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, increased commodity prices 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 and
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; 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; the impact of international
hostilities, including the Russian invasion of Ukraine, on global markets,
economies and consumer spending, on energy and shipping costs and on the
Company's supply chain and suppliers; 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; risks associated with the
Company's minority investments in early-stage growth companies and venture
capital funds that invest in such companies; 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 2022 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 2022 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. The Company's most critical accounting policies have been discussed
in the Company's 2022 Annual Report on Form 10-K and are incorporated by
reference herein. As of October 31, 2022, there have been no material changes to
any of the Company's critical accounting policies.
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®, Calvin Klein® and
Scuderia Ferrari®. The Company's collaboration with Scuderia Ferrari ended on
June 30, 2022, although the Company has the right to sell remaining inventory
through December 31, 2022.
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 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 affect how the Company and its customers and suppliers operate their
businesses. Various containment and mitigation measures that have at times been
imposed by governmental and other authorities around the world have adversely
affected sales of our products and our supply chain.
Although the COVID-19 pandemic's adverse impact on the Company has significantly
diminished in recent quarters, the pandemic is expected to continue to affect
the Company's results of operations for the foreseeable future due to impacts on
supply chains, shipping operations, consumer behavior, spending levels, shopping
preferences and tourism.
Russia's invasion of Ukraine
On February 24, 2022, Russia launched a comprehensive invasion of Ukraine. The
invasion and the subsequent economic sanctions imposed by some countries may
negatively impact the Company's revenue to the extent the conflict and the
sanctions significantly impact the economic conditions in or our ability to sell
products to customers in the affected region. In response to the invasion, the
Company decided in March 2022 to suspend all sales to Russia and Belarus. Sales
and assets in Russia, Belarus and Ukraine are
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immaterial to the Company's results of operations, financial condition and cash
flows. However, the conflict is having broader implications on economies outside
the region, such as global inflationary impacts due to the disruption to food
and other exports from Ukraine and the sanctions imposed on exports from Russia.
Results of Operations Overview
The following is a discussion of the results of operations for the three and
nine months ended October 31, 2022 compared to the three and nine months ended
October 31, 2021, along with a discussion of the changes in financial condition
during the first nine months of fiscal 2023. The Company's results of operations
for the first nine months of fiscal 2023 should not be deemed indicative of the
results that the Company will experience for the full year of fiscal 2023. 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, 2022 filed with
the Securities and Exchange Commission on March 24, 2022.
Results of operations for the three months ended October 31, 2022 as compared to
the three months ended October 31, 2021
Net Sales: Comparative net sales by business segment were as follows (in
thousands):
Three Months Ended
October 31,
2022 2021
Watch and Accessory Brands:
United States $ 63,391 $ 70,752
International 122,774 123,574
Total Watch and Accessory Brands 186,165 194,326
Company Stores:
United States 23,959 22,031
International 1,273 1,389
Total Company Stores 25,232 23,420
Net Sales $ 211,397 $ 217,746
Comparative net sales by categories were as follows (in thousands):
Three Months Ended
October 31,
2022 2021
Watch and Accessory Brands:
Owned brands category $ 61,585 $ 69,433
Licensed brands category 122,814 122,098
After-sales service and all other 1,766 2,795
Total Watch and Accessory Brands 186,165 194,326
Company Stores 25,232 23,420
Net Sales $ 211,397 $ 217,746
Net Sales
Net sales for the three months ended October 31, 2022 were $211.4 million,
representing a $6.3 million or 2.9% decrease below the prior year period. This
decrease is primarily attributable to the Watch and Accessory Brands segment,
partially offset by an increase in the Company Stores segment. For the three
months ended October 31, 2022, fluctuations in foreign currency exchange rates
negatively impacted net sales by $13.7 million when compared to the prior year
period. On a constant dollar basis net sales increased 3.4% as compared to the
prior year period.
Watch and Accessory Brands Net Sales
Net sales for the three months ended October 31, 2022 in the Watch and Accessory
Brands segment were $186.2 million, a decrease below the prior year period of
$8.2 million, or 4.2%. The decrease in net sales was primarily due to the
negative impact of fluctuations in foreign exchange rates, lower demand from the
Company's wholesale customers and a decrease in online retail, partially offset
by the addition of the Calvin Klein brand.
