Movado Group Inc. 10-Q Summary: Period Ended July 31, 2009
Business Context and Reporting Period
This is a quarterly report (Form 10-Q) for Movado Group, Inc., a designer, manufacturer, and distributor of luxury and accessible luxury watches (including Movado, Ebel, Concord, and licensed brands). The report covers the three and six-month periods ended July 31, 2009. The company operates primarily through Wholesale and Retail segments across the United States and International markets.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended July 31, 2009 | 6 Months Ended July 31, 2009 |
|---|---|---|
| Net Sales | $89,701 | $157,276 |
| Gross Profit | $52,664 | $89,687 |
| Gross Margin % | 58.7% | 57.0% |
| Operating Income (Loss) | $3,117 | $(8,002) |
| Net Income (Loss) | $484 | $(8,426) |
| Net Income (Loss) Attributable to Movado | $528 | $(8,432) |
| Cash and Cash Equivalents (End of Period) | $47,474 | $47,474 |
| Total Debt (Current + Long-term) | $40,000 | $40,000 |
| Net Cash Used in Operating Activities | N/A | $(18,607) |
Material Changes vs. Prior Period
- Revenue Decline: Net sales for the six months ended July 31, 2009, decreased by 31.9% ($73.8 million) compared to the prior year. Wholesale sales dropped 36.9%, while Retail sales declined 7.5%. The decline is attributed to the global economic downturn and a stronger U.S. dollar.
- Profitability Shift: The company reported a net loss of $8.4 million for the six-month period, compared to net income of $9.5 million in the prior year. Operating loss was $8.0 million, driven by a $57.8 million decrease in gross profit.
- Expense Reduction: Selling, General, and Administrative (SG&A) expenses decreased by 27.5% ($37.1 million) year-over-year due to cost-cutting initiatives, including headcount reductions, lower marketing spend, and store closures.
- Inventory Build: Inventory levels increased by $11.4 million during the six-month period, primarily due to decreased sales volume.
Guidance, Outlook, and Risks
- Dividend Suspension: On April 9, 2009, the Board discontinued the quarterly cash dividend to retain capital. Dividends are prohibited under the new credit agreement until specific financial performance measures are met.
- Debt Restructuring: On June 5, 2009, the company entered a new $50 million revolving credit facility (amended to $55 million on July 17, 2009) with Bank of America and Bank Leumi USA. This facility replaced and paid off previous senior notes and credit agreements. As of July 31, 2009, $40 million was drawn, with $8.5 million availability remaining.
- Cost Initiatives: Management continues to streamline operations and manage inventory tightly. The company expects the remaining severance liability ($1.6 million) to be paid in fiscal 2010.
- Risks: Key risks include the ongoing difficult global economic environment, foreign currency exchange rate fluctuations (hedged via forward contracts), and the ability to secure financing on favorable terms. The company notes that forward-looking statements are subject to uncertainties regarding consumer spending and economic conditions.
Investor Verification Checklist
- Covenant Compliance: Verify the company's ability to meet the "Block Release Date" requirements (fixed charge coverage ratio of 1.25:1 and domestic EBITDA >$10 million) to unlock the remaining $10 million of credit facility availability.
- Inventory Valuation: Assess the risk of further inventory write-downs given the $11.4 million build and the $5.3 million in liquidation sales of discontinued inventory already recorded.
- Cash Burn Rate: Monitor the $18.6 million cash used in operating activities against the $47.5 million cash balance to ensure sufficient liquidity for the next 12 months without additional financing.
- Wholesale Segment Performance: Track the recovery of the Wholesale segment, which recorded an operating loss of $6.0 million for the six-month period, compared to a profit of $15.5 million in the prior year.