Movado Group, Inc. — Q2 FY2015 Form 10-Q
Reporting period: Three and six months ended July 31, 2014; comparative periods ended July 31, 2013. Amounts are in millions of dollars except per-share data. Interim results are unaudited.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Net sales | $143.6 | $138.3 | $264.5 | $248.3 |
| Gross profit / margin | $77.6 / 54.0% | $74.8 / 54.1% | $142.8 / 54.0% | $134.7 / 54.3% |
| Operating income | $17.2 | $17.0 | $28.1 | $27.0 |
| Net income attributable to Movado | $12.2 | $12.5 | $19.5 | $20.7 |
| Diluted EPS | $0.47 | $0.48 | $0.76 | $0.80 |
- Q2 sales increased 3.8%; six-month sales increased 6.5%. Foreign exchange movements added $1.6 million and $3.2 million to sales, respectively.
- Q2 gross margin declined about 10 basis points; six-month margin declined about 30 basis points. Management attributed the pressure mainly to unfavorable currency effects, partly offset by fixed-cost leverage.
- Six-month SG&A rose 6.5% to $114.7 million, including higher compensation, trade-show and other selling costs, and $1.2 million of unfavorable currency impact.
Segments and material comparisons
- Wholesale sales grew 3.3% in Q2 and 6.2% for the half. Licensed-brand sales rose to $73.8 million in Q2 and $135.5 million for the half; luxury-brand sales declined 1.8% and 1.1%, respectively.
- Retail sales increased 8.3% in Q2 and 9.8% for the half. The company operated 37 outlet stores at July 31, versus 34 a year earlier.
- For the six months, wholesale operating income was $23.2 million versus $23.0 million; retail operating income was $4.9 million versus $4.0 million. International wholesale operating income decreased to $23.7 million from $24.5 million, while U.S. wholesale reported a $0.5 million loss, improved from a $1.5 million loss.
- Net income attributable to Movado fell despite higher sales. The six-month prior-year comparison included a $1.5 million pretax gain on the sale of a building; the current-year effective tax rate also increased to 29.9% from 26.7%. The prior-year period included a $1.0 million tax benefit from favorable tax audit settlements.
Cash flow, liquidity and debt
- Cash and cash equivalents were $169.6 million at July 31, 2014, up from $151.5 million a year earlier. Cash from operating activities was negative $5.7 million for the six months, compared with negative $0.2 million a year earlier; management cited working-capital investment, including higher receivables and inventory built ahead of the holiday season.
- Investing activities provided $29.7 million, primarily from $33.7 million in maturities of short-term investments, partly offset by $4.3 million in capital expenditures. Financing activities used $11.4 million, including $5.1 million of dividends and $7.7 million of repurchases.
- The company reported no outstanding debt. Its $25 million asset-based revolving facility had $20.7 million of availability after letters of credit, and matures March 12, 2015. The company reported covenant compliance and no cash-dominion requirement. Separate Swiss credit lines totaled $5.5 million, with no borrowings.
- Current assets were $497.2 million and current liabilities $82.8 million. However, $156.9 million of cash was held at foreign subsidiaries; most was designated as permanently reinvested to support international operations.
- Management believes cash on hand, expected operating cash flow and borrowing capacity will cover working-capital needs for at least the next 12 months.
Outlook, risks and unusual items
- The filing provides no quantified revenue or earnings guidance. Management cites seasonality and says interim results may not indicate full-year results.
- Key stated risks include consumer demand and economic conditions, product preferences and competition, key customer or supplier disruption, licensing and intellectual-property matters, international operations, currency movements and the effectiveness of hedging.
- The company hedges Swiss-franc exposure; its net forward-contract portfolio was 41.0 million Swiss francs equivalent, with maturities through January 20, 2015. It held no gold futures or Swiss-franc option cash-flow hedges at period-end. Foreign-currency translation reduced Q2 comprehensive income materially, including an $8.8 million translation loss.
- The board approved a $0.10-per-share dividend payable September 19, 2014. The company repurchased 193,073 shares for $7.7 million during the half. The $50 million repurchase authorization expires January 31, 2016.
- The Lacoste license agreement was extended through December 31, 2022. Management said pending legal matters are not expected to materially affect the company. No material changes to previously disclosed risk factors or internal controls were reported.
Important facts for investors to verify
- Whether sales growth—particularly in licensed brands and retail—continues, and whether luxury-brand demand improves in international markets.
- Whether inventory and receivables convert to cash after the seasonal build, given negative operating cash flow in the first half.
- The impact of foreign exchange on gross margin, earnings and accumulated comprehensive income, and the extent to which hedges offset currency exposure.
- The availability and renewal of the revolving facility, which matures March 12, 2015, and compliance with its covenants.
- Whether the higher effective tax rate and ongoing dividends and share repurchases remain sustainable as earnings and cash flow develop.