United States Watch and Accessory Brands Net Sales
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Net sales for the three months ended October 31, 2022 in the United States
locations of the Watch and Accessory Brands segment were $63.4 million, below
the prior year period by $7.4 million, or 10.4%, resulting primarily from
decreased volumes resulting from lower demand from the Company's wholesale
customers in the owned brand category and a decrease in online retail. The net
sales recorded in the owned brands category decreased by $6.4 million, or 12.0%,
and net sales recorded in the licensed brand category increased $0.6 million, or
3.9%.
International Watch and Accessory Brands Net Sales
Net sales for the three months ended October 31, 2022 in the International
locations of the Watch and Accessory Brands segment were $122.8 million, below
the prior year by $0.8 million, or 0.6%, which included fluctuations in foreign
currency exchange rates that negatively impacted net sales by $13.7 million when
compared to the prior year period, mostly offset by increased volumes resulting
from higher demand with growth in the Company's wholesale customers. The net
sales decrease in the owned brands category was $1.4 million, or 8.9%, and is
primarily due to net sales decreases in Asia and the Americas (excluding the
United States), partially offset by an increase in the Middle East, while Europe
remained flat. Overall net sales in the licensed brands category increased $0.1
million, or 0.1%, from the prior year period due to higher demand from the
Company's wholesale customers, which includes the addition of the Calvin Klein
brand; however, most individual licensed brands' net sales decreased from the
prior year period mainly due to the negative impact of foreign exchange rate
fluctuations. The overall net sales increase in the licensed brands category
reflected net sales increases in the Middle East, Asia and the Americas
(excluding the United States), partially offset by a decrease in Europe.
Company Stores Net Sales
Net sales for the three months ended October 31, 2022 in the Company Stores
segment were $25.2 million, $1.8 million or 7.7% above the prior year period.
The net sales increase was primarily the result of the growth of the Company's
online outlet store at www.movadocompanystore.com and the opening of new retail
outlet stores. As of October 31, 2022 and 2021, the Company operated 55 and 50
retail outlet locations, respectively.
Gross Profit
Gross profit for the three months ended October 31, 2022 was $121.0 million or
57.3% of net sales as compared to $125.6 million or 57.7% of net sales in the
prior year period. The decrease in gross profit of $4.6 million was primarily
due to lower net sales combined with a lower gross margin percentage. The
decrease in the gross margin percentage of approximately 40 basis points for the
three months ended October 31, 2022 resulted primarily from the negative impact
of fluctuations in foreign exchange rates of approximately 70 basis points,
approximately 30 basis points due to increased shipping costs and approximately
20 basis points due to the increase and deleveraging of certain fixed costs,
partially offset by a favorable impact of sales mix of approximately 80 basis
points.
Selling, General and Administrative ("SG&A")
SG&A expenses for the three months ended October 31, 2022 were $82.8 million,
representing a decrease from the prior year period of $1.4 million, or 1.7%. The
decrease in SG&A expenses was primarily due to the following factors: a decrease
in performance-based compensation of $3.0 million; lower marketing expenses of
$1.8 million; and a decrease in consulting charges of $1.2 million. Decreased
SG&A expenses were partially offset by an increase in payroll related expenses
of $3.0 million; and an increase in allowance for doubtful accounts of $0.8
million. For the three months ended October 31, 2022, fluctuations in foreign
currency rates related to the foreign subsidiaries positively impacted SG&A
expenses by $1.7 million when compared to the prior year period.
Watch and Accessory Brands Operating Income
For the three months ended October 31, 2022, the Company recorded operating
income of $33.6 million in the Watch and Accessory Brands segment which includes
$16.5 million of unallocated corporate expenses as well as $27.6 million of
certain intercompany profits related to the Company's supply chain operations.
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 included
$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.
The decrease in operating income was the result of a decrease in gross profit of
$4.0 million, partially offset by a decrease in SG&A expenses of $2.7 million
when compared to the prior year period. The decrease in gross profit of $4.0
million was primarily the result of lower net sales. The decrease in SG&A
expenses of $2.7 million was primarily due to the following factors: a decrease
in performance-based compensation of $2.9 million; lower marketing expenses of
$2.0 million; and a decrease in consulting charges of $1.2 million. Decreased
SG&A expenses were partially offset by an increase in payroll related expenses
of $2.2 million; and an increase in allowance for doubtful accounts of $0.8
million.
