Movado Group, Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended April 30, 2020. Amounts are in U.S. dollars; financial statement amounts below are in millions except per-share data. The quarter was severely affected by COVID-19-related store closures and reduced consumer demand.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $69.7 | $146.5 | Down 52.5% |
| Gross profit / margin | $31.9 / 45.8% | $78.9 / 53.8% | Margin down 8.0 percentage points |
| SG&A | $58.1 | $73.9 | Down 21.3% |
| Operating loss / income | $(182.2) | $5.0 | Includes $155.9 impairment charge |
| Net loss / income attributable to Movado | $(150.0) | $3.9 | EPS: $(6.48) vs. $0.17 |
| Cash used in operating activities | $(25.6) | $(25.6) | Approximately unchanged |
Sales declined across channels and regions. Wholesale revenue was $52.9 million versus $115.2 million; direct-to-consumer revenue was $16.3 million versus $30.4 million. The gross-margin decline reflected inventory reserves, lower fixed-cost absorption, tariffs, sales mix and foreign exchange.
The company recorded $133.7 million of goodwill impairment and $22.2 million of MVMT intangible-asset impairment, leaving no goodwill at April 30, 2020. It also recognized $7.2 million of corporate initiative costs, including inventory and receivables reserves, unrefunded event deposits and restructuring costs. The income-tax benefit was $32.3 million, with a reported effective tax rate of 17.7%.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $187.8 million at April 30, 2020, compared with $185.9 million at January 31, 2020. Working capital was $348.9 million.
- Loans payable to banks were $82.5 million, up from $51.9 million at January 31, 2020. The company borrowed $30.9 million during the quarter as a precautionary liquidity measure.
- At April 30, the $100 million revolving facility had $17.2 million of availability. Cash plus undrawn facility commitments was subject to a newly established minimum-liquidity covenant of $100 million.
- Investing activities used $1.0 million. Financing activities provided $30.5 million, principally from bank borrowings. Cash, cash equivalents and restricted cash ended the quarter at $188.4 million.
- Dividends and share repurchases were suspended. No shares were repurchased under the public program during the quarter; employee share withholding resulted in 36,923 shares surrendered.
Material changes, outlook and risks
- COVID-19 led the company and most wholesale customers to close retail stores from mid-March. Management said the pandemic was expected to have a material adverse effect on FY2021 business, results, financial condition and cash flows; the duration and recovery path could not be reasonably predicted. The filing provides no numerical revenue or earnings guidance.
- Management reported that 14 company stores had reopened as of June 9, 2020. Actions included expense and capital-spending reductions, inventory management, furloughs, salary reductions and a suspension of dividends and buybacks. Approximately 80% of the North American workforce was temporarily furloughed effective April 6.
- On June 5, 2020, lenders amended the revolving credit agreement, effective April 30. The amendment provided temporary covenant relief, tightened certain restrictions, required at least $100 million of liquidity through April 30, 2021, and raised borrowing costs during the suspension period to LIBOR plus 2.75% and the unused commitment fee to 0.45%. Management said it expected covenant compliance for at least one year based on current expectations.
- Rent deferrals or other lease arrangements were being negotiated; aside from a Hong Kong warehouse, formal agreements were not in place, and April rent was accrued.
- U.S. Customs disputed the company’s watch-import cost allocation methodology, estimating approximately $5.1 million of potential underpaid duties, plus possible penalties and interest. The company contests the position and cannot predict the outcome.
- Other risks include prolonged weak demand, supply disruption, further impairment, customer credit losses, foreign exchange and tariff exposure, and the company’s dependence on financing availability. Management stated that cash, operating cash flows and credit lines were expected to support requirements for the next 12 months.
Most important facts for investors to verify
- Whether sales, store reopenings and wholesale customer demand recover sufficiently to stabilize operating cash flow.
- Compliance with the amended credit facility’s minimum-liquidity and financial covenants, and actual borrowing availability and costs.
- Whether further impairment, inventory reserves or customer credit losses arise as forecasts change.
- Final terms and financial effects of rent arrangements, and the outcome of the U.S. Customs duty dispute.
- Timing and conditions for restoring dividends or share repurchases; the filing does not commit to a restart date.