FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q, including, without limitation,
statements under Item 2 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this report, as well as
statements in future filings by the Company with the Securities and Exchange
Commission (the "SEC"), in the Company's press releases and oral statements made
by or with the approval of an authorized executive officer of the Company, which
are not historical in nature, are intended to be, and are hereby identified as,
"forward-looking statements" for purposes of the safe harbor provided by the
Private Securities Litigation Reform Act of 1995. These statements are based on
current expectations, estimates, forecasts and projections about the Company,
its future performance, the industry in which the Company operates and
management's assumptions. Words such as "expects", "anticipates", "targets",
"goals", "projects", "intends", "plans", "believes", "seeks", "estimates",
"may", "will", "should" and variations of such words and similar expressions are
also intended to identify such forward-looking statements. The Company cautions
readers that forward-looking statements include, without limitation, those
relating to the Company's future business prospects, projected operating or
financial results, revenues, working capital, liquidity, capital needs,
inventory levels, plans for future operations, expectations regarding capital
expenditures, operating efficiency initiatives and other items, cost savings
initiatives, and operating expenses, effective tax rates, margins, interest
costs, and income as well as assumptions relating to the foregoing.
Forward-looking statements are subject to certain risks and uncertainties, some
of which cannot be predicted or quantified. Actual results and future events
could differ materially from those indicated in the forward-looking statements,
due to several important factors herein identified, among others, and other
risks and factors identified from time to time in the Company's reports filed
with the SEC, including, without limitation, the following: general economic and
business conditions which may impact disposable income of consumers in the
United States and the other significant markets (including Europe) where the
Company's products are sold; uncertainty regarding such economic and business
conditions, including inflation and tightness in the labor market; trends in
consumer debt levels and bad debt write-offs; general uncertainty related to
possible terrorist attacks, natural disasters, pandemics, including the effect
of the COVID-19 pandemic and other diseases on travel and traffic in the
Company's retail stores and the stores of its wholesale customers; supply
disruptions, delivery delays and increased shipping costs as a result of the
COVID-19 pandemic and power outages in China; adverse impact on the Company's
wholesale customers and customer traffic in the Company's stores as a result of
increased uncertainty and economic disruption caused by the COVID-19 pandemic;
uncertainty relating to the availability and efficacy of vaccines and treatments
for COVID-19; the impact of the United Kingdom's exit from the European Union;
defaults on or downgrades of sovereign debt and the impact of any of those
events on consumer spending; changes in consumer preferences and popularity of
particular designs, new product development and introduction; decrease in mall
traffic and increase in e-commerce; the ability of the Company to successfully
implement its business strategies, competitive products and pricing, including
price increases to offset increased costs; the impact of "smart" watches and
other wearable tech products on the traditional watch market; seasonality;
availability of alternative sources of supply in the case of the loss of any
significant supplier or any supplier's inability to fulfill the Company's
orders; the loss of or curtailed sales to significant customers; the Company's
dependence on key employees and officers; the ability to successfully integrate
the operations of acquired businesses without disruption to other business
activities; the possible impairment of acquired intangible assets including
goodwill if the carrying value of any reporting unit were to exceed its fair
value; risks associated with the Company's minority investments in early-stage
growth companies and venture capital funds that invest in such companies;
volatility in reported earnings resulting from changes in the estimated fair
value of contingent acquisition consideration; the continuation of the Company's
major warehouse and distribution centers; the continuation of licensing
arrangements with third parties; losses possible from pending or future
litigation and administrative proceedings; the ability to secure and protect
trademarks, patents and other intellectual property rights; the ability to lease
new stores on suitable terms in desired markets and to complete construction on
a timely basis; the ability of the Company to successfully manage its expenses
on a continuing basis; information systems failure or breaches of network
security; complex and quickly-evolving regulations regarding privacy and data
protection; the continued availability to the Company of financing and credit on
favorable terms; business disruptions; and general risks associated with doing
business outside the United States including, without limitation, import duties,
tariffs (including retaliatory tariffs), quotas, political and economic
stability, changes to existing laws or regulations, and success of hedging
strategies with respect to currency exchange rate fluctuations.
These risks and uncertainties, along with the risk factors discussed under Item
1A. "Risk Factors" in the Company's 2021 Annual Report on Form 10-K, should be
considered in evaluating any forward-looking statements contained in this report
or incorporated by reference herein. All forward-looking statements speak only
as of the date of this report or, in the case of any document incorporated by
reference, the date of that document. All subsequent written and oral
forward-looking statements attributable to the Company or any person acting on
its behalf are qualified by the cautionary statements in this section. The
Company undertakes no obligation to update or publicly release any revisions to
forward-looking statements to reflect events, circumstances or changes in
expectations after the date of this report.
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Critical Accounting Policies and Estimates
The Company's Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States and those
significant policies are more fully described in Note 1 to the Company's
consolidated financial statements and contained in the Company's 2021 Annual
Report on Form 10-K and are incorporated by reference herein. The preparation of
these financial statements and the application of certain critical accounting
policies require management to make judgments based on estimates and assumptions
that affect the information reported. On an on-going basis, management evaluates
its estimates and judgments, including those related to sales discounts and
markdowns, product returns, bad debt, inventories, income taxes, warranty
obligations, useful lives of property, plant and equipment, impairments,
stock-based compensation and contingencies and litigation. Management bases its
estimates and judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources on historical experience,
contractual commitments and on various other factors that are believed to be
reasonable under the circumstances. Actual results could differ from these
estimates.
Critical accounting policies are those that are most important to the portrayal
of the Company's financial condition and the results of operations and require
management's most difficult, subjective and complex judgments as a result of the
need to make estimates about the effect of matters that are inherently
uncertain. As of October 31, 2021, there have been no material changes to any of
the Company's critical accounting policies except the Company accounts for its
equity securities without readily determinable fair values at cost, less
impairment, plus/minus subsequent observable price changes, and performs an
assessment each quarter to determine whether or not a triggering event has
occurred that results in changes in fair value. These investments were not
material to the Company's consolidated financial statements ($1.1 million) and
are included in Other non-current assets in the accompanying consolidated
balance sheets.
