MOVADO GROUP, INC. — Q2 FY2013 Form 10-Q
Business context and reporting period. Unaudited quarterly filing for the three and six months ended July 31, 2012. Movado operates Wholesale and Retail segments, selling its own and licensed watch brands. Comparisons are with the periods ended July 31, 2011.
Financial performance
| Metric | Three months ended July 31, 2012 | Six months ended July 31, 2012 |
|---|---|---|
| Net sales | $118.0 million; up 4.2% | $221.7 million; up 9.2% |
| Gross profit / margin | $65.8 million / 55.7%, versus 53.8% | $124.8 million / 56.3%, versus 54.0% |
| Operating income | $10.7 million, versus $5.0 million | $19.2 million, versus $6.6 million |
| Net income attributable to Movado Group | $8.1 million, versus $4.4 million; diluted EPS $0.32 versus $0.18 | $14.7 million, versus $4.9 million; diluted EPS $0.58 versus $0.19 |
Cash flow and liquidity. First-half operating cash flow was negative $2.1 million, compared with positive $12.4 million a year earlier; management attributed the current-period use mainly to working-capital changes, including liability payments and inventory growth. Investing cash use was $2.6 million, including $2.4 million of capital expenditures. Financing cash use was $14.7 million, primarily dividends. Cash ended the period at $156.3 million, down from $182.2 million at January 31, 2012. Current assets were $409.1 million and current liabilities $69.1 million.
The company had no outstanding debt. Its revolving facility, maturing March 2015, had $20.7 million available after letters of credit; there were no revolver borrowings. The company reported covenant compliance. Total liabilities were $96.0 million and equity was $383.5 million.
Changes versus prior periods
- Revenue growth came primarily from Wholesale, especially U.S. licensed and accessible-luxury products and international licensed brands. Retail revenue was broadly flat for the first half.
- Gross margin expanded in both periods. Management cited product/channel mix and fixed-cost leverage; currency helped the quarterly comparison but modestly hurt the first-half comparison.
- Wholesale operating income increased to $7.8 million for the quarter and $14.9 million for the half year. U.S. geographic operations remained loss-making, though losses narrowed; international operating income rose.
- Quarterly SG&A declined 1.6%, partly due to favorable currency effects and lower marketing expense timing. First-half SG&A rose 2.5%, including higher compensation and marketing costs, partly offset by currency benefits.
- Cash declined from January as operating working capital and dividends used cash. First-half dividends were $15.1 million, including the $0.50-per-share special dividend; the regular quarterly dividend was increased to $0.05 per share.
Outlook, risks, and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management said cash, expected operating cash flow, and short-term borrowing capacity should meet working-capital needs for at least 12 months, and expected to be able to pay dividends during the facility term, subject to board decisions and facility terms.
- Management identified consumer demand and economic conditions, especially in Europe, changing preferences, competition, seasonality, supply and customer concentration, licensing and intellectual-property matters, foreign exchange, and access to financing as risks. The company hedges Swiss-franc exposure; its July 31 forward portfolio was CHF 38.0 million equivalent. It held no gold futures then.
- Foreign-currency translation reduced first-half accumulated other comprehensive income by $14.2 million and contributed to a quarterly comprehensive loss of $9.7 million despite positive net income.
- The current-period tax expense included a $0.5 million discrete charge related to a foreign tax audit. The prior-year comparison included $0.7 million of gain on a building sale, which did not recur.
- The company closed its Rockefeller Center flagship store in February 2012 after failing to renew the lease and signed a worldwide Ferrari watch license, with collections planned to launch beginning in fiscal 2014. It also donated $3.0 million to its foundation in March, partly in company shares.
- Management said pending legal matters were not expected to have a material adverse effect; no material risk-factor changes were reported. Disclosure controls were assessed as effective at a reasonable-assurance level.
Investor verification points
- Assess whether sales growth and improved gross margins persist, particularly in licensed brands, while luxury-category sales remain weaker in some international markets.
- Monitor operating cash conversion, inventory and working-capital needs, and the decline in cash following dividends.
- Track currency movements, hedge results, and the impact of translation on reported equity and comprehensive income.
- Review the facility’s availability, covenant conditions, dividend capacity, and future cash needs; the $20.7 million availability is not the same as cash on hand.
- Evaluate the tax-audit exposure, Ferrari license execution, and the effect of the store closure and ESQ brand repositioning.