MOVADO GROUP, INC. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2019 (fiscal 2020); comparison is with the corresponding 2018 periods. Amounts are in U.S. dollars unless stated otherwise.
Business context and results
Movado designs, manufactures and distributes owned and licensed watch and accessory brands, and operates retail outlet stores. Its principal segments are Watch and Accessory Brands and Company Stores. The MVMT brand, acquired in October 2018, is included in the current-period results.
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Net sales | $157.8 million, up 9.5% from $144.1 million | $304.4 million, up 12.2% from $271.2 million |
| Gross profit and margin | $85.3 million; 54.1%, versus $77.8 million; 54.0% | $164.2 million; 54.0%, versus $145.4 million; 53.6% |
| Operating income | $8.8 million, versus $12.9 million | $13.8 million, versus $21.0 million |
| Net income attributable to Movado | $17.5 million, versus $9.1 million | $21.4 million, versus $17.3 million |
| Diluted earnings per share | $0.75, versus $0.39 | $0.92, versus $0.73 |
Revenue growth was concentrated in Watch and Accessory Brands: segment sales rose 11.2% in the quarter and 14.1% in the six-month period. Company Stores sales were essentially flat in both comparisons; management attributed comparable-store weakness mainly to lower outlet-center foot traffic, partly offset by new stores. Direct-to-consumer sales increased to $37.7 million for the quarter from $25.3 million, and to $68.1 million for six months from $45.1 million.
Profitability, cash flow and liquidity
- SG&A increased 17.8% to $76.6 million in the quarter and 21.0% to $150.5 million for six months. Higher marketing, including MVMT-related spending, payroll, rent, acquisition-related amortization and Spain joint-venture costs contributed. Operating income declined despite higher sales and gross profit.
- Net income included a non-cash $13.6 million gain from remeasurement of MVMT contingent consideration, recorded in non-operating income. The liability fell to $1.9 million from $16.7 million at January 31, 2019. The gain materially supported reported earnings and is not operating income.
- Six-month operating cash flow was a use of $32.6 million, versus $4.1 million provided a year earlier. The main working-capital uses included a $37.5 million increase in inventories and an $11.2 million increase in receivables; accounts payable increased $12.8 million and partly offset these uses. Investing cash use was $7.0 million, chiefly capital expenditures; financing cash use was $14.6 million, including $9.2 million of dividends and $4.2 million of share repurchases.
- Cash and cash equivalents were $134.9 million at July 31, 2019, versus $175.6 million a year earlier. Bank borrowings were $50.3 million, compared with none at July 31, 2018; $49.4 million remained available under the $100 million revolving facility. The facility matures October 2023. Working capital was $334.8 million, versus $378.0 million a year earlier.
- Total assets were $840.6 million and total liabilities $336.8 million. Inventory was $201.0 million, up from $171.4 million a year earlier. Adoption of lease accounting resulted in $91.1 million of operating lease right-of-use assets and $97.6 million of operating lease liabilities at quarter-end.
Changes, outlook and risks
- Foreign currency movements reduced sales by $2.1 million in the quarter and $6.7 million for six months; management estimated corresponding adverse operating-income effects of $0.9 million and $2.3 million for Watch and Accessory Brands.
- Management stated that cash on hand, expected operating cash flows and short-term borrowing capacity should meet working-capital needs for at least the next 12 months. The filing provides no specific sales or earnings guidance.
- Management expected a new 15% U.S. tariff, effective September 1, 2019, on smartwatches and most Chinese-origin watch cases, straps and bracelets; certain packaging already faced a 25% tariff. The precise financial impact was not clear, and tariffs could rise further. Potential responses—including price increases or shifting production—could affect demand, costs and operations.
- U.S. Customs disputes the company’s watch-component tariff allocation methodology; its alternative approach implies approximately $5.1 million of underpaid duties over the audited period, plus possible penalties and interest. The company disputes the position and cannot predict the outcome.
- MVMT contingent payments could total up to $100 million, with actual amounts dependent on performance through fiscal 2023. The company warned that future fair-value changes could cause significant earnings volatility. Its Spanish distributor lawsuit was settled in February 2019 for an immaterial cash payment, with the distribution agreement extended through early fiscal 2023.
- The company adopted lease accounting on February 1, 2019; management said it did not materially affect results or cash flows. Disclosure controls were assessed as effective at a reasonable assurance level. The filing reported no material risk-factor changes other than the added China-tariff risk.
Investor facts to verify
- How much of reported earnings growth reflects the $13.6 million non-cash MVMT remeasurement gain, and what underlying MVMT performance assumptions drove the revised liability?
- Whether inventory and receivables convert to cash as expected, given the $32.6 million operating cash outflow and increased inventory.
- The actual cost and commercial effects of China tariffs, including whether pricing, sourcing or product mix changes are needed.
- The resolution and potential total exposure of the U.S. Customs duty dispute, including penalties and interest.
- Future MVMT contingent payments, borrowing needs and cash available after dividends, repurchases and lease obligations.