U.S. Watch and Accessory Brands Operating (Loss)/Income
In the United States locations of the Watch and Accessory Brands segment, for
the three months ended October 31, 2022, the Company recorded an operating loss
of $2.2 million which includes unallocated corporate expenses of $16.5 million.
For the three months ended
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October 31, 2021 the Company recorded operating income of $0.8 million in the
United States locations of the Watch and Accessory Brands segment which included
unallocated corporate expenses of $21.6 million. The change to operating loss
from operating income of $3.0 million was the result of a decrease in gross
profit of $5.4 million, partially offset by a decrease in SG&A expenses of $2.4
million when compared to the prior year period. The decrease in gross profit of
$5.4 million was primarily the result of lower net sales. The decrease in SG&A
expenses of $2.4 million was primarily due to the following factors: lower
marketing expenses of $3.7 million; and a decrease in performance-based
compensation of $1.9 million. The decrease in SG&A expenses was partially offset
by an increase in payroll related expenses of $2.0 million, and an increase in
allowance for doubtful accounts of $0.4 million.
International Watch and Accessory Brands Operating Income
In the International locations of the Watch and Accessory Brands segment, for
the three months ended October 31, 2022, the Company recorded operating income
of $35.9 million which includes $27.6 million of certain intercompany profits
related to the Company's International supply chain operations. For the three
months ended October 31, 2021 the Company recorded operating income of $34.1
million in the International locations of the Watch and Accessory Brands segment
which included $28.9 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 $1.5 million, combined with a decrease
in SG&A expenses of $0.3 million. The increase in gross profit of $1.5 million
was primarily the result of a higher gross margin percentage primarily due to a
favorable impact of sales mix. The decrease in SG&A expenses of $0.3 million was
primarily due to the following factors: a decrease in consulting charges of $1.6
million; and a decrease in performance-based compensation of $0.9 million. The
decrease in SG&A expenses was partially offset by higher marketing expenses of
$1.7 million; and an increase in allowance for doubtful accounts of $0.4
million.
Company Stores Operating Income
The Company recorded operating income of $4.6 million and $6.5 million in the
Company Stores segment for the three months ended October 31, 2022 and 2021,
respectively. The decrease in operating income of $1.9 million was primarily
related to a lower gross profit of $0.6 million mainly due to a lower gross
profit percentage and a $1.3 million increase in SG&A expenses. The increase in
SG&A expenses was primarily due to an increase of $0.8 million in payroll
related expenses; and an increase in rent and rent related expenses of $0.3
million due to the opening of new company stores. As of October 31, 2022, and
2021, the Company operated 55 and 50 retail outlet locations, respectively.
Other Non-Operating Income
The Company recorded other income of $0.4 million primarily due to interest
income for the three months ended October 31, 2022.
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 for both the three months ended October 31,
2022 and 2021, respectively. There were no borrowings under the Company's
revolving credit facility during the three months ended October 31, 2022 and
2021.
Income Taxes
The Company recorded an income tax provision of $8.4 million and $9.6 million
for the three months ended October 31, 2022 and 2021, respectively.
The effective tax rate was 21.9% and 23.1% for the three months ended October
31, 2022 and 2021, respectively. The significant components of the effective tax
rate changed primarily due to the mix of earnings.
Net Income Attributable to Movado Group, Inc.
The Company recorded net income attributable to Movado Group, Inc. of $29.3
million and $31.4 million for the three months ended October 31, 2022 and 2021,
respectively.
Results of operations for the nine months ended October 31, 2022 as compared to
the nine months ended October 31, 2021
Net Sales: Comparative net sales by business segment were as follows (in
thousands):
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Nine Months Ended
October 31,
2022 2021
Watch and Accessory Brands:
United States $ 168,173 $ 177,307
International 315,663 279,477
Total Watch and Accessory Brands 483,836 456,784
Company Stores:
United States 70,266 66,856
International 3,523 2,778
Total Company Stores 73,789 69,634
Net Sales $ 557,625 $ 526,418Comparative net sales by categories were as follows (in thousands):
Nine Months Ended
October 31,
2022 2021
Watch and Accessory Brands:
Owned brands category $ 171,449 $ 178,706
Licensed brands category 308,190 273,801
After-sales service and all other 4,197 4,277
Total Watch and Accessory Brands 483,836 456,784
Company Stores
73,789 69,634
Net Sales $ 557,625 $ 526,418
Net Sales
Net sales for the nine months ended October 31, 2022 were $557.6 million,
representing a $31.2 million or 5.9% increase above the prior year period. This
increase is primarily attributable to growth in the Watch and Accessory Brands
segment. For the nine months ended October 31, 2022, fluctuations in foreign
currency exchange rates negatively impacted net sales by $25.9 million when
compared to the prior year period. On a constant dollar basis net sales
increased 10.9% as compared to the prior year period.
