Movado Group, Inc. — Q3 FY2018 Form 10-Q
Reporting period: Three and nine months ended October 31, 2017. Amounts below are in U.S. dollars; financial statement figures are unaudited.
Business context and reporting period
Movado designs, manufactures and distributes owned- and licensed-brand watches through Wholesale, and operates retail outlet stores. The quarter included results of Olivia Burton, acquired July 3, 2017, within International Wholesale. Management cautions that interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Three months 2017 | Three months 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $190.7m | $179.8m | $418.7m | $422.0m |
| Gross profit / margin | $104.1m / 54.6% | $98.6m / 54.8% | $219.3m / 52.4% | $230.1m / 54.5% |
| Operating income / margin | $25.2m / 13.2% | $31.1m / 17.3% | $29.9m / 7.1% | $46.5m / 11.0% |
| Net income attributable to Movado | $17.4m | $20.2m | $18.7m | $29.8m |
| Diluted EPS | $0.75 | $0.87 | $0.80 | $1.28 |
Quarterly sales rose 6.0%, while nine-month sales declined 0.8%. In the quarter, International Wholesale sales grew 34.7% and Retail sales grew 16.9%, offset in part by a 21.9% decline in U.S. Wholesale sales. For the nine months, U.S. Wholesale sales fell 21.7%; International Wholesale sales increased 17.2% and Retail sales rose 7.9%.
Gross margin fell 20 basis points in the quarter and 210 basis points year to date. Management attributed the nine-month decline principally to unfavorable channel and product mix, severance, currency effects and Olivia Burton inventory step-up amortization, partly offset by cost savings.
Cash flow, liquidity and debt
- Nine-month operating cash flow was negative $9.4m, compared with negative $10.8m a year earlier. Management cited seasonal receivables and inventory growth, including inventory related to Olivia Burton.
- Investing cash outflow was $82.0m, primarily reflecting the Olivia Burton acquisition; financing cash outflow was $12.6m, including dividends and repurchases. Cash declined $100.8m from January 31 to $155.5m.
- At October 31, cash was $155.5m, current assets $484.7m and current liabilities $100.9m. Bank borrowings totaled $30.0m ($5.0m current, $25.0m long-term); revolving facility availability was approximately $69.7m. The company reported compliance with its debt covenants.
- Most foreign cash is designated to support foreign operations. Management said cash on hand, expected operating cash flow and borrowing capacity should cover working-capital needs for at least the next 12 months.
Material changes, outlook and risks
- Olivia Burton: Acquired for cash on July 3; the filing describes approximately $79.0m net of cash acquired. Since acquisition, the brand contributed $12.1m in sales and $4.4m in operating income, excluding unallocated corporate costs and certain support expenses. The purchase allocation recorded $55.3m goodwill and about $21.4m of trade name and other intangibles.
- Cost savings and unusual charges: The company recorded $13.4m of fiscal 2018 pre-tax initiative charges through October 31, including $7.0m in the third quarter. Charges included severance, asset write-offs and contract termination costs, including costs associated with ceasing participation in Baselworld. Management expects approximately $12.0m of pre-tax savings in fiscal 2018, to be reinvested in marketing and other operations; initiatives are expected to be substantially complete by fiscal year-end.
- Outlook: The filing provides no specific revenue or earnings guidance. Management described the U.S. watch market as challenging, with declining traffic at malls, traditional department stores and jewelry chains. It identified consumer preferences, competition from smartwatches, seasonality, foreign exchange, tariffs, licensing arrangements and acquisition integration as risks.
- Contingency: U.S. Customs disputes the company’s methodology for allocating costs of certain imported watches and proposed an estimated $5.1m in duties for the five-year review period, plus possible penalties and interest. Movado contests the position and cannot predict the outcome.
- Other developments: The Hugo Boss license was extended through December 31, 2023, with certain terms amended. A new share-repurchase authorization permits purchases up to $50.0m through August 2020. A $0.13-per-share dividend was approved for payment in December 2017.
Most important facts for investors to verify
- Whether U.S. Wholesale demand and the steep year-to-date sales and operating-income declines stabilize.
- Whether the projected $12.0m of fiscal 2018 savings are achieved, and how reinvestment affects margins and earnings.
- Olivia Burton’s sustained sales and profitability, integration costs, and the assumptions supporting acquired goodwill and intangible values.
- The resolution and potential total exposure of the U.S. Customs duty dispute, including penalties and interest.
- Cash availability across jurisdictions, seasonal working-capital needs, and continued compliance with credit-facility covenants.
- The acquisition disclosures report approximately $79.0m net of acquired cash in the narrative, while the purchase-price allocation table lists $84.9m as total purchase price; verify the reconciliation in the filing and related disclosures.