Movado Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2017; unaudited. Movado designs, manufactures and distributes owned- and licensed-brand watches and operates retail outlets.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $128.8 million | $128.1 million | $228.0 million | $242.1 million |
| Gross profit | $66.1 million | $70.3 million | $115.3 million | $131.6 million |
| Gross margin | 51.3% | 54.9% | 50.5% | 54.3% |
| Operating income | $8.3 million | $10.1 million | $4.7 million | $15.5 million |
| Net income attributable to Movado | $5.5 million | $6.3 million | $1.3 million | $9.6 million |
| Diluted EPS | $0.24 | $0.27 | $0.06 | $0.41 |
- Six-month operating cash flow was negative $10.0 million, versus negative $14.3 million a year earlier. Working capital use was $26.4 million, chiefly from inventory buildup, higher receivables and supplier prepayments.
- Cash and cash equivalents were $162.4 million at July 31, down from $256.3 million at January 31, primarily reflecting the Olivia Burton acquisition. Of this cash, $150.9 million was held at foreign subsidiaries; most foreign earnings were considered permanently reinvested.
- Six-month investing cash outflow was $80.4 million, including $79.0 million net cash paid for the acquisition. Financing cash outflow was $8.4 million, including dividends and share repurchases.
- Total bank debt was $30.0 million ($5.0 million current and $25.0 million long-term); cash exceeded debt by approximately $132.4 million. The $100 million secured revolving facility had $69.7 million available. The company reported compliance with its covenants.
- Current assets were $452.7 million and current liabilities $86.1 million. Total assets were $634.1 million and shareholders’ equity $478.2 million.
Changes and operating drivers
- Q2 sales were nearly flat year over year, while six-month sales declined 5.8%. U.S. wholesale sales fell 11.7% in Q2 and 21.6% for the six months; international wholesale sales rose 9.3% and 5.3%, respectively. Retail sales increased in both periods.
- Six-month gross margin fell 380 basis points, mainly from unfavorable channel and product mix, severance costs and foreign exchange. Q2 margin declined 360 basis points, primarily from mix.
- Six-month operating income fell $10.8 million. SG&A declined 4.8%, but lower gross profit and acquisition and restructuring costs more than offset the savings. The six-month effective tax rate rose to 68.3% from 34.8%, including a $1.0 million discrete tax expense on adoption of share-based-payment accounting rules.
- On July 3, Movado acquired JLB Brands Ltd., owner of the Olivia Burton brand. The acquisition was funded with foreign cash and involved no assumed debt. Olivia Burton contributed $0.9 million of sales and $0.1 million of net income from acquisition through July 31. The filing reports $55.3 million of acquisition goodwill and $21.4 million of acquired intangibles; goodwill is not tax deductible.
Outlook, risks and unusual items
- Management expects approximately $12 million of cost savings in fiscal 2018 and approximately $15 million of ongoing annual pre-tax savings, with the initiatives substantially complete by fiscal year-end. The company recorded $6.4 million of related first-half pre-tax charges.
- The filing provides no specific revenue or earnings guidance. Management stated cash on hand, expected operating cash flow and short-term borrowing capacity should cover working-capital needs for at least the next 12 months.
- U.S. Customs disputes the company’s tariff allocation methodology and proposed approximately $5.1 million of allegedly underpaid duties for the five-year review period, plus possible penalties and interest. Movado contests the position and says it cannot predict the outcome.
- Key risks include weak and unpredictable watch demand, declining mall and department-store traffic, competition from smartwatches, foreign-exchange movements, customer and supplier concentration, licensing relationships, and execution and impairment risks associated with Olivia Burton. A 1% rise in interest rates was estimated to reduce annual income by about $0.3 million.
- Subsequent to quarter-end, the board authorized a new share repurchase program of up to $50 million through August 2020 and approved a $0.13-per-share dividend payable September 25, 2017.
Important facts for investors to verify
- Whether U.S. wholesale sales and gross margins stabilize, and whether international and retail growth can offset domestic weakness.
- Actual timing and realization of the stated cost savings relative to restructuring charges.
- Olivia Burton’s performance, integration costs, purchase-price allocation and the recoverability of acquired goodwill and intangibles.
- Cash availability and repatriation implications, given the large foreign-held cash balance and permanently reinvested earnings.
- Developments in the Customs dispute, including potential duties, penalties and interest; the filing gives no clear estimate of ultimate exposure.
- Capacity to maintain dividends and repurchases while funding operations and meeting debt covenants.