MOVADO GROUP, INC. — Form 10-Q Summary
Business context and period: Unaudited results for the three months ended April 30, 2013, compared with the three months ended April 30, 2012. Movado designs, manufactures and distributes watches through its Wholesale segment and operates outlet stores through its Retail segment.
Financial results and liquidity
| Metric | Q1 ended April 30, 2013 | Comparable 2012 period |
|---|---|---|
| Net sales | $110.0 million | $103.7 million |
| Gross profit / margin | $59.9 million / 54.5% | $59.0 million / 56.9% |
| SG&A | $49.9 million | $50.5 million |
| Operating income | $10.0 million | $8.5 million |
| Net income attributable to Movado | $8.2 million; diluted EPS $0.32 | $6.6 million; diluted EPS $0.26 |
| Operating cash flow | $(17.8) million | $(24.4) million |
| Cash and equivalents at April 30 | $141.5 million | $158.8 million |
- Cash decreased $26.4 million during the quarter. Operating cash use primarily reflected working-capital needs, including higher inventory and receivables and liability payments. Investing cash use was $4.4 million, including $6.5 million of capital expenditures, partly offset by $2.2 million of proceeds from a building sale. Financing cash use was $2.3 million, including dividends and share repurchases.
- The company reported no outstanding debt. Its $25 million asset-based revolving facility had $20.6 million available, net of letters of credit, at April 30, 2013; it was in compliance with its covenants. A Swiss subsidiary also had an unused 10.0 million Swiss franc credit line.
- Total assets were $515.4 million and total equity was $426.9 million at April 30, 2013. Inventory was $172.3 million. Foreign subsidiaries held $125.7 million of cash; most was described as permanently reinvested to support overseas operations.
Material changes and drivers
- Sales grew 6.1%. Wholesale sales rose 6.9%, led by U.S. wholesale growth of 18.8%, particularly accessible luxury brands. International wholesale sales fell 2.3%; retail sales were approximately flat.
- Gross profit increased modestly, but gross margin declined 2.4 percentage points. Management attributed the decline primarily to an unfavorable product and channel mix impact of about 330 basis points, partly offset by currency benefits of about 80 basis points and fixed-cost leverage of about 10 basis points.
- Operating income improved by $1.5 million, with lower SG&A and higher sales contributing. International wholesale operating income declined $6.0 million, while U.S. wholesale results improved substantially from the prior-year period.
- The effective tax rate rose to 28.8% from 19.1%; management cited prior-year accounting for valuation allowances as the main reason.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management said cash on hand, expected operating cash flow and short-term borrowing capacity should meet working-capital needs for at least the next 12 months, and expected to be able to pay dividends through the remaining term of its credit facility.
- The quarter included a $1.5 million pretax gain on the sale of a building, with $2.2 million in cash proceeds. This unusual gain contributed to reported pretax income and should be distinguished from recurring operating performance.
- The board authorized a new share repurchase program of up to $50 million, expiring January 31, 2016. The company repurchased 14,933 shares for about $0.5 million during the quarter; management said the program is primarily intended to offset equity-award dilution.
- Key disclosed risks include consumer demand and economic conditions, changing product preferences and competition, international and euro-area instability, foreign-exchange movements, supplier or customer disruptions, licensing and intellectual-property matters, and execution of hedging strategies. The company hedges Swiss franc exposures; it held no gold futures or Swiss franc option portfolio at quarter-end.
- Legal claims arise in the ordinary course of business. Management did not expect pending matters to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth and accessible-luxury strength persisted, and whether the lower gross margin was temporary or reflects a continuing mix shift.
- How much earnings depended on the nonrecurring building-sale gain, and the drivers of the higher effective tax rate.
- Cash conversion and working-capital trends, especially inventory, receivables and accrued liabilities, alongside elevated capital spending.
- Availability and covenant headroom under the revolving facility, and the extent to which overseas cash is practically available for U.S. needs.
- Execution and use of the new repurchase authorization, future dividend decisions, and exposure to currency and international-market risks.