Movado Group, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended October 31, 2015 (fiscal 2016). Financial statements are unaudited. Amounts below are in U.S. dollars.
Business context and results
Movado designs, manufactures and distributes luxury and licensed watches through its Wholesale segment; its Retail segment comprises outlet stores. Wholesale sales include luxury brands such as Movado, Ebel and Concord, and licensed brands including Coach, HUGO BOSS, Juicy Couture, Lacoste, Tommy Hilfiger and SCUDERIA FERRARI.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $185.6m | $188.6m | $451.7m | $453.1m |
| Gross profit / margin | $100.1m / 53.9% | $99.8m / 53.0% | $241.6m / 53.5% | $242.6m / 53.5% |
| Operating income | $33.5m | $33.3m | $58.6m | $61.4m |
| Net income attributable to Movado | $21.5m | $22.2m | $37.2m | $41.7m |
| Diluted EPS | $0.92 | $0.87 | $1.55 | $1.63 |
| Operating cash flow | Not separately presented | Not separately presented | $10.2m | $1.3m |
Financial position, cash flow and capital
- At October 31, cash and cash equivalents were $181.2m, versus $157.9m a year earlier and $199.9m at January 31, 2015. Cash declined $18.7m from fiscal year-end, including an $8.6m adverse foreign-exchange effect.
- Current assets were $520.6m and current liabilities $87.1m; the resulting current ratio was approximately 6.0x. Inventory was $179.0m and receivables $124.4m.
- Total assets were $613.1m; total liabilities were $160.2m, including $40.0m of long-term bank borrowings. The company had no bank borrowings at January 31, 2015 or October 31, 2014.
- The $100m secured revolving facility matures January 30, 2020. Availability was approximately $56.3m, including $3.7m of letters of credit. The company reported compliance with its covenants. The facility requires minimum trailing-four-quarter EBITDA of $50m and a maximum consolidated leverage ratio of 2.50x.
- Nine-month investing cash use was $6.0m, including $5.8m of capital expenditures. Financing cash use was $14.3m, including $45.9m of share repurchases and $7.8m of dividends, partly offset by $40.0m net bank borrowings.
- Movado repurchased 1.75m shares during the nine months at an average $26.28 per share. Its repurchase authorization was $100m and expired January 31, 2016; $17.2m remained available at October 31.
Changes versus comparable periods
- Q3 sales fell 1.6%; nine-month sales declined 0.3%. Foreign-exchange movements reduced reported sales by $6.9m in Q3 and $20.2m for the nine months.
- Q3 gross margin improved 90 basis points, attributed to channel and product mix, selective price increases and sourcing improvements, partly offset by currency effects. Nine-month gross margin was unchanged at 53.5%.
- Q3 operating income was broadly flat, while nine-month operating income declined 4.7%. International Wholesale operating income fell $12.9m for the nine months, substantially reflecting lower gross profit and unfavorable currency effects; U.S. Wholesale operating income increased $11.1m.
- Nine-month net income attributable to Movado declined 10.8%. The effective tax rate rose to 35.3% from 31.4%, primarily because of U.S. tax on certain foreign subsidiary earnings, unrecognized tax benefits on some foreign losses and initiative-related items.
- Operating cash flow improved to $10.2m from $1.3m, but remained affected by a $45.6m working-capital use, mainly receivables and seasonal inventory buildup, partly offset by higher accrued liabilities.
Outlook, management commentary, risks and unusual items
- 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. The filing provides no quantified sales or earnings guidance.
- Management cited holiday-season inventory buildup and seasonality. It identified consumer demand and preferences, competition, smartwatches and wearable technology, licensing arrangements, customers and suppliers, international operations, foreign exchange, and access to financing among the risks that could affect results.
- The company began operating-efficiency initiatives, primarily at foreign subsidiaries. Nine-month pre-tax charges were $2.7m for severance, occupancy and fixed-asset items; $1.0m remained accrued at October 31. Management expected most remaining liabilities to be paid during fiscal 2016. No such charges were recorded in Q3.
- Movado discontinued production of ESQ watches and extended the license through December 31, 2016, with a limited sell-through period for remaining inventory. It announced two smartwatch collections for the holiday season and launched the Movado Edge collection.
- A shareholder complaint alleging misleading financial statements was voluntarily dismissed with prejudice on June 30, 2015. Management said other ordinary-course legal matters were not expected to have a material effect.
- The board approved a $0.11-per-share dividend payable December 18, 2015. Future dividends remain at the board’s discretion. Foreign currency translation reduced nine-month other comprehensive income by $19.6m.
Important facts for investors to verify
- Whether holiday selling, inventory levels and receivable collections convert into stronger operating cash flow after the seasonal working-capital investment.
- How much of the reported sales and international profit trends reflect currency movements versus underlying demand, and whether the company’s hedges mitigate exposure.
- Progress and total costs of efficiency initiatives, including whether expected fiscal 2016 payments and benefits materialize.
- Revolver availability, covenant headroom and the effect of variable rates; management estimated a 1% interest-rate change would affect annual net income by approximately $0.2m.
- Execution and commercial contribution of the smartwatch launches and other brand initiatives, alongside the continued reduction of ESQ distribution.
- Cash location and repatriation constraints: $172.3m of cash was held at foreign subsidiaries, most of it asserted to be permanently reinvested; $2.7m of federal tax liability was recorded on $12.7m of pre-2013 foreign earnings earmarked for repatriation.