MOVADO GROUP, INC. — Q2 FY2024 Form 10-Q
Reporting period: Three and six months ended July 31, 2023; comparisons are to the corresponding 2022 periods. Amounts are in U.S. dollars unless stated otherwise.
Business context
Movado designs, manufactures and distributes owned- and licensed-brand watches and accessories, and operates retail outlet stores. Its segments are Watch and Accessory Brands and Company Stores. The interim financial statements are unaudited; management cautions that results for the first half are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Net sales | $160.4m | $182.8m | $305.3m | $346.2m |
| Gross profit / margin | $89.3m / 55.7% | $106.9m / 58.5% | $171.3m / 56.1% | $203.6m / 58.8% |
| Operating income | $9.6m | $30.7m | $20.5m | $56.0m |
| Net income attributable to Movado | $8.0m | $24.0m | $17.2m | $42.5m |
| Diluted EPS | $0.36 | $1.05 | $0.76 | $1.83 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $9.2m | $(25.4)m |
Q2 sales fell 12.3% year over year (13.8% on a constant-currency basis); first-half sales fell 11.8% (12.1% constant currency). Q2 foreign-exchange movements added $2.8m to sales; first-half movements added $0.9m. Watch and Accessory Brands sales declined 13.1% in Q2 and 12.8% for the half, mainly on lower wholesale demand and lower online retail. Company Stores sales declined 7.8% and 6.1%, respectively.
Gross margin declined 280 basis points in Q2 and 270 basis points for the half. Management cited lower fixed-cost absorption, unfavorable sales mix and currency effects; lower shipping costs partly offset first-half pressure. SG&A rose 4.4% in Q2 and 2.1% for the half, including higher payroll expenses, partly offset by lower performance-based compensation and marketing costs.
Cash and cash equivalents were $218.9m at July 31, 2023, versus $203.1m a year earlier and $251.6m at January 31, 2023. First-half cash declined by $31.9m, including $37.7m of dividends, $6.1m of investing outflows and $38.2m of financing outflows; operating activities provided $9.2m. Inventory was $181.4m, down from $215.0m a year earlier. Working capital was $412.7m, compared with $390.5m a year earlier.
The company had no borrowings under its $100m revolving credit facility and $99.7m of availability at July 31, 2023. It also had no borrowings on its Swiss subsidiary’s unsecured lines of credit. Total liabilities were $245.8m; these include operating lease liabilities. Interest expense was $0.1m for Q2 and $0.2m for the half.
Material changes and unusual items
- Operating income and earnings fell sharply year over year as lower sales and weaker gross margins outweighed slightly higher SG&A.
- Q2 other income was $1.5m, primarily from interest income and non-service components of the Swiss pension plan. First-half other income was $2.6m and included a $0.5m impairment of an equity investment.
- The company released reserves in Q2 related to a U.S. Customs duty audit after the statute of limitations lapsed on May 1, 2023. The filing does not provide a clear value for the reserve release.
- First-half dividends totaled $37.7m, including a $1.00-per-share special dividend and quarterly dividends of $0.35 per share. The company repurchased $0.4m of stock, compared with $21.5m in the prior-year half.
Outlook, risks and contingencies
The filing provides no quantified sales, earnings or margin guidance. Management identifies consumer demand and economic conditions, inflation and interest rates, supply and shipping disruption, foreign-exchange movements, competition (including smart watches), wholesale customer demand, licensing arrangements, and execution of business strategies as risks. The company hedges certain currency exposures; it held no gold futures at period-end, leaving gold-cost changes unhedged. Management reported no material changes to previously disclosed risk factors and stated disclosure controls were effective at a reasonable assurance level.
The company had $14.8m remaining in potential capital calls on previously committed investments, generally callable over periods extending up to ten years from the first call. It intends to permanently reinvest approximately $270.2m of undistributed foreign earnings; the tax cost of future distribution is not practicable to estimate. Management said other legal matters were not expected to materially affect financial condition, results or cash flows beyond amounts accrued.
Important facts for investors to verify
- Whether the decline in wholesale demand and online sales stabilizes, and how it affects future revenue and margins.
- Whether gross-margin pressure from sales mix, fixed-cost absorption and foreign exchange persists.
- The amount and financial-statement effect of the customs-reserve release, which is not specified in the filing.
- Cash-flow and liquidity trends after the substantial special dividend, including potential investment capital calls and the location of cash held abroad.
- Future dividend decisions, which remain at the board’s discretion, and the status of the remaining $20.6m share-repurchase authorization.