Overview
The Company conducts its business in two operating segments: Watch and Accessory
Brands and Company Stores. The Company's Watch and Accessory Brands segment
includes the designing, manufacturing and distribution of watches and, to a
lesser extent, jewelry and other accessories, of owned and licensed brands, in
addition to revenue generated from after-sales service activities and shipping.
The Company Stores segment includes the Company's retail outlet business in the
United States and Canada. The Company also operates in two major geographic
locations: United States and International, the latter of which includes the
results of all non-U.S. Company operations.
The Company divides its watch and accessory business into two principal
categories: the owned brands category and the licensed brands category. The
owned brands category consists of the Movado®, Concord®, Ebel®, Olivia Burton®
and MVMT® brands. Products in the licensed brands category include the following
brands manufactured and distributed under license agreements with the respective
brand owners: Coach®, Tommy Hilfiger®, HUGO BOSS®, Lacoste® and SCUDERIA
FERRARI®.
Gross margins vary among the brands included in the Company's portfolio and also
among watch models within each brand. Watches in the Company's owned brands
category generally earn higher gross margin percentages than watches in the
licensed brands category. The difference in gross margin percentages within the
licensed brands category is primarily due to the impact of royalty payments made
on the licensed brands. Gross margins in the Company's e-commerce business
generally earn higher gross margin percentages than those of the traditional
wholesale business. Gross margins in the Company's outlet business are affected
by the mix of product sold and may exceed those of the wholesale business since
the Company earns margins on its outlet store sales from manufacture to point of
sale to the consumer.
Recent Developments and Initiatives
COVID-19
The COVID-19 pandemic and related public health measures materially impacted the
Company's operating results for the fiscal year ended January 31, 2021 and
continue to materially affect how the Company and its customers and suppliers
operate their businesses. In response to the pandemic, in the first quarter of
fiscal 2021 government authorities began to mandate various restrictions,
including travel restrictions, quarantines and other social distancing
requirements. In mid-March 2020, the Company and the majority of the Company's
wholesale customers temporarily closed all of their retail stores due to health
concerns associated with COVID-19. The impact of these closures was partially
offset by strong growth in e-commerce sales, by both the Company and many of its
retail customers. During fiscal 2021, the Company further responded to the
pandemic by taking actions to enhance its financial liquidity and flexibility,
including minimizing non-essential operating expenses and capital expenditures,
applying for available government payroll subsidies, and temporarily suspending
the Company's share repurchase program and regular quarterly dividends. The
Company also committed to a restructuring plan (the "Restructuring Plan") on
June 29, 2020 (see Note 5 - Restructuring Provision for further discussion).
Although the Company reopened all of its retail stores during the second quarter
of fiscal 2021 and most of the Company's brick and mortar wholesale customers
have reopened the vast majority of their retail locations as well, the
discretionary consumer goods segment remains challenged at brick-and-mortar
retail locations in many regions and supply chains and shipping operations
continue to
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be impacted by the pandemic. In addition, during the 2021 fiscal year and
continuing through the third quarter of fiscal 2022, the Company has implemented
remote work policies and employed additional safety measures for on-site work.
These policies and measures have caused strain for, and may have adversely
impacted the productivity of, certain employees.
Although the full magnitude of the effects on the Company's business is
difficult to predict at this time, the COVID-19 pandemic is expected to continue
to impact the Company's results of operations for the foreseeable future. In
addition to unpredictable regional resurgences of COVID-19 cases which often
result in the reimposition or tightening of containment and mitigation measures,
the ongoing economic impacts and health concerns associated with the pandemic
will likely continue to affect supply chains, shipping operations, consumer
behavior, spending levels, shopping preferences and tourism. Nevertheless, the
pandemic's adverse impact on the Company has significantly diminished in recent
quarters and the Company believes that based on the Company's current
expectations, cash flows from operations and its credit lines and cash on-hand,
the Company has adequate funds to support its operating, capital and debt
service requirements and expects to maintain compliance with its debt covenants
for the next twelve months subsequent to the issuance of the accompanying
unaudited Consolidated Financial Statements.
Fiscal 2021 Impairments
During the three months ended April 30, 2020, in light of the COVID-19 pandemic
that resulted in the closing of the Company's stores and of the vast majority of
the stores of the Company's wholesale customers (resulting in a decrease in
revenues and gross margin), a decrease in customer spending and the recent
decline in global equity markets, the Company concluded that a triggering event
had occurred during the first quarter of fiscal 2021, resulting in the need to
perform a quantitative interim impairment assessment over the Company's Olivia
Burton, MVMT and Company Stores' long-lived assets as well as the Watch and
Accessory Brands reporting unit.
The Company made revisions to its internal forecasts, resulting in a reduction
in both current and future expected cash flows, due to the COVID-19 pandemic and
the uncertain business environment. As a result, during the first quarter of
fiscal 2021, the Company recorded impairment charges related to goodwill of
$133.7 million and intangible assets related to MVMT's tradename and customer
relationships of $22.2 million.
Results of Operations Overview
The following is a discussion of the results of operations for the three and
nine months ended October 31, 2021 compared to the three and nine months ended
October 31, 2020, along with a discussion of the changes in financial condition
during the first nine months of fiscal 2022. The Company's results of operations
for the first nine months of fiscal 2022 should not be deemed indicative of the
results that the Company will experience for the full year of fiscal 2022. See
"Recent Developments and Initiatives" above. See also "Risk Factors" of our
Annual Report on Form 10-K for the fiscal year ended January 31, 2021 filed with
the Securities and Exchange Commission on March 25, 2021.
Results of operations for the three months ended October 31, 2021 as compared to
the three months ended October 31, 2020
Net Sales: Comparative net sales by business segment were as follows (in
thousands):
Three Months Ended
October 31,
2021 2020
Watch and Accessory Brands:
United States $ 70,752 $ 48,403
International 123,574 103,705
Total Watch and Accessory Brands 194,326 152,108
Company Stores:
United States 22,031 17,082
International 1,389 673
Total Company Stores 23,420 17,755
Net Sales $ 217,746 $ 169,863
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Comparative net sales by categories were as follows (in thousands):
Three Months Ended
October 31,
2021 2020
Watch and Accessory Brands:
Owned brands category $ 69,433 $ 55,774
Licensed brands category 122,098 95,576
After-sales service and all other 2,795 758
Total Watch and Accessory Brands 194,326 152,108
Company Stores 23,420 17,755
Net Sales $ 217,746 $ 169,863
Net Sales
Net sales for the three months ended October 31, 2021 were $217.7 million, $47.9
million or 28.2% above the prior year period. For the three months ended October
31, 2021, fluctuations in foreign currency exchange rates positively impacted
net sales by $2.5 million when compared to the prior year period.
