MOVADO GROUP, INC. — Q3 FY2023 Form 10-Q
Reporting period: Quarter and nine months ended October 31, 2022. Unaudited results; amounts below are in U.S. dollars. Movado designs, manufactures and distributes owned- and licensed-brand watches and accessories, and operates outlet stores.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Net sales | $211.4m | $217.7m | $557.6m | $526.4m |
| Gross profit / margin | $121.0m / 57.3% | $125.6m / 57.7% | $324.6m / 58.2% | $298.2m / 56.7% |
| Operating income | $38.3m | $41.4m | $94.2m | $79.3m |
| Net income attributable to Movado | $29.3m | $31.4m | $71.8m | $60.2m |
| Diluted EPS | $1.28 | $1.33 | $3.12 | $2.54 |
| Operating cash flow | Not presented by quarter | $(23.6)m | $38.7m |
Q3 sales declined 2.9% reported, but increased 3.4% on a constant-currency basis; foreign exchange reduced sales by $13.7m. Nine-month sales rose 5.9% reported and 10.9% constant currency, despite a $25.9m FX headwind. Nine-month operating margin was approximately 16.9%, versus 15.1% a year earlier.
Q3 gross margin fell about 40 basis points year over year, reflecting FX, higher shipping costs and fixed-cost deleverage, partly offset by favorable sales mix. Nine-month gross margin increased about 150 basis points, primarily on favorable mix, partly offset by FX and shipping costs.
Segments and material changes
- Watch and Accessory Brands: Q3 sales decreased 4.2% to $186.2m; nine-month sales increased 5.9% to $483.8m. Nine-month growth reflected international wholesale demand and the addition of Calvin Klein, partly offset by FX and weaker U.S. owned-brand and online sales.
- Company Stores: Q3 sales rose 7.7% to $25.2m, while operating income declined to $4.6m from $6.5m. Nine-month sales rose 6.0% to $73.8m, but operating income declined to $15.7m from $19.9m, primarily due to higher payroll, rent and marketing costs. The company operated 55 outlet locations, versus 50 a year earlier.
- Q3 consolidated operating income declined 7.6%, as lower gross profit was only partly offset by lower SG&A. Nine-month operating income rose 18.8%, with higher gross profit more than offsetting increased SG&A.
- Owned-brand sales were weaker: down 11.3% in Q3 and 4.1% for the nine-month period. Licensed-brand sales increased 0.6% in Q3 and 12.6% for nine months.
Cash, liquidity and capital allocation
- Cash and cash equivalents were $186.7m at October 31, 2022, compared with $201.8m a year earlier and $277.1m at January 31, 2022. Working capital was $398.3m, compared with $391.1m at October 31, 2021.
- Operating cash flow was a $23.6m use of cash for nine months, versus $38.7m provided a year earlier. Key working-capital uses included $66.2m for inventory and $50.0m for trade receivables; inventory rose to $215.0m from $170.7m year over year.
- Investing activities used $7.6m, including $4.7m in capital expenditures and $2.7m in long-term investments. Financing activities used $51.9m, including $28.2m of open-market share repurchases and $23.6m of dividends.
- No borrowings were outstanding under the $100m revolving facility; $99.7m was available, net of letters of credit. The facility matures October 2026. No borrowings were outstanding on the Swiss subsidiary’s demand lines of credit.
- The company paid quarterly dividends of $0.35 per share during the first three quarters of FY2023. At October 31, $24.3m remained available under the current share repurchase authorization.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or sales guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Management says COVID-19’s adverse effects have diminished but may continue through supply-chain, shipping, consumer-spending, shopping and tourism impacts. Other cited risks include inflation, shipping and input costs, consumer demand, the Russia-Ukraine conflict, tariffs, foreign exchange, licensing arrangements, competition from smartwatches and retail traffic. Sales and assets in Russia, Belarus and Ukraine were described as immaterial; the company suspended sales to Russia and Belarus in March 2022.
- Currency movements remain material: the company uses forward contracts to manage exposures. At period-end, it reported a potential $0.7m loss if Swiss-franc forward contracts were settled; euro contracts would produce an immaterial gain. The company held no gold futures hedges.
- U.S. Customs disputes the company’s watch-component tariff allocation methodology and proposed an estimated $5.1m of duties for the period under review, plus possible penalties and interest. The company disputes the position and cannot predict the outcome. It also maintains an accrual for certain pre-August 2021 Chinese watch-case imports pending clarity on retroactive tariff treatment; the accrual amount is not stated here.
- Up to $16.8m remained unfunded under venture-capital and other investment commitments and may be called over time. The Scuderia Ferrari collaboration ended June 30, 2022; remaining inventory may be sold through December 31, 2022.
- The company reported that disclosure controls were effective at a reasonable assurance level and that there were no material changes in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether inventory and receivables convert to cash and operating cash flow recovers after the substantial nine-month working-capital outflow.
- How sales and margins trend excluding FX, particularly in U.S. owned brands and the licensed-brand portfolio.
- The outcome and potential financial exposure from the Customs duty dispute and Chinese-import tariff accrual.
- The timing and scale of remaining investment capital calls, alongside continued dividends and repurchases.
- Whether demand, shipping costs, supply conditions and the end of the Ferrari collaboration affect subsequent-period results.