MOVADO GROUP, INC. — FY2016 Form 10-K
Reporting period: Fiscal year ended January 31, 2016. The filing also reports fourth-quarter results; figures below are in U.S. dollars, generally millions unless noted.
Business context
Movado designs, sources, markets and distributes watches through wholesale and retail segments. Its portfolio includes owned brands Movado, Ebel and Concord, as well as licensed brands including Coach, HUGO BOSS, Tommy Hilfiger, Lacoste, Juicy Couture and Scuderia Ferrari. It operated 40 U.S. outlet stores. International markets generated approximately 45% of sales; licensed brands accounted for about 50% of fiscal-year sales.
Key financial results
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net sales | $594.9 | $587.0 | +1.4% |
| Gross profit / margin | $316.9 / 53.3% | $310.0 / 52.8% | Margin +0.5 percentage point |
| SG&A | $246.8 | $238.5 | +3.5% |
| Operating income / margin | $70.1 / 11.8% | $71.5 / 12.2% | Income down 1.9% |
| Net income attributable to Movado | $45.1 | $51.8 | Down 12.9% |
| Diluted EPS | $1.90 | $2.02 | Down 5.9% |
| Operating cash flow | $74.6 | $59.6 | +$15.0 |
| Cash and cash equivalents, year-end | $228.2 | $199.9 | +$28.3 |
| Total debt, year-end | $40.0 | $0 | Increased |
| Working capital, year-end | $410.9 | $413.0 | Down $2.1 |
Fiscal 2016 investing activities used $9.2 million, including $8.1 million of capital expenditures; financing activities used $23.7 million, including $48.7 million for share repurchases and $10.3 million of dividends, partly offset by net borrowings. Cash at foreign subsidiaries was $203.5 million, much of it designated to support overseas operations. The company reported $40.0 million drawn on its $100 million secured revolving facility, with approximately $56.4 million available after letters of credit; it was in covenant compliance.
Material changes versus the prior year
- Sales rose modestly despite a $24.3 million adverse foreign-exchange translation impact. U.S. wholesale sales increased 2.2%; international wholesale sales increased 0.8%; retail sales were nearly flat, and comparable outlet sales declined 2.3%.
- Gross margin improved by about 50 basis points, reflecting favorable mix, selective pricing and sourcing improvements, partly offset by approximately 180 basis points of currency pressure.
- Operating income was lower as SG&A increased, including higher compensation and a $4.0 million pre-tax charge for operating-efficiency actions. The effective tax rate rose to 33.8% from 27.1%, contributing to lower net income.
- The company repurchased 1.86 million shares for approximately $48.7 million, versus 0.83 million shares for $26.4 million in FY2015. Average basic shares outstanding fell to 23.5 million from 25.3 million.
- On January 6, 2016, Movado acquired its joint-venture partner’s remaining 49% interest in the French and German distribution businesses; $1.4 million remained payable at year-end.
- Fiscal 2016 fourth-quarter sales were $143.3 million versus $133.9 million; net income attributable to Movado was $7.9 million versus $10.1 million, and diluted EPS was $0.34 versus $0.40.
Outlook, commentary and risks
- Management stated that cash on hand, expected operating cash flow and short-term borrowing capacity should meet working-capital needs for at least the next 12 months. Fiscal 2017 capital expenditures were estimated at approximately $12 million, compared with $8.1 million in FY2016. The filing does not provide a clear earnings or revenue forecast.
- Movado launched limited-quantity smart-watch collections in the fourth quarter, using technology from Fullpower Technologies and HP. The company identified competition from smart wearables, technology support and compatibility, privacy, cybersecurity and product-return risks.
- Other significant exposures include discretionary consumer spending, fashion and product-demand forecasting, foreign exchange, reliance on independent manufacturers and two key Swiss movement suppliers, customer concentration, and license renewal or performance requirements. Signet Jewelers and Macy’s and their affiliates together represented approximately 20.7% of total sales.
- The new Swiss-origin rules may raise costs or constrain sourcing for Swiss-made watches. The company also cited possible competitive effects if the Trans-Pacific Partnership were ratified and implemented.
- Subsequent events: the board approved a new $50 million share-repurchase authorization expiring September 30, 2017, and raised the quarterly dividend to $0.13 per share. COO Rick Coté announced retirement for June 2016; the company expects an approximately $2.0 million pre-tax FY2017 first-quarter charge related to his retirement.
- Operating leases, purchase obligations and license/endorsement commitments totaled approximately $268.5 million. The filing reported no material pending legal proceedings; a securities complaint filed in 2015 was dismissed with prejudice. The independent auditor gave an unqualified opinion and reported effective internal control over financial reporting.
Most important facts for investors to verify
- Whether revenue and operating performance improve after accounting for currency headwinds, and whether the gross-margin gains are sustainable.
- Cash availability and the practical flexibility of the $203.5 million held by foreign subsidiaries, given the company’s reinvestment intentions and repatriation tax considerations.
- Debt, revolving-credit availability and covenant headroom, especially as the company funds repurchases, dividends and planned capital expenditures.
- Licensed-brand performance, renewal terms and concentration exposure, including the transition away from ESQ Movado production.
- Smart-watch sales, product support and compatibility, customer returns, and associated privacy and cybersecurity exposure.
- Execution and costs of the efficiency initiative, including the announced Coté retirement charge and the expected FY2017 capital program.