Watch and Accessory Brands Net Sales
Net sales for the three months ended October 31, 2021 in the Watch and Accessory
Brands segment were $194.3 million, above the prior year period by $42.2
million, or 27.8%. The increase in net sales was primarily due to increased
volumes resulting from higher demand with growth in the Company's wholesale
customers, growth in online retailers, both in the Company's owned and wholesale
customers' e-commerce websites, and to a lesser extent, limited price increases.
Prior period net sales were negatively impacted by restrictions affecting some
stores of the Company's wholesale customers during a portion of the period due
to the COVID-19 pandemic. Some of these restrictions have continued into fiscal
2022. There were increases in net sales in both the United States and
International locations of the Watch and Accessory Brands segment.
United States Watch and Accessory Brands Net Sales
Net sales for the three months ended October 31, 2021 in the United States
locations of the Watch and Accessory Brands segment were $70.7 million, above
the prior year period by $22.3 million, or 46.2%, resulting from net sales
increases across most brands in both the owned and licensed brand categories.
The net sales recorded in the owned brands category increased by $16.1 million,
or 43.1%, and net sales recorded in the licensed brand category increased $4.7
million, or 41.9%.
International Watch and Accessory Brands Net Sales
Net sales for the three months ended October 31, 2021 in the International
locations of the Watch and Accessory Brands segment were $123.6 million, above
the prior year by $19.9 million, or 19.2%, which included fluctuations in
foreign currency exchange rates which favorably impacted net sales by $2.5
million when compared to the prior year period. The increase in net sales was
across all brands in the licensed brand category, partially offset by a decrease
in the owned brands category across most brands. The net sales increase recorded
in the licensed brands category was $21.9 million, or 25.9% and is due to sales
increases in all regions. The net sales decrease in the owned brands category
was $2.4 million, or 13.0%, primarily due to net sales decreases in Asia, Europe
and the Middle East.
Company Stores Net Sales
Net sales for the three months ended October 31, 2021 in the Company Stores
segment were $23.4 million, $5.7 million or 31.9% above the prior year period.
The net sales increase is primarily the result of increased traffic in the
Company's retail stores, the addition of three new store openings and MCS.com.
As of October 31, 2021 and 2020, the Company operated 50 and 47 retail outlet
locations, respectively.
Gross Profit
Gross profit for the three months ended October 31, 2021 was $125.6 million or
57.7% of net sales as compared to $92.5 million or 54.4% of net sales in the
prior year period. The increase in gross profit of $33.1 million was primarily
due to higher net sales combined with a higher gross margin percentage. The
increase in the gross margin percentage of approximately 330 basis points for
the three months ended October 31, 2021 resulted primarily from a favorable
impact of sales mix of approximately 320 basis points and increased
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leveraging of certain fixed costs as a result of higher sales of approximately
20 basis points, partially offset by an approximately 10 basis point impact due
to increased shipping costs.
Selling, General and Administrative ("SG&A")
SG&A expenses for the three months ended October 31, 2021 were $84.2 million,
representing an increase from the prior year period of $14.8 million, or 21.3%.
The prior year period included corporate initiative charges primarily in
response to the COVID-19 pandemic of $0.7 million consisting of $0.6 million in
other restructuring charges and $0.1 million in severance and payroll related.
Excluding these charges SG&A expenses would have increased $15.5 million
primarily from higher marketing expenses of $7.6 million; an increase in
performance-based compensation of $3.7 million; an increase in consulting
charges of $1.6 million; an increase in payroll related expenses of $1.2 million
primarily due to government subsidies received in the prior year period in
response to the COVID-19 pandemic and an increase in credit card fees and sales
commissions of $0.6 million due to higher sales in the current year period. For
the three months ended October 31, 2021, fluctuations in foreign currency rates
related to the foreign subsidiaries negatively impacted SG&A expenses by $0.5
million when compared to the prior year period.
Watch and Accessory Brands Operating Income
For the three months ended October 31, 2021, the Company recorded operating
income of $34.9 million in the Watch and Accessory Brands segment which includes
$21.6 million of unallocated corporate expenses as well as $28.9 million of
certain intercompany profits related to the Company's supply chain operations.
For the three months ended October 31, 2020, the Company recorded operating
income of $19.8 million in the Watch and Accessory Brands segment which included
$16.3 million of unallocated corporate expenses as well as $23.0 million of
certain intercompany profits related to the Company's supply chain operations.
The increase in operating income was the result of an increase in gross profit
of $27.6 million, partially offset by an increase in SG&A expenses of $12.5
million when compared to the prior year period. The increase in gross profit was
primarily the result of higher net sales and also reflected a higher gross
margin percentage primarily due to a favorable change in sales mix partially
offset by increased shipping costs. The SG&A expenses for the prior year period
included corporate initiatives charges primarily in response to the COVID-19
pandemic of $0.7 million consisting of $0.6 million in other restructuring
charges and $0.1 million in severance and payroll related. Without these charges
SG&A expense would have increased $13.2 million. The underlying increase in SG&A
expenses of $13.2 million resulted primarily from higher marketing expenses of
$6.6 million; an increase in performance-based compensation of $3.6 million; an
increase in consulting charges of $1.6 million; and an increase in payroll
related expenses of $1.0 million primarily due to government subsidies received
in the prior year period in response to the COVID-19 pandemic. For the three
months ended October 31, 2021, fluctuations in foreign currency exchange rates
positively impacted the Watch and Accessory Brands segment operating income by
$0.4 million when compared to the prior year period.
