MOVADO GROUP, INC. — Q2 FY2012 Form 10-Q
Reporting period: Quarter and six months ended July 31, 2011. Unaudited results; dollar amounts below are in millions except per-share data. The company designs, manufactures, distributes and retails watches through Wholesale and Retail segments. The former Movado boutique division is reported as discontinued operations after its closure in fiscal 2011.
Financial results
| Metric | Three months ended July 31, 2011 | Three months ended July 31, 2010 | Six months ended July 31, 2011 | Six months ended July 31, 2010 |
|---|---|---|---|---|
| Net sales | $113.2 | $85.4 | $203.1 | $158.2 |
| Gross profit / margin | $60.9 / 53.8% | $44.4 / 52.0% | $109.6 / 54.0% | $82.9 / 52.4% |
| SG&A | $55.9 | $46.6 | $103.0 | $90.2 |
| Operating income (loss) | $5.0 | ($2.2) | $6.6 | ($7.3) |
| Net income (loss) attributable to Movado | $4.4 | ($20.9) | $4.9 | ($33.3) |
| Diluted EPS | $0.18 | ($0.84) | $0.19 | ($1.35) |
- Quarterly sales rose 32.6% year over year; six-month sales rose 28.4%. Foreign exchange increased reported sales by $6.1 million and $8.3 million, respectively.
- Wholesale sales grew 37.9% for the quarter and 32.0% for the six months; Retail sales grew 4.2% and 6.1%. Management cited product innovation, stronger demand and increased marketing, including strength in accessible-luxury and licensed brands. International sales growth also benefited from foreign exchange.
- Gross margin improved year over year. Management attributed the change to favorable channel/product mix and fixed-cost leverage, partly offset in the quarter by currency effects and sales of excess watch movements.
- SG&A increased 20.0% in the quarter and 14.1% for the six months, including higher marketing and compensation costs and adverse foreign-currency effects.
Cash, liquidity and balance sheet
- Six-month operating cash flow was $12.4 million, versus cash used of $12.7 million in the prior-year period. Investing used $2.1 million; financing used $1.4 million, including $1.5 million of dividends.
- Cash was $128.8 million at July 31, 2011, versus $54.3 million a year earlier and $103.0 million at January 31, 2011. The six-month cash increase of $25.8 million included a $16.9 million favorable exchange-rate effect; operating cash flow was $12.4 million.
- Current assets were $427.5 million and current liabilities $66.4 million. Inventory was $196.6 million, up from $181.3 million at January 31, but below $205.8 million a year earlier.
- No borrowings were outstanding at July 31. The $55 million secured revolving facility, maturing July 17, 2012, had $48.4 million available after the availability block and letters of credit. The company reported covenant compliance and was not subject to the facility’s minimum-EBITDA covenant or cash-dominion provisions.
- Management said cash, expected operating cash flow and short-term borrowing capacity should cover working-capital needs for at least the next 12 months.
Changes, outlook and notable matters
- Compared with the prior-year period, the company returned to operating and net profitability from continuing operations. The prior-year comparisons include $17.7 million of discontinued-operation losses in the quarter and $23.7 million for the six months, primarily associated with closing the Movado boutiques.
- The company reinstated quarterly dividends after suspending them in 2009. Management anticipated an annualized dividend of $0.12 per share, approximately $3 million based on then-current shares, subject to quarterly Board approval and credit-agreement limits. The company paid $0.06 per share during the six months.
- Effective February 1, 2011, the company adopted average-cost inventory accounting for U.S. inventories and applied the change retrospectively. It reduced six-month 2011 reported income by $0.5 million versus FIFO and increased July 31 inventory and retained earnings by $1.2 million; the company said operating cash flow was unaffected.
- Other income included a $0.7 million pretax gain on a building sale; sale proceeds were $1.2 million.
- No specific full-year sales or earnings guidance is provided in the supplied filing text. Forward-looking results are subject to consumer demand and preferences, competition, seasonality, supply availability, key-customer exposure, international operating conditions, currency movements and the effectiveness of hedging. Management reported no material changes to previously disclosed risk factors.
- Foreign-currency and gold-price hedges are used, but do not eliminate market exposure. The filing reports 24.0 million Swiss francs equivalent in forward contracts and commodity futures for approximately 4,400 ounces of gold at July 31; these positions had stated settlement values of a $1.8 million net gain and a $0.3 million net loss, respectively.
- Management judged pending ordinary-course legal matters not likely to materially affect the company. Disclosure controls were assessed as effective at a reasonable-assurance level, with no material change in internal control over financial reporting reported.
Investor verification priorities
- Assess whether sales growth and improved margins persist, separating underlying demand from favorable currency translation, product/channel mix and inventory-related sales.
- Track inventory levels and composition, and the earnings effects of the average-cost accounting method.
- Verify cash-flow quality and liquidity, including the large exchange-rate contribution to the cash increase, borrowing-base availability and the July 2012 facility maturity.
- Confirm the Board’s future dividend decisions and continued compliance with facility dividend limits and covenants.
- Review the performance of U.S. Wholesale, International Wholesale and Retail separately; international operating income growth contrasted with a U.S. operating loss in the quarter and six-month period.