Movado Group, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended January 31, 2014. This is an annual filing; fiscal Q4 ended on that date. The company designs, sources, markets and distributes watches across owned and licensed brands, with wholesale and outlet-retail segments.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $570.3 million | $505.5 million |
| Gross profit / margin | $305.3 million / 53.5% | $277.9 million / 55.0% |
| Operating income / margin | $67.7 million / 11.8% | $49.3 million / 9.8% |
| Net income attributable to Movado Group | $50.9 million | $57.1 million |
| Diluted earnings per share | $1.97 | $2.22 |
| Cash from operating activities | $54.5 million | $38.8 million |
| Cash and cash equivalents at year-end | $157.7 million | $167.9 million |
| Working capital | $401.7 million | $360.6 million |
Cash and cash equivalents plus short-term investments were $190.8 million at year-end; the $33.1 million investment was a six-month time deposit. The company reported no outstanding debt and $20.4 million of availability under its $25 million asset-based revolver, which matures March 12, 2015. Management said available cash, operating cash flow and borrowing capacity should cover working-capital needs for at least twelve months. Total assets were $578.6 million and shareholders’ equity was $466.0 million.
Investing activities used $47.9 million, including the $33.1 million time deposit and $16.7 million of capital expenditures, partly offset by $2.2 million of building-sale proceeds. Financing activities used $16.5 million, primarily for $6.6 million of dividends and $10.5 million of share repurchases. Inventory rose to $181.3 million from $167.3 million; receivables increased to $68.7 million from $61.4 million.
Changes versus the prior year
- Sales increased 12.8%. Wholesale sales rose to $511.0 million; retail sales increased 5.5% to $59.3 million, with comparable outlet sales up 1.5%.
- Operating income increased 37.3%, and operating margin improved by 2.0 percentage points, despite lower gross margin. Gross margin declined 1.5 percentage points, primarily due to product and channel mix and the ESQ Movado transition.
- Net income attributable to the company declined 10.9%. FY2013 included a $19.8 million tax benefit from reversing most of the U.S. deferred-tax valuation allowance; FY2014’s effective tax rate was 25.2%, versus negative 18.0% in FY2013.
- Operating cash flow increased by $15.7 million. Cash declined by $10.2 million, partly reflecting the time-deposit investment, capital spending, dividends and repurchases.
- FY2014 Q4 sales were $132.3 million versus $123.6 million; attributable net income was $7.2 million versus $7.9 million, and diluted EPS was $0.28 versus $0.31.
Outlook, commentary, risks and unusual items
- Management forecast approximately $17 million in FY2015 capital expenditures. It planned to shift certain retail space from ESQ Movado to the more productive Movado brand in Q2 FY2015, while continuing ESQ in select locations and direct-to-consumer channels. No consolidated revenue or earnings guidance is provided in the filing.
- The ESQ strategy generated significant FY2014 charges and reserves. The filing separately reports a $7.8 million sales reserve for anticipated returns, a $7.5 million gross-profit impact related to returns and excess-inventory write-downs, and $0.8 million for excess displays and point-of-sale materials; it also describes an $8.3 million strategy charge in its segment discussion. These disclosures use different line-item descriptions; investors should verify their relationship rather than add them together.
- Other notable items included a $2.5 million U.S. customs duty refund, a $1.5 million gain on a building sale, and a $2.0 million Movado Group Foundation donation. FY2013 results included the Coach-brand repositioning allowance and the substantial deferred-tax valuation-allowance reversal.
- Key risks include discretionary consumer demand and seasonality, fashion and product-mix changes, inventory and returns, competition, reliance on licensors and independent manufacturers, foreign exchange exposure, and customer credit. Licensed brands represented approximately 48% of FY2014 sales; about 47% of revenue came from international markets. A majority of Swiss movements for several owned brands came from two suppliers.
- Contractual obligations totaled $242.6 million, including $136.7 million of other long-term obligations, primarily license and endorsement commitments, $60.3 million of purchase obligations and $45.6 million of operating leases. Pending legal matters were described as ordinary-course matters not expected to materially affect the company. The company reported effective disclosure controls and internal control over financial reporting; the independent auditor gave an unqualified opinion.
- The board approved a quarterly dividend increase to $0.10 per share after year-end, payable April 21, 2014. The $50 million share-repurchase authorization expires January 31, 2016.
Most important facts for investors to verify
- How ESQ-related sales-return reserves, inventory charges and display write-downs reconcile across the filing, and whether expected returns or inventory pressure persist in FY2015.
- Whether sales growth and operating-margin improvement continue after the ESQ transition, given FY2014’s gross-margin decline and the seasonal sales pattern.
- Inventory growth, receivable collection and the availability of the revolver, which matures in March 2015.
- The sustainability of earnings and dividends apart from the prior-year tax benefit and other unusual items; monitor deferred-tax asset realizability and foreign tax exposures.
- License renewals, minimum royalty commitments, and supplier and currency exposures, particularly Swiss-franc costs and concentration in movement suppliers.