MOVADO GROUP, INC. — Form 10-Q Summary
Business context and reporting period
Movado Group designs, manufactures and distributes luxury and licensed-brand watches and operates outlet stores. This unaudited 10-Q covers the quarter and nine months ended October 31, 2014 (fiscal 2015), compared with the same periods in 2013.
Financial performance
| Metric | Three months ended Oct. 31, 2014 | Three months ended Oct. 31, 2013 | Nine months ended Oct. 31, 2014 | Nine months ended Oct. 31, 2013 |
|---|---|---|---|---|
| Net sales | $188.6 million | $189.7 million | $453.1 million | $438.0 million |
| Gross profit / margin | $99.8 million / 53.0% | $101.3 million / 53.4% | $242.6 million / 53.5% | $236.0 million / 53.9% |
| Operating income | $33.3 million | $34.1 million | $61.4 million | $61.1 million |
| Net income attributable to Movado Group | $22.2 million | $23.0 million | $41.7 million | $43.7 million |
| Diluted EPS | $0.87 | $0.89 | $1.63 | $1.69 |
- Quarterly sales declined 0.6%; nine-month sales increased 3.4%. Nine-month operating income was nearly flat, while attributable net income fell about 4.5%.
- Nine-month operating cash flow was $1.3 million, down from $16.6 million. Management attributed the low cash generation primarily to a $54.1 million working-capital use, including higher receivables and seasonal inventory build.
- Cash and cash equivalents were $157.9 million at October 31, 2014, versus $163.1 million a year earlier. Current assets were $507.2 million and current liabilities $92.4 million. About $144.0 million of cash was held at foreign subsidiaries, most of it asserted permanently reinvested.
- No debt was outstanding. The company had $20.9 million available under its $25 million asset-based revolving facility, after accounting for $4.1 million of letters of credit. The facility matures in 2019; the company reported covenant compliance.
- Nine-month investing cash flow was positive $25.3 million, mainly from $33.7 million of time-deposit maturities; capital expenditures were $7.5 million. Financing used $19.5 million, including $13.2 million of share repurchases and $7.6 million of dividends.
Material changes and management commentary
- For the quarter, wholesale sales declined 1.2%, while retail sales rose 6.8%, supported by store openings. Luxury-category wholesale sales fell, partly offset by growth in licensed brands and after-sales service. International Movado sales were weaker than expected, including in Asia.
- For the nine months, licensed-brand sales and retail growth lifted revenue, but luxury-category sales declined. Gross margin fell 40 basis points in both the quarter and nine-month period; management cited currency effects and channel/product mix.
- Quarterly SG&A declined 1.0%, mainly because performance-based compensation was lower. Nine-month SG&A increased 3.6%, with higher compensation, selling, marketing and trade-show costs partly offset by lower performance compensation.
- Foreign currency movements reduced quarterly sales by $1.3 million and reduced nine-month gross margin by about 40 basis points. Nine-month foreign-currency translation losses were $17.0 million, contributing to a decline in comprehensive income attributable to Movado to $24.9 million from $45.4 million.
- Management announced an updated fiscal 2015 outlook on November 14, citing slower growth in the overall watch category, retailers’ focus on productivity, and certain brands performing below plan, including Movado in international markets. The filing text provided here does not give a clear numerical revised outlook.
- After quarter-end, the board increased the share-repurchase authorization from $50 million to $100 million, expiring January 31, 2016, and approved a $0.10-per-share dividend payable December 19, 2014. The Lacoste license was extended through December 31, 2022.
Risks, contingencies and unusual items
- Key stated risks include consumer spending and economic conditions, changing preferences, competitive pricing, seasonality, significant customers and suppliers, license and intellectual-property matters, international operations, and foreign-exchange exposure. The filing reports no material changes to risk factors from the 2014 Form 10-K.
- The company hedges Swiss-franc exposure; its forward-contract portfolio totaled CHF 48.0 million equivalent. A hypothetical settlement at October 31 would have produced a $1.4 million loss, net of tax. No gold futures were held, leaving gold-price changes to affect cost of sales.
- Ordinary-course legal claims were not expected by management to have a material adverse effect. Letters of credit totaled $4.1 million; foreign-bank guarantees were $1.3 million.
- A $1.5 million gain on sale of a building benefited the comparable 2013 nine-month period and did not recur in 2014. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Obtain the November 14, 2014 outlook announcement and verify the revised fiscal-year revenue, earnings and margin expectations, which are not stated numerically in this filing text.
- Track receivables, inventory and operating cash flow through the holiday season, including whether the inventory build converts into sales and cash.
- Assess continued weakness in Movado and other luxury brands, especially internationally, against licensed-brand and outlet-store growth.
- Review currency exposure, hedge effectiveness and the impact of foreign cash being largely designated as permanently reinvested.
- Monitor repurchases and dividends against liquidity, facility covenants and the company’s stated capital needs.