Watch and Accessory Brands Net Sales
Net sales for the nine months ended October 31, 2022 in the Watch and Accessory
Brands segment were $483.8 million, an increase above the prior year period by
$27.1 million, or 5.9%. The increase in net sales was primarily due to the
addition of the Calvin Klein brand and increased volumes resulting from higher
demand with growth from the Company's wholesale customers in the International
locations, partially offset by the negative impact of fluctuations in foreign
exchange rates, a decrease in online retail and a decrease in the United States
locations.
United States Watch and Accessory Brands Net Sales
Net sales for the nine months ended October 31, 2022 in the United States
locations of the Watch and Accessory Brands segment were $168.2 million, below
the prior year period by $9.1 million, or 5.2%, resulting primarily from
decreased volumes resulting from lower demand in the Company's wholesale
customers in the owned brand category and a decrease in online retail. The net
sales recorded in the owned brands category decreased $8.5 million, or 6.2%, and
net sales recorded in the licensed brand category increased $1.1 million, or
3.0%.
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International Watch and Accessory Brands Net Sales
Net sales for the nine months ended October 31, 2022 in the International
locations of the Watch and Accessory Brands segment were $315.7 million, above
the prior year by $36.2 million, or 12.9%, which included fluctuations in
foreign currency exchange rates that negatively impacted net sales by $25.9
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
from increased volumes resulting from higher demand with growth in the Company's
wholesale customers and the addition of the Calvin Klein brand. The net sales
increase recorded in the owned brands category was $1.3 million, or 3.1%, and is
primarily due to net sales increases in Europe, the Middle East and the Americas
(excluding the United States), partially offset by a decrease in Asia. The net
sales increase in the licensed brands category was $33.3 million, or 14.1%, due
to net sales increases across all regions.
Company Stores Net Sales
Net sales for the nine months ended October 31, 2022 in the Company Stores
segment were $73.8 million, $4.2 million or 6.0% above the prior year period.
The net sales increase was primarily the result of the growth of the Company's
online outlet store at www.movadocompanystore.com and the opening of new retail
outlet stores. As of October 31, 2022 and 2021, the Company operated 55 and 50
retail outlet locations, respectively.
Gross Profit
Gross profit for the nine months ended October 31, 2022 was $324.6 million or
58.2% of net sales as compared to $298.2 million or 56.7% of net sales in the
prior year period. The increase in gross profit of $26.4 million was primarily
due to higher net sales combined with a higher gross margin percentage. The
increase in the gross margin percentage of approximately 150 basis points for
the nine months ended October 31, 2022 resulted primarily from a favorable
impact of sales mix of approximately 240 basis points, partially offset by a
negative impact of fluctuations in foreign exchange rates of approximately 50
basis points and approximately 30 basis points impact due to increased shipping
costs.
Selling, General and Administrative ("SG&A")
SG&A expenses for the nine months ended October 31, 2022 were $230.4 million,
representing an increase from the prior year period of $11.5 million, or 5.2%.
The increase in SG&A expenses was primarily due to the following factors: an
increase in payroll related expense of $5.8 million; higher marketing expenses
of $4.4 million; an increase in allowance for doubtful accounts of $0.9 million;
an increase in rent and related expenses of $0.8 million; an increase in
consulting charges of $0.4 million; and an increase in sales commissions of $0.4
million. Increased SG&A expenses were partially offset by a decrease in
performance-based compensation of $3.6 million. For the nine months ended
October 31, 2022, fluctuations in foreign currency rates related to the foreign
subsidiaries positively impacted SG&A expenses by $3.6 million when compared to
the prior year period.
Watch and Accessory Brands Operating Income
For the nine months ended October 31, 2022, the Company recorded operating
income of $78.5 million in the Watch and Accessory Brands segment which includes
$42.5 million of unallocated corporate expenses as well as $65.5 million of
certain intercompany profits related to the Company's supply chain operations.
