Movado Group Inc. 10-Q Summary: Quarter Ended April 30, 2003
Business Context and Reporting Period
This is an unaudited quarterly report (Form 10-Q) for Movado Group Inc., a designer, manufacturer, and distributor of quality watches. The report covers the three-month period ended April 30, 2003. The company operates through three primary segments: Wholesale, Retail (Movado Boutiques and outlets), and Other (service centers and shipping).
Key Financial Metrics
| Metric | Q1 2004 (Ended Apr 30, 2003) | Q1 2003 (Ended Apr 30, 2002) |
|---|---|---|
| Net Sales | $60.17 million | $57.27 million |
| Gross Profit | $36.44 million (60.6% margin) | $35.18 million (61.4% margin) |
| Operating Income | $1.97 million | $1.39 million |
| Net Income | $0.86 million | $0.33 million |
| Diluted EPS | $0.07 | $0.03 |
| Cash and Equivalents | $34.55 million | $21.41 million |
| Total Debt (Current + Long-term) | $53.75 million | $71.00 million |
| Net Cash Used in Operating Activities | ($21.81 million) | ($19.89 million) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 5.1% year-over-year. Wholesale sales rose 4.3%, driven by domestic growth in Movado, ESQ, and Tommy Hilfiger brands. Retail sales increased 10.0%, fueled by a 24.7% comparable store sales increase in Movado Boutiques.
- International Decline: International wholesale sales dropped 8.1% due to the SARS outbreak in Asia, the war in Iraq, and a sluggish economy in Europe and South America.
- Profitability: Operating income improved 42.3% to $1.97 million. Net income more than doubled to $0.86 million. However, gross margin percentage declined slightly from 61.4% to 60.6% due to product mix and the negative impact of a weaker U.S. dollar on costs.
- Debt Reduction: Average debt for the quarter decreased 26.5% to $44.4 million. Outstanding bank borrowings were $18.8 million at period end, down from $31.0 million in the prior year.
- Cash Flow: Operating cash outflows increased to $21.8 million, primarily due to higher inventory purchases for new boutiques and increased receivables from higher sales volume.
Outlook, Risks, and Management Commentary
- Liquidity: The company maintains a $100 million revolving credit line expiring June 22, 2003, which is currently being renewed. Management expects the renewal to be completed prior to expiration.
- Market Risks: Significant exposure exists to foreign currency fluctuations, particularly the Swiss franc, which is hedged via forward and option contracts. The company also faces risks related to gold prices and general economic conditions affecting consumer disposable income.
- Capital Expenditures: Investing cash outflows of $1.6 million were primarily for the build-out of new Movado Boutiques and information systems projects.
- Dividends: The company paid dividends of $0.03 per share ($0.36 million total) during the quarter.
- Accounting Standards: The company noted the issuance of SFAS No. 149 and SFAS No. 150, neither of which is expected to have a significant impact on financial position or results.
Investor Verification Checklist
- Credit Line Renewal: Verify the status of the $100 million revolving credit line renewal, which was due June 22, 2003.
- International Recovery: Monitor the recovery of international wholesale sales following the SARS outbreak and geopolitical instability in the first quarter.
- Margin Pressure: Assess the sustainability of gross margins given the volatility of the U.S. dollar against the Swiss franc and gold prices.
- Inventory Levels: Review inventory turnover rates, as inventory levels increased significantly ($119.4 million) to stock new retail locations.
- Pro Forma EPS: Note that pro forma net income under SFAS No. 123 (fair value accounting for stock options) would have been $0.17 million, significantly lower than the reported $0.86 million.