MOVADO GROUP, INC. — Form 10-Q Summary
Business context and period: Watch designer, manufacturer and distributor with Wholesale and Retail segments and U.S. and international operations. This filing covers the quarter and nine months ended October 31, 2012; amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Three months ended October 31, 2012 | Nine months ended October 31, 2012 |
|---|---|---|
| Net sales | $160.2 million, up 12.3% year over year | $381.9 million, up 10.5% |
| Gross profit / margin | $90.4 million / 56.4%, versus 56.8% | $215.2 million / 56.4%, versus 55.1% |
| Operating income | $25.0 million, versus $19.1 million | $44.2 million, versus $25.7 million |
| Net income attributable to Movado | $34.5 million, versus $16.4 million | $49.2 million, versus $21.3 million |
| Diluted earnings per share | $1.34, versus $0.65 | $1.92, versus $0.85 |
| Operating cash flow | Not separately provided for the quarter | $5.8 million, versus $32.7 million |
- Sales and segments: Wholesale sales rose 13.6% in the quarter and 11.8% year to date; Retail sales were broadly flat. U.S. wholesale growth was supported by accessible-luxury and licensed brands. International growth also came from licensed and accessible-luxury brands, partly offset by weaker luxury-category sales.
- Margins and expenses: Quarterly gross margin fell 0.4 percentage points, with unfavorable product and channel mix partly offset by currency and volume effects. Nine-month margin improved 1.3 percentage points, reflecting mix and fixed-cost leverage. SG&A rose 5.7% in the quarter and 3.7% year to date.
- Cash and liquidity: Cash and equivalents were $164.8 million at October 31, 2012, down from $182.2 million at January 31, 2012. Current assets were $476.0 million and current liabilities $106.1 million. Operating cash flow weakened mainly because receivables and inventory absorbed cash. Management said cash on hand, expected operating cash flow and short-term borrowing capacity should meet working-capital needs for at least 12 months.
- Debt and facilities: No debt was outstanding. The $25 million secured revolving facility, maturing March 12, 2015, had $20.5 million of availability after letters of credit; the company reported covenant compliance. Separate Swiss bank lines totaled 10 million Swiss francs and were undrawn.
Changes, outlook, risks and unusual items
- Quarterly results included a $19.4 million tax benefit from reversing most of the U.S. deferred-tax-asset valuation allowance. The remaining allowance was $2.8 million. The nine-month period also included a $0.5 million discrete expense related to a foreign tax audit. Accordingly, reported net income and EPS benefited materially from a non-operating tax item.
- SG&A included a $3.0 million charitable contribution accrued for the Movado Group Foundation, as well as higher compensation and marketing spending. Management cited increased marketing investment as intended to support sales growth.
- Foreign exchange reduced sales by $2.9 million in the quarter and $7.7 million year to date. The company identified Swiss-franc exposure, consumer demand and preferences, competition, seasonality, licensing arrangements, supply availability, and economic and currency uncertainty—particularly in Europe—as risks.
- The company announced after quarter-end a special dividend of $0.75 per share, payable December 21, 2012, in addition to its regular quarterly dividend. The filing provides no numerical sales or earnings guidance. Management’s liquidity expectation is described above.
- Legal claims were described as arising in the ordinary course of business; management did not expect their outcome to materially affect financial position, results or cash flows. Standby letters of credit totaled $4.5 million, with an additional $2.3 million of foreign bank guarantees.
- The company closed its Rockefeller Center flagship store in February 2012 after it could not renew the lease; it continued to operate 33 outlet stores. It also signed a worldwide Ferrari watch license, with the collection planned to launch beginning in fiscal 2014.
Important facts for investors to verify
- How much reported earnings growth reflects the $19.4 million deferred-tax valuation-allowance reversal, and how results compare excluding that benefit.
- Whether receivables and inventory normalize and operating cash flow recovers after the $34.6 million working-capital outflow reported year to date.
- Whether sales growth and margin performance continue, especially given quarterly mix pressure, weaker luxury-category sales in international markets, and currency effects.
- The cash and covenant impact of the announced $0.75 special dividend and the company’s ability to sustain future dividends.
- Progress on the Ferrari license launch and any material changes in the company’s stated currency, consumer-demand, supply, and licensing risks.