continue to believe that you should present
disaggregated reportable segments. Until you comply with our comment
we will not consider our review completed and we will not declare any
future registration statement effective.
Company Response
----------------
After reading your most recent comments, we have reexamined SFAS 131
in great detail and have reevaluated our policy for segment reporting.
Our detailed analysis of our business under the parameters of SFAS 131
requires an understanding of some of the structural changes that have
impacted our business during the last several months.
Towards the end of 2005, the Company aggressively sought to increase
revenues and market share by expanding the demographic appeal and
reach of our footwear product offerings. As part of this strategy, the
Company has recently added several new brands and has acquired a new
company. Some of our new brands that began shipping product in the
last nine months include SMNY, Jump for Women, Jump for Men, Natural
Comfort, Rule for Women and Rule for Men. We acquired Daniel M.
Friedman on February 7th of this year. The Company plans to continue
adding brands in the near future such as Steven Mens and Little Miss
Comfort.
Our assessment under of SFAS 131 focused on paragraphs 10 and 17.
Paragraph 10 defines an operating segment as a component of an
enterprise that satisfies three parameters. We evaluated each
parameter as follows:
a. An operating segment engages in business activities from which it
may earn revenues and incur expenses. All our brands earn
revenues and they incur expenses included in cost of goods sold.
Beyond the cost of goods sold and a few direct expenses such as
salesmen commissions, a brand does not incur direct expenses. For
example, product design is a corporate department. The addition
of a new brand does not necessarily require that additional
resources be allocated to the design department resulting in
additional expenses. Management reviews the projected sales
levels and the number of SKU's for the entire Company when
allocating resources to the design department. Thus, the addition
of or the growth of one division will not result in additional
design expenses if the increase in business activity is offset by
a decline of another division. This analysis will hold true for
production, sales and administrative expenses, all of which are
maintained on a corporate basis. With the exception of some
direct expenses as noted above, our individual brands do not
incur direct expenses.
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b. An operating segment's results are regularly reviewed by the
enterprise's chief operating decision maker to make decisions
about resources to be allocated to the segment and assess its
performance. The Company's chief operating decision maker is its
COO. Our COO monitors sales, gross profit, customer orders and
inventory levels on a brand-by-brand basis. This is demonstrated
by the four reports we sent you in our reply to your January 11th
letter. As you might recall, we sent you the following reports:
o Steve Madden Retail Divisional Flash Report. This
report gives comparative sales and gross margin data on
a store-to-store basis.
o Steve Madden Actual & Plan Sales Report. This report
supplies the COO with comparative sales, booking and
gross margin data for the wholesale divisions.
o Order Register By Div/Sol/Sty. This report lists all
new sales orders received that have a sell price that
is different than the Company's regular selling price.
o Available to Sell Report. This report lists inventory
that is available to sell for each individual style.
These reports, which are reviewed by the COO on a daily basis,
supply him with data regarding sales, gross profit, customer
orders and inventory levels. The COO utilizes these reports to
plan and allocate resources for inventory purchases. Managing
inventory levels on a brand-by-brand basis is crucial to the
success of the business. Other than inventory planning and the
direct expenses mentioned previously, the COO does not allocate
resources on a brand basis. As explained in the preceding
paragraph, cost centers are structured on a corporate level, and
thus the COO allocates resources on a corporate level. The COO
will not allocate design resources to a specific brand if it
exhibits an increase in sales. However, if the combined wholesale
division is realizing an increase in revenues, the COO may decide
to invest in the corporate design department. Other than
inventory purchases, resources are allocated between the
wholesale, retail and first cost divisions.
c. An operating segment has discrete financial information
available. Historically, the Company has had six brands, all of
which designed and marketed footwear for women, men and children.
