Milestone: Building an Empire

How do you turn an $1,100 investment into a global powerhouse with $500 million in revenues and the potential to reach $1 billion in the next 10 years? Just ask Steve Madden.

Despite some big obstacles along the way, Steven Madden Ltd. has evolved into a footwear firm with the right mix of on-trend product at affordable prices — a particularly smart combination during an economic recovery.

Even in light of the crumbling economic climate of 2008, annual revenues at the firm rose 6 percent to $457.1 million. And for 2009, the company expects to report sales later this week topping half a billion dollars.

“I don’t think Steve in his wildest dreams thought the company would be what it is today,” said Edward Rosenfeld, CEO of Steven Madden. After the firm’s conception, it was more about making it to the next week, let alone 20 years. True to form even then, “[Steve] was thinking about the next 10 minutes,” Rosenfeld quipped.

The executive said the firm’s success is due, in large part, to the fact that Madden never strayed from his original mission.

“The same things that make it successful today — trend-right merchandise — are the same things that got the company on the map,” added Rosenfeld, who joined the firm about five years ago after a previous stint as an investment banker at Peter J. Solomon.

Rosenfeld, who was named CEO in 2008, lauded Madden’s ability to overcome the challenges small firms often face — particularly a lack of funds.

The CEO recounted a story from the early days of the company: In 1993, after opening the first retail store on Broadway in New York’s Soho neighborhood, “they decided to put the corporate office in the back of the store,” said Rosenfeld. “The store didn’t have air conditioning and it was incredibly hot. So they got an air conditioner, but they didn’t have enough money to get the duct to take the hot air out [of the building]. The hot air was blowing on Steve and [CFO] Arvind Dharia. They got into a huge fight because Arvind said he couldn’t take it anymore.”

And yet, Dharia is still with the firm, as he has been since 1991. The CFO recalled how money was so tight in the beginning, he didn’t have an actual office chair. Instead, he sat on a milk crate for three months before eventually buying his own desk and chair.

“I endured this Spartan existence because I believed this company was special and would be a success, and because of my continual sense of Steve’s superior abilities and his charismatic way with both consumers and with our wholesale customers,” said Dharia. “I was convinced he would take this company to the next level.”

Indeed, the company wasn’t restrained financially for long. In 1993, Steven Madden had grown to just under $5 million in sales and decided to pursue an initial public offering. It went public on Dec. 10, 1993, raising $5.7 million.

Over the next two years, the firm jumped from $8.5 million in sales to $38.7 million. That’s when Madden’s wholesale business spiked. The division now makes up three-quarters of total business, said Rosenfeld.

By 1997, the company had sales of $59.3 million, and that vaulted to $163 million in 1999.

After growing so fast for so many years, in 2002, the company faced what Rosenfeld said was its biggest obstacle to date: Madden was sent to jail for conspiracy to commit money laundering and securities fraud.

Rosenfeld said the loyalty of Madden’s employees is a testament to the founder and was what kept the company afloat during that time. Revenues ended roughly flat at $324 million in full-year 2003, whereas from 2001 to 2002, sales had jumped 34 percent.

“Creatively, the company was at a bit of a standstill,” said Scott Krasik, senior analyst at CL King & Associates, referring to Madden’s time in jail. “The trends were moving away from chunky to more tailored fashion looks, and while they had some good designs, they didn’t have Steve to [represent] their fashion M.O.”

But after Madden returned to the firm in 2005, “growth was super-charged,” Rosenfeld said. In full-year 2006, the firm saw sales pop 26 percent year-over-year.

The company’s stock responded accordingly. For much of 2002, during the height of the scandal, it had traded in the $8-to-$11 range, but by October 2006, a year after Madden returned, it hit a closing high of $42.76. Shares most recently reached a fresh high of $42.93 in early January.

“Since Steve has come back, I would say the product is at its best,” said Jeff Van Sinderen, senior analyst at B. Riley & Co. “He’s done a phenomenal job at capturing market share with a great value proposition and product that is really compelling. It’s a very tough thing to do.”

One of the other ways the firm has seen such success is in its speed-to-market capabilities. “That’s something Steve built into the business from the beginning — a culture where everyone is focused on speed,” said Rosenfeld. “We place a premium on speed because we are in the trend business.”

Sam Poser, senior analyst at Sterne Agee, noted Madden’s ability to recognize that “the consumer gets bored very quickly.” Because Madden knows brands “have to keep finding freshness,” he said, the company has perfected its speed-to-market capabilities, turning wholesale inventories an impressive 12 times a year.

The company’s factory in its Long Island City, N.Y.-based office plays a key role in its speedy delivery, along with its sourcing operations in China, Mexico and Europe.

“Steve could have an idea for a shoe in the morning and literally have a sample made in the factory and ready by lunchtime,” said Rosenfeld. “We can make up a couple cases [of the shoes] and put them in the stores immediately. You can get a read [on the shoe’s sales performance] quickly.”

But even with its many capabilities, Steven Madden has been subject to the whims of fashion.The company hit a rough patch in 2007, when a lack of must-have footwear styles impacted the industry.

“We always do better when there are new trends,” explained Rosenfeld. “When people are buying the same kinds of shoes they bought last year, that’s not the best environment for Steve Madden.”

The firm saw revenues slip to $431.1 million in full-year 2007, from $475.2 million the prior year. It was late that year when the company announced a strategic review amid a leveraged buyout craze that had hit the fashion sector. The firm considered selling itself after getting “a couple of inquiries,” according to Rosenfeld.

At the same time, the company faced pressure from shareholders who wanted Madden to buy back shares to increase value. The firm eventually bought back 2.6 million shares for around $17 each.

“We’re glad we elected to stay the course,” the CEO said. “We did right by our shareholders. We gave them a lot more value than if we sold the business.”

Van Sinderen said the company made the right decision. “They’ve been able to enhance shareholder value by staying in control of the company and keeping it public,” he said.

Shareholders have also been pleased with the firm’s recent results. In one of the most challenging economic climates in history, the firm will report its “biggest year ever” on Thursday.

Analysts, on average, are expecting earnings per share of $2.65, which would compare with $1.51 the prior year.

Looking ahead, global operations are one of the vendor’s key objections and something Rosenfeld predicted could reach $100 million in sales over the next five years. He said demand for Madden’s products overseas is “even greater than we anticipated.” The biggest opportunity is in Asia, he said.

Another priority for the firm is its licensing business, which is still fairly small, registering $3 million in royalty income in about the last year.

“Licensing is an area where we’re underdeveloped. We have a brand that is really meaningful to our consumers and we haven’t done as much as you might have expected in terms of expanding out of footwear,” admitted Rosenfeld. He added that the firm’s most meaningful new line is its ready-to-wear apparel for men, women and kids via a partnership with L’Koral Industries.

Acquisitions are another potential growth area. With no debt and $150 million in cash on its balance sheet, the firm is ready. Just this month, Madden made a small buy, snapping up handbag maker Big Buddha for $11 million, plus certain earn-out provisions.

Though Rosenfeld said he couldn’t predict exactly where the firm will be in another 10 years — except that he’d like it to double its revenues to $1 billion — he said the company still will be focused on “delivering great product to our customers.”

For Van Sinderen, it’s the firm’s founder who has gotten it this far and who will keep the company riding high in the years to come. “Here’s a company that’s had its ups and downs,” he said. “[Steve] obviously had some really difficult circumstances to deal with and he has risen above those. He has done better than ever. … That’s extremely admirable.”

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