U.S. Watch and Accessory Brands Operating Income/(Loss)
In the United States locations of the Watch and Accessory Brands segment, for
the three months ended October 31, 2021, the Company recorded operating income
of $0.8 million which includes unallocated corporate expenses of $21.6 million.
For the three months ended October 31, 2020 the Company recorded an operating
loss of $9.8 million in the United States locations of the Watch and Accessory
Brands segment which included unallocated corporate expenses of $16.3 million.
The improvement in operating income was the result of higher gross profit of
$16.6 million, partially offset by an increase in SG&A expenses of $6.0 million
when compared to the prior year period. The increase in gross profit of $16.6
million was due to higher net sales, combined with a higher gross margin
percentage. The SG&A expenses for the prior year period included corporate
initiatives charges primarily in response to the COVID-19 pandemic consisting of
$0.6 million in other restructuring charges. Without these charges SG&A expense
would have increased $6.6 million. The underlying increase in SG&A expenses of
$6.6 million resulted primarily from higher marketing expenses of $4.1 million
and an increase in performance-based compensation of $2.7 million.
International Watch and Accessory Brands Operating Income
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In the International locations of the Watch and Accessory Brands segment, for
the three months ended October 31, 2021, the Company recorded operating income
of $34.1 million which includes $28.9 million of certain intercompany profits
related to the Company's International supply chain operations. For the three
months ended October 31, 2020 the Company recorded operating income of $29.6
million in the International locations of the Watch and Accessory Brands segment
which included $23.0 million of certain intercompany profits related to the
Company's supply chain operations. The increase in operating income was
primarily related to a higher gross profit of $11.0 million, partially offset
with higher SG&A expenses of $6.5 million. The increase in gross profit of $11.0
million was due to higher net sales partially offset with a slightly lower
margin percentage. The SG&A expenses for the prior year period included
corporate initiatives charges primarily in response to the COVID-19 pandemic of
$0.1 million in severance and payroll related. Without these charges SG&A
expense would have increased $6.6 million. The underlying increase in SG&A
expenses of $6.6 million resulted primarily from higher marketing expenses of
$2.5 million; an increase of consulting charges of $1.4 million; an increase in
payroll related expenses of $1.3 million primarily due to government subsidies
received in the prior year period in response to the COVID-19 pandemic; and an
increase in performance-based compensation of $0.9 million. Fluctuation in
foreign currency exchange rates positively impacted operating income by $0.4
million when compared to the prior year period.
Company Stores Operating Income
The Company recorded operating income of $6.5 million and $3.2 million in the
Company Stores segment for the three months ended October 31, 2021 and 2020,
respectively. The increase in operating income of $3.3 million was primarily
related to higher gross profit of $5.5 million mainly due to higher net sales
and a higher gross margin percentage partially due to reduced promotions,
partially offset by a $2.2 million increase in SG&A expenses. The increase in
SG&A expenses was primarily due to higher marketing expenses of $1.0 million; an
increase in rent and rent related of $0.3 million due to the opening of new
company stores; an increase in credit card fees and sales commissions of $0.3
million due to higher sales in the current year period as compared to the prior
year period; and an increase of $0.2 million in payroll related and
performance-based compensation expense. As of October 31, 2021, and 2020, the
Company operated 50 and 47 retail outlet locations, respectively.
Other Non-Operating Income
The Company recorded other income of $0.1 million primarily due to the
non-service components of the Company's Swiss pension plan for the three months
ended October 31, 2021.
Interest Expense
Interest expense was $0.1 million and $0.6 million for the three months ended
October 31, 2021 and 2020, respectively. The decrease was primarily due to no
borrowings under the Company's revolving credit facility during the current year
period partially offset by higher unused credit line fees during the three
months ended October 31, 2021 as compared to the three months ended October 31,
2020.
Income Taxes
The Company recorded an income tax provision of $9.6 million and $7.5 million
for the three months ended October 31, 2021 and 2020, respectively.
The effective tax rate was 23.1% and 33.5% for the three months ended October
31, 2021 and 2020, respectively. The significant components of the effective tax
rate changed primarily due to the U.S. tax on Global Intangible Low-Taxed Income
with no related tax credits and excess tax deficiencies related to stock-based
compensation, both of which were recognized in the prior year, partially offset
by changes in jurisdictional earnings.
Net Income Attributable to Movado Group, Inc.
The Company recorded net income attributable to Movado Group, Inc. of $31.4
million and $14.8 million for the three months ended October 31, 2021 and 2020,
respectively.
Results of operations for the nine months ended October 31, 2021 as compared to
the nine months ended October 31, 2020
Net Sales: Comparative net sales by business segment were as follows (in
thousands):
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Nine Months Ended
October 31,
2021 2020
Watch and Accessory Brands:
United States $ 177,307 $ 95,605
International 279,477 197,978
Total Watch and Accessory Brands 456,784 293,583
Company Stores:
United States 66,856 33,180
International 2,778 1,304
Total Company Stores 69,634 34,484
Net Sales $ 526,418 $ 328,067Comparative net sales by categories were as follows (in thousands):
Nine Months Ended
October 31,
2021 2020
Watch and Accessory Brands:
Owned brands category $ 178,706 $ 112,757
Licensed brands category 273,801 177,674
After-sales service and all other 4,277 3,152
Total Watch and Accessory Brands 456,784 293,583
Company Stores 69,634 34,484
Net Sales $ 526,418 $ 328,067
Net Sales
Net sales for the nine months ended October 31, 2021 were $526.4 million, $198.4
million or 60.5% above the prior year period. This increase is primarily as a
result of the partial recovery from the ongoing COVID-19 pandemic. For the nine
months ended October 31, 2021, fluctuations in foreign currency exchange rates
positively impacted net sales by $12.1 million when compared to the prior year
period.
Watch and Accessory Brands Net Sales
Net sales for the nine months ended October 31, 2021 in the Watch and Accessory
Brands segment were $456.8 million, above the prior year period by $163.2
million, or 55.6%. The increase in net sales was primarily due to increased
volumes resulting from higher demand with growth in the Company's wholesale
customers and growth in online retailers, both in the Company's owned and
wholesale customers' e-commerce websites, due to the partial recovery from the
ongoing COVID-19 pandemic. Prior period net sales were negatively impacted by
closures and restrictions affecting the stores of the Company's wholesale
customers during a portion of the period due to the COVID-19 pandemic. Some of
these restrictions have continued into fiscal 2022. There were increases in net
sales in both the United States and International locations of the Watch and
Accessory Brands segment.
