Movado Group, Inc. — Q2 FY2014 Form 10-Q
Reporting period: Quarter and six months ended July 31, 2013; filed August 27, 2013. The company designs, manufactures and distributes watches through Wholesale and Retail segments, including its owned and licensed brands. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Three months ended July 31, 2013 | Prior-year quarter | Six months ended July 31, 2013 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $138.3 | $118.0 | $248.3 | $221.7 |
| Gross profit / margin | $74.8 / 54.1% | $65.8 / 55.7% | $134.7 / 54.3% | $124.8 / 56.3% |
| Operating income | $17.0 | $10.7 | $27.0 | $19.2 |
| Net income attributable to Movado Group | $12.5 | $8.1 | $20.7 | $14.7 |
| Diluted EPS | $0.48 | $0.32 | $0.80 | $0.58 |
- Quarterly sales rose 17.2%; six-month sales rose 12.0%. Wholesale sales drove most of the increase, while Retail sales rose 7.2% for the quarter and 3.7% for the six months.
- Gross margin declined 1.6 percentage points in the quarter and 2.0 points for the six months. Management attributed the pressure principally to channel and product mix, partly offset by fixed-cost leverage and favorable currency effects.
- Operating cash flow was negative $0.2 million for the six months, versus negative $2.1 million a year earlier. Working-capital use was $25.9 million, chiefly from inventory build ahead of the holiday season and higher receivables associated with sales growth.
- Investing cash flow was negative $8.2 million, including $10.2 million of capital expenditures, partly offset by $2.2 million proceeds from a building sale. Financing cash flow was negative $6.0 million, including dividends and $3.3 million of share repurchases.
- Cash and cash equivalents were $151.5 million at July 31, 2013, versus $156.3 million a year earlier and $167.9 million at January 31, 2013. Current assets were $447.2 million and current liabilities $77.2 million.
- Total liabilities were $105.6 million. The company had no outstanding debt; its $25 million revolving facility had $20.5 million available at period-end. It also had unused Swiss-franc credit lines equivalent to $10.8 million.
Changes versus prior period and operating drivers
- Quarterly U.S. wholesale sales increased 26.1%, supported by licensed and accessible-luxury brands. Coach sell-in associated with its repositioning, the new Scuderia Ferrari line, and strength in Movado BOLD, Museum and relaunched ESQ Movado contributed.
- International wholesale sales increased 12.4% in the quarter and 5.4% for the six months. International wholesale operating income increased in the quarter but declined $2.7 million for the six months to $24.0 million.
- U.S. wholesale operating results improved substantially year over year but remained a loss: $2.3 million in the quarter and $1.0 million for the six months. Retail operating income was $2.9 million for the quarter and $4.0 million for the six months, slightly below prior-year levels.
- SG&A increased 4.9% in the quarter and 2.0% for the six months, including higher marketing costs. A lower accrual for performance-based compensation partly offset expense increases.
- Foreign-exchange movements added $0.9 million to quarterly sales and $0.4 million to six-month sales. Currency translation reduced six-month comprehensive income; the six-month translation adjustment was negative $4.3 million, compared with negative $14.2 million in the prior-year period.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or margin 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.
- Management cited risks including consumer demand and economic conditions, changing product preferences, competition, seasonality, significant-customer or supplier issues, licensed-brand arrangements, international and currency exposure, and the effectiveness of hedging. The filing reported no material change to the previously disclosed annual-report risk factors.
- Most foreign cash—$124.9 million at July 31, 2013—was associated with earnings considered permanently reinvested and intended to support overseas operations. The company had previously provided for $12.7 million of earnings not yet repatriated.
- A $1.5 million pretax gain on the sale of a building was recorded in the six-month period; proceeds were $2.2 million. A $1.0 million tax benefit related primarily to favorable changes in domestic and foreign tax audits was recorded in the quarter.
- The board approved an increase in the quarterly dividend to $0.08 per share on August 27, 2013, payable September 20, 2013. The company repurchased 98,633 shares during the six months for approximately $3.3 million under a $50 million authorization.
- The company reported compliance with facility financial covenants and no cash-dominion requirement. Ordinary-course legal matters were not expected by management to have a material adverse effect; $4.5 million of domestic letters of credit and $2.3 million of foreign-bank guarantees were outstanding.
Important facts for investors to verify
- Whether elevated inventory and receivables convert to sales and cash in the holiday-selling period, and whether working capital normalizes.
- Whether sales mix continues to pressure gross margin, particularly as recent growth was driven by specific licensed and accessible-luxury brands.
- How international earnings and foreign-cash restrictions affect accessible liquidity, and whether currency hedges offset Swiss-franc purchase exposure.
- Whether U.S. wholesale operations achieve sustained profitability and international six-month operating-income weakness reverses.
- The sustainability of the higher dividend and planned repurchases relative to operating cash generation, capital spending and facility availability.