MOVADO GROUP, INC. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2021 (the company’s first quarter of fiscal 2022), compared with the three months ended April 30, 2020. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context and key financial metrics
- Business: Watch and Accessory Brands, covering owned and licensed brands, and Company Stores, the retail outlet business.
- Revenue: $134.8 million, up 93.5% from $69.7 million. Wholesale sales were $99.4 million versus $52.9 million; direct-to-consumer sales were $34.7 million versus $16.3 million.
- Profit and margins: Gross profit was $74.2 million, or 55.0% of sales, versus $31.9 million, or 45.8%. Operating income was $13.3 million versus an operating loss of $182.2 million. Net income attributable to Movado was $9.4 million, or $0.40 per diluted share, versus a net loss of $150.0 million, or $6.48 per diluted share.
- Cash flow: Operating activities used $15.4 million, compared with $25.6 million used. Investing activities used $0.5 million; financing activities used $19.8 million. Cash, cash equivalents and restricted cash totaled $187.5 million at quarter-end.
- Liquidity and debt: Cash and cash equivalents were $187.0 million; bank borrowings were $10.0 million. The $100 million revolving facility had $89.7 million available. Working capital was $368.9 million and current assets were $483.5 million against current liabilities of $114.6 million.
- Balance sheet: Total assets were $694.7 million and total liabilities were $262.9 million at April 30, 2021. Inventory was $170.0 million, up from $152.6 million at January 31, 2021.
Material changes versus the prior comparable period
- Sales increased across both business segments, primarily reflecting partial recovery from pandemic-related store closures and restrictions in the prior-year quarter, along with growth in online retail. The company reported that foreign exchange benefited sales by $4.4 million.
- Gross margin improved 9.2 percentage points. Management attributed the increase mainly to the non-recurrence of prior-year inventory reserves, improved fixed-cost leverage, favorable sales mix and foreign exchange.
- The prior-year quarter included $155.9 million of goodwill and intangible-asset impairment charges. No such impairment was recorded in the current quarter; the prior-year charge substantially affected the reported loss comparison.
- SG&A increased $2.8 million, or 4.8%, to $60.9 million. The prior period included $3.7 million of corporate initiative charges; excluding those charges, SG&A increased, primarily due to higher marketing and performance-based compensation.
- Cash used in operations improved year over year but remained negative, with inventory investment and payments for payroll, severance and other liabilities contributing to current-quarter cash use.
- Bank borrowings fell from $82.5 million at April 30, 2020 to $10.0 million at April 30, 2021. The company repaid $11.1 million during the quarter.
Outlook, management commentary and risks
- Management said the pandemic’s adverse impact had diminished in recent quarters but expected it to affect results for the foreseeable future. The filing cautions that first-quarter results are not necessarily indicative of full-year fiscal 2022 results.
- The company expects approximately half of the roughly $90 million in fiscal 2021 SG&A savings to recur in fiscal 2022. Its completed restructuring plan is expected to generate annual savings of $14 million to $16 million; remaining restructuring cash payments were estimated at approximately $1.7 million for the rest of the fiscal year.
- No specific full-year revenue or earnings guidance is provided in the filing. Management said cash on hand, operating cash flows and credit availability should fund operating, capital and debt-service requirements for the next 12 months, and it expected to maintain compliance with debt covenants.
- Key uncertainties include renewed COVID-19 restrictions, consumer demand and discretionary spending, store traffic, supply disruptions, and the pace of economic recovery. The company also identifies foreign-exchange exposure, competition from smart watches, reliance on licensed brands and suppliers, and possible impairment of acquired assets as risks.
- Contingency: U.S. Customs disputes the company’s watch-import tariff allocation method. Its proposed alternative implies $5.1 million of duties for the period under review, plus possible penalties and interest. The company contests the position and says the outcome cannot be predicted with certainty.
- The company reported no material changes to previously disclosed risk factors and concluded disclosure controls and procedures were effective at a reasonable assurance level.
Important facts for investors to verify
- Whether the strong year-over-year recovery persists when comparisons are made against periods less affected by pandemic closures, and how sales and margins develop by segment and channel.
- Whether the stated cost savings recur as expected and whether marketing and performance-based compensation continue to pressure SG&A.
- Whether operating cash flow improves as inventory investment and other working-capital requirements evolve.
- Revolver availability, covenant compliance and the company’s ability to maintain liquidity if sales or recovery weaken.
- Developments in the U.S. Customs matter, including potential duties, penalties and interest, and any change in the company’s assessment of the contingency.