Movado Group, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended January 31, 2018. The filing is an annual report, not a stand-alone quarterly filing; fourth-quarter figures are included below where relevant. Amounts are in U.S. dollars.
Business context and financial performance
Movado designs, sources, markets and distributes watches through its Wholesale and Retail segments, using owned and licensed brands. It operates globally and generated 54.1% of revenue internationally. The fiscal year included the July 2017 acquisition of Olivia Burton.
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $568.0 million | $552.8 million |
| Gross profit / margin | $298.1 million / 52.5% | $294.8 million / 53.3% |
| Operating income / margin | $43.2 million / 7.6% | $54.0 million / 9.8% |
| Income before taxes | $42.1 million | $51.5 million |
| Income tax provision | $57.4 million | $16.3 million |
| Net income (loss) attributable to Movado Group | $(15.2) million | $35.1 million |
| Diluted EPS | $(0.66) | $1.51 |
| Cash from operating activities | $54.7 million | $58.2 million |
Revenue increased 2.8%, including a $3.0 million favorable foreign-exchange effect. International wholesale sales rose 19.9% to $307.3 million, including Olivia Burton and growth across several markets. U.S. wholesale sales fell 19.0% to $184.7 million amid weaker mall, department-store and jewelry-chain traffic. Retail sales increased 11.1% to $75.9 million.
Gross margin declined about 80 basis points, primarily due to an unfavorable channel and product mix, partly offset by currency and cost-savings benefits. SG&A rose 5.8% to $254.9 million. Marketing expense was $73.1 million, down from $75.7 million. FY2018 included $13.6 million of cost-savings and Baselworld exit charges and $6.8 million of Olivia Burton transaction and acquisition-accounting expenses.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $214.8 million at year-end, down from $256.3 million; $201.9 million was held by foreign subsidiaries.
- Working capital was $381.3 million, compared with $433.4 million. Cash used in investing activities was $84.3 million, including $79.0 million for Olivia Burton, net of cash acquired. Capital expenditures were $5.8 million.
- Year-end bank borrowings were $25.0 million; the company repaid the balance on February 28, 2018. It reported $74.7 million of availability under its $100 million revolving facility at January 31, 2018 and compliance with covenants.
- Operating cash flow of $54.7 million was below the prior year. The filing cites working-capital movements and $7.8 million of cash payments related to cost-savings actions among the factors affecting cash generation.
- FY2018 dividends totaled $0.52 per share, or approximately $11.9 million. The board subsequently approved a quarterly dividend increase to $0.20 per share. The company repurchased 140,507 shares for approximately $3.6 million during FY2018 and authorized a new $50 million repurchase program through August 2020.
Material changes and unusual items
- The 2017 Tax Act resulted in a provisional $45.0 million tax charge in Q4, including $28.2 million of transition tax, $8.3 million for deferred-tax remeasurement and $8.5 million for withholding and state taxes. This drove the FY2018 net loss and 136.1% effective tax rate. The tax accounting remained provisional; the company had not completed its GILTI analysis.
- Q4 FY2018 sales were $149.2 million versus $130.8 million a year earlier. Q4 net loss attributable to the company was $33.9 million, compared with net income of $5.2 million in Q4 FY2017, principally reflecting the tax charge.
- Olivia Burton contributed $17.8 million in sales and $5.3 million in operating income from acquisition through year-end. The company recorded $60.3 million of goodwill and $23.1 million of net intangible assets at January 31, 2018; no goodwill impairment indicators were identified in its annual test.
- The company recorded $13.6 million of pre-tax cost-savings initiative expenses, substantially completing the actions by year-end, and stopped participating in the Baselworld Watch and Jewelry Show.
- Fiscal 2018 operating leases totaled $66.2 million in future minimum payments; purchase obligations were $83.8 million and minimum license and endorsement commitments were approximately $203.0 million. The filing reports total contractual obligations of $381.2 million, including the transition tax.
Outlook, risks and contingencies
Management gave no specific revenue or earnings guidance in the supplied filing text. It expected FY2019 capital expenditures of approximately $12.0 million and stated that cash, expected operating cash flows and short-term borrowing capacity should meet working-capital needs for at least twelve months. Management highlighted continued investment in digital marketing and e-commerce, including a planned Digital Center of Excellence.
Key risks include weak discretionary spending and traditional retail traffic; competition from smartwatches and other wearables; fashion and demand forecasting; reliance on licensed brands, third-party manufacturers and a small number of Swiss movement suppliers; foreign-exchange exposure; international, Brexit, tariff and tax uncertainty; cyber, privacy and e-commerce risks; and seasonal sales concentration. The second half generated 59.8% of FY2018 sales.
U.S. Customs disputes the company’s tariff-allocation methodology and estimated approximately $5.1 million of potentially underpaid duties for the audited period, plus possible penalties and interest. Movado disputes the position; the outcome is uncertain. The filing states that other disclosed legal matters were not expected to materially affect financial condition, future results beyond accrued amounts, or cash flows.
The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. JLB Brands, acquired during FY2018, was excluded from the internal-control assessment and audit; its assets and revenue each represented 3% of the respective consolidated amounts.
Important facts for investors to verify
- How much of the revenue increase and international growth reflects Olivia Burton, foreign exchange, or underlying comparable brand demand?
- Whether the U.S. wholesale sales decline persists, and whether retail growth and margin mix can offset it.
- The final accounting and cash-tax consequences of the 2017 Tax Act, including transition-tax estimates, foreign earnings plans and GILTI.
- The resolution and potential exposure from the U.S. Customs duty audit, including penalties and interest.
- Olivia Burton’s sustained sales and profitability, and the assumptions supporting its goodwill and intangible-asset values.
- Progress on cost savings, the projected FY2019 capital spending, and liquidity after the post-year-end debt repayment and increased dividend.