Movado Group, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended January 31, 2017. The filing also reports unaudited fourth-quarter results. Movado designs, sources, markets and distributes watches through wholesale and retail operations, with owned and licensed brands.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $552.8 million | $594.9 million | Down 7.1% |
| Gross profit / margin | $294.8 million / 53.3% | $316.9 million / 53.3% | Profit down $22.1 million; margin unchanged |
| Operating income / margin | $54.0 million / 9.8% | $70.1 million / 11.8% | Down 23.0% |
| Net income attributable to Movado | $35.1 million | $45.1 million | Down 22.3% |
| Diluted EPS | $1.51 | $1.90 | Down 20.5% |
| Cash from operations | $58.4 million | $74.6 million | Down $16.2 million |
Fiscal 2017 interest expense was $1.5 million; the effective tax rate was 31.7%, versus 33.8%. Capital expenditures were $5.9 million. Cash and cash equivalents were $256.3 million, including $238.2 million held at foreign subsidiaries; working capital was $433.4 million. Total bank debt was $30.0 million, with approximately $69.7 million available under the revolving facility. The company was in compliance with its debt covenants.
At January 31, 2017, total assets were $607.8 million and total equity was $474.0 million. The company paid $0.52 per share in dividends during the year. A further $0.13-per-share dividend was approved after year-end.
Fourth-quarter results and material changes
Fiscal 2017 fourth-quarter net sales were $130.8 million, versus $143.3 million a year earlier. Net income attributable to Movado was $5.2 million versus $7.9 million, and diluted EPS was $0.22 versus $0.34.
- U.S. wholesale sales fell 12.7%; international wholesale sales fell 4.6%, including a $6.5 million adverse foreign-exchange impact. Retail sales increased 5.2%, with comparable outlet sales up 3.4%.
- Licensed-brand sales declined 10.8% to $265.1 million; luxury-brand sales fell 6.2% to $205.4 million. Wholesale sales overall declined 8.6% while retail sales rose 5.2%.
- Gross margin held at 53.3%, but lower sales reduced gross profit. SG&A declined 2.4%, partly reflecting lower incentive compensation, favorable currency translation and the absence of prior-year efficiency charges.
- Cash from operations declined from $74.6 million to $58.4 million. The company ended the year with higher cash, aided in part by $4.9 million of favorable exchange-rate effects on cash.
Outlook, commentary, risks and unusual items
- Management cited a challenging and unpredictable watch and retail environment, declining traffic in malls and traditional department stores, and weakness in Latin America, Asia and Canada. Europe and the Middle East partly offset international declines.
- On March 20, 2017, the company announced workforce reductions and operating consolidation. It expects approximately $12 million of savings in fiscal 2018 and approximately $15 million in ongoing annual pre-tax savings, with $7–$10 million of pre-tax charges, mostly in fiscal 2018’s first quarter. These are expectations, not reported results.
- Movado Connect, powered by Google’s Android Wear 2.0, and smartwatch launches from Tommy Hilfiger and HUGO BOSS were planned for fall 2017. Smartwatches introduce technology, software compatibility, privacy, warranty and intellectual-property risks.
- Licensed brands represented approximately 48% of fiscal 2017 sales. The Juicy Couture license is due to expire December 31, 2017; Ferrari renewal discussions were ongoing. The Rebecca Minkoff/Uri Minkoff collaboration was expected to launch in 2017.
- A U.S. Customs audit proposed an alternative tariff allocation methodology implying approximately $5.1 million of underpaid duties over the five-year review period. Movado disputes the methodology and amount; the outcome is uncertain.
- Fiscal 2017 included a $1.3 million impairment charge on a privately held investment and a $1.8 million compensation charge related to the former COO’s retirement. The filing also identifies foreign-exchange exposure, dependence on third-party suppliers and licenses, seasonality, consumer-demand and inventory risks, and proposed Swiss-origin requirements as material concerns.
- Approximately $307 million of undistributed foreign earnings was considered permanently reinvested; the company stated that the tax cost of possible future distribution was not practicable to estimate.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded that disclosure controls and internal controls were effective at the reporting date.
Important facts for investors to verify
- Whether wholesale demand and sales trends improve, particularly in the U.S., and whether revenue declines affect operating margins.
- Delivery and market acceptance of the planned smartwatch collections, including ongoing platform compatibility and any related costs or liabilities.
- Actual timing, savings and charges from the fiscal 2018 restructuring, and whether cash and covenant headroom remain adequate.
- Resolution and potential financial effect of the $5.1 million Customs duty dispute.
- Renewal or expiration outcomes for the Ferrari and Juicy Couture licenses, and the contribution of licensed brands to sales and profitability.
- Foreign cash availability and repatriation tax implications, along with currency, supplier, customer concentration and inventory exposures.