For various non-operational reasons (i.e., some of the brands
were licensed), the Company treated the brands as separate
divisions. As the Company was growing and the brands were
maturing, management believed that reporting certain financial
data on a brand basis would help to illuminate management's
discussion and analysis of financial condition and results of
operations. As stated above, sales, cost of goods sold and gross
profit were maintained on a brand basis. However, design,
production, selling and administrative expenses were maintained
on a corporate basis. These expenses were allocated to the
individual divisions based on various factors including percent
of sales, the estimated time a person devoted to a division and
the amount of square footage the brand occupied in the Company's
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offices. To illustrate this point, travel expenses are most often
incurred by corporate employees who travel on behalf of several
divisions. Travel expenses are allocated based on a division's
proportion of net sales. Other than sales and cost of goods sold,
discrete financial information is not available on the individual
brands. Because of our structure of corporate design, production,
selling and administrative departments, and following the
addition of several new brands during the past several months,
obtaining discrete financial data on the brand level is not
reasonably possible, and as noted above, would be based on
estimated allocations.
Paragraph 17 of SFAS 131 outlines the criteria for aggregating
segments. The measure for aggregation under paragraph 17 of SFAS 131
is "similar long-term performance." As you noted in your letter,
differences in the levels of off-price sales, markdowns, allowances
and the maturity of the brands may cause our margins to vary across
our brands in any given year. However, over the long-term, we expect
our brands to achieve similar long-term performance.
The differences in the levels of off-price sales, markdowns,
allowances and the maturity of the brands, which cause our margins to
vary across our brands, vary from year to year. However, the measure
for aggregation under paragraph 17 of SFAS 131 is "similar long-term
performance." Based on this measure, as we have previously noted, we
expect our brands to have similar performance over the long term. The
brands achieve similar long-term performance because they have the
same operating models and similar economic characteristics. For
example, the divisions all design and market shoes for fashion
conscious young men and women as well as children who shop in
department and specialty stores; all the divisions utilize third-party
factories located mostly in China and Brazil; all the Company's brands
are distributed from three third-party warehouses, two in California
and one in New Jersey; and one Creative and Design Chief and one
Executive Vice President of Sales manages all the divisions. It is
because of these similar economic characteristics and operating models
that the divisions will, over the long-term, have similar
performances.
The variability between brand performance in any given year is one
reason why we have different brands. Having several brands counteracts
the effects of hot and cold trends of specific brands resulting in
consistent financial results from year to year.
After reevaluating our business in light of paragraphs 10 and 17,
Management still believes that the parameters of SFAS 131 do not
require businesses such as the Company's business to treat each of its
brands as an operating segment. However, Management recognizes that
the availability of sales and cost of goods sold data for each brand
meets the requirements of paragraph 10 and thus, subject to the
aggregation provisions of paragraph 17 and the quantitative provisions
of paragraph 18, will report its brands as segments on future filings.
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Paragraph 18 addresses quantitative thresholds for segment reporting.