United States Watch and Accessory Brands Net Sales
Net sales for the nine months ended October 31, 2021 in the United States
locations of the Watch and Accessory Brands segment were $177.3 million, above
the prior year period by $81.7 million, or 85.5%, resulting from net sales
increases across all brands in both the owned and licensed brand categories
primarily due to the partial recovery from the ongoing COVID-19 pandemic. The
net sales recorded in the owned brands category increased by $63.4 million, or
86.0%, and net sales recorded in the licensed brand category increased $17.2
million, or 82.5%.
International Watch and Accessory Brands Net Sales
Net sales for the nine months ended October 31, 2021 in the International
locations of the Watch and Accessory Brands segment were $279.5 million, above
the prior year by $81.5 million, or 41.2%, which included fluctuations in
foreign currency exchange rates which favorably impacted net sales by $12.1
million when compared to the prior year period. The increase in net sales was
across most brands in both the owned and licensed brand categories primarily due
to the partial recovery from the ongoing COVID-19 pandemic. The net sales
increase recorded in the owned brands category was $2.5 million, or 6.5% and is
due to sales increases in most regions. The net sales increase in the licensed
brands category was $79.0 million, or 50.3%, due to net sales increases across
all regions.
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Company Stores Net Sales
Net sales for the nine months ended October 31, 2021 in the Company Stores
segment were $69.6 million, $35.2 million or 101.9% above the prior year period.
The net sales increase is primarily the result of all of the Company's retail
stores being open during the period as compared to the closure of the Company's
retail stores during part of the prior year period in response to the COVID-19
pandemic, lessened restrictions on the Company's retail stores during the period
as compared to the same period in the prior year and the addition of three new
store openings. As of October 31, 2021 and 2020, the Company operated 50 and 47
retail outlet locations, respectively.
Gross Profit
Gross profit for the nine months ended October 31, 2021 was $298.2 million or
56.7% of net sales as compared to $169.7 million or 51.7% of net sales in the
prior year period. The increase in gross profit of $128.5 million was primarily
due to higher net sales combined with a higher gross margin percentage. The
increase in the gross margin percentage of approximately 500 basis points for
the nine months ended October 31, 2021 resulted primarily from a favorable
impact of sales mix of approximately 320 basis points, the non-recurrence of a
prior year charge related to an increase in inventory reserves in response to
the COVID-19 pandemic of approximately 110 basis points, increased leveraging of
certain fixed costs as a result of higher sales of approximately 40 basis points
and a positive impact of fluctuations in foreign exchange rates of approximately
40 basis points, partially offset by an approximately 10 basis point impact due
to increased shipping costs.
Selling, General and Administrative ("SG&A")
SG&A expenses for the nine months ended October 31, 2021 were $218.9 million,
representing an increase from the prior year period of $37.1 million, or 20.4%.
The prior year period included corporate initiative charges primarily in
response to the COVID-19 pandemic of $11.8 million consisting of $8.0 million in
severance and payroll related, $1.5 million in write-off of unrefunded trade
show deposits, $1.2 million in other restructuring charges and $1.1 million in
additional accounts receivable reserves. Excluding these charges SG&A expenses
would have increased $48.9 million primarily from higher marketing expenses of
$26.1 million; an increase in performance-based compensation of $10.3 million;
an increase in payroll related expenses of $6.9 million primarily due to the
non-reoccurrence of the furloughing of employees and temporary salary reductions
during a portion of the prior year period in response to the COVID-19 pandemic;
an increase in credit card fees and sales commissions of $2.7 million due to
higher sales in the current year period; and an increase in consulting and
recruiting charges of $2.1 million. The increase in SG&A was partially offset by
a decrease of $0.8 million in customer and sales promotions. For the nine months
ended October 31, 2021, fluctuations in foreign currency rates related to the
foreign subsidiaries negatively impacted SG&A expenses by $2.2 million when
compared to the prior year period.
Impairment of Goodwill and Intangible Assets
As a result of the economic conditions caused by the response to COVID-19, the
Company performed a quantitative assessment of its goodwill and long-lived
intangible assets at April 30, 2020. The Company recorded a goodwill impairment
of $133.7 million related to the Company's Watch and Accessory Brands reporting
unit as the carrying value of goodwill exceeded the fair value at April 30,
2020. The Company also recorded a $22.2 million impairment charge related to
MVMT's trade name and customer relationships as the carrying amount of these
long-lived intangible assets exceeded the fair value.
Watch and Accessory Brands Operating Income/(Loss)
For the nine months ended October 31, 2021 the Company recorded operating income
of $59.4 million in the Watch and Accessory Brands segment which includes $43.5
million of unallocated corporate expenses as well as $59.7 million of certain
intercompany profits related to the Company's supply chain operations. For the
nine months ended October 31, 2020, the Company recorded an operating loss of
$169.8 million in the Watch and Accessory Brands segment, which included
goodwill and intangible asset impairment charges of $133.7 million and $22.2
million, respectively. Without these charges, for the nine months ended October
31, 2020, operating loss would have been $13.9 million which included $28.4
million of unallocated corporate expenses as well as $45.3 million of certain
intercompany profits related to the Company's supply chain operations. In
addition to the asset impairments in the prior year period, the increase in
operating income was the result of an increase in gross profit of $102.3
million, which included corporate initiatives costs in the prior year period of
$3.5 million comprising an increase in inventory reserves, partially offset by
an increase in SG&A expenses of $29.0 million when compared to the prior year
period. The increase in gross profit was primarily the result of higher net
sales and also a higher gross margin percentage primarily due to a favorable
change in sales mix partially offset by increased shipping costs. The SG&A
expenses for the prior year period included corporate initiatives charges
primarily in response to the COVID-19 pandemic of $11.8 million consisting of
$8.0 million in severance and payroll related, $1.5 million in write-off of
unrefunded trade show deposits, $1.2 million in other restructuring charges and
$1.1 million in additional accounts receivable reserves. Without these charges
SG&A expense would have increased $40.8 million. The underlying increase in SG&A
expenses of $40.8 million resulted primarily from higher marketing expenses of
$23.3 million; an increase in performance-based compensation of $9.7 million; an
increase in payroll related expenses of $4.7 million primarily due to the
non-reoccurrence of the furloughing of employees and temporary salary reductions
during a portion of the prior year period in response to the COVID-19 pandemic;
an increase in consulting and recruiting charges of $2.1 million; and an
increase in credit card fees and sales commissions of $1.7 million due to higher
sales in the current year period. The
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increase in SG&A expense was partially offset by a decrease of $0.7 million in
customer and sales promotions. For the nine months ended October 31, 2021,
fluctuations in foreign currency exchange rates positively impacted the Watch
and Accessory Brands segment operating income by $3.0 million when compared to
the prior year period.
