MOVADO GROUP, INC. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2022; fiscal 2023. Comparisons are with the corresponding 2021 periods. Unaudited results.
Business context
Movado designs, manufactures and distributes watches, jewelry and accessories through its Watch and Accessory Brands segment, and operates retail outlet stores through its Company Stores segment. Its portfolio includes owned and licensed brands. The Scuderia Ferrari collaboration ended June 30, 2022; the company may sell remaining inventory through December 31, 2022.
Financial performance
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Net sales | $182.8 million, up 5.1% (up 10.5% at constant currency) | $346.2 million, up 12.2% (up 16.5% at constant currency) |
| Gross profit / margin | $106.9 million / 58.5%, versus $98.5 million / 56.6% | $203.6 million / 58.8%, versus $172.7 million / 55.9% |
| Operating income | $30.7 million, versus $24.6 million | $56.0 million, versus $37.9 million |
| Net income attributable to Movado | $24.0 million, versus $19.4 million; diluted EPS $1.05 versus $0.82 | $42.5 million, versus $28.8 million; diluted EPS $1.83 versus $1.21 |
| Operating cash flow | Not separately presented in the filing | Used $25.4 million, versus $22.7 million provided |
For the quarter, sales growth was led by international Watch and Accessory Brands, including the addition of Calvin Klein and stronger wholesale demand. U.S. Watch and Accessory Brands sales declined. For the six months, licensed-brand sales rose to $185.4 million from $151.7 million; owned-brand sales were nearly flat at $109.9 million. Foreign exchange reduced sales by $9.3 million for the quarter and $13.4 million for the six-month period.
Gross margin increased about 190 basis points for the quarter and 290 basis points for the six months, principally due to favorable sales mix; foreign exchange partly offset the quarterly improvement, while higher shipping costs partly offset the six-month improvement. SG&A increased 3.3% for the quarter and 9.6% for the six months, reflecting higher marketing, payroll, consulting and other costs.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $203.1 million at July 31, 2022, versus $199.7 million a year earlier and $277.1 million at January 31, 2022. Working capital was $390.5 million.
- Six-month operating cash use was driven largely by a $59.4 million inventory increase and higher receivables, alongside payments of performance compensation and income taxes. Inventory was $215.0 million, up from $160.3 million at January 31, 2022.
- Investing activities used $5.3 million, including $3.0 million of capital expenditures and $2.3 million of long-term investments. Financing activities used $37.8 million, including $21.5 million of share repurchases and $15.8 million of dividends.
- No borrowings were outstanding under the $100 million revolving credit facility; $99.7 million remained available. The facility matures October 28, 2026. No borrowings were outstanding under the Swiss subsidiary’s credit lines either.
- The company paid quarterly dividends of $0.35 per share, compared with $0.20 in the prior-year quarters. It repurchased 586,582 shares for $21.5 million during the six months; $30.9 million remained under the newer repurchase authorization.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management cautions that interim results are not necessarily indicative of full-year results. It says COVID-19 effects have diminished but may continue through supply-chain, shipping, consumer-spending and tourism impacts. Other cited risks include inflation and labor costs, shipping disruptions, the Russia-Ukraine conflict, foreign exchange, tariffs, consumer demand and changes in watch preferences. The company suspended sales to Russia and Belarus in March 2022; sales and assets in Russia, Belarus and Ukraine were described as immaterial.
The company disputes a U.S. Customs assessment methodology that could imply $5.1 million of underpaid duties, plus possible penalties and interest; it cannot predict the outcome. It continues to accrue for certain pre-August 2021 Chinese watch-case imports pending clarity on the retroactive effect of a customs ruling. The company also had $17.2 million of remaining potential capital calls on investment commitments, generally callable over periods ending up to ten years after the first call. Management stated other legal matters were not expected to materially affect financial condition, results or cash flows.
Management attributed the improvement in effective tax rates partly to releases of certain foreign valuation allowances. It reported disclosure controls were effective at a reasonable assurance level and no material changes in internal control over financial reporting during the quarter.
Investor verification points
- Assess whether inventory growth and the shift to negative operating cash flow reflect planned growth and normalize as expected.
- Verify the sustainability of improved gross margins and earnings amid currency headwinds, higher costs and weaker U.S. owned-brand sales.
- Monitor wholesale demand, the Calvin Klein contribution, and performance after the Scuderia Ferrari license ended.
- Track the U.S. Customs duty dispute, Chinese tariff accruals and remaining investment capital-call commitments.
- Review cash use from dividends and buybacks against liquidity needs and the company’s outlook, which contains no specific financial guidance.