MOVADO GROUP, INC. — FY2013 Form 10-K
Business and reporting period. Movado designs, sources, markets and distributes watches through Wholesale and Retail segments and owned and licensed brands. This annual report covers the fiscal year ended January 31, 2013; the filing also reports fourth-quarter results. The company operated 34 U.S. outlet stores and generated about half of sales internationally.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $505.5 million | $468.1 million |
| Gross profit / margin | $277.9 million / 55.0% | $256.3 million / 54.8% |
| Operating income / margin | $49.3 million / 9.8% | $33.6 million / 7.2% |
| Net income attributable to Movado | $57.1 million | $32.0 million |
| Diluted EPS | $2.22 | $1.27 |
| Cash from operating activities | $38.8 million | $86.1 million |
FY2013 sales rose 8.0%; currency movements reduced year-over-year sales by $7.6 million. U.S. wholesale sales increased 15.4%, international wholesale sales 3.8%, and retail sales 1.6%; comparable outlet-store sales rose 3.7%. Wholesale operating income was $38.0 million and Retail operating income was $11.3 million.
Fourth-quarter FY2013 sales were $123.6 million, gross profit was $62.7 million and net income attributable to Movado was $7.9 million. The comparable FY2012 quarter reported sales of $122.4 million, gross profit of $65.7 million and net income of $10.7 million.
Liquidity, debt and capital allocation
At January 31, 2013, cash and cash equivalents were $167.9 million, working capital was $360.6 million and total assets were $526.4 million. The company had no outstanding debt. Its $25 million secured revolving facility, maturing March 2015, had $20.4 million of availability; separate Swiss credit lines were undrawn. Cash from operations fell by $47.3 million year over year, principally reflecting an unfavorable $20.7 million working-capital change. Investing activities used $16.3 million and financing activities used $38.4 million, including $36.7 million of dividends.
FY2013 dividends totaled $1.45 per share, including two special dividends; management anticipated regular quarterly dividends totaling $0.20 per share in FY2014, subject to Board approval. The Board authorized a share-repurchase program of up to $50 million through January 31, 2016, primarily to offset equity-award dilution. Expected FY2014 capital expenditures were approximately $17 million.
Changes, outlook and notable items
- Growth and improved operating profitability reflected higher wholesale sales, stronger gross margin and expense leverage. Gross margin increased 0.2 percentage points; SG&A rose 2.6% to $228.5 million.
- FY2013 net income included an $8.8 million income-tax benefit, chiefly from reversing most of the U.S. deferred-tax valuation allowance. The benefit was non-cash and depends on the company’s ability to realize deferred tax assets through future taxable income.
- A $4.9 million Coach sales allowance was recorded in FY2013 as the brand was repositioned for the fashion-watch channel. Management described the allowance as an estimate of retailer costs associated with the transition.
- The company recorded a $3.0 million Movado Group Foundation donation in FY2013. It also acquired additional U.K. joint-venture shares for $4.7 million, increasing its ownership of MGS to 90%; Swico retained logistics and after-sales support roles.
- Movado signed a Ferrari watch license through December 31, 2017, with first sales expected in FY2014. Licensed brands represented approximately 45% of FY2013 sales; no single licensed brand exceeded 20%.
- No specific revenue or earnings guidance was provided. Management expected to rely principally on operating cash flow for FY2014 needs and believed cash, expected operating cash flow and borrowing capacity would cover needs for at least twelve months.
Risks and contingencies
Key risks include discretionary consumer spending and seasonal holiday demand; fashion and product acceptance; intense competition, including online retailers; inventory forecasting and markdowns; dependence on licensors and license renewals; reliance on third-party manufacturers and concentrated Swiss movement suppliers; foreign-exchange exposure, particularly the Swiss franc; customer credit and concentration; and international economic conditions. The company reported $76.2 million of supplier purchase obligations and $50.2 million of operating-lease commitments. It also reported $3.6 million of gross unrecognized tax benefits and $2.0 million of accrued interest and penalties. Management said pending legal matters were not expected to materially affect consolidated results or financial condition. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of FY2013 earnings growth and EPS reflected the one-time deferred-tax valuation-allowance reversal, and whether the related deferred tax assets are likely to be realized.
- Why operating cash flow declined despite higher net income, and whether working-capital movements reverse in FY2014.
- Whether the Coach repositioning and related allowance support improved sell-through and sustainable sales without additional retailer concessions or inventory costs.
- Renewal terms, minimum royalty and advertising commitments, and performance requirements for major licenses; licensed brands made up about 45% of sales.
- Progress on the Ferrari launch, U.K. distribution integration and planned capital spending, alongside the proposed repurchases and ongoing dividends.