U.S. Watch and Accessory Brands Operating Loss
In the United States locations of the Watch and Accessory Brands segment, for
the nine months ended October 31, 2021, the Company recorded an operating loss
of $2.7 million, which includes unallocated corporate expenses of $43.5 million.
For the nine months ended October 31, 2020 the Company recorded an operating
loss of $142.6 million in the United States locations of the Watch and Accessory
Brands segment which included goodwill and intangible asset impairment charges
of $77.5 million and $22.2 million, respectively. Without these charges, for the
nine months ended October 31, 2020, operating loss would have been $42.9
million, which included unallocated corporate expenses of $28.4 million. In
addition to these assets impairments in the prior year period, the decrease in
operating loss was the result of higher gross profit of $58.5 million, which
included corporate initiative costs in the prior year period of $3.5 million
comprising an increase in inventory reserves, partially offset by an increase in
SG&A expenses of $18.3 million when compared to the prior year period. The
increase in gross profit of $58.5 million was due to higher net sales, combined
with a higher gross margin percentage. The SG&A expenses for the prior year
period included corporate initiatives charges primarily in response to the
COVID-19 pandemic of $8.4 million primarily consisting of $6.3 million in
severance and payroll related, $1.1 million in additional accounts receivable
reserves and $1.0 million in other restructuring charges. Without these charges
SG&A expense would have increased $26.7 million. The underlying increase in SG&A
expenses of $26.7 million resulted primarily from higher marketing expenses of
$14.0 million; an increase in performance-based compensation of $8.8 million; an
increase in payroll related expenses of $2.6 million primarily due to the
non-reoccurrence of the furloughing of employees and temporary salary reductions
during a portion of the prior year period in response to the COVID-19 pandemic;
an increase in credit card fees and sales commission of $0.7 million due to
higher sales in the current year period; and an increase in consulting and
recruiting charges of $0.3 million.
International Watch and Accessory Brands Operating Income/(Loss)
In the International locations of the Watch and Accessory Brands segment, for
the nine months ended October 31, 2021 the Company recorded operating income of
$62.1 million, which includes $59.7 million of certain intercompany profits
related to the Company's International supply chain operations. For the nine
months ended October 31, 2020 the Company recorded an operating loss of $27.2
million in the International locations of the Watch and Accessory Brands segment
which included goodwill impairment charges of $56.2 million. Without this
charge, for the nine months ended October 31, 2020, the Company would have
generated operating income of $29.0 million, which included $45.3 million of
certain intercompany profits related to the Company's supply chain operations.
In addition to the goodwill impairment charge, the increase in operating income
was primarily related to higher gross profit of $43.8 million, partially offset
by higher SG&A expenses of $10.7 million. The increase in gross profit of $43.8
million was due to higher net sales partially offset with a slightly lower gross
margin percentage. The SG&A expenses for the prior year period included
corporate initiatives charges primarily in response to the COVID-19 pandemic of
$3.4 million consisting of $1.7 million in severance and payroll related, $1.5
million in write-off of unrefunded trade show deposits and $0.2 million in other
restructuring charges. Without these charges SG&A expense would have increased
$14.1 million. The underlying increase in SG&A expenses of $14.1 million
resulted primarily from higher marketing expenses of $9.3 million; an increase
in payroll related expenses of $2.1 million primarily due to the
non-reoccurrence of the furloughing of employees and temporary salary reductions
during a portion of the prior year period in response to the COVID-19 pandemic;
an increase in consulting and recruiting charges of $1.8 million; an increase in
sales commissions and credit card fees of $1.0 million due to higher sales in
the current year period; and an increase in performance-based compensation of
$0.9 million. The increase in SG&A expenses was partially offset by a decrease
of $0.7 million in customer and sales promotions. Fluctuation in foreign
currency exchange rates positively impacted operating income by $3.0 million
when compared to the prior year period.
Company Stores Operating Income
The Company recorded operating income of $19.9 million and $1.7 million in the
Company Stores segment for the nine months ended October 31, 2021 and 2020,
respectively. The improvement in operating income of $18.2 million was primarily
related to higher gross profit of $26.3 million mainly due to higher net sales
and a higher gross margin percentage, partially offset by a $8.1 million
increase in SG&A expenses. The increase in SG&A expenses was primarily due to
higher marketing expenses of $2.8 million; an increase in payroll related
expenses of $2.2 million primarily due to company stores being open throughout
the period (as compared to the significant closures during the prior year
period); an increase in credit card fees and sales commissions of $1.1 million
due to higher sales in the current year period as compared to the prior year
period, an increase in rent and rent related of $0.7 million due to the opening
of new
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company stores; and an increase in performance-based compensation of $0.6
million. As of October 31, 2021, and 2020, the Company operated 50 and 47 retail
outlet locations, respectively.
Other Non-Operating Income
The Company recorded other income of $0.4 million primarily due to the final
settlement related to a sale of a building in an international location in the
prior year period and the non-service components of the Company's Swiss pension
plan for the nine months ended October 31, 2021.
The Company recorded a gain on sale of a non-operating asset of $1.3 million
related to a sale of a building in an international location for the nine months
ended October 31, 2020.
