MOVADO GROUP, INC. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2018 (fiscal 2019 first quarter). Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise stated. The company designs, markets and distributes owned and licensed watch brands through Wholesale and Retail segments.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $127.1 | $99.3 |
| Gross profit / gross margin | $67.5 / 53.1% | $49.1 / 49.5% |
| Operating income (loss) | $8.1 | $(3.6) |
| Net income (loss) | $8.1 | $(4.2) |
| Diluted earnings (loss) per share | $0.35 | $(0.18) |
| Cash used in operating activities | $2.6 | $16.6 |
- Sales increased 28.1% year over year. Foreign exchange contributed $5.8 million of the increase; adoption of ASC 606 added $2.2 million to reported sales and $0.5 million to net income. Prior-year results were not restated.
- Gross margin rose 360 basis points, attributed primarily to prior-year cost savings, favorable currency effects and improved fixed-cost absorption. SG&A increased 12.5% to $59.4 million, mainly due to higher marketing spending, currency translation, sales meetings, distribution costs and Olivia Burton amortization; this was partly offset by the absence of prior-year restructuring charges.
- International Wholesale sales rose 43.8% to $78.3 million, including the $5.8 million favorable currency effect. U.S. Wholesale sales grew 3.4% to $33.8 million; U.S. licensed-brand sales declined 22.6%. Retail sales increased 24.3% to $15.1 million, supported by stronger comparable and non-comparable store sales.
- Cash and cash equivalents were $177.0 million at April 30, versus $233.6 million a year earlier and $214.8 million at January 31, 2018. Cash used in operations improved year over year but remained negative, with inventory purchases and other working-capital uses contributing.
- No bank debt was outstanding at quarter-end; the company repaid $25.0 million of borrowings during the quarter. Its $100 million revolving facility had approximately $99.7 million available, and the company reported compliance with its covenants. Current assets were $452.2 million and current liabilities $78.0 million.
- Financing activities used $27.7 million, including debt repayment, $4.6 million of dividends and $1.2 million of share repurchases. The declared dividend was $0.20 per share, versus $0.13 a year earlier.
Material changes and notable items
- The company acquired Olivia Burton owner JLB Brands in July 2017 for approximately $79.0 million net of cash acquired, funded with foreign-subsidiary cash and without assumed debt. Q1 2018 included $0.8 million of related acquired-intangible amortization. The filing does not separately quantify the brand’s contribution to current-quarter sales.
- Foreign currency translation reduced other comprehensive income by $15.2 million in the quarter; total comprehensive loss was $7.2 million despite net income of $8.1 million.
- ASC 606 was adopted on February 1, 2018 using the modified retrospective method, reducing opening retained earnings by $0.7 million. The reported-period effects principally reflect timing of wholesale markdowns and returns.
- The company recorded a provisional $28.2 million Transition Tax obligation under the 2017 Tax Act, payable over eight years. Estimates related to the Act remain subject to revision.
Outlook, risks and contingencies
- Management stated that cash on hand, expected operating cash flow and short-term borrowing capacity should be sufficient for working-capital needs for at least the next 12 months. The filing provides no specific sales or earnings guidance.
- Key stated risks include consumer demand and changing preferences, competition including smart watches, seasonality, licensed-brand relationships, supply availability, international operations and currency movements, integration of acquisitions, and potential impairment of goodwill or acquired intangibles.
- U.S. Customs disputes the company’s historical tariff-allocation methodology and proposed an alternative implying approximately $5.1 million of underpaid duties over the covered five-year period, plus possible penalties and interest. The company disputes the position; outcome is uncertain.
- The company also noted that tax estimates and its assessment of reinvested foreign earnings may change. It reported ordinary-course legal matters not expected to materially affect financial condition or future results beyond amounts accrued.
- The board approved a $0.20-per-share dividend on May 30, 2018, payable June 25 to shareholders of record June 11. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of sales and profit growth came from underlying demand, currency movements, ASC 606 timing effects and Olivia Burton.
- Whether operating cash flow turns positive as inventory and other working-capital requirements evolve.
- Developments in the U.S. Customs duty dispute and any resulting exposure beyond the proposed $5.1 million, including penalties and interest.
- Final Transition Tax and other tax-related estimates, including the company’s foreign-earnings reinvestment assessment.
- Progress in international and U.S. licensed-brand sales, and the durability of improved gross margins amid higher marketing spending.