MOVADO GROUP, INC. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2022, ended October 31, 2021. Comparisons are to the corresponding 2020 periods, which were materially affected by COVID-19 store closures and restrictions. Amounts below are in millions except per-share data.
Financial performance
| Metric | Three months ended Oct. 31, 2021 | Three months ended Oct. 31, 2020 | Nine months ended Oct. 31, 2021 | Nine months ended Oct. 31, 2020 |
|---|---|---|---|---|
| Net sales | $217.7 | $169.9 | $526.4 | $328.1 |
| Gross profit / margin | $125.6 / 57.7% | $92.5 / 54.4% | $298.2 / 56.7% | $169.7 / 51.7% |
| Operating income (loss) | $41.4 | $23.1 | $79.3 | $(168.0) |
| Net income (loss) attributable to Movado Group | $31.4 | $14.8 | $60.2 | $(141.8) |
| Diluted earnings (loss) per share | $1.33 | $0.63 | $2.54 | $(6.11) |
- Quarterly sales increased 28.2%; nine-month sales increased 60.5%. Management attributed growth mainly to higher demand and a partial recovery from pandemic disruption. Foreign exchange added $2.5 million to quarterly sales and $12.1 million to nine-month sales.
- Quarterly gross margin rose about 330 basis points, mainly from product and channel mix; nine-month margin rose about 500 basis points, reflecting mix, the absence of prior-year inventory reserve charges, fixed-cost leverage and foreign exchange, partly offset by higher shipping costs.
- Quarterly SG&A was $84.2 million, up 21.3%; nine-month SG&A was $218.9 million, up 20.4%. Increases included marketing and performance-based compensation. Prior-year results included COVID-related corporate initiative costs.
- The prior-year nine-month operating loss included $155.9 million of goodwill and intangible-asset impairments ($133.7 million goodwill and $22.2 million intangible assets). The resulting comparison substantially affects the year-over-year profit improvement.
- Quarterly segment sales were $194.3 million for Watch and Accessory Brands and $23.4 million for Company Stores. Nine-month sales were $456.8 million and $69.6 million, respectively. The company operated 50 outlet stores versus 47 a year earlier.
Cash flow, balance sheet and capital
- Cash from operating activities was $38.7 million for the first nine months, versus $6.7 million used in the prior-year period. The current period included $60.2 million of attributable net income; receivables increased $62.4 million and inventory increased $23.8 million, primarily supporting higher sales.
- Cash and cash equivalents were $201.8 million at October 31, 2021, compared with $223.8 million at January 31, 2021 and $163.2 million at October 31, 2020. Working capital was $391.1 million, versus $338.2 million a year earlier.
- No borrowings were outstanding under the $100 million revolving facility at October 31; availability was $99.7 million. The company repaid $21.1 million of bank borrowings during the nine-month period.
- An October 2021 credit agreement amendment extended facility maturity to October 29, 2026, reinstated a 0% LIBOR floor, adjusted commitment fees, and permitted up to $25 million of U.S. cash to be netted against debt for the leverage covenant.
- Financing activities used $54.0 million, including $17.0 million of share repurchases and $16.2 million of dividends. The company repurchased 548,402 shares at an average $31.04 during the nine months. A further $50 million repurchase authorization was approved on November 23, 2021, after quarter-end.
Outlook, risks and notable items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management said pandemic effects had diminished but expected COVID-19 to continue affecting results, supply chains, shipping, consumer behavior and tourism. Management believed cash, operating cash flows and available credit were sufficient for operating, capital and debt-service needs, and expected covenant compliance for the next 12 months.
- Risks highlighted include renewed pandemic restrictions, supply and shipping disruption and cost increases, China power outages, inflation and tight labor markets, consumer spending and store traffic, tariffs, foreign exchange, competition from smartwatches, licensing relationships, and execution of strategy. Management reported no material changes to the risk factors in its 2021 Form 10-K.
- U.S. Customs disputes the company’s watch-component tariff valuation methodology; its proposed approach implies $5.1 million of underpaid duties for the covered period, plus possible penalties and interest. The company disputes the position and cannot predict the outcome.
- A customs ruling effective August 1, 2021 says certain China-sourced watch cases paired with non-Chinese movements are not subject to the special tariff. The company continues to accrue for pre-August 1 imports pending clarity on retroactive application; the accrual amount is not stated here.
- The company committed up to $11 million to venture and venture-growth funds during fiscal 2022; capital calls may occur over time. It also invested $1.1 million in a privately held company and venture capital funds during the quarter.
- The company reported adequate income-tax reserves but noted that assessments may differ. Disclosure controls were deemed effective at a reasonable assurance level, with no material change in internal control reported for the quarter.
Most important facts for investors to verify
- How much of the sales and margin growth reflects durable demand and mix versus reopening-related recovery, foreign exchange and the unusually weak prior-year comparison.
- Whether receivables and inventory growth convert into cash, and how working capital and operating cash flow develop in coming quarters.
- The amount and potential resolution of the customs duty accrual, including possible penalties, interest and retroactive tariff treatment.
- Progress on supply-chain and shipping constraints, cost inflation, and management’s ability to protect margins.
- Future capital allocation, including dividends, repurchases, the new credit facility terms and funding of venture-fund commitments.