MOVADO GROUP, INC. — FY2015 Form 10-K Summary
Reporting period: Fiscal year ended January 31, 2015. The filing’s “fourth quarter” refers to the three months ended January 31, 2015; this is not a calendar-year 2014 annual report. Amounts below are in U.S. dollars unless noted.
Business context
Movado designs, sources, markets and distributes watches through Wholesale and Retail segments. Its portfolio includes Movado, Ebel and Concord, plus licensed brands including Coach, Tommy Hilfiger, HUGO BOSS, Lacoste, Juicy Couture and Scuderia Ferrari. The company operates 38 U.S. outlet stores and generated approximately 45% of sales internationally. Sales are seasonal, with 54.9% of FY2015 sales in the fiscal year’s second half.
Key financial results
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net sales | $587.0 million | $570.3 million | +2.9% |
| Gross profit / margin | $310.0 million / 52.8% | $305.3 million / 53.5% | Margin down 70 bps |
| Operating income / margin | $71.5 million / 12.2% | $67.7 million / 11.8% | +5.5% |
| Net income attributable to Movado Group | $51.8 million | $50.9 million | +1.8% |
| Diluted EPS | $2.02 | $1.97 | +2.5% |
| Cash from operating activities | $59.6 million | $54.5 million | +$5.1 million |
U.S. wholesale sales rose 4.9% to $255.7 million; international wholesale sales were nearly flat at $266.6 million. Retail sales increased 9.2% to $64.7 million, with comparable outlet sales up 2.5%. Licensed-brand wholesale revenue grew to $294.3 million from $276.4 million, while luxury-brand revenue declined to $212.7 million from $220.3 million.
Fourth-quarter FY2015 net sales were $133.9 million versus $132.3 million a year earlier. Net income attributable to Movado Group was $10.1 million versus $7.2 million; diluted EPS was $0.40 versus $0.28.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $199.9 million at year-end, up from $157.7 million; $192.4 million was held at foreign subsidiaries. Working capital was $419.2 million versus $401.7 million.
- Operating cash flow was $59.6 million. Investing activities provided $21.6 million, principally reflecting proceeds from maturing time deposits, against $11.1 million of capital expenditures. Financing activities used $36.2 million, mainly for share repurchases and dividends.
- No debt was outstanding at January 31, 2015. A new $100 million senior secured revolving facility matures in 2020; approximately $96.1 million was available at inception, after letters of credit. It includes a $50 million uncommitted increase option and financial covenants.
- FY2015 share repurchases totaled $26.4 million for 833,973 shares. Dividends paid were $0.40 per share. The board increased the repurchase authorization to $100 million, expiring January 31, 2016.
Changes, outlook and notable items
- Operating income improved despite lower gross margin, with sales growth and SG&A discipline contributing; SG&A rose just 0.4% and declined as a share of sales. Management cited lower performance-based compensation as an offset to increased compensation and brand-building costs.
- Gross margin was pressured by foreign exchange, sales/channel mix and the prior-year duty refund; the company estimated these factors reduced the year-over-year margin comparison. The company expects the lower-than-planned increase in Movado wholesale sales, amid retailers’ tight inventory management, to continue into the next year.
- In FY2014, the company recorded a $7.8 million sales reserve for anticipated ESQ returns and a $7.5 million cost-of-sales charge for ESQ returns and excess inventory, as well as a $0.8 million charge for excess displays. It reduced ESQ’s retail presence to make room for Movado. FY2015 gross margin also benefited from the strategy compared with the prior year.
- FY2014 included a $2.5 million duty refund and a $1.5 million gain on a building sale; these items did not recur in FY2015. FY2015’s effective tax rate was 27.1%, compared with 25.2% in FY2014; FY2013’s tax benefit was unusually affected by a large deferred-tax valuation-allowance release.
- Management expects FY2016 capital expenditures of approximately $15 million and believes cash, operating cash flow and borrowing capacity will cover working-capital needs for at least 12 months. No full-year revenue or earnings guidance is provided in the supplied filing text.
- On January 30, 2015, the Coach license was extended through June 30, 2020; the Lacoste license had been extended through December 31, 2022. Licensed brands represented approximately 51% of FY2015 sales, making license renewals and performance material.
Risks and contingencies
Key exposures include discretionary consumer demand, competition from traditional watch brands and smart wearables, changing fashion preferences, inventory and product-return estimates, dependence on third-party manufacturers and a concentrated supply of Swiss movements, foreign exchange (especially the Swiss franc), and reliance on licensed brands, key retailers and distributors. The proposed Swiss “Swissness” rules could raise costs or complicate Swiss-origin labeling. Foreign cash is largely designated as permanently reinvested; approximately $244 million of undistributed foreign earnings had no recorded deferred tax liability.
A purported securities class action filed February 4, 2015 alleges misleading statements about financial performance during March–November 2014 and refers to a November 2014 reduction in projections. The company says it believes the complaint is meritless and intends to defend it; management could not estimate any potential loss. The filing also reports $73.6 million in purchase obligations and $183.5 million in minimum license-agreement commitments. No off-balance-sheet financing arrangements were reported.
Most important facts for investors to verify
- Whether sales momentum, particularly Movado wholesale sell-in and international luxury-brand sales, met management’s expectations after year-end.
- Whether the ESQ-to-Movado assortment shift produces the expected incremental sales and profitability, and whether returns or inventory reserves require further adjustment.
- How gross margin responds to currency movements, channel/product mix, and the absence of prior-year duty refunds.
- Foreign-cash accessibility and potential tax costs of repatriation, alongside compliance with the new credit facility’s EBITDA and leverage covenants.
- Developments in the securities litigation, license renewals and the proposed Swiss-origin rules.
- Whether the $15 million FY2016 capital-spending expectation and ongoing repurchases and dividends remain consistent with cash generation and business needs.