Interest Expense
Interest expense was $0.6 million and $1.5 million for the nine months ended
October 31, 2021 and 2020, respectively. The decrease was primarily due to lower
weighted average borrowings outstanding under the Company's revolving credit
facility partially offset by a higher weighted average interest rate and higher
unused credit line fees during the nine months ended October 31, 2021 as
compared to the nine months ended October 31, 2020.
Income Taxes
The Company recorded an income tax provision of $18.2 million and an income tax
benefit of $26.4 million for the nine months ended October 31, 2021 and 2020,
respectively.
The effective tax rate was 23.0% and 15.7% for the nine months ended October 31,
2021 and 2020, respectively. The significant components of the effective tax
rate changed primarily due to prior year impairments of the portion of goodwill
of the Watch and Accessory Brands reporting unit which is not tax deductible and
the recording of valuation allowances on certain foreign deferred tax assets in
the current year, partially offset by the CARES Act NOL Carryback Provision in
the prior year.
Net Income/(Loss) Attributable to Movado Group, Inc.
The Company recorded net income attributable to Movado Group, Inc. of $60.2
million and net loss attributable to Movado Group, Inc. of $141.8 million for
the nine months ended October 31, 2021 and 2020, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2021 the Company's cash generated from operations was negatively
impacted due to the COVID-19 pandemic. During fiscal 2021, the Company responded
to the pandemic by taking actions to enhance its financial liquidity and
flexibility, including minimizing non-essential operating expenses and capital
expenditures, applying for available government payroll subsidies, and
temporarily suspending the Company's share repurchase program and regular
quarterly dividends. The Company also committed to the Restructuring Plan.
Although the COVID-19 pandemic is expected to continue to impact the Company's
results of operations for the foreseeable future, the pandemic's adverse impact
on the Company has significantly diminished in recent quarters and the Company
believes that based on the Company's current expectations, cash flows from
operations and its credit lines and cash on-hand, the Company has adequate funds
to support its operating, capital and debt service requirements and expects to
maintain compliance with its debt covenants for the next twelve months
subsequent to the issuance of the accompanying unaudited Consolidated Financial
Statements.
At October 31, 2021 the Company had working capital of $391.1 million as
compared to $338.2 million at October 31, 2020. The increase in working capital
was primarily the result of an increase in cash of $38.6 million and an increase
in accounts receivable resulting primarily from higher sales partially offset by
an increase in accrued liabilities. The Company defines working capital as the
difference between current assets and current liabilities.
The Company had $38.7 million of cash provided by operating activities for the
nine months ended October 31, 2021 as compared to $6.7 million of cash used in
operating activities for the nine months ended October 31, 2020. Cash provided
by operating activities for the nine months ended October 31, 2021 included net
income attributable to the Movado Group, Inc. of $60.2 million, positively
adjusted by $18.5 million related to non-cash items. Cash provided by operating
activities for the nine months ended October 31, 2021 included an increase in
accrued liabilities of $22.6 million primarily due to timing of payments and a
decrease in income taxes receivable of $17.2 million due to a receipt of a U.S.
federal income tax refund. Cash used in operating activities included an
increase in trade receivables of $62.4 million as a result of higher sales, an
increase in investment in inventories of $23.8 million primarily to support
sales growth and a decrease in income taxes payable of $3.5 million primarily
due to the timing of payments.
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Cash used in investing was $4.9 million for the nine months ended October 31,
2021 as compared to $1.2 million for the nine months ended October 31, 2020. The
cash used in the nine months ended October 31, 2021 was primarily related to
capital expenditures of $3.6 million primarily due to the Company's opening of
three new stores (two in Canada), website platform upgrades and the construction
of shop-in-shops at some of the Company's wholesale customers and $1.1 million
of long-term investments. The prior year period included proceeds from a sale of
a non-operating asset in Switzerland of $1.3 million.
Cash used by financing activities was $54.0 million for the nine months ended
October 31, 2021 as compared to cash used by financing activities of $17.6
million for the nine months ended October 31, 2020. The cash used in the nine
months ended October 31, 2021 included repayment of bank borrowings of $21.1
million, $17.0 million in stock repurchased in the open market, $16.2 million in
dividends paid ($2.3 million of which had been declared in January 2021) and
$1.7 million of shares repurchased as a result of the surrender of shares in
connection with the vesting of certain stock awards, partially offset by $2.2
million received in connection with stock options exercised. Cash used in
financing activities for the nine months ended October 31, 2020 included net
repayment of bank borrowings of $16.8 million.
On October 12, 2018, the Company, together with Movado Group Delaware Holdings
Corporation, Movado Retail Group, Inc. and Movado LLC (together with the
Company, the "U.S. Borrowers"), each a wholly owned domestic subsidiary of the
Company, and Movado Watch Company S.A. and MGI Luxury Group S.A. (collectively,
the "Swiss Borrowers" and, together with the U.S. Borrowers, the "Borrowers"),
each a wholly owned Swiss subsidiary of the Company, entered into an Amended and
Restated Credit Agreement (the "Credit Agreement") with the lenders party
thereto and Bank of America, N.A. as administrative agent (in such capacity, the
"Agent"). The Credit Agreement amended and restated the Company's prior credit
agreement dated as of January 30, 2015 and extended the maturity of the $100.0
million senior secured revolving credit facility (the "Facility") provided
thereunder to October 12, 2023. The Facility includes a $15.0 million letter of
credit subfacility, a $25.0 million swingline subfacility and a $75.0 million
sublimit for borrowings by the Swiss Borrowers, with provisions for uncommitted
increases to the Facility of up to $50.0 million in the aggregate subject to
customary terms and conditions.
On June 5, 2020, the Company and its lenders entered into an amendment (the
"Second Amendment") to the Credit Agreement effective as of April 30, 2020.
Among other things, the Second Amendment provided for temporary relief with
respect to the financial maintenance covenants in the Credit Agreement starting
April 30, 2020 while also temporarily tightening certain covenants and
temporarily increasing the interest rate and commitment fee. These temporary
changes to the Credit Agreement ended as a result of the Company's achievement
of certain financial milestones as of and for the periods ending January 31,
2021. In addition, the Second Amendment increased the LIBOR floor for loans
under the Credit Agreement from 0% to 1.00% and reduced the minimum EBITDA
financial covenant level to $35.0 million starting with the four-quarter period
ending July 31, 2021.
