Movado Group, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended October 31, 2020. The company designs, manufactures and distributes owned and licensed watches and accessories and operates outlet stores. Results were materially affected by the COVID-19 pandemic.
Key financial results
| Metric | Three months ended Oct. 31, 2020 | Prior-year quarter | Nine months ended Oct. 31, 2020 | Prior-year period |
|---|---|---|---|---|
| Net sales | $169.9 million | $205.6 million | $328.1 million | $510.0 million |
| Gross profit / margin | $92.5 million / 54.4% | $110.1 million / 53.5% | $169.7 million / 51.7% | $274.3 million / 53.8% |
| Operating income (loss) | $23.1 million | $22.6 million | $(168.0) million | $36.4 million |
| Net income (loss) attributable to Movado | $14.8 million | $17.8 million | $(141.8) million | $39.2 million |
| Diluted EPS | $0.63 | $0.76 | $(6.11) | $1.68 |
| Cash used in operating activities | Not separately provided | Not separately provided | $6.7 million | $44.6 million |
Liquidity, debt and cash flow
- At October 31, 2020, cash and cash equivalents were $163.2 million; bank loans payable were $37.3 million. The revolving credit facility had $62.4 million of availability.
- Working capital was $338.2 million, versus $346.8 million at October 31, 2019. The company reported total assets of $701.8 million and total liabilities of $308.3 million.
- Nine-month investing cash outflow was $1.2 million, including $2.4 million of capital expenditures, partly offset by $1.3 million from an asset sale. Financing cash outflow was $17.6 million, including net repayment of bank borrowings.
- The company did not pay dividends or make public-program share repurchases in the period. Its prior repurchase authorization expired August 29, 2020.
Material changes and unusual items
- Quarterly sales fell 17.4% year over year; nine-month sales fell 35.7%. Quarter sales in Watch and Accessory Brands decreased 18.0%, while Company Stores sales decreased 11.3%. Management attributed declines chiefly to pandemic-related store closures, restrictions and reduced traffic. E-commerce growth partially offset declines.
- Quarter gross margin improved about 90 basis points, attributed to cost savings, currency and mix. Nine-month gross margin declined about 210 basis points, reflecting lower fixed-cost leverage, inventory reserves, unfavorable mix and tariffs, partly offset by cost savings.
- Nine-month operating results included $133.7 million of goodwill impairment and $22.2 million of intangible-asset impairment recorded in Q1. The charges followed revised forecasts and reduced expected cash flows associated with pandemic impacts. Goodwill was zero at October 31, 2020.
- The company recorded $15.4 million of corporate-initiative and restructuring provisions during the nine months. It expects approximately $14–$16 million in annual savings from severance, employee-related and property actions; some cash severance payments extend into the next fiscal year.
- The nine-month net loss also reflects the impairment charges. The prior-year comparison included a $13.6 million gain from remeasurement of MVMT contingent consideration; the current period included a $1.3 million gain on sale of a non-operating asset.
Outlook, commentary and risks
- Management said sales trends improved through Q2 and Q3 as restrictions eased, but expected declines in retail and wholesale channels to continue. It warned that renewed infections, tighter restrictions, reduced consumer spending, supply disruptions and weak store traffic could further affect results. No numerical sales or earnings guidance was provided.
- Management believes cash on hand, operating cash flows and credit lines are adequate for operating, capital and debt-service needs over the next 12 months, and expects covenant compliance over that period. These expectations depend on uncertain pandemic and recovery conditions.
- A credit-agreement amendment provides temporary covenant relief, requires at least $100 million of liquidity through April 30, 2021, and increases borrowing costs during the suspension period to LIBOR plus 2.75%, with a 0.45% fee on unused commitments. The facility’s maturity is October 2023.
- U.S. Customs disputes the company’s tariff allocation methodology and has proposed approximately $5.1 million in underpaid duties for the period reviewed, plus possible penalties and interest. The company disputes the position; the outcome is uncertain.
- Other risks include pandemic-related demand and operational disruption, exposure to foreign exchange and interest rates, and the possibility of further asset impairments. The filing reported no material change to previously disclosed risk factors other than its pandemic update.
Important facts for investors to verify
- Whether sales and margins continue to recover, especially in wholesale and owned-brand channels, and how e-commerce performs.
- Whether projected restructuring savings are realized and whether additional costs or asset impairments arise.
- Liquidity, facility availability, covenant headroom and borrowing costs as temporary lender protections change.
- Resolution and potential financial exposure of the U.S. Customs tariff dispute.
- Whether management’s 12-month liquidity and covenant-compliance expectations remain supportable under evolving pandemic conditions.