Specifically, if a segment comprises less than 10% of combined revenue
or combined profit, it does not have to be reported as a separate
operating segment. Paragraph 18 also defines a 10% asset threshold,
however, other than inventory and receivables, assets are not
maintained on a divisional basis. Below is an analysis of these
thresholds for all segments/divisions based on the years ended
December 31, 2004 and 2005, and the six months ended June 30, 2006:
Year ended December 31, 2004
(000's omitted)
Segment/division Revenues % to total Operating income * % to total
---------------- ---------- ---------- ------------------ ----------
Wholesale:
Womens $113,000 33% $ 2,000 11%
l.e.i $ 38,000 11% $ 1,000 5%
Mens $ 31,000 9% a $ 1,000 5%
Candie's $ 16,000 5% a $ 0,000 0%
Steven $ 21,000 6% a $ 2,000 11%
Stevies $ 10,000 3% a $ 0,000 0%
Unionbay $ 1,000 0% a $ 0,000 0%
---------------------------- ------------------------------------
Total of aggregated
wholesale divisions a $ 79,000 23% $ 3,000 16%
Retail $108,000 31% $ 8,000 42%
---------------------------- ------------------------------------
Net sales $338,000 99% $14,000 74%
Commission and licensing
fees - net $ 5,000 1% $ 5,000 26%
---------------------------- ------------------------------------
Total $343,000 100% $19,000 100%
============================ ====================================
Year ended December 31, 2005
(000's omitted)
Segment/division Revenues % to total Operating income * % to total
---------------- ---------- ---------- ------------------ ----------
Wholesale:
Womens $118,000 31% $ 5,000 16%
Mens $ 55,000 14% $ 9,000 28%
l.e.i. $ 30,000 8% a $ 2,000 6%
Candie's $ 22,000 6% a $ 3,000 9%
SMNY $ 2,000 1% a $ 0,000 0%
Steven $ 16,000 4% a $(1,000) (3%)
Stevies $ 8,000 2% a $ 1,000 3%
Unionbay $ 1,000 0% a $ 0,000 0%
---------------------------- ------------------------------------
Total of aggregated
wholesale divisions a $ 49,000 13% $ 5,000 16%
Retail $122,000 32% $ 6,000 19%
---------------------------- ------------------------------------
Net sales $376,000 98% $25,000 78%
Commission and licensing
fees - net $ 7,000 2% $ 7,000 22%
---------------------------- ------------------------------------
Total $383,000 100% $32,000 100%
============================ ====================================
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Six months ended June 30, 2006
(000's omitted)
Segment/division Revenues % to total Operating income * % to total
---------------- ---------- ---------- ------------------ ----------
Wholesale:
Womens $ 68,000 28% $13,000 33%
Mens $ 30,000 12% $ 5,000 12%
Daniel Friedman $ 26,000 11% $ 5,000 12%
Rule for Women $ 6,000 2% a $ 1,000 3%
Steven $ 10,000 4% a $ 1,000 3%
l.e.i. $ 2,000 1% a $ 0,000 0%
Stevies $ 3,000 1% a $ 0,000 0%
Rule for Men $ 3,000 1% a $ 1,000 3%
Candie's $ 18,000 7% a $ 3,000 8%
SMNY $ 12,000 5% a $ 3,000 8%
Jump for Women $ 0,000 0% a $ 0,000 0%
Jump for Men $ 0,000 0% a $ 0,000 0%
Natural Comfort $ 0,000 0% a $ 0,000 0%
---------------------------- ------------------------------------
Total of aggregated
wholesale divisions a $ 54,000 22% $ 9,000 25%
Retail $ 59,000 24% $ 1,000 3%
---------------------------- ------------------------------------
Net sales $237,000 97% $33,000 82%
Commission and licensing
fees - net $ 7,000 3% $ 7,000 18%
---------------------------- ------------------------------------
Total $244,000 100% $40,000 100%
============================ ====================================
* Note: operating income is net of design, production, selling and
administrative expenses that are allocated based on several factors.
a Note: divisions that would be aggregated based on the provisions of
paragraphs 17 and 18 of SFAS 131.
The above analysis indicates that for the years ended December 31,
2005 and 2004, the Company would have reported five operating segments
(including a segment that aggregated several brands) as opposed to the
three operating segments it actually presented in its financial
statements. For the six months ended June 30, 2006, despite the
addition of several brands, the Company would have reported six
operating segments. Pursuant to the parameters of paragraph 18, the
Company will report six operating segments on its future filings. The
Company will reevaluate the aggregation and 10% threshold provisions
in connection with each future filing to insure proper disclosure.
The Company would welcome an opportunity to discuss the analysis provided in
this letter and the implications for the Company's future filings at you
earliest convenience. We will contact you in the near future to suggest times
for a teleconference. In connection with our response to your comment outlined
above, the Company acknowledges the following:
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o the Company is responsible for the adequacy and accuracy of the
disclosure in filings;
o staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filings; and
o the Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
Sincerely,
/s/ ARVIND DHARIA
- -----------------------
Arvind Dharia
Chief Financial Officer
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