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 included
$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.
The increase in operating income was the result of an increase in gross profit
of $26.2 million, partially offset by an increase in SG&A expenses of $7.1
million when compared to the prior year period. The increase in gross profit of
$26.2 million was primarily the result of higher net sales, combined with a
higher gross margin percentage primarily due to a favorable impact of sales mix,
partially offset by a negative impact of fluctuations in foreign exchange rates
and increased shipping costs. The increase in SG&A expenses of $7.1 million was
primarily due to the following factors: an increase in payroll related expense
of $3.7 million; higher marketing expenses of $3.6 million; an increase in
allowance for doubtful accounts of $0.9 million and an increase in sales
commissions of $0.3 million. Increased SG&A expenses were partially offset by a
decrease in performance-based compensation of $3.4 million.
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, 2022, the Company recorded an operating loss
of $8.1 million which includes unallocated corporate expenses of $42.5 million.
For the nine months ended October 31, 2021 the Company recorded an operating
loss of $2.7 million in the United States locations of the Watch and Accessory
Brands segment which included unallocated corporate expenses of $43.5 million.
The increase in operating loss was the result of an increase in SG&A expenses of
$3.5 million, combined with a decrease in gross profit of $1.9 million when
compared to the prior year period. The decrease in gross profit of $1.9 million
was primarily the result of a decrease in net sales, partially offset by a
higher gross margin percentage primarily due to a favorable impact of sales mix.
The increase in SG&A expenses of $3.5 million was primarily due to the following
factors: an increase in payroll related expenses of $2.2 million; an increase in
consulting charges of $1.4 million; higher
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marketing expenses of $1.3 million; and an increase in allowance for doubtful
accounts of $0.6 million. The increase in SG&A expenses were partially offset by
a decrease in performance-based compensation of $2.9 million.
International Watch and Accessory Brands Operating Income
In the International locations of the Watch and Accessory Brands segment, for
the nine months ended October 31, 2022, the Company recorded operating income of
$86.7 million which includes $65.5 million of certain intercompany profits
related to the Company's International supply chain operations. For the nine
months ended October 31, 2021 the Company recorded operating income of $62.1
million in the International locations of the Watch and Accessory Brands segment
which included $59.7 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 $28.1 million, partially offset by
higher SG&A expenses of $3.5 million when compared to the prior year period. The
increase in gross profit of $28.1 million was primarily the result of higher net
sales, combined with a higher gross margin percentage primarily due to a
favorable impact of sales mix. The increase in SG&A expenses of $3.5 million was
primarily due to the following factors: higher marketing expenses of $2.3
million; an increase in payroll related expenses of $1.5 million; an increase in
allowance for doubtful accounts of $0.3 million; and an increase in sales
commissions of $0.2 million. Increased SG&A expenses were partially offset by a
decrease in consulting charges of $1.4 million and a decrease in
performance-based compensation of $0.5 million.
Company Stores Operating Income
The Company recorded operating income of $15.7 million and $19.9 million in the
Company Stores segment for the nine months ended October 31, 2022 and 2021,
respectively. The decrease in operating income of $4.2 million was primarily
related to a $4.4 million increase in SG&A expenses partially offset by a higher
gross profit of $0.2 million mainly due to higher net sales. The increase in
SG&A expenses was primarily due to an increase of $2.1 million in payroll
related expenses; an increase in rent and rent related of $1.0 million due to
the opening of new company stores; and an increase in marketing expenses of $0.8
million. As of October 31, 2022, and 2021, the Company operated 55 and 50 retail
outlet locations, respectively.
Other Non-Operating Income
The Company recorded other income of $0.7 million primarily due to interest
income and the non-service components of the Company's Swiss pension plan for
the nine months ended October 31, 2022.
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
fiscal 2021 and the non-service components of the Company's Swiss pension plan
for the nine months ended October 31, 2021.
Interest Expense
Interest expense was $0.4 million and $0.6 million for the nine months ended
October 31, 2022 and 2021, respectively. The decrease was 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 nine months ended
October 31, 2022 as compared to the nine months ended October 31, 2021.
Income Taxes
The Company recorded an income tax provision of $20.9 million and $18.2 million
for the nine months ended October 31, 2022 and 2021, respectively.
