MOVADO GROUP, INC. — Form 10-Q Summary
Reporting period: Second quarter and six months ended July 31, 2021. Unless noted, amounts are in U.S. dollars; financial statement amounts are unaudited. Movado designs, manufactures and distributes owned- and licensed-brand watches and accessories and operates outlet stores.
Financial results
| Metric | Three months ended July 31, 2021 | Six months ended July 31, 2021 |
|---|---|---|
| Net sales | $173.9 million, up 96.4% year over year | $308.7 million, up 95.1% |
| Gross profit / margin | $98.5 million / 56.6% (51.2% prior year) | $172.7 million / 55.9% (48.8% prior year) |
| Operating income | $24.6 million, versus an $8.9 million loss | $37.9 million, versus a $191.1 million loss |
| Net income attributable to Movado | $19.4 million, versus a $6.6 million loss; diluted EPS $0.82 | $28.8 million, versus a $156.6 million loss; diluted EPS $1.21 |
For the six-month period, operating cash flow was $22.7 million, compared with $11.4 million used in the prior-year period. Investing activities used $1.9 million and financing activities used $43.8 million. Cash and cash equivalents were $199.7 million at July 31, 2021, down from $223.8 million at January 31, 2021. The cash decline largely reflects debt repayments, dividends and share repurchases.
At July 31, 2021, the company had no borrowings under its $100 million revolving facility and reported $99.7 million of availability. Working capital was $369.4 million, versus $324.1 million at July 31, 2020. Total liabilities were $271.5 million; operating lease liabilities totaled $79.4 million. Inventory was $183.3 million, up from $152.6 million at January 31, 2021.
Changes and operating drivers
- Sales rose across Watch and Accessory Brands and Company Stores as retail locations reopened and demand recovered from pandemic-related disruption. Growth in e-commerce also contributed. Foreign exchange added $5.2 million to quarterly sales and $9.6 million to six-month sales versus the respective prior-year periods.
- Quarterly gross margin improved 540 basis points, primarily from sales mix and favorable currency effects, partly offset by higher fixed costs as prior-year furloughs and temporary salary reductions did not recur. Six-month margin improved 710 basis points, also benefiting from the nonrecurrence of prior-year inventory-reserve charges and better fixed-cost absorption.
- SG&A was $73.8 million for the quarter, up 36.0%, and $134.8 million for six months, up 19.9%. Higher marketing, payroll and performance-based compensation were key drivers; comparisons also reflect prior-year COVID-related cost actions.
- The prior-year six-month loss included $133.7 million of goodwill impairment and $22.2 million of intangible-asset impairment. No triggering events for impairment were identified in the first six months of fiscal 2022.
Outlook, risks and notable items
- No specific revenue or earnings guidance is provided in the filing. Management expects pandemic-related effects to continue to affect retail and wholesale sales, while noting that the pandemic’s adverse impact had diminished in recent quarters.
- Management expects the company’s cash, operating cash flows and available credit to support operating, capital and debt-service needs for the next 12 months and expects to remain compliant with debt covenants. It also expects annual restructuring-related savings of $14 million to $16 million; approximately one-third of fiscal 2021 cost savings were expected to recur in fiscal 2022.
- Key uncertainties include renewed COVID-19 outbreaks and restrictions, consumer demand and store traffic, supply and delivery disruptions, foreign-exchange movements, competition from smartwatches, licensing arrangements, and the ability to execute business plans. The filing says risk factors were not materially changed from the 2021 Form 10-K.
- U.S. Customs disputes the company’s method of allocating imported-watch costs for tariff purposes and proposed $5.1 million of underpaid duties for the covered five-year period, plus possible penalties and interest. The company disputes the position and cannot predict the outcome.
- The company paid $11.6 million in dividends and repurchased 334,000 shares for $10.0 million during the six months. A new $25 million repurchase authorization had $15.0 million remaining at July 31, 2021. The company also committed up to $1 million to a venture capital fund.
Important facts for investors to verify
- Whether sales and margin gains persist as comparisons move beyond periods heavily affected by pandemic store closures, and how much growth is attributable to e-commerce, reopening and currency.
- Whether inventory growth supports demand without requiring additional markdowns or reserves, and whether working-capital needs affect future cash generation.
- Progress on management’s fiscal 2022 cost-savings expectations and the effects of renewed pandemic restrictions or supply disruptions.
- Developments in the U.S. Customs tariff matter, including potential duties, penalties and interest.
- Future dividend and repurchase decisions, available revolver capacity, and continued compliance with credit-facility covenants.