MOV

Movado Group Inc. 10-Q Summary: Period Ended July 31, 1999

Business Context and Reporting Period

This is a quarterly report (Form 10-Q) for Movado Group, Inc., covering the six-month period ended July 31, 1999. The Company designs, manufactures, and distributes quality watches through its Wholesale segment and operates retail and service centers through its Other segment. A significant event during this period was the completion of the sale of the Piaget distribution business in February 1999.

Key Financial Metrics

Cash Flow: Net cash used in operating activities was $21.9 million, primarily due to inventory buildup and accounts payable reductions. Net cash provided by investing activities was $21.4 million, driven by $28.4 million in proceeds from the Piaget disposition. Net cash provided by financing activities was $27.9 million, largely from bank borrowings.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 6.0% year-over-year. Excluding the sold Piaget business, sales from ongoing operations grew 13.2%, driven by a 16% increase in domestic sales (Concord, Movado, ESQ, Coach) and a 4% increase in international sales.
• Profitability: Net income more than doubled to $8.7 million. This was significantly aided by a one-time gain of $4.8 million (pre-tax) on the disposition of the Piaget business. Operating income from continuing operations also improved due to higher gross margins.
• Margins: Gross margins expanded by 180 basis points to 59.9%. This improvement is attributed to the removal of the lower-margin Piaget distribution business, reduced supply chain costs, and a favorable decline in the Swiss franc against the U.S. dollar.
• Liquidity and Debt: Cash balances increased significantly from $5.6 million to $32.6 million due to the asset sale. However, total debt increased, with the debt-to-total-capitalization ratio rising to 38.9% from 28.8% at the start of the fiscal year, primarily due to increased bank borrowings and the issuance of Series A Senior Notes in the prior quarter.

Guidance, Outlook, and Risks

• Outlook: Management expects the effective tax rate to approximate 23% for fiscal 2000. Capital expenditures are expected to average the levels of fiscal 1999 and 1998. The Company anticipates continued growth in existing brands and new product lines.
• Year 2000 Compliance: The Company is executing a project to replace obsolete hardware and software to ensure Year 2000 compliance. Approximately $9.3 million of the estimated $11.0 million total project cost has been expended. The Company expects to be globally compliant by the end of calendar year 1999.
• Risks: Key risks include general economic conditions affecting consumer disposable income, competitive pricing, seasonality, and the potential failure of third-party vendors to be Year 2000 compliant. The Company also faces a $5 million sinking fund payment on Senior Notes due January 31, 2000.
• Unusual Items: The financial results include a significant non-recurring gain from the sale of the Piaget business. Operating expenses increased due to the launch of the Coach brand, Movado Boutiques, and the implementation of a new core information system.

Investor Verification Checklist

• Verify the sustainability of the 13.2% sales growth in ongoing operations excluding the one-time Piaget sale.
• Confirm the Company's ability to service its increased debt load, specifically the $48.0 million outstanding under the revolving credit agreement and the upcoming $5 million sinking fund payment.
• Assess the impact of the new core information system on future operating expenses and efficiency.
• Monitor the progress of Year 2000 compliance for international operations (Switzerland, Canada, Far East) scheduled for completion in early fiscal 2001.
• Review the inventory levels ($118.1 million) to ensure they align with anticipated demand for the upcoming selling season.