Movado Group, Inc. — Q3 Fiscal 2019 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended October 31, 2018. Movado designs, manufactures and distributes owned- and licensed-brand watches and accessories, and operates outlet stores. The company acquired MVMT Watches, Inc. on October 1, 2018; MVMT results are included from that date.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended Oct. 31, 2018 | Three months ended Oct. 31, 2017 | Nine months ended Oct. 31, 2018 | Nine months ended Oct. 31, 2017 |
|---|---|---|---|---|
| Net sales | $208.9 | $190.7 | $480.2 | $418.7 |
| Gross profit / margin | $113.4 / 54.3% | $104.1 / 54.6% | $258.7 / 53.9% | $219.3 / 52.4% |
| Operating income | $24.1 | $25.2 | $45.1 | $29.9 |
| Net income | $26.9 | $17.4 | $44.2 | $18.7 |
| Diluted EPS | $1.14 | $0.75 | $1.87 | $0.80 |
| Operating cash flow | Not separately reported | Not separately reported | $26.8 | $(9.4) |
- Quarterly sales increased 9.6%; nine-month sales increased 14.7%. Nine-month foreign exchange movements added $6.7 million to sales; quarterly movements reduced sales by $0.9 million.
- Quarterly gross margin declined about 30 basis points, while the nine-month margin improved about 150 basis points. Operating income fell 4.3% in the quarter but rose about 51% year to date.
- Quarterly income tax benefit was $2.8 million versus tax expense of $7.5 million in the prior-year quarter. Nine-month tax expense was $0.7 million versus $10.3 million. Effective tax rates were -11.7% and 1.5%, respectively, in 2018; discrete tax items materially affected comparability.
- At October 31, cash and cash equivalents were $142.7 million, versus $214.8 million at January 31, 2018. Current assets were $483.9 million and current liabilities $137.1 million. Inventory was $183.5 million, up from $151.7 million at fiscal year-end.
- Debt was $49.6 million, all under the revolving facility; the company reported approximately $50.1 million of facility availability. The $100 million secured revolving facility matures October 12, 2023. The company reported compliance with its financial covenants.
- Nine-month investing cash outflow was $101.4 million, primarily including the MVMT acquisition and capital expenditures. Financing provided $12.4 million, including borrowings, partly offset by dividends and share repurchases. Cash, cash equivalents and restricted cash decreased $72.1 million.
Material changes and notable items
- Sales growth included higher licensed-brand sales and the addition of MVMT. Company Stores sales also grew, supported by new locations; the company operated 44 outlets versus 41 a year earlier.
- Quarterly SG&A increased $10.4 million to $89.3 million, including higher MVMT integration/acquisition costs and marketing. Nine-month SG&A rose $24.1 million to $213.6 million, including $13.8 million of MVMT-related costs and increased marketing, partly offset by nonrecurring prior-year cost-savings charges and lower trade-show and Olivia Burton acquisition costs.
- MVMT’s acquisition-date consideration included an initial payment of $100 million, subject to adjustments, plus contingent payments of up to $100 million based on performance. The accounting purchase price was reported as $112.2 million, including contingent consideration; the filing also reports $108.4 million net of cash acquired after closing adjustments. MVMT contributed $5.0 million of sales and $0.3 million of operating income from acquisition through October 31. The company recorded $77.5 million of goodwill and $28.9 million of identifiable intangibles.
- Adoption of ASC 606 reduced opening retained earnings by $0.7 million. Its reported impact was to reduce quarterly sales by $1.0 million and net income by $0.6 million; nine-month sales increased by $0.04 million while net income was reduced by $0.3 million.
Outlook, risks and contingencies
- The filing provides no specific numerical sales or earnings guidance. Management said cash on hand, credit availability and expected operating cash flow should meet working-capital needs for at least the next 12 months.
- Management cited consumer demand and preferences, competition including smartwatches, seasonality, customer and supplier concentration, foreign currency, licensing arrangements, acquisition integration and potential impairment of goodwill or intangibles among relevant risks. The filing states there were no material changes to previously disclosed risk factors.
- MVMT contingent payments could total up to $100 million, with no minimum payment; the recorded contingent purchase-price liability was $16.6 million at October 31. Its fair value depends on estimates of MVMT performance and other unobservable assumptions.
- U.S. Customs disputes the company’s historical tariff-allocation methodology and estimated approximately $5.1 million in potentially underpaid duties, plus possible penalties and interest. The company disputes the position and cannot predict the outcome.
- A distributor sued over the MVMT Germany distribution agreement, seeking specific performance and unspecified damages. The company disputes the claims and says the agreement caps its liability at amounts paid by the distributor; it does not expect a material financial effect.
- The company estimated a $28.2 million Transition Tax obligation payable over eight years. Tax estimates remain provisional, including deferred withholding taxes and the treatment of GILTI. The Q3 tax benefit included a $3.9 million revision to estimated foreign withholding taxes.
- Management estimated that a 1% increase in interest rates would reduce annual income by approximately $0.4 million. The company does not hedge its variable-rate debt exposure.
- The company approved a $0.20-per-share dividend on December 4, 2018, payable December 28 to shareholders of record December 14; future dividends remain at the board’s discretion.
Most important facts for investors to verify
- Whether sales growth and margin performance persist after separating organic growth, MVMT contribution, foreign exchange and accounting changes.
- Whether MVMT meets earn-out targets, the ultimate contingent payment, and the expected integration costs and benefits.
- Cash conversion and working-capital trends, particularly receivables and the elevated seasonal inventory balance, alongside acquisition-related cash use and debt.
- The outcome and potential financial exposure from the U.S. Customs matter and the MVMT distributor lawsuit.
- Final tax estimates and the sensitivity of reported earnings to discrete tax benefits and provisional tax accounting.