Movado Group, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended January 31, 2012. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Amounts below are in U.S. dollars.
Business context and performance
Movado designs, sources, markets and distributes watches through wholesale and retail operations. Its brands include Movado, Ebel, Concord, ESQ and licensed brands. Wholesale is the larger business; retail consisted of 33 U.S. outlet stores and the Rockefeller Center flagship, which closed in February 2012. Sales are seasonal, with 56.6% of FY2012 sales in the second half.
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $468.1 million | $382.2 million |
| Gross profit / margin | $256.3 million / 54.8% | $183.0 million / 47.9% |
| SG&A | $222.8 million | $195.1 million |
| Operating income (loss) | $33.6 million | ($12.1 million) |
| Net income (loss) attributable to Movado | $32.0 million | ($47.2 million) |
| Diluted earnings (loss) per share | $1.27 | ($1.91) |
| Cash provided by operating activities | $86.1 million | $40.4 million |
Fourth-quarter results
FY2012 fourth-quarter sales were $122.4 million, gross profit was $65.7 million, and net income attributable to Movado was $10.7 million. In the comparable FY2011 quarter, sales were $101.0 million and the company reported a $31.0 million net loss. The prior-year quarter included a substantial inventory write-down.
Material changes and financial position
- Annual sales rose 22.5%. Wholesale sales increased in both the U.S. and internationally; retail sales rose 4.2%. Favorable currency movements added $12.5 million to reported sales.
- Gross margin increased 6.9 percentage points. Management attributed the improvement mainly to the absence of FY2011’s $24.1 million inventory write-down, higher volume and product/channel mix; currency movements reduced FY2012 margin by about 120 basis points. FY2012 also included a $2.3 million pretax profit from selling previously written-down Ebel movements.
- SG&A increased 14.2%, including higher compensation and benefits, increased marketing, adverse currency translation and a $3.0 million foundation donation. Marketing expense was $64.2 million, or 13.7% of sales.
- Cash and cash equivalents were $182.2 million, up from $103.0 million; working capital was $346.2 million. Current assets were $432.6 million and current liabilities $86.4 million.
- The company had no debt outstanding at year-end. Its revolving credit facility was amended in March 2012, with maturity extended to March 2015. Availability was $46.6 million at January 31; following the amendment, stated availability was $24.3 million.
- Capital expenditures were $8.2 million in FY2012. Contractual obligations totaled $243.8 million, including $57.5 million of operating leases, $70.7 million of purchase obligations and $115.6 million of other long-term obligations, primarily license and endorsement commitments.
Outlook, commentary and risks
Management expected to rely primarily on operating cash flow for FY2013 needs and forecast approximately $20 million of capital expenditures. It anticipated quarterly dividends totaling $0.20 per share and a special dividend of $0.50 per share for FY2013; future regular dividends remain subject to board approval. No specific revenue or earnings guidance is provided in the filing. A new Ferrari watch license was signed in March 2012, with initial sales expected in calendar 2013.
Key risks include discretionary consumer demand and economic conditions, fashion and product acceptance, competition and online retail, inventory forecasting and potential write-downs, dependence on third-party manufacturers and concentrated Swiss movement suppliers, currency and gold-price exposure, major customer credit risk, and reliance on licensed brands and renewals. The company reported that about half of sales were international. The effective tax rate was unusually low at 1.8%, reflecting a $10.3 million release of a Swiss deferred-tax valuation allowance, partly offset by a $4.3 million Swiss tax settlement and other tax items; continued realization of deferred tax assets depends on future taxable income. Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion.
Important facts for investors to verify
- How much of the FY2012 margin and earnings recovery is sustainable after the prior-year inventory charge and FY2012 movement-sale gain?
- Whether sales momentum, inventory levels and customer demand remain sound, particularly given seasonality and discretionary-product exposure.
- Whether the Swiss tax-asset realization assumptions hold and how future repatriations of foreign cash may affect taxes and liquidity.
- Cash and borrowing availability after the amended credit facility, and the effect of planned capital spending and announced dividends on liquidity.
- License renewal terms, minimum royalty and advertising commitments, and the commercial contribution expected from the Ferrari launch.