MOVADO GROUP, INC. — FY2020 Form 10-K
Reporting period: Fiscal year ended January 31, 2020. The filing was signed March 26, 2020. Although the request references 2019 Q4, this 10-K reports the full fiscal year; selected fourth-quarter results are noted below. Dollar amounts are in U.S. dollars.
Business context
Movado designs, sources, markets and distributes watches and accessories through owned brands—including Movado, Concord, Ebel, Olivia Burton and MVMT—and licensed brands. It operates a Watch and Accessory Brands business and Company Stores, with 47 outlet stores in the U.S. and Canada at fiscal year-end. Approximately 56.9% of fiscal 2020 revenue came from international markets. The business is seasonal, with 56.6% of annual sales in the second half of the fiscal year.
Key financial results
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $701.0 million | $679.6 million |
| Gross profit / margin | $374.9 million / 53.5% | $369.4 million / 54.4% |
| SG&A / % of sales | $331.9 million / 47.3% | $307.2 million / 45.2% |
| Operating income / margin | $43.0 million / 6.1% | $62.2 million / 9.2% |
| Income attributable to Movado Group | $42.7 million | $61.6 million |
| Diluted EPS | $1.83 | $2.61 |
| Cash provided by operating activities | $32.1 million | $86.2 million |
| Capital expenditures | $12.7 million | $10.6 million |
| Cash and cash equivalents at year-end | $185.9 million | $189.9 million |
| Working capital at year-end | $355.3 million | $355.5 million |
| Bank loans at year-end | $51.9 million | $50.3 million |
Reported fiscal 2020 operating cash flow less capital expenditures was approximately $19.4 million, compared with approximately $75.5 million in FY2019. These are simple calculations from the filing’s cash-flow and capex figures.
Material changes and unusual items
- Sales rose 3.1%; foreign exchange reduced the year-over-year sales comparison by $12.1 million. International Watch and Accessory Brands sales grew 7.1%, while U.S. Watch and Accessory Brands sales fell 4.3%. Company Stores sales rose 5.8%, but comparable-store sales declined.
- Gross margin decreased about 90 basis points. Management attributed the decline primarily to currency effects, unfavorable sales mix and U.S. special tariffs, partly offset by fixed-cost leverage.
- Operating income fell about 30.9%, as SG&A rose 8.1%, including increased marketing and expenses associated with MVMT, new stores and joint ventures. Marketing expense was $135.3 million, or 19.3% of sales, versus $108.2 million, or 15.9%, in FY2019.
- FY2020 included $15.4 million of noncash non-operating income from reducing the MVMT contingent-consideration liability to zero following updated performance expectations. This gain helped reported pretax income; it was not operating income or cash generated from operations.
- Income tax expense was $15.1 million, with a 26.3% effective tax rate, versus $0.2 million and 0.3% in FY2019. FY2019’s unusually low rate reflected tax-law effects and release of certain foreign valuation allowances.
- Fiscal fourth-quarter sales were $191.0 million versus $199.4 million; net income attributable to Movado was $3.5 million versus $17.4 million; diluted EPS was $0.15 versus $0.74. The quarter included $1.7 million of the contingent-consideration gain.
Liquidity, debt and capital allocation
At January 31, 2020, Movado had $185.9 million of cash, including $121.3 million held by foreign subsidiaries, and $51.9 million outstanding under a $100 million revolving facility. Facility availability was $47.8 million. Management stated that cash on hand, expected operating cash flows and short-term borrowing capacity were expected to cover working-capital needs for at least 12 months. In March 2020, as a precaution related to COVID-19, the company borrowed an additional $30 million under the facility.
The company paid $18.4 million in dividends in FY2020 and repurchased $4.2 million of stock under its repurchase program. In light of COVID-19 uncertainty, the board suspended the regular quarterly dividend until further notice. Management said it remained committed to a long-term dividend and would consider resumption when appropriate.
Contractual obligations totaled $474.0 million, including $111.8 million of lease obligations, $69.2 million of purchase obligations, $269.2 million of other long-term obligations (primarily license and endorsement commitments), and $23.8 million of remaining transition tax. These totals are not equivalent to debt due immediately.
Outlook, risks and contingencies
- COVID-19: By mid-March 2020, the company and most wholesale customers had temporarily closed retail stores, and company outlets remained closed at the time of filing. Chinese supplier disruptions delayed orders planned for early FY2021. Management could not reasonably estimate the effects on sales, liquidity, results or financial position; FY2020 results should not be viewed as indicative of FY2021.
- Spending and investment: The company expected FY2021 capital expenditures of approximately $8.0 million, compared with $12.7 million in FY2020. The filing gives no reliable revenue or earnings guidance for FY2021.
- Tariffs: U.S. special tariffs affected certain China-sourced products. The filing estimated $2–$3 million of potential FY2021 gross-profit exposure if U.S. imports remained at FY2020 levels and there were no offsets; it expressly cautioned that this was not a forecast. A request to Customs to reconsider its treatment of watch cases and bands was pending.
- Customs dispute: U.S. Customs proposed an alternative tariff-allocation method implying approximately $5.1 million of underpaid duties for the period under review, plus possible penalties and interest. Movado disputed the position and could not predict the outcome.
- Operating risks: Key risks include discretionary consumer demand, retail traffic and online channel shifts, competition from smartwatches, fashion trends and inventory forecasting, foreign exchange, supplier concentration, licensing terms, and potential asset impairment. Licensed brands represented 49.2% of FY2020 sales. The filing reported no goodwill or other impairment charge for FY2020, but noted that weaker MVMT profitability could trigger future impairment testing.
- Other matters: Minimum commitments under license and endorsement agreements totaled $263.0 million, payable over six years. The company reported no off-balance-sheet financing or unconsolidated special-purpose entities. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- How long store closures and supplier delays lasted, and their actual effects on sales, cash flow, inventory and liquidity after the filing date.
- Whether the additional $30 million borrowing increased further, and the company’s subsequent cash, debt, facility availability and covenant position.
- Whether the board resumed dividends and whether the stated FY2021 capital-spending expectation changed.
- The resolution and financial impact of the Customs duty dispute and the pending tariff reconsideration, including any penalties or price and sourcing changes.
- Whether sales and profitability at MVMT and other acquired brands support carrying values and avoid impairment, and how license renewals and minimum commitments affect margins and cash needs.