Movado Group, Inc. — Q1 FY2013 Form 10-Q
Reporting period: Three months ended April 30, 2012. Financial statements are unaudited; interim results are not necessarily indicative of full-year performance. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $103.7 million | $89.9 million | Up 15.4% |
| Gross profit / margin | $59.0 million / 56.9% | $48.6 million / 54.1% | Margin up 2.8 percentage points |
| Operating income | $8.5 million | $1.6 million | Up $6.9 million |
| Net income attributable to Movado | $6.6 million; $0.26 per diluted share | $0.5 million; $0.02 per diluted share | Improved substantially |
| Operating cash flow | $(24.4) million | $3.6 million | Declined $28.0 million |
| Cash and cash equivalents | $158.8 million at April 30 | $109.3 million at April 30, 2011 | Up $49.5 million year over year |
Sales growth was led by wholesale, up 16.9% to $93.5 million; retail sales rose 3.0% to $10.1 million. International sales were $52.7 million and U.S. sales were $50.9 million. Currency movements reduced year-over-year sales by $1.1 million. Gross margin benefited from approximately 190 basis points of channel and product mix and 130 basis points of fixed-cost leverage, partly offset by about 40 basis points of foreign-exchange pressure. SG&A rose 7.4% to $50.5 million, including higher compensation and marketing costs.
The effective tax rate was 19.1%, compared with 58.3% a year earlier; management said both interim rates reflect accounting guidance for income taxes. The filing notes a U.S. deferred-tax valuation allowance and says management may reassess it within the next twelve months based on expected income.
Liquidity, debt and capital allocation
Cash fell $23.5 million during the quarter, primarily as working capital used $34.5 million, reflecting liability paydowns and higher inventory. Inventory was $172.0 million, up from $163.7 million at January 31, 2012. Investing cash outflow was $0.8 million, principally capital expenditures. Cash included $113.7 million held at foreign subsidiaries; most foreign cash was described as intended to support overseas operations and permanently reinvested, while certain excess Hong Kong and Swiss balances were expected to be repatriated with tax provided.
No debt was outstanding at April 30. The amended asset-based revolving facility matures March 12, 2015, with a $25 million commitment and $20.4 million of availability after letters of credit. The company reported covenant compliance and said it expected sufficient cash, operating cash flow and short-term borrowing capacity for working capital needs over at least the next twelve months. The company also said it presently expected to be able to pay dividends through the facility’s remaining term.
The quarterly dividend was increased to $0.05 per share. A separate $0.50-per-share special dividend, approximately $12.6 million, was paid May 15, 2012. The board retains discretion over future dividends. A $3.0 million donation to the Movado Group Foundation was made in March, consisting of $2.2 million in company shares and $0.8 million cash.
Material changes, outlook and risks
- Wholesale operating income increased to $7.1 million from $1.0 million; retail operating income rose to $1.4 million from $0.6 million. International operating income was $13.5 million, while the U.S. location reported an operating loss of $5.1 million.
- Licensed-brand sales were a principal growth driver, particularly internationally. U.S. accessible-luxury sales increased despite a $1.8 million reserve for anticipated returns of older ESQ styles.
- The Rockefeller Center flagship store closed February 14, 2012 after the company could not renew its lease. The company entered an exclusive worldwide Ferrari watch license, with a term through December 31, 2017; launch was planned for fiscal 2014.
- Management provided no specific revenue or earnings guidance in the filing. It cautioned that results are exposed to economic and consumer-spending conditions, changing preferences, competition, seasonality, suppliers and customers, licensing and intellectual-property matters, international business conditions, and foreign-exchange risk. Swiss-franc purchases are hedged; the filing also identifies gold-price exposure and says there were no gold hedge contracts at quarter-end.
- The company reported no material change in previously disclosed risk factors, no material change in internal control over financial reporting, and no known legal proceedings expected to have a material adverse effect. Management said disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether strong sales and margin gains persist, especially in international licensed brands, and how currency movements affect results.
- Whether working-capital outflows and inventory levels normalize; operating cash flow was negative despite higher earnings.
- The location, availability and intended use of cash, including foreign cash and planned repatriations, and the company’s capacity to fund dividends and operations.
- The effect of the special dividend and foundation donation on cash, equity and future capital allocation.
- Potential changes to the U.S. deferred-tax valuation allowance, and the commercial performance and obligations of the Ferrari license.