Business context and reporting period
Movado Group, Inc. designs, manufactures and distributes owned and licensed watch brands and operates outlet stores. This Form 10-Q covers the three and nine months ended October 31, 2019, the third quarter and first nine months of fiscal 2020; comparisons are with the corresponding fiscal 2019 periods. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Net sales | $205.6m | $208.9m | $510.0m | $480.2m |
| Gross profit / margin | $110.1m / 53.5% | $113.4m / 54.3% | $274.3m / 53.8% | $258.7m / 53.9% |
| Operating income | $22.6m | $24.1m | $36.4m | $45.1m |
| Net income attributable to Movado Group | $17.8m | $26.9m | $39.2m | $44.2m |
| Diluted EPS | $0.76 | $1.14 | $1.68 | $1.87 |
- Q3 sales fell 1.6%; foreign exchange reduced sales by $4.3m. Nine-month sales rose 6.2%, despite an $11.1m adverse foreign-exchange impact.
- Q3 operating margin was approximately 11.0%, versus 11.5% a year earlier; nine-month operating margin was approximately 7.1%, versus 9.4%.
- Nine-month results included a noncash $13.6m gain from remeasuring MVMT contingent consideration. The liability was $1.9m at October 31, 2019; future revaluations may create earnings volatility.
- Cash and cash equivalents were $116.0m at October 31, down from $142.7m a year earlier. Nine-month operating cash flow was negative $44.6m, versus positive $26.8m; cash use included $52.7m higher receivables and $38.1m higher inventory.
- Working capital was $346.8m, reported as unchanged from a year earlier. The company had $50.7m of bank borrowings and $49.0m available under its $100m revolving facility, which matures in October 2023. The facility is floating-rate debt.
- Nine-month investing cash outflow was $10.0m, primarily capital expenditures; financing cash outflow was $19.2m, including $13.8m in dividends and $4.2m in open-market repurchases.
- Adoption of lease accounting added $88.1m of operating lease right-of-use assets and $95.3m of operating lease liabilities at October 31. Nine-month operating lease expense was $21.3m.
Material changes and management commentary
- Q3 Watch and Accessory Brands sales declined 2.0%, mainly due to weaker U.S. sales, partly offset by international growth. Company Stores sales increased 2.3%; management cited lower comparable-store sales associated with reduced outlet-center foot traffic, offset by new stores.
- Nine-month Watch and Accessory Brands sales increased 6.9%; Company Stores sales increased 0.8%. Higher sales lifted nine-month gross profit, but SG&A rose 11.4% to $237.9m, reflecting marketing, payroll, rent, MVMT-related costs and Spain joint-venture expenses. Segment operating income declined.
- Management said cash on hand, expected operating cash flows and short-term borrowing capacity should meet working-capital needs for at least the next 12 months. The filing provides no specific sales or earnings guidance.
- The board approved a $0.20-per-share dividend on November 26, 2019, payable December 20, 2019 to holders of record December 6. Future dividends remain at the board’s discretion.
Risks, contingencies and unusual items
- New U.S. tariffs affect Chinese-origin packaging and smartwatches; a CBP position also subjects many China-sourced watch cases and bands to a 15% tariff. The company is seeking reconsideration. Management said the precise cost impact is not yet predictable; potential responses include price increases or shifting production.
- U.S. Customs disputes the company’s historical method for allocating watch component costs for tariff purposes, asserting approximately $5.1m in potentially underpaid duties, plus possible penalties and interest. The company disputes the position and cannot predict the outcome.
- The MVMT acquisition includes contingent payments of up to $100m, dependent on performance through fiscal 2023. Estimates use unobservable assumptions and may materially affect reported earnings when revised.
- The company’s disclosed risks include foreign-exchange exposure, consumer demand and preferences, competition including smartwatches, seasonality, dependence on suppliers and license agreements, acquisition integration, and potential impairment of goodwill or intangible assets.
- The 2018 lawsuit concerning an MVMT distribution agreement was settled in February 2019 with an immaterial cash payment and amendments to the agreement. Other disclosed proceedings were not expected to materially affect financial condition, results or cash flows beyond amounts accrued.
Important facts for investors to verify
- Whether sales and margin trends improved after quarter-end, especially U.S. wholesale performance and outlet-store traffic.
- How much operating cash flow depends on seasonal receivable and inventory movements, and whether working capital converts to cash.
- The financial impact and resolution of the CBP tariff ruling and customs duty dispute.
- Future MVMT performance and contingent consideration estimates, including the potential for additional earnings volatility.
- Debt-facility availability, floating interest costs, lease commitments and management’s stated 12-month liquidity assessment.