MOVADO GROUP, INC. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended April 30, 2022; comparative period is the three months ended April 30, 2021. Financial statements are unaudited. Amounts below are U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
Movado designs, manufactures and distributes watches, jewelry and accessories through its Watch and Accessory Brands segment, and operates retail outlet stores through its Company Stores segment. Its portfolio includes owned and licensed brands. Wholesale, direct-to-consumer and after-sales service revenue are reported across the segments.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $163.4 | $134.8 |
| Gross profit / gross margin | $96.7 / 59.2% | $74.2 / 55.0% |
| Operating income / operating margin | $25.3 / 15.5% | $13.3 / 9.8% |
| Net income attributable to Movado | $18.5 | $9.4 |
| Diluted earnings per share | $0.79 | $0.40 |
| Cash used in operating activities | $20.8 | $15.4 |
Sales rose 21.2%, primarily reflecting higher volumes and demand; foreign exchange reduced year-over-year sales by $4.2 million. Gross margin expanded approximately 420 basis points, mainly due to favorable sales mix, partly offset by higher shipping costs. SG&A increased 17.1% to $71.4 million, including higher marketing and payroll costs.
- Watch and Accessory Brands: Sales were $143.4 million, up 23.3%; segment operating income was $21.5 million versus $8.8 million. Growth reflected higher demand, wholesale customer growth and the addition of the Calvin Klein brand.
- Company Stores: Sales were $20.1 million, up 8.3%, aided by four new outlet stores and online outlet growth. Operating income declined to $3.7 million from $4.5 million as expenses rose.
- Revenue mix: Wholesale sales were $128.6 million versus $99.4 million; direct-to-consumer sales were $33.7 million versus $34.7 million; after-sales service sales were $1.1 million versus $0.7 million.
Liquidity, cash flow and debt
At April 30, 2022, cash and cash equivalents were $225.3 million, compared with $187.0 million a year earlier and $277.1 million at January 31, 2022. Working capital was $386.6 million, versus $368.9 million at April 30, 2021. Current assets were $525.0 million and current liabilities $138.4 million.
Operating cash outflow was $20.8 million, with inventory investment of $24.3 million and a $17.1 million decline in accrued payroll and benefits, primarily reflecting performance-compensation payments. Investing cash outflow was $3.3 million, including $1.8 million for long-term investments and $1.4 million of capital expenditures. Financing cash outflow was $22.9 million, including $14.4 million of share repurchases and $7.9 million of dividends. Cash, cash equivalents and restricted cash decreased $51.9 million during the quarter.
The company had no borrowings under its $100 million revolving credit facility and reported $99.7 million of availability, net of letters of credit. It also reported no borrowings on its Swiss subsidiary’s credit lines. Lease liabilities are reported separately; the filing does not present these as bank debt.
Material changes, outlook and risks
- Sales increased across both segments, with the strongest growth in international Watch and Accessory Brands. International sales were 57% of consolidated sales, compared with 51% in the prior-year quarter.
- The company paid a quarterly dividend of $0.35 per share, up from $0.20 in the comparable period, and repurchased 378,380 shares for $14.4 million. At quarter-end, $38.0 million remained available under the newer repurchase program.
- No specific full-year financial guidance is provided in the supplied filing text. Management cautions that interim results are not necessarily indicative of full-year results.
- Management says COVID-19’s adverse impact has diminished but expects continued effects on supply chains, shipping, consumer behavior and tourism. Risks also include inflation, shipping and supply disruptions, consumer spending, currency movements, and the Russia-Ukraine conflict. The company suspended sales to Russia and Belarus; those sales and assets were described as immaterial.
- U.S. Customs disputes the company’s historical method for allocating imported-watch component costs for tariff purposes; its alternative estimate implies $5.1 million of duties, plus possible penalties and interest. The company disputes the position and says the outcome is uncertain. It also continues to accrue for certain pre-August 2021 Chinese watch-case imports pending clarity on the retroactive effect of a customs ruling.
- The company had up to $21.5 million of commitments to minority and venture-capital investments; $17.7 million remained unfunded at quarter-end and could be called over time. The filing says the resolution of other legal proceedings and contingencies is not expected to materially affect financial condition, results or cash flows.
- Management concluded disclosure controls and procedures were effective at a reasonable assurance level; it reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales growth and the higher gross margin persist, particularly given mix effects, shipping costs and currency headwinds.
- Whether elevated inventory and operating cash outflows unwind as expected; inventory was $180.0 million at quarter-end, up from $160.3 million at January 31, 2022.
- The eventual exposure, if any, from the U.S. Customs duty dispute and Chinese-import tariff accruals; the filing does not state a clear accrued amount for these matters.
- The timing and cash impact of the remaining $17.7 million investment commitments, dividends and planned share repurchases.
- Developments in supply-chain, inflation, geopolitical and consumer-demand risks, and any effect on future results; the filing provides no quantified guidance.