MOV

Movado Group Inc. 10-Q Summary: Quarter Ended April 30, 2010

Business Context and Reporting Period

This is a quarterly report (Form 10-Q) for Movado Group, Inc., a designer, manufacturer, and distributor of luxury and accessible luxury watches. The report covers the three-month period ended April 30, 2010. The company operates through two primary segments: Wholesale (designing, manufacturing, and distribution) and Retail (boutiques and outlet stores). Operations are geographically divided between the United States and International markets, with significant international assets located in Switzerland.

Key Financial Metrics

Liquidity: The company maintains a $55.0 million asset-based revolving credit facility. As of April 30, 2010, $10.0 million was outstanding, with $32.1 million in total availability remaining after accounting for blocked amounts and letters of credit.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 16.7% year-over-year. Excluding $4.3 million of liquidation sales from the prior year, organic growth was 24.6%. Wholesale sales grew 23.0%, driven by customer replenishment in the U.S. and International markets, particularly in accessible luxury and licensed brands.
• Operating Performance: The operating loss narrowed by $3.0 million compared to the prior year, despite higher SG&A expenses. This improvement was driven by an $8.5 million increase in gross profit.
• Impairment Charges: A non-cash impairment charge of $3.4 million was recorded in SG&A expenses related to long-lived assets of the Movado boutique division, which management decided to close.
• Cash Flow: Net cash used in operating activities decreased to $5.9 million from $11.4 million in the prior year. This improvement was due to a reduction in accounts receivable ($7.9 million), partially offset by an inventory build of $4.4 million.
• Debt Structure: The company incurred $10.0 million in long-term debt under its revolving credit facility, whereas no long-term debt was reported in the prior year period.

Outlook, Risks, and Unusual Items

• Boutique Closure: On May 27, 2010, the company announced the closure of its U.S. Movado boutique division effective June 30, 2010. An estimated charge of $25 million is expected, including lease terminations, severance, and the $3.4 million asset write-off already recorded. Future results for these boutiques will be reported as discontinued operations.
• Repatriation of Earnings: The company intends to repatriate approximately $15 million of foreign earnings previously considered permanently reinvested to fund the boutique closure costs. This triggered a deferred tax liability of $4.1 million, offset by a valuation allowance.
• Market Risks: The company faces risks related to global economic uncertainty, consumer spending weakness, and foreign currency fluctuations (specifically the Swiss franc). A weaker U.S. dollar favorably impacted sales by $1.4 million but unfavorably impacted SG&A expenses by $2.3 million.
• Dividends: The company discontinued its quarterly cash dividend in April 2009 to retain capital and has not reinstated it.

Key Facts for Investor Verification

• Discontinued Operations: Verify the classification of the boutique division as discontinued operations in future filings and the accuracy of the projected $25 million closure charge.
• Inventory Levels: Monitor inventory levels ($204.6 million) relative to sales trends to ensure the recent build-up does not lead to future write-downs or liquidity strain.
• Credit Facility Covenants: Confirm compliance with the $55 million revolving credit facility covenants, specifically the "Block Release Date" requirements regarding fixed charge coverage ratios and domestic EBITDA.
• Foreign Currency Exposure: Assess the effectiveness of the hedging program (42.0 million Swiss francs hedged) against future currency volatility.
• Valuation Allowances: Review the $3.7 million addition to valuation allowances on net deferred tax assets and its impact on the effective tax rate.