MOVADO GROUP, INC. — Q2 FY2017 Form 10-Q
Reporting period: Quarter and six months ended July 31, 2016. Comparisons are with the corresponding periods in 2015 unless otherwise stated. Financial amounts are in U.S. dollars.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $128.1 million, down 12.0% | $242.1 million, down 9.0% |
| Gross profit and margin | $70.3 million; 54.9% (prior year 54.3%) | $131.6 million; 54.3% (prior year 53.2%) |
| Operating income | $10.1 million (prior year $18.2 million) | $15.5 million (prior year $25.1 million) |
| Net income attributable to Movado Group | $6.3 million (prior year $12.1 million) | $9.6 million (prior year $15.7 million) |
| Diluted EPS | $0.27 (prior year $0.50) | $0.41 (prior year $0.65) |
| Operating cash flow | Six-month cash used: $14.2 million, versus $2.6 million provided |
Liquidity, debt and capital
- At July 31, cash and cash equivalents were $205.8 million; current assets were $499.4 million and current liabilities $68.8 million. Cash was down $22.4 million from January 31, 2016.
- Bank debt totaled $38.0 million ($3.0 million current and $35.0 million long-term). The $100 million secured revolving facility had approximately $61.7 million available, including the effect of letters of credit. The company reported covenant compliance.
- Inventory was $186.1 million, up $23.6 million from January 31, principally reflecting seasonal inventory buildup for the holiday period. Management said cash on hand, expected operating cash flow and borrowing capacity should meet working-capital needs for at least 12 months.
- Six-month investing cash outflow was $3.4 million; financing cash outflow was $12.2 million, including $6.0 million in dividends and $2.9 million in share repurchases. The quarterly dividend was increased to $0.13 per share; a further $0.13 dividend was approved for September 2016. A $50 million repurchase authorization runs through September 30, 2017.
Material changes and management commentary
- Wholesale sales fell 14.3% in the quarter and 10.9% year to date. U.S. wholesale sales were down 20.7% and 16.1%, respectively; management attributed weakness primarily to retailers tightly managing inventory amid challenging and unpredictable retail conditions. International wholesale sales also declined, with Latin America and Canada cited as difficult markets.
- Licensed-brand sales were a major source of wholesale decline. Retail sales grew 6.7% in the quarter and 8.6% year to date; the company operated 40 outlet locations versus 38 a year earlier.
- Gross margin improved despite lower sales, helped by channel/product mix, sourcing improvements and currency effects; lower sales reduced fixed-cost leverage. SG&A was nearly flat year to date, as lower marketing and the non-recurrence of prior-year efficiency charges were offset by currency effects, higher customer-related allowances and compensation costs.
- The company recorded $1.8 million of compensation-related expense in the first quarter associated with the retirement of its Vice Chairman and COO; $0.4 million remained accrued at July 31. The company said it did not plan to replace the COO role.
- Cash used in operations reflected working-capital needs, including seasonal inventory buildup, royalty and trade-show prepayments, and tax payments. Of total cash, $195.9 million was held at foreign subsidiaries; most foreign earnings were designated as permanently reinvested.
Outlook, risks and contingencies
- The filing provides no specific revenue or earnings guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Management identified consumer demand, retail conditions, product preferences and competition—including smart watches—licensing arrangements, key customers and suppliers, and international operations as risks. Brexit-related uncertainty could disrupt U.K. operations or increase import costs; sterling weakness could also raise U.K. costs and reduce the reported U.S.-dollar value of U.K. income.
- In August 2016, U.S. Customs issued a draft audit report asserting approximately $5.1 million of additional duties over the five-year period reviewed. The company disputes the proposed methodology and estimate; the outcome is uncertain.
- Foreign-exchange exposure is partly hedged. The company had no gold futures hedges at July 31; changes in gold purchase prices therefore affect cost of sales. Management estimated a 1% rise in interest rates would reduce annual income by approximately $0.4 million.
- After quarter-end, the company paid $1.7 million to acquire the remaining 10% of its U.K. distribution joint venture, making it wholly owned. It reported no other legal proceedings expected to materially affect its financial condition or future results.
Most important facts for investors to verify
- Whether wholesale demand and retailer inventory caution continue, particularly in the U.S., Latin America and Canada.
- Whether margin gains can persist if sales remain weak, and the extent of customer credit and uncollectible-receivable exposure.
- The resolution and potential financial impact of the Customs duty dispute, including whether any amount is accrued.
- How much foreign-held cash is practically available for U.S. needs, given the company’s reinvestment intentions and potential repatriation taxes.
- Compliance with revolving-credit covenants and the effect of currency, interest-rate, gold-price and Brexit-related developments.