MOVADO GROUP, INC. — Q1 Fiscal 2018 Form 10-Q
Reporting period: Three months ended April 30, 2017. Movado designs, manufactures and distributes luxury and licensed-brand watches and operates retail outlet stores. The quarter is an interim period; results are not necessarily indicative of the full year.
Financial performance and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $99.3 million | $114.1 million |
| Gross profit / margin | $49.1 million / 49.5% | $61.3 million / 53.8% |
| SG&A | $52.8 million | $55.9 million |
| Operating income (loss) | $(3.6) million | $5.4 million |
| Net income (loss) attributable to Movado | $(4.2) million | $3.3 million |
| Diluted earnings (loss) per share | $(0.18) | $0.14 |
| Operating cash flow | $(16.6) million | $(21.1) million |
At April 30, 2017, cash and cash equivalents were $233.6 million, current assets $493.0 million, current liabilities $66.9 million, and total assets $595.0 million. Cash was down $22.7 million from January 31, 2017 but up $29.7 million from April 30, 2016. The company had $30.0 million drawn under its revolving credit facility ($5.0 million current and $25.0 million long-term), with approximately $69.7 million of facility availability. It was in compliance with its debt covenants.
Operating cash use primarily reflected working-capital investment, including inventory build, lower accounts payable, prepaid expenses and tax payments, as well as the quarterly net loss. Cash used in investing activities was $0.4 million and cash used in financing activities was $4.7 million. The quarterly dividend was $0.13 per share.
Changes versus the prior comparable period
- Sales fell $14.8 million, or 13.0%; foreign exchange reduced year-over-year sales by $2.3 million.
- Wholesale sales declined 14.5% to $87.2 million. U.S. wholesale sales fell 31.8%, while international wholesale sales rose 0.9% despite the currency headwind. Retail sales were flat at $12.1 million.
- Luxury-brand wholesale sales declined to $33.1 million from $42.0 million; licensed-brand sales declined to $51.4 million from $56.8 million.
- Gross margin contracted 430 basis points. Management attributed the decline mainly to channel and product mix (about 170 basis points), severance related to cost savings (about 140 basis points), foreign exchange (about 100 basis points), and lower fixed-cost absorption (about 20 basis points).
- SG&A decreased 5.6%, but the company moved from operating income to an operating loss and from net income to a net loss. Lower sales and gross profit more than offset reduced expenses.
- Cash used in operations improved by $4.5 million year over year. Inventory was $160.4 million, down from $178.4 million a year earlier but up from $153.2 million at January 31, 2017.
Outlook, management commentary and risks
- Management expects approximately $12 million of savings in fiscal 2018 and approximately $15 million of ongoing annual pre-tax savings from cost-reduction measures. The company recorded $6.3 million of related pre-tax charges in the quarter, primarily severance and payroll-related costs, and expects the initiatives to be substantially complete by fiscal year-end.
- The filing provides no clear full-year revenue or earnings guidance. Management said cash on hand, expected operating cash flow and short-term borrowing capacity should cover working-capital needs for at least the next 12 months.
- Most cash at foreign subsidiaries—$228.6 million of the $233.6 million total—was associated with earnings considered permanently reinvested. The company disclosed approximately $311 million of undistributed foreign earnings for which it had not recorded a deferred tax liability. This may limit the practical availability of some cash for domestic use.
- U.S. Customs disputes the company’s historical method for allocating costs of certain imported watches for tariff purposes and proposed an alternative implying approximately $5.1 million of underpaid duties over five years. Movado disputes the position; the outcome is uncertain.
- The company cited challenging and unpredictable watch-market conditions, declining traffic in malls and traditional department stores, competition including smartwatches, consumer and economic uncertainty, foreign-exchange exposure, and risks to licensing and supply arrangements. It held no gold futures at quarter-end, leaving gold-price changes to affect cost of sales.
- The company adopted ASU 2016-09 and recorded $1.0 million of excess tax expense as a discrete item. The quarter’s $0.3 million tax expense despite a pre-tax loss also reflected no tax benefit on losses in certain foreign operations. The effective tax rate was negative 7.1%.
- On May 25, 2017, the board approved another $0.13-per-share dividend, payable June 20, 2017. The share-repurchase authorization, up to $50 million, expires September 30, 2017; $45.1 million remained available at April 30, 2017.
Important facts for investors to verify
- Progress toward the stated fiscal 2018 and ongoing cost savings, including the remaining restructuring charges and effects on margins.
- Whether U.S. Customs’ proposed duty assessment changes, and any resulting financial-statement exposure.
- Sales trends by U.S. and international wholesale, brand category and retail, together with gross-margin recovery and foreign-exchange effects.
- Operating cash conversion, inventory levels, access to overseas cash, and compliance with the revolving-credit covenants.
- Future tax effects of share-based compensation and the company’s permanently reinvested foreign earnings.