MOV

Movado Group Inc. 10-Q Summary

Business Context and Reporting Period

This is a Quarterly Report on Form 10-Q for Movado Group Inc., covering the three and six months ended July 31, 2008. The company designs, manufactures, and distributes luxury and accessible luxury watches (Movado, Ebel, Concord) and licensed brands (Coach, HUGO BOSS, etc.) through Wholesale and Retail segments. Operations are split geographically between the United States and International markets.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 7.0% year-over-year for the three months ended July 31, 2008 ($129.7M vs. $139.5M) and 4.1% for the six months ($231.0M vs. $240.8M). The prior year periods included significant sales of excess discontinued inventory ($8.3M for 3 months; $11.0M for 6 months) which inflated prior-year comparisons.
• Segment Performance:
  • Wholesale: Sales declined due to weakness in the Luxury and Accessible Luxury categories, particularly in the U.S. market. However, the Licensed Brand category grew 28.5% (3 months) and 35.1% (6 months).
  • International: Sales grew 1.3% (3 months) and 8.5% (6 months), driven by licensed brand expansion and favorable foreign currency translation effects.
  • Retail: Sales were flat for the quarter and down 3.9% for the six months.
• Profitability: Despite lower sales, gross margins improved (64.7% vs. 59.8% prior year 3-month) due to higher margins in licensed brands and favorable foreign exchange impacts. Operating income declined 31.8% (3 months) and 33.3% (6 months) primarily due to increased SG&A expenses.
• Cash Flow: Operating cash flow turned negative ($33.9M used) compared to positive ($7.0M provided) in the prior year. This was driven by a seasonal inventory build of $31.0M and working capital changes.

Guidance, Outlook, and Risks

• Expense Reduction Plan: On August 7, 2008, management announced a plan to streamline operations, reducing payroll by approximately 10% (90 positions). The company expects annualized pre-tax savings of $25.0 million, with $6.0 million realized in fiscal 2009. A total pre-tax charge of approximately $9.0 million is expected in fiscal 2009; $2.2 million was recorded in the first six months.
• Share Repurchases: The company completed a 1 million share repurchase program in April 2008 and initiated a new program for an additional 1 million shares. As of July 31, 2008, 937,360 shares were repurchased under the new program at an average price of $20.76.
• Liquidity: Management believes cash on hand ($84.5M) and borrowing capacity are sufficient for the next 12 months. The company has access to revolving credit facilities totaling $50.0M (US) and 90.0M Swiss Francs (Swiss), with $24.8M outstanding as of July 31, 2008.
• Risks: Key risks include the challenging U.S. economy impacting consumer spending, the success of the expense reduction plan, foreign currency fluctuations (hedged via forward contracts), and potential supply chain disruptions.

Investor Verification Checklist

• Inventory Levels: Verify the necessity of the $31M inventory build given the decline in U.S. wholesale sales and the risk of future write-downs.
• Luxury Segment Trends: Confirm the sustainability of the decline in the Luxury category (down 29.4% QoQ) excluding the one-time prior-year inventory sales.
• Expense Reduction Execution: Monitor the realization of the projected $25M annualized savings and the impact of the $9M restructuring charge on future earnings.
• Foreign Exchange Impact: Assess the sensitivity of future results to the strengthening U.S. dollar, which previously provided a favorable translation boost.
• Debt Covenants: Review compliance with financial covenants (interest coverage, debt coverage) under the amended Prudential and bank credit agreements.