Effective October 29, 2021, the Company and its lenders entered into an
additional amendment (the "Third Amendment") to the Credit Agreement. Among
other things, the Third Amendment extends the maturity of the Facility to
October 29, 2026; reinstates the 0% LIBOR floor; reduces the commitment fee at
certain leverage ratios; allows the Company to net up to $25 million of cash and
cash equivalents held in U.S. accounts from total debt for purposes of
determining compliance with the leverage ratio financial covenant; and increases
the Company's general basket for making investments under the Credit Agreement's
operating covenants. The foregoing summary of the Third Amendment is qualified
by reference to the full text of the amendment, which is attached hereto as
Exhibit 4.1 and incorporated herein by reference.
As of October 31, 2021, and October 31, 2020, there was zero and $37.3 million
(of which all but $10 million was denominated in Swiss Francs), respectively, in
loans outstanding under the Facility. Availability under the Facility was
reduced by the aggregate number of letters of credit outstanding, issued in
connection with retail and operating facility leases to various landlords and
for Canadian payroll to the Royal Bank of Canada, totaling approximately $0.3
million at both October 31, 2021 and October 31, 2020. At October 31, 2021, the
letters of credit have expiration dates through May 31, 2022. As of October 31,
2021, and October 31, 2020, availability under the Facility was $99.7 million
and $62.4 million, respectively. For additional information regarding the
Facility, see Note 8 - Debt and Lines of Credit to the Consolidated Financial
Statements.
The Company had weighted average borrowings under the Facility of zero and $44.5
million during the three months ended October 31, 2021 and 2020, respectively,
with a weighted average interest rate of 3.75% during the three months ended
October 31, 2020. The Company had weighted average borrowings under the Facility
of $6.5 million and $60.5 million, with a weighted average interest rate of
2.79% and 2.37%, during the nine months ended October 31, 2021 and 2020,
respectively.
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A Swiss subsidiary of the Company maintains unsecured lines of credit with an
unspecified maturity with a Swiss bank. As of October 31, 2021, and 2020, these
lines of credit totaled 6.5 million Swiss Francs for both periods, with a dollar
equivalent of $7.1 million for both periods. As of October 31, 2021, and 2020,
there were no borrowings against these lines. As of October 31, 2021 and 2020,
two European banks had guaranteed obligations to third parties on behalf of two
of the Company's foreign subsidiaries in the dollar equivalent of $1.3 million
for both periods, in various foreign currencies, of which $0.6 million, in both
periods, was a restricted deposit as it relates to lease agreements.
Cash paid for interest, including unused commitments fees, was $0.4 million and
$1.3 million for the nine-month period ended October 31, 2021 and October 31,
2020, respectively.
From time to time the Company may make minority investments in growth companies
in the consumer products sector and other sectors relevant to its business,
including certain of the Company's suppliers and customers, as well as in
venture capital funds that invest in such companies. During the second quarter
of fiscal 2022, the Company committed to invest up to $1,000,000 in a venture
capital fund that makes investments in securities of portfolio companies whose
primary business focus is accelerating innovation in retail and consumer goods.
The Company satisfied $600,000 in capital calls in respect of this commitment
during the third quarter of fiscal 2022. In addition, during the third quarter
of fiscal 2022, the Company committed to invest up to $10,000,000 in two related
venture capital and venture growth funds that make investments in equity and
equity-oriented securities of privately held companies in media, entertainment,
information technology and technology-related fields, as well as in digital
assets. The Company may be called upon to satisfy capital calls in respect of
this commitment at any time during a period generally ending ten years after the
first capital call, which may be made at any time.
On January 11, 2021, with the consent of its bank group, the Company's Board of
Directors declared a cash dividend of $0.10 per share, which was paid on
February 5, 2021 in the amount of $2.3 million, to shareholders of record on
January 21, 2021. The Company paid additional cash dividends of $0.20 per share
or $4.6 million during the three months ended April 30, 2021, $0.20 per share or
$4.7 million during the three months ended July 31, 2021 and $0.20 per share or
$4.6 million during the three months ended October 31, 2021. The Company did not
pay cash dividends during the nine months ended October 31, 2020. Although the
Company currently expects to continue to declare cash dividends in the future,
the decision of whether to declare any future cash dividend, including the
amount of any such dividend and the establishment of record and payment dates,
will be determined, in each quarter, by the Board of Directors, in its sole
discretion.
On August 29, 2017, the Board approved a share repurchase program under which
the Company was authorized to purchase up to $50.0 million of its outstanding
common stock from time to time. This authorization expired on August 29, 2020.
On March 25, 2021, the Board approved a share repurchase program under which the
Company is authorized to purchase up to $25.0 million of its outstanding common
stock through September 30, 2022, depending on market conditions, share price
and other factors. On November 23, 2021, the Board approved a share repurchase
program under which the Company is authorized to purchase up to an additional
$50.0 million of its outstanding common stock through November 23, 2024,
depending on market conditions, share price and other factors. Under both share
repurchase programs, the Company is permitted to purchase shares of its common
stock from time to time through open market purchases, repurchase plans, block
trades or otherwise. During the nine months ended October 31, 2021, the Company
repurchased a total of 548,402 shares of its common stock under the March 25,
2021 share repurchase program at a total cost of $17.0 million, or an average of
$31.04 per share. At October 31, 2021, $8.0 million remains available for
purchase under the Company's March 25, 2021 repurchase program and all $50.0
million remains available for purchase under the Company's November 23, 2021
repurchase program. During the nine months ended October 31, 2020, the Company
did not repurchase any shares of its common stock.
Off-Balance Sheet Arrangements
The Company does not have off-balance sheet financing or unconsolidated
special-purpose entities.
Accounting Changes and Recent Accounting Pronouncements
See Note 3- Recent Accounting Pronouncements to the accompanying unaudited
Consolidated Financial Statements for a description of certain accounting
changes and recent accounting pronouncements which may impact the Company's
Consolidated Financial Statements in future reporting periods.
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MOVADO GROUP, INC. 
