MOVADO GROUP, INC. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2020 (fiscal 2021 second quarter), compared with the corresponding 2019 periods. Movado designs, manufactures and distributes watches and accessories through owned and licensed brands, and operates outlet stores.
Financial performance
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Net sales | $88.5 million, down 43.9% from $157.8 million | $158.2 million, down 48.0% from $304.4 million |
| Gross profit and margin | $45.4 million; 51.2%, versus $85.3 million; 54.1% | $77.2 million; 48.8%, versus $164.2 million; 54.0% |
| Operating income (loss) | $(8.9) million, versus $8.8 million | $(191.1) million, versus $13.8 million |
| Net income (loss) attributable to Movado | $(6.6) million, or $(0.28) per diluted share, versus $17.5 million, or $0.75 | $(156.6) million, or $(6.75) per diluted share, versus $21.4 million, or $0.92 |
- The six-month operating loss includes $133.7 million of goodwill impairment and $22.2 million of intangible-asset impairment. Excluding these charges, management reported a Watch and Accessory Brands segment operating loss of $33.6 million for the six months.
- Quarterly sales fell across owned brands, licensed brands and Company Stores. Management attributed the decline mainly to COVID-19 closures and reduced retail traffic; e-commerce grew strongly but only partially offset weakness in stores and wholesale.
- Cash used in operating activities was $11.4 million for the six months, compared with $32.6 million used a year earlier. Investing activities used $0.6 million; financing activities used $6.7 million.
- At July 31, cash and cash equivalents were $170.2 million; working capital was $324.1 million. Bank loans payable were $48.3 million, and availability under the revolving facility was $51.4 million. The company reported total assets of $679.7 million, down from $847.3 million at January 31, primarily reflecting impairments.
- Quarterly SG&A declined 29.1% to $54.3 million, but lower sales and gross margin more than offset expense reductions. Six-month SG&A declined 25.3% to $112.4 million.
Material changes and unusual items
- The pandemic prompted temporary retail closures, workforce furloughs and reduced work rates, salary reductions, lower discretionary spending, and tighter expense and capital spending controls. By quarter-end all company stores and most wholesale-customer stores had reopened, though many faced reduced hours and traffic.
- A June restructuring plan generated $14.6 million of provisions, of which approximately $8.0 million is expected to require cash payments. The company expects annual savings of $14 million to $16 million; severance payments are expected to continue into the next fiscal year.
- The company recorded a $1.3 million gain on sale of a non-operating asset in the quarter. The prior-year quarter included a $13.6 million non-cash gain from remeasurement of MVMT contingent consideration, so period comparisons include this non-operating difference.
- Cash dividends and the share repurchase program were suspended in fiscal 2021. No program repurchases were made in the six months; the company stated it intends to resume dividends when conditions stabilize and credit-facility terms permit.
- The six-month income tax benefit was $33.9 million, including a $6.2 million benefit from early adoption of an income-tax accounting standard. The filing notes that a substantial portion of goodwill impairment is not tax deductible.
Liquidity, debt, outlook and risks
- The company amended its $100 million revolving credit facility. Temporary covenant relief runs through delivery of the compliance certificate for the period ended July 31, 2021, or earlier if specified milestones are met. The amendment requires at least $100 million of liquidity through April 30, 2021, tightens certain restrictions on dividends, repurchases, debt, investments and capital expenditures, and increases borrowing costs during the suspension period to LIBOR plus 2.75% (with a 1.00% LIBOR floor).
- Management believes cash on hand, operating cash flows and credit availability will support operating, capital and debt-service needs for the next 12 months and expects covenant compliance over that period. It cautions that pandemic effects remain difficult to predict and could materially affect sales, liquidity, cash flows and results.
- No quantified sales or earnings guidance is provided. Management expects continued pressure on retail and wholesale sales from health measures, consumer behavior and economic conditions, while emphasizing digital sales, cost control and liquidity preservation.
- Risks include renewed store closures or weaker traffic, reduced discretionary spending, supply-chain delays, tariffs and currency movements, and potential impairment of acquired assets. U.S. Customs disputes the company’s watch-import duty allocation methodology, asserting approximately $5.1 million of potential underpaid duties plus possible penalties and interest; the company contests the position and cannot predict the outcome.
- Management said other legal proceedings and contingencies were not expected to materially affect financial condition or cash flows beyond amounts accrued. Disclosure controls were assessed as effective at a reasonable assurance level.
Important facts for investors to verify
- Whether reopening and e-commerce trends are sufficient to recover wholesale and in-store sales, and how margins respond as sales volumes change.
- The assumptions underlying the $155.9 million combined goodwill and intangible impairment, and whether further impairment indicators emerge.
- Cash generation, facility availability and compliance with the amended $100 million minimum-liquidity requirement and other covenants.
- Whether restructuring savings reach the stated $14 million to $16 million annual range, and the timing of related cash severance payments.
- Developments in the U.S. Customs duty dispute and the potential exposure to duties, penalties and interest.