MOVADO GROUP, INC. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended April 30, 2016, compared with the three months ended April 30, 2015. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise stated.
Business context and results
Movado designs, manufactures and distributes luxury and licensed watches through Wholesale and Retail segments. Wholesale sales include luxury brands, licensed brands and after-sales services; Retail consists of outlet stores. Management attributed weaker wholesale sales to retailers managing inventory amid a challenging and unpredictable retail environment. The company operated 40 outlet stores, versus 38 a year earlier.
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $114.1 | $120.5 | Down $6.4 (5.3%) |
| Gross profit / margin | $61.3 / 53.8% | $62.4 / 51.8% | Profit down $1.1; margin up 2.0 points |
| Operating income / margin | $5.4 / 4.7% | $6.9 / 5.7% | Down $1.5 |
| Income before taxes | $5.1 | $6.8 | Down $1.7 |
| Income tax expense / effective rate | $1.7 / 34.1% | $3.1 / 46.3% | Rate down 12.2 points |
| Net income attributable to Movado | $3.3 | $3.6 | Down $0.3 |
| Diluted EPS | $0.14 | $0.15 | Down $0.01 |
- Wholesale sales fell 7.0% to $102.0 million; Retail sales rose 11.4% to $12.1 million. U.S. Wholesale sales declined 10.7%; International Wholesale sales declined 3.3% (including a $0.3 million adverse currency effect).
- Luxury-brand sales were $42.0 million versus $44.9 million; licensed-brand sales were $56.8 million versus $60.8 million. Retail’s increase reflected higher comparable and non-comparable store sales.
- Gross margin improved through favorable currency effects (about 0.8 points), product/channel mix, selective price increases and sourcing improvements (about 0.6 points combined), and the absence of prior-year efficiency initiative costs (about 0.6 points).
- SG&A increased 0.7% to $55.9 million. Higher compensation and benefits, including costs associated with the COO’s announced retirement, and unfavorable currency effects were partly offset by the absence of prior-year efficiency initiative costs.
Cash flow, balance sheet and capital
- Cash and cash equivalents were $203.9 million at April 30, 2016, versus $185.8 million a year earlier and $228.2 million at January 31, 2016. Cash at foreign subsidiaries was $199.3 million. Most foreign earnings are intended to remain invested abroad; the filing cites $299.2 million of undistributed foreign earnings without a recorded deferred tax liability.
- Operating cash flow was negative $21.0 million, compared with negative $11.2 million. Management attributed current-quarter use primarily to a $29.2 million unfavorable working-capital change, including inventory buildup, tax payments and prepaid trade-show costs.
- Investing cash outflow was $2.0 million; financing cash outflow was $10.2 million. The latter included $5.0 million of debt repayments, $3.0 million of dividends and $0.9 million of share repurchases.
- Inventory was $178.4 million, up from $162.5 million at January 31, 2016. Current assets were $494.5 million and current liabilities $65.8 million. The company reported $35.0 million of bank borrowings, classified as long-term, and no current bank debt.
- The $100 million secured revolving facility matures January 30, 2020; approximately $64.7 million was available at quarter-end, after $35.0 million drawn and approximately $0.3 million of letters of credit. The company was in compliance with its covenants, including minimum trailing-four-quarter EBITDA of $50 million and maximum leverage of 2.50:1.00.
- Total equity was $459.4 million. Foreign-currency translation contributed $17.9 million to comprehensive income, lifting accumulated other comprehensive income; this is distinct from operating earnings.
Outlook, commentary and risks
- No specific full-year revenue, earnings or margin guidance is provided in the filing. Management said existing cash, expected operating cash flow and short-term borrowing capacity should cover working-capital needs for at least the next 12 months.
- The Board authorized repurchases of up to $50 million of common stock through September 30, 2017. The company repurchased 34,000 shares under the program for approximately $0.9 million during the quarter. The Board approved a $0.13-per-share dividend payable June 21, 2016, to shareholders of record June 7.
- The Vice Chairman and COO was expected to retire in June 2016; the company did not plan to replace the COO role. The quarter included $1.8 million of related compensation expenses.
- Key stated risks include consumer demand and retail conditions, changing preferences and competition (including smart watches and wearables), significant customers and suppliers, licensing relationships, international economic and political conditions, foreign exchange, hedging effectiveness, litigation, information-security issues, and access to financing. The company had no gold futures hedges at quarter-end and does not hedge its variable-rate debt exposure; it estimated a 1% interest-rate change would affect income by about $0.4 million.
- The company stated that pending legal matters were not expected to materially affect financial condition or future results. It noted ordinary-course legal and tax contingencies, minimum license and advertising commitments, and $1.1 million of restricted cash related to a vendor agreement.
Important facts for investors to verify
- Whether wholesale demand, particularly in U.S. luxury and licensed brands and in Asia and Latin America, stabilized after quarter-end.
- Whether the improved gross margin persists as mix, pricing, foreign exchange and sourcing effects change.
- How inventory growth and seasonal working-capital needs affect operating cash flow and liquidity.
- The terms, availability and covenant headroom of the credit facility, and the extent to which foreign cash is accessible for U.S. needs.
- The total and timing of retirement-related costs, ongoing share repurchases, and future dividend decisions.
- Developments in currency exposure, tax positions, license commitments and legal contingencies.