MOVADO GROUP, INC. — Form 10-Q Summary
Reporting period: Fiscal 2017 third quarter and nine months ended October 31, 2016; unaudited. Comparisons are with the corresponding 2015 periods unless stated otherwise. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $179.8, down 3.1% | $422.0, down 6.6% |
| Gross profit / margin | $98.6 / 54.8%, versus $100.1 / 53.9% | $230.1 / 54.5%, versus $241.6 / 53.5% |
| Operating income | $31.1, versus $33.5 | $46.5, versus $58.6 |
| Net income attributable to Movado Group | $20.2, versus $21.5 | $29.8, versus $37.2 |
| Diluted earnings per share | $0.87, versus $0.92 | $1.28, versus $1.55 |
| Operating cash flow | Not provided separately | $(10.7), versus $10.2 provided |
Quarterly gross margin rose about 90 basis points; nine-month gross margin rose about 100 basis points. Management attributed the improvement chiefly to product/channel mix and sourcing improvements. Lower sales drove lower gross profit in both periods.
Sales and operating trends
- Wholesale sales fell 3.2% in the quarter and 7.7% year to date. Licensed-brand sales declined, particularly in U.S. wholesale, as retail customers managed inventory amid a challenging retail environment.
- Luxury-brand sales increased in the quarter but declined year to date. Retail sales fell 2.8% in the quarter, attributed to lower outlet-center traffic, but rose 4.3% for the nine months.
- Nine-month U.S. wholesale operating income dropped to $6.2 from $19.0; international wholesale income increased to $33.7 from $32.8. Retail operating income was approximately flat at $6.6.
- Foreign exchange reduced sales by $3.2 in the quarter and $4.8 for the nine months. Nine-month SG&A was nearly flat at $183.6, including a $1.8 compensation-related charge following the COO’s retirement announcement.
Cash, debt and liquidity
- At October 31, cash and equivalents were $199.8, compared with $181.2 a year earlier and $228.2 at January 31, 2016. Of the October balance, $194.6 was held at foreign subsidiaries; most foreign earnings were designated as permanently reinvested.
- Nine-month operating cash use was attributed primarily to working-capital needs, including a $60.4 increase in trade receivables and seasonal inventory build. Investing cash use was $5.5; financing cash use was $17.0.
- Bank borrowings totaled $38.0: $3.0 current and $35.0 long-term. The $100.0 revolving facility had approximately $61.7 available, including the effect of outstanding letters of credit. The company reported compliance with its covenants.
- Management said cash on hand, expected operating cash flow and short-term borrowing capacity should meet working-capital needs for at least the next 12 months. The company paid $0.39 per share in dividends during the nine months and approved another $0.13 dividend for December 2016.
Outlook, risks and unusual items
- The filing provides no numerical sales or earnings guidance. Management described retail conditions as challenging and unpredictable and noted continued customer inventory discipline.
- A $1.3 impairment charge reduced a privately held investment to zero after its business outlook deteriorated.
- U.S. Customs preliminarily asserted that an alternative tariff methodology could result in approximately $5.1 of additional duties over the five-year review period. Movado disputes the assertion; the outcome is uncertain.
- Management identified currency exposure, including potential Brexit-related effects on U.K. trade, costs and translated earnings. The company uses currency hedges; it had no gold futures hedges at period end.
- Other stated risks include consumer demand, competition from smart watches, licensing arrangements, suppliers, customer concentration, litigation, and financing and operating risks. The filing reported no material change to previously disclosed risk factors.
- The company acquired the remaining 10% interest in its U.K. distribution joint venture for $1.7, making it wholly owned. A new Rebecca Minkoff watch partnership was announced after quarter end.
Important facts for investors to verify
- Whether the sales declines and lower U.S. wholesale profitability continue, and whether margin gains can be sustained.
- Receivables, inventory and operating cash flow through the holiday season, given the substantial seasonal working-capital use.
- Developments in the U.S. Customs tariff dispute and any resulting duty exposure or reserve.
- Availability of foreign cash for U.S. needs, debt-facility headroom and continued covenant compliance.
- Effects of currency movements and Brexit-related developments on U.K. costs, sales and earnings.