MOVADO GROUP, INC. — Q2 FY2016 Form 10-Q
Reporting period: Quarter and six months ended July 31, 2015. Movado designs, manufactures and distributes luxury and licensed watches through Wholesale operations, and operates outlet stores through its Retail segment. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Three months ended July 31, 2015 | Prior year | Six months ended July 31, 2015 | Prior year |
|---|---|---|---|---|
| Net sales | $145.6 | $143.6 | $266.0 | $264.5 |
| Gross profit / margin | $79.0 / 54.3% | $77.6 / 54.0% | $141.5 / 53.2% | $142.8 / 54.0% |
| Operating income | $18.2 | $17.2 | $25.1 | $28.1 |
| Net income attributable to Movado | $12.1 | $12.2 | $15.7 | $19.5 |
| Diluted EPS | $0.50 | $0.47 | $0.65 | $0.76 |
- Quarterly sales rose 1.4%; six-month sales rose 0.6%. Foreign-exchange movements reduced reported sales by $6.8 million in the quarter and $13.3 million in the half-year.
- Quarterly gross margin improved about 30 basis points, reflecting mix, price increases and sourcing improvements, partly offset by roughly 200 basis points of currency pressure. Half-year gross margin declined about 80 basis points, principally due to currency pressure, partly offset by mix, pricing and sourcing improvements.
- For the six months, operating income declined $3.0 million. U.S. Wholesale operating income improved to $6.1 million from a $0.5 million loss, while International Wholesale operating income fell to $14.7 million from $23.7 million. Management cited lower International gross profit, including currency and margin effects.
- Interest expense was $0.4 million for the six months, versus $0.2 million a year earlier. The six-month effective tax rate increased to 37.2% from 29.9%, primarily due to unrecognized tax benefits on certain foreign losses and tax effects of efficiency-related costs.
Cash, liquidity and capital allocation
- Cash and cash equivalents were $188.0 million at July 31, 2015, versus $169.6 million a year earlier and $199.9 million at January 31, 2015. Approximately $175.4 million was held at foreign subsidiaries; most foreign balances were considered permanently reinvested. The company had recorded a $2.7 million federal tax liability related to $12.7 million of pre-2013 foreign earnings earmarked for future repatriation.
- Six-month operating cash flow was positive $2.6 million, compared with negative $5.7 million. Working capital used $25.7 million, mainly reflecting seasonal inventory build, higher receivables and tax payments, partly offset by higher accrued liabilities.
- Inventory was $188.5 million, up from $170.8 million at January 31, 2015; management attributed the working-capital increase in part to preparation for the holiday selling season.
- The company had $40.0 million drawn on its $100 million secured revolving facility, with approximately $56.3 million available after letters of credit. The facility matures January 30, 2020; borrowings are secured by substantially all borrower assets. Movado reported compliance with its covenants, including minimum trailing-four-quarter EBITDA of $50 million and maximum leverage of 2.50:1. No bank borrowings were outstanding at July 31, 2014.
- Six-month cash used for share repurchases was $39.1 million; 1.47 million shares were repurchased at an average $26.57. Dividends paid were $5.2 million. The board approved a further $0.11-per-share dividend after quarter-end, payable September 22, 2015.
- Management said cash on hand, expected operating cash flow and short-term borrowing capacity should cover working-capital needs for at least the next 12 months. Capital expenditures were $3.7 million; no off-balance-sheet financing or unconsolidated special-purpose entities were reported.
Management commentary, outlook and risks
- Movado cited strong sell-through and new products, including Movado BOLD, as contributors to U.S. luxury-brand sales; licensed-brand results varied by brand and market. Retail sales were nearly flat in the quarter and down 1.1% for the half-year amid a challenging outlet environment.
- The company began operating-efficiency and streamlining actions, primarily at foreign subsidiaries. Six-month charges were $2.67 million, mainly severance, occupancy and fixed-asset costs; no such charges were recorded in the quarter. The remaining accrued balance was $1.68 million, and management expected most remaining liabilities to be paid in fiscal 2016.
- No specific sales, earnings or margin guidance was provided in the filing. Results are seasonal and interim performance is not necessarily indicative of full-year results.
- Key disclosed risks include consumer spending and preferences, competition and smart watches/wearables, licensed-brand relationships, significant customers and suppliers, foreign currency, international operations, hedging effectiveness, litigation, information systems and financing availability. Currency remains a principal market risk; the company hedged Swiss franc and euro exposures. A 1% interest-rate change was estimated to affect net income by about $0.2 million.
- A shareholder lawsuit alleging misleading statements about financial performance was voluntarily dismissed with prejudice on June 30, 2015. Management said other ordinary-course proceedings were not expected to have a material effect. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales and margin trends improve after accounting for the reported $13.3 million six-month foreign-exchange headwind, particularly in International Wholesale.
- Inventory quality, seasonal sell-through and working-capital conversion following the holiday build.
- Progress and cash costs of efficiency initiatives, and the effect on reported margins and taxes.
- Use of the revolving facility, covenant headroom, interest costs and the extent to which foreign cash is available to fund U.S. needs.
- Remaining share-repurchase authorization, future dividend decisions, and the duration and terms of key brand licenses, including the ESQ license extension through December 31, 2016.