MOVADO GROUP, INC. — Q3 FY2012 Form 10-Q
Reporting period: Three and nine months ended October 31, 2011. The company designs, manufactures, distributes and sells watches through Wholesale and Retail segments, across U.S. and international markets. Unless noted, financial amounts below are in millions of dollars.
Key financial results
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Net sales | $142.6 | $123.0 | $345.7 | $281.2 |
| Gross profit / margin | $81.0 / 56.8% | $68.9 / 56.0% | $190.6 / 55.1% | $151.8 / 54.0% |
| Operating income / margin | $19.1 / 13.4% | $18.5 / 15.0% | $25.7 / 7.4% | $11.2 / 4.0% |
| Income attributable to Movado Group | $16.4 | $17.1 | $21.3 | $(16.2) |
| Diluted EPS | $0.65 | $0.69 | $0.85 | $(0.65) |
| Operating cash flow | Not separately stated | Not separately stated | $32.7 | $4.9 |
Liquidity, debt and cash flow
- At October 31, 2011, cash and cash equivalents were $138.0, versus $63.2 a year earlier and $103.0 at January 31, 2011. Current assets were $433.8 and current liabilities $80.8.
- The company had no outstanding debt under its $55.0 asset-based revolving facility and reported $49.3 of availability, net of the availability block and letters of credit. The facility matures July 17, 2012. It also reported no borrowings on its Swiss subsidiary’s credit lines.
- Nine-month investing cash outflow was $3.5, including $4.5 of capital expenditures and $1.2 of proceeds from an asset sale. Financing cash outflow was $1.8, primarily dividends. Cash increased $35.0, including a favorable $7.6 foreign-exchange effect.
- Management said cash, expected operating cash flow and short-term borrowing capacity should meet working-capital needs for at least 12 months.
Material changes and operating trends
- Q3 sales rose 16.0% year over year; nine-month sales rose 22.9%. Wholesale drove growth, with nine-month wholesale sales up 25.6%; Retail sales increased 4.4% for the nine-month period. Foreign exchange favorably affected sales by $3.3 in Q3 and $11.6 year to date.
- Management attributed sales growth to product innovation, stronger sell-through, increased marketing, licensed-brand demand and international market expansion. Q3 international wholesale sales benefited from licensed and luxury categories; accessible-luxury sales there declined.
- Gross margin improved year over year, which management attributed chiefly to channel and product mix and fixed-cost leverage, partly offset by adverse currency effects. Q3 SG&A increased 22.8% to $61.9; nine-month SG&A increased 17.2% to $164.9, reflecting higher compensation and benefits, increased marketing and foreign-exchange effects.
- Q3 operating income increased only modestly despite higher sales; Q3 net income attributable to the company fell to $16.4 from $17.1, including higher tax expense. For nine months, continuing-operations income improved, while the prior-year comparison included a $23.7 after-tax loss from discontinued Movado boutiques.
- Comparisons are also affected by a $4.3 million prior-year benefit from reversing a liability for the company’s late Chairman’s retirement agreement. The boutiques had been closed in fiscal 2011 and are reported as discontinued operations.
Outlook, unusual items and risks
- The filing gives no specific sales or earnings guidance. Management anticipated an annualized dividend of $0.12 per share, subject to quarterly Board approval and credit-agreement conditions; $0.09 per share was declared for the first nine months.
- For Q4 FY2012, the company expected about $3.3 million of sales and gross margin from selling certain Ebel watch movements and related parts. A charge for future disposition of this inventory had been recorded in Q4 of the prior fiscal year.
- Effective February 1, 2011, the company changed U.S. inventory costing from FIFO to average cost and applied the change retroactively. For the nine months ended October 31, 2011, average cost increased cost of sales by $1.3 and reduced income and diluted EPS by $1.3 and $0.05, respectively; the change had no operating-cash-flow impact.
- The company accrued $0.7 for a prior-period uncertain foreign tax position. It reported $0.7 of pretax gain on the sale of a building. Legal matters were described as ordinary-course claims, with management not expecting a material effect.
- Key disclosed risks include consumer and economic conditions, changing preferences and competition, seasonality, significant customers and suppliers, international operations, currency and gold-price exposure, and availability of credit. The company hedges Swiss-franc exposures; its reported forward portfolio was 27.0 million Swiss francs equivalent. Management reported effective disclosure controls and no material change in internal control during the period.
Important facts for investors to verify
- Whether sales growth and gross-margin gains persist after considering foreign-exchange effects, product/channel mix and higher SG&A.
- Facility availability, covenant compliance and refinancing or renewal plans ahead of the July 2012 maturity; the company’s dividend remains subject to covenant limits and Board discretion.
- The contribution of the Ebel inventory disposition to Q4 sales and gross margin, and any further costs or effects from the inventory-accounting change.
- The composition and sustainability of operating cash flow, including working-capital movements and the foreign-exchange contribution to reported cash growth.
- Potential developments in the $0.7 million uncertain tax position and the company’s currency, commodity and other disclosed risks.