Movado Group, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended October 31, 2013. Movado operates Wholesale and Retail segments, selling its own and licensed watch brands; comparisons are with the corresponding 2012 periods. Interim results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Three months ended Oct. 31, 2013 | Three months ended Oct. 31, 2012 | Nine months ended Oct. 31, 2013 | Nine months ended Oct. 31, 2012 |
|---|---|---|---|---|
| Net sales | $189.7m | $160.2m | $438.0m | $381.9m |
| Gross profit / margin | $101.3m / 53.4% | $90.4m / 56.4% | $236.0m / 53.9% | $215.2m / 56.4% |
| Operating income / margin | $34.1m / 18.0% | $25.0m / 15.6% | $61.1m / 14.0% | $44.2m / 11.6% |
| Net income attributable to Movado | $23.0m | $34.5m | $43.7m | $49.2m |
| Diluted EPS | $0.89 | $1.34 | $1.69 | $1.92 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $16.6m | $5.8m |
Amounts are in U.S. dollars; financial statement amounts converted from thousands. For the quarter, sales rose 18.4% and operating income increased, but net income fell mainly because the prior-year period included a $19.4m U.S. deferred-tax valuation-allowance reversal. Nine-month sales rose 14.7%; net income was lower for the same tax-comparison reason. The 2013 effective tax rates were 31.1% for the quarter and 29.1% year to date, versus tax benefits in 2012.
Gross margin declined 3.0 percentage points in the quarter and 2.5 points year to date, primarily from channel and product mix; foreign exchange also reduced quarterly margin by about 0.5 points. Higher sales supported operating income growth. Marketing and trade-show costs increased, partly offset by lower compensation expense and the absence of a $3.0m prior-year charitable contribution.
At October 31, cash and equivalents were $163.1m, total current assets $497.3m, current liabilities $103.1m, and total equity $462.7m. Cash was $164.8m at October 31, 2012. Nine-month operating cash flow improved to $16.6m, while working capital absorbed $36.6m, mainly from higher receivables and inventory built for the holiday season. Investing cash outflow was $9.9m, including $11.9m of capital expenditures, partly offset by $2.2m of building-sale proceeds; financing outflow was $11.7m, including dividends and share repurchases.
The company had no outstanding debt. Its $25m asset-based revolving facility had $20.4m available at October 31, 2013, after letters of credit; the facility matures March 12, 2015. The company reported covenant compliance and expected cash, operating cash flow and short-term borrowing capacity to cover needs for at least 12 months. Of cash and equivalents, $136.9m was held at foreign subsidiaries, most of which management considers permanently reinvested.
Material changes, outlook, risks and unusual items
- Wholesale sales increased 18.8% in the quarter and 15.5% year to date; U.S. wholesale growth was particularly strong. Drivers included Movado BOLD and Museum collections, licensed-brand sales including the newly introduced Scuderia Ferrari line, and Coach’s repositioning. Retail sales increased 14.1% in the quarter and 7.3% year to date.
- Management provided no specific financial guidance in the supplied filing text. It cited consumer demand and preferences, competition, seasonality, key customer and supplier exposure, licensing arrangements, international conditions, foreign exchange, and execution of hedging strategies among forward-looking risks. The company hedged Swiss-franc exposure; its net forward portfolio was 51.0m Swiss francs equivalent, with maturities through April 23, 2014. It held no gold futures hedges.
- In the nine-month period, the company recorded a $1.5m pretax gain on sale of a building. It also repurchased 198,733 shares for about $7.5m; the authorization permits up to $50m of repurchases through January 31, 2016.
- After quarter-end, the company reported a $2.5m pretax customs-duty drawback refund recorded in fiscal Q4 2014, with no further refunds anticipated. A November 13, 2013 Tommy Hilfiger license amendment extended the agreement through December 31, 2019, with a conditional extension through 2024 and minimum sales and guaranteed royalty provisions. The board approved a subsequent $0.08-per-share dividend, payable December 20, 2013.
- Management said pending legal matters were not expected to have a material effect. No material changes to previously reported risk factors or internal control over financial reporting were reported; disclosure controls were deemed effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether sales growth can continue while channel and product mix pressures on gross margin persist.
- Receivables and inventory growth, holiday-season sell-through, and the resulting working-capital and cash-flow needs.
- The tax comparison: 2012 benefited from a $19.4m valuation-allowance reversal; confirm the implications for ongoing tax rates and deferred-tax assets.
- Foreign cash availability and repatriation constraints, foreign-exchange exposure, and the effectiveness and cost of hedging.
- Tommy Hilfiger license conditions, minimum sales requirements and guaranteed royalties, alongside the company’s broader dependence on third-party licenses.
- Revolver availability, covenant headroom, dividend capacity, and the pace and purpose of share repurchases.