Movado Group, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Three and six months ended July 31, 2018; unaudited. Movado designs, manufactures and distributes owned- and licensed-brand watches, and operates retail outlets. Results are presented across Wholesale and Retail segments and U.S. and international markets.
Financial performance
| Metric | Three months ended July 31, 2018 | Six months ended July 31, 2018 |
|---|---|---|
| Net sales | $144.1 million, up 11.9% | $271.2 million, up 18.9% |
| Gross profit / margin | $77.8 million / 54.0% (prior year 51.4%) | $145.4 million / 53.6% (prior year 50.5%) |
| Operating income | $12.9 million (prior year $8.3 million) | $21.0 million (prior year $4.7 million) |
| Net income | $9.1 million (prior year $5.5 million) | $17.3 million (prior year $1.3 million) |
| Diluted EPS | $0.39 (prior year $0.24) | $0.73 (prior year $0.06) |
- Revenue mix and drivers: Q2 Wholesale sales were $123.1 million and Retail sales $21.0 million. International Wholesale growth more than offset lower U.S. Wholesale sales; Retail growth reflected comparable-store sales, new outlets and product mix. For the six-month period, international sales were $163.4 million versus $107.9 million in the U.S.
- U.S. Wholesale sales fell 13.3% in Q2 and 6.2% for the six months, principally due to weakness in licensed brands amid a challenging U.S. fashion-watch market. International Wholesale sales grew 26.8% in Q2 and 34.4% for six months; reported growth included favorable foreign-exchange effects of $1.8 million and $7.6 million, respectively.
- Gross-margin expansion reflected sales mix, foreign exchange and better fixed-cost leverage; the six-month comparison also benefited from the non-recurrence of prior-year cost-savings charges. Q2 SG&A increased 12.4% to $65.0 million; six-month SG&A increased 12.4% to $124.4 million, including higher marketing and distribution costs and expenses associated with the pending MVMT acquisition.
- Six-month effective tax rate was 16.8%, compared with 68.3% a year earlier. The company attributed the decrease mainly to stock-compensation tax benefits, release of a valuation allowance on certain foreign deferred tax assets and jurisdictional earnings mix. Prior-year acquisition costs and other tax items also affect comparability.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $175.6 million at July 31, 2018, versus $214.8 million at January 31, 2018 and $162.4 million a year earlier. Total assets were $627.2 million; shareholders’ equity was $463.4 million.
- Six-month operating cash flow was positive $4.1 million, versus $10.0 million used in the prior-year period. Management cited $17.3 million of net income and non-cash items, partly offset by a $22.1 million working-capital use, primarily inventory built for the holiday season and supplier prepayments.
- Investing cash outflow was $5.3 million, primarily capital expenditures; prior-year outflow of $80.4 million principally reflected the Olivia Burton acquisition. Financing cash outflow was $31.5 million, including repayment of $25.0 million in bank borrowings, dividends and share repurchases.
- No borrowings were outstanding under the $100 million revolving facility; availability was approximately $99.7 million. The company reported compliance with its covenants. It had no debt outstanding at period-end and stated that cash, facility availability and expected operating cash flow should cover working-capital needs for at least 12 months.
- Inventory was $171.4 million, up from $151.7 million at fiscal year-end. The company paid $0.40 per share in dividends during the six months and approved a further $0.20-per-share dividend payable September 25, 2018.
Material changes, outlook and risks
- ASC 606 was adopted February 1, 2018. Adoption reduced opening retained earnings by $0.7 million; reported six-month sales and net income were increased by $1.1 million and $0.3 million, respectively, versus amounts without adoption. Q2 reported sales and net income were lower by $1.1 million and $0.2 million, respectively, than under the prior accounting.
- After quarter-end, Movado agreed to acquire MVMT Watches Inc. for an initial payment of approximately $100 million (approximately $85 million net of anticipated tax benefits) plus contingent payments of up to $100 million before tax benefits. Funding is expected from cash and revolver borrowings; closing was expected around October 1, 2018, subject to customary conditions. The filing gives no quantified operating guidance for future periods.
- The company’s estimated $28.2 million Transition Tax obligation is payable in installments over eight years; related tax estimates remain provisional. The company continues to assess the Tax Act’s effects, including GILTI and foreign earnings reinvestment.
- U.S. Customs disputes the company’s tariff-allocation methodology and alleges approximately $5.1 million of underpaid duties over the relevant five-year period, plus possible penalties and interest. Movado disputes the position and cannot predict the outcome. Management said other legal proceedings and contingencies were not expected to have a material effect beyond amounts accrued.
- Key risks include execution and financing of the MVMT acquisition, consumer demand and fashion trends, pressure in the U.S. fashion-watch market, foreign-exchange movements, supplier and customer concentration, licensing arrangements, tariffs and import duties, litigation, and integration or impairment risks for acquired brands. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether international growth and higher gross margins persist, and whether weakness in U.S. licensed-brand sales stabilizes.
- MVMT closing conditions, final purchase-price adjustments, earnout performance, funding mix and resulting leverage.
- Inventory conversion and operating cash flow through the holiday selling season.
- Resolution and potential financial exposure of the U.S. Customs matter, including penalties and interest.
- Final tax effects of the Tax Act and any further effects of ASC 606 on period-to-period comparability.