Movado Group, Inc. — Q1 FY2016 Form 10-Q
Reporting period: Three months ended April 30, 2015, compared with the three months ended April 30, 2014. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. The interim financial statements are unaudited.
Financial performance and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $120.5 | $120.9 |
| Gross profit / gross margin | $62.4 / 51.8% | $65.2 / 53.9% |
| Operating income | $6.9 | $10.9 |
| Income before taxes | $6.8 | $10.9 |
| Net income attributable to Movado Group | $3.6 | $7.4 |
| Diluted earnings per share | $0.15 | $0.29 |
| Operating cash flow | $(11.2) | $(12.1) |
- Gross margin declined about 210 basis points. Management attributed this mainly to approximately 200 basis points of foreign-exchange pressure and 60 basis points from efficiency-initiative charges, partly offset by a favorable channel and product mix of about 60 basis points.
- Cash and cash equivalents were $185.8 at April 30, 2015, versus $137.8 a year earlier and $199.9 at January 31, 2015. Current assets were $487.2 and current liabilities $89.9.
- Inventory was $183.9, up $13.1 from January 31, 2015. Operating cash use reflected working-capital needs, especially inventory build for future sales and income-tax payments.
- The company drew $25.0 under its $100.0 million senior secured revolving facility; reported availability was approximately $71.5, including letters of credit. The facility matures January 30, 2020. The company was in covenant compliance at quarter-end and reported no borrowings on its Swiss subsidiary’s separate credit lines.
- Financing cash use was $0.3, including $22.2 of share repurchases and $2.6 of dividends, offset substantially by $25.0 of bank borrowing. Capital expenditures were $1.5. The quarterly dividend declared was $0.11 per share, versus $0.10 in the comparable period.
Changes versus the prior comparable period
- Sales declined $0.5, or 0.4%, despite U.S. wholesale growth; currency movements reduced sales by approximately $6.5. U.S. wholesale sales rose 5.2% to $53.7, while international wholesale sales fell 4.7% to $55.9. Retail sales declined 3.3% to $10.9.
- Wholesale luxury-category sales increased to $44.9 from $44.2; licensed-brand sales decreased to $60.8 from $61.7. Retail operated 38 outlet stores, compared with 35 a year earlier.
- Operating income fell $4.0 and attributable net income fell $3.7. International operating income decreased to $4.4 from $11.8; U.S. operating income improved to $2.4 from a loss of $0.8, while retail operating income declined to $1.0 from $1.5.
- The effective tax rate rose to 46.3% from 31.6%, primarily because of valuation allowances against certain foreign deferred tax assets and tax effects associated with efficiency-initiative costs.
- Foreign-currency translation and hedge movements contributed to a $3.6 decline in accumulated other comprehensive income during the quarter; total comprehensive loss attributable to the company was $0.01.
Outlook, commentary, risks and unusual items
- Management stated that cash on hand, expected operating cash flow, and short-term borrowing capacity should be sufficient for working-capital needs for at least the next 12 months. The filing provides no specific quarterly or full-year revenue or earnings guidance.
- The company recorded $2.7 of pretax charges for operating-efficiency actions, primarily severance, occupancy costs, and fixed-asset write-offs, mainly at certain foreign subsidiaries. Remaining liabilities were expected to be paid during fiscal 2016.
- Foreign-exchange exposure is significant: purchases include Swiss francs and sales include euros and other currencies. The company reported forward-contract exposures of 28.0 million Swiss francs and 14.0 million euros, with maturities through December 18, 2015. It held no gold futures hedges at quarter-end; changes in gold prices therefore affect cost of sales.
- Management cited risks including consumer demand and preferences, competition and smart watches, economic and geopolitical conditions, supply and customer concentration, licensing arrangements, international operations, currency exposure, financing availability, and litigation.
- A purported securities class action filed February 4, 2015 alleges misleading statements about financial performance during March–November 2014. The company called the complaint meritless and intends to defend it; management could not estimate potential loss.
- On May 1, 2015, the company amended and extended its Juicy Couture license agreement through December 31, 2017. The board approved a $0.11-per-share dividend payable June 22, 2015 to holders of record June 8, 2015.
Important facts for investors to verify
- Whether the sales and margin trends persist after adjusting for currency effects, especially the sharp decline in international operating income.
- Inventory levels, sell-through, and the timing of working-capital conversion into operating cash flow.
- Progress and remaining costs of the efficiency initiatives, including any further restructuring or impairment charges.
- Revolver usage, covenant headroom, and the impact of variable-rate debt; the filing estimates a 1% interest-rate change would affect net income by about $0.1.
- Potential developments or financial exposure from the securities litigation and the tax valuation allowances.
- Future dividend and repurchase decisions: the $100.0 million repurchase authorization expires January 31, 2016, and future dividends remain at the board’s discretion.