Business Context and Reporting Period
Company: Movado Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 30, 2011
Business Overview: Movado designs, manufactures, and distributes watches under the Movado, Ebel, Concord, and ESQ brands, as well as licensed brands (Coach, HUGO BOSS, etc.). Operations are divided into Wholesale and Retail segments, and geographically into United States and International segments. The company closed its Movado boutique division in the prior fiscal year, reporting those results as discontinued operations.
Key Financial Metrics
| Metric | Q1 2012 (Ended Apr 30, 2011) | Q1 2011 (Ended Apr 30, 2010) |
|---|---|---|
| Net Sales | $89.9 million | $72.8 million |
| Gross Profit | $48.6 million | $38.5 million |
| Gross Margin | 54.1% | 52.9% |
| Operating Income | $1.6 million | ($5.1 million) Loss |
| Net Income (Continuing Ops) | $0.5 million | ($6.2 million) Loss |
| Net Income (Total) | $0.5 million | ($12.2 million) Loss |
| Diluted EPS | $0.02 | ($0.50) |
| Cash and Equivalents | $109.3 million | $62.0 million |
| Operating Cash Flow | $3.6 million | ($5.9 million) |
| Long-Term Debt | $0 | $10.0 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 23.4% year-over-year, driven by a 25.5% increase in wholesale sales and a 9.0% increase in retail sales. International wholesale sales grew 32.2%, while U.S. wholesale sales grew 17.9%.
- Profitability Turnaround: The company returned to profitability from continuing operations, recording $0.5 million in net income compared to a $6.2 million loss in the prior year. This was primarily due to higher gross profit ($10.1 million increase) and improved operating leverage.
- Expense Management: Selling, General, and Administrative (SG&A) expenses increased 7.8% to $47.0 million. This increase was intentional, driven by a $1.9 million rise in marketing spend to drive growth and $1.6 million in higher compensation/benefits.
- Discontinued Operations: The prior year included a $6.0 million loss from discontinued operations (Movado boutiques), which had no impact in the current period as the division was fully closed.
- Accounting Change: The company changed its U.S. inventory valuation method from FIFO to Average Cost effective February 1, 2011. This change reduced reported net income by $0.5 million for the quarter but improved comparability with competitors.
Guidance, Outlook, and Risks
- Dividend Reinstatement: The Board reinstated a quarterly cash dividend of $0.03 per share, anticipating an annualized dividend of $0.12 per share. This is permitted under the amended credit facility covenants.
- Liquidity and Debt: The company has no outstanding borrowings under its $55.0 million revolving credit facility. Total availability is $44.0 million. The facility was amended in April 2011 to reduce interest rate margins and modify dividend covenants.
- Outlook: Management expects cash on hand and operating cash flows to be sufficient for working capital needs for the next 12 months. Growth is expected to continue in accessible luxury and licensed brand categories.
- Risks: Key risks include foreign currency exchange fluctuations (hedged via derivatives), consumer spending trends, and the ability to manage expenses. The company faces no material legal proceedings expected to impact financial position.
Investor Verification Checklist
- Inventory Valuation Impact: Verify the long-term implications of the switch from FIFO to Average Cost on future cost of sales and gross margins.
- Dividend Sustainability: Confirm that the company maintains the required fixed charge coverage ratio (1.25 to 1.0) to continue paying dividends under the credit agreement.
- Marketing ROI: Monitor whether the increased marketing spend ($1.9 million increase) continues to drive proportional sales growth in subsequent quarters.
- Currency Hedging: Review the effectiveness of the hedging program against the Swiss Franc, given the significant portion of purchases are denominated in that currency.
- Discontinued Operations Liabilities: Track the remaining accrued liabilities ($0.7 million) related to the closure of the boutique division to ensure they are settled as expected.