MOVADO GROUP, INC. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2019 (first quarter of fiscal 2020). Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context and results
Movado designs, manufactures and distributes owned- and licensed-brand watches and accessories, and operates retail outlet stores. Its Watch and Accessory Brands segment includes the MVMT brand, acquired in October 2018; Company Stores comprises retail outlets.
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $146.5 | $127.1 |
| Gross profit / gross margin | $78.9 / 53.8% | $67.5 / 53.1% |
| Operating income / margin | $5.0 / 3.4% | $8.1 / 6.4% |
| Net income attributable to Movado | $3.9 | $8.1 |
| Diluted EPS | $0.17 | $0.35 |
| Operating cash flow | $(25.6) | $(2.6) |
| Capital expenditures | $2.2 | $1.7 |
Material changes and financial position
- Sales increased 15.3% year over year; foreign exchange reduced the comparison by $4.7 million. Watch and Accessory Brands sales rose 17.3%, while Company Stores sales were essentially flat. Direct-to-consumer revenue increased to $30.4 million from $19.8 million.
- Gross margin improved about 70 basis points, mainly from favorable sales mix and fixed-cost leverage, partly offset by approximately 110 basis points of adverse foreign-exchange impact.
- Despite higher sales and gross profit, SG&A rose 24.4% to $73.9 million, including higher marketing, payroll, rent and acquisition-related costs. Operating income fell about 39%; net income attributable to Movado fell about 52%.
- Cash and cash equivalents were $150.7 million at April 30, 2019, versus $177.0 million a year earlier. Current assets were $447.1 million and current liabilities $112.0 million, or working capital of $335.1 million.
- Inventory increased to $178.0 million from $159.0 million a year earlier. Operating cash use widened, driven in part by a $14.8 million inventory investment, incentive-compensation payments and other working-capital timing. Capital expenditures were $2.2 million.
- Movado had $49.1 million of borrowings under its $100 million secured revolving facility and $50.6 million of remaining availability at quarter-end. The facility matures October 2023. Weighted-average borrowing cost for the quarter was 1.00%.
- Quarter-end total assets were $828.7 million and total liabilities $335.4 million. Adoption of lease accounting added $87.4 million of operating lease right-of-use assets and $93.6 million of operating lease obligations (current and non-current).
Outlook, risks and unusual items
- Management said cash on hand, expected operating cash flows and short-term borrowing capacity should meet working-capital needs for at least the next 12 months. The filing provides no specific earnings or sales guidance.
- Management cited demand, consumer preferences, competition, e-commerce and smartwatches, supplier availability, acquisition integration, licensing arrangements, foreign exchange and international trade conditions among risks to results.
- Additional U.S. tariffs on certain Chinese-origin packaging products rose from 10% to 25% on May 10, 2019. The filing also describes possible additional tariffs on other Chinese products, including smartwatches and watch straps or bracelets; the impact was not yet predictable.
- The MVMT acquisition included contingent payments of up to $100 million through fiscal 2023. The recorded contingent purchase-price liability was $16.9 million at April 30, 2019; its valuation depends on projected revenue and brand EBITDA, among other assumptions. A $0.2 million quarterly remeasurement increase reduced operating income.
- U.S. Customs disputes the company’s historical tariff-allocation methodology and proposed an alternative implying approximately $5.1 million of duties, plus possible penalties and interest. Movado disputes the position and cannot predict the outcome.
- A lawsuit concerning MVMT’s German distribution agreement was settled in February 2019 for an immaterial cash payment, with amendments extending the agreement into early fiscal 2023. The filing says other proceedings are not expected to materially affect results beyond amounts accrued.
- The company paid a $0.20-per-share quarterly dividend and repurchased $2.6 million of shares under its repurchase program. The board approved another $0.20 dividend payable June 25, 2019, subject to its stated terms.
Important facts for investors to verify
- Whether sales growth, including growth attributable to MVMT and e-commerce, can translate into improved operating profit after elevated marketing and acquisition-related spending.
- Inventory levels and operating cash flow in subsequent quarters, given the quarter’s increased inventory investment and cash use.
- The realized impact of tariffs, including potential further measures, on product costs, pricing and demand.
- MVMT’s performance against earn-out targets and changes in the contingent liability, as well as integration and goodwill or intangible-asset impairment risks.
- Resolution of the U.S. Customs duty dispute and any potential additional duties, penalties or interest.
- Borrowings, facility availability and foreign-currency exposure; the filing reports that the company does not hedge its floating-rate debt interest-rate risk.