Movado Group, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended January 31, 2019. The filing also reports fourth-quarter results. Unless otherwise noted, amounts are in U.S. dollars.
Business context and reporting period
Movado designs, sources, markets and distributes owned and licensed watch and accessory brands, and operates outlet stores. Fiscal 2019 included MVMT from its October 1, 2018 acquisition; the Company also acquired 51% of its Spanish distributor, City Time, in December 2018. Sales are seasonal, with 60.1% generated in the second half of fiscal 2019. International markets contributed 54.6% of annual sales.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $679.6 million | $568.0 million |
| Gross profit / margin | $369.4 million / 54.4% | $298.1 million / 52.5% |
| SG&A expenses | $307.2 million | $254.9 million |
| Operating income / margin | $62.2 million / 9.2% | $43.2 million / 7.6% |
| Income attributable to Movado Group | $61.6 million | $(15.2) million |
| Diluted earnings per share | $2.61 | $(0.66) |
| Cash provided by operating activities | $86.2 million | $54.7 million |
Fourth-quarter FY2019 net sales were $199.4 million, gross profit was $110.6 million, income before taxes was $16.9 million, and net income attributable to Movado Group was $17.4 million ($0.74 diluted EPS).
FY2019 net sales rose 19.7%; management attributed growth to both U.S. and international sales, including MVMT, and favorable foreign exchange of $4.1 million. Watch and Accessory Brands sales were $595.9 million; Company Stores sales were $83.7 million. The gross-margin improvement of 190 basis points reflected favorable sales mix, fixed-cost leverage and other factors.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $189.9 million at year-end, down from $214.8 million. Working capital was $355.5 million, versus $381.3 million.
- Cash used in investing was $109.0 million, primarily for acquisitions and capital expenditures of $10.6 million. Cash from financing was $3.7 million.
- Year-end borrowings were $50.3 million under a $100 million revolving facility maturing October 2023; availability was $49.4 million. Interest expense was $0.8 million.
- The Company paid $18.5 million in dividends, or $0.80 per share, and repurchased $7.4 million of stock during the year.
- Management said cash on hand, expected operating cash flow and short-term borrowing capacity should meet working-capital needs for at least 12 months. FY2020 capital expenditures were forecast at approximately $15 million.
Material changes, outlook and risks
- MVMT contributed $39.8 million of sales and $0.6 million of operating income from acquisition through year-end. The acquisition included an initial payment of $100 million and contingent payments of up to $100 million; the recorded contingent consideration liability was $16.7 million at year-end. FY2019 included $14.4 million of MVMT-related transaction and integration expenses.
- Reported earnings comparisons are substantially affected by tax accounting: FY2018 included a $45.0 million provisional charge from the 2017 Tax Act, while FY2019’s tax provision was only $0.2 million (effective tax rate 0.3%), including tax benefits. The FY2019 net-income rebound therefore is not solely an operating comparison.
- Material risks include fashion and consumer-demand shifts, competition from smartwatches, online-channel and traditional-retail changes, seasonality, reliance on licensed brands and third-party suppliers, foreign exchange, tariffs, and acquisition integration. Licensed brands represented 47.2% of FY2019 sales.
- U.S. Customs disputes the Company’s tariff cost-allocation methodology, proposing approximately $5.1 million in underpaid duties for the period reviewed, plus possible penalties and interest. The Company disputes the position; the outcome is uncertain.
- Most operating leases were expected to be recognized on the balance sheet beginning FY2020, with estimated right-of-use assets and lease liabilities of $80–$100 million. The Company said the accounting change was not expected to significantly affect results or cash flows.
- The filing provides no specific revenue or earnings guidance. It reported that the MVMT-related distribution lawsuit was settled in February 2019 for an immaterial cash payment; other terms extended the agreement through early FY2023.
Important facts for investors to verify
- How much of sales growth and margin improvement is sustainable after separating acquisition contribution, foreign exchange and one-time costs?
- What are MVMT’s subsequent sales, profitability and earn-out performance, and will integration costs or contingent consideration change materially?
- What is the eventual exposure from the U.S. Customs duty dispute, and are there any developments in tariff policy affecting sourcing?
- How will licensed-brand renewals, especially the Coach and Tommy Hilfiger agreements, affect future sales and margins?
- How do inventory, receivables and cash generation trend after year-end, given inventory growth and the reported increase in bad-debt expense?
- What will the lease-accounting transition and the scheduled transition-tax installments mean for reported liabilities and cash needs?