The effective tax rate was 22.1% and 23.0% for the nine months ended October 31,
2022 and 2021, respectively. The significant components of the effective tax
rate changed primarily due to the release of certain foreign valuation
allowances in the current year as compared to the recording of certain foreign
valuation allowances in the prior year, partially offset by return to provision
adjustments.
Net Income Attributable to Movado Group, Inc.
The Company recorded net income attributable to Movado Group, Inc. of $71.8
million and $60.2 million for the nine months ended October 31, 2022 and 2021,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2022 and October 31, 2021, the Company had $186.7 million and
$201.8 million, respectively, of cash and cash equivalents. Of this total, $56.7
million and $127.5 million, respectively, consisted of cash and cash equivalents
at the Company's foreign subsidiaries.
At October 31, 2022 the Company had working capital of $398.3 million as
compared to $391.1 million at October 31, 2021. The increase in working capital
was primarily the result of an increase in inventories partially offset by an
increase in income taxes payable and accounts payable. The Company defines
working capital as the difference between current assets and current
liabilities.
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The Company had $23.6 million of cash used in operating activities for the nine
months ended October 31, 2022 as compared to $38.7 million of cash provided by
operating activities for the nine months ended October 31, 2021. Cash used in
operating activities for the nine months ended October 31, 2022 included net
income of $73.7 million, positively adjusted by $15.6 million related to
non-cash items. Cash used in operating activities for the nine months ended
October 31, 2022 included a $66.2 million increase in investment in inventories
primarily due to timing of receipts and the addition of the Calvin Klein brand,
an increase of $50.0 million in trade receivables as a result of higher sales, a
decrease in accrued payroll of $9.2 million primarily as a result of payments of
performance-based compensation, net of current year accrual, and a decrease of
$6.4 million in income taxes payable as a result of timing of payments,
partially offset by an increase in accrued liabilities of $19.6 million
primarily as a result of timing of payments and a decrease of $9.4 million in
income taxes receivable partly due to tax refunds received.
Cash used in investing activities was $7.6 million for the nine months ended
October 31, 2022 as compared to cash used in investing activities of $4.9
million for the nine months ended October 31, 2021. The cash used in the nine
months ended October 31, 2022 was primarily related to capital expenditures of
$4.7 million primarily due to the Company's opening of new stores and new
computer software and $2.7 million of long-term investments.
Cash used in financing activities was $51.9 million for the nine months ended
October 31, 2022 as compared to cash used in financing activities of $54.0
million for the nine months ended October 31, 2021. The cash used in the nine
months ended October 31, 2022 included $28.2 million in stock repurchased in the
open market, $23.6 million in dividends paid and $1.1 million of shares
repurchased as a result of the surrender of shares in connection with the
vesting of certain stock awards, partially offset by $1.0 million received in
connection with stock options exercised. Cash used in financing activities for
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 and $16.2
million in dividends paid ($2.3 million of which had been declared in January
2021).
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., each a wholly
owned Swiss subsidiary of the Company, entered into an Amended and Restated
Credit Agreement (as subsequently amended, the "Credit Agreement") with the
lenders party thereto and Bank of America, N.A. as administrative agent (in such
capacity, the "Agent"). As a result of the merger of Movado Watch Company S.A.
into MGI Luxury Group S.A. in July 2022, MGI Luxury Group S.A. (subsequently
renamed MGI Luxury Group GmbH as a result of the conversion of its corporate
form) became the sole Swiss subsidiary of the Company party to the Credit
Agreement (in such capacity, the "Swiss Borrower" and, together with the U.S.
Borrowers, the "Borrowers"). The Credit Agreement provides for a $100.0 million
senior secured revolving credit facility (the "Facility") and has a maturity
date of October 28, 2026. 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 Borrower, with provisions for uncommitted increases
to the Facility of up to $50.0 million in the aggregate subject to customary
terms and conditions. The Credit agreement contains affirmative and negative
covenants binding on the Company and its subsidiaries that are customary for
credit facilities of this type, including, but not limited to, restrictions and
limitations on the incurrence of debt and liens, dispositions of assets, capital
expenditures, dividends and other payments in respect of equity interests, the
making of loans and equity investments, mergers, consolidations, liquidations
and dissolutions, and transactions with affiliates (in each case, subject to
various exceptions).
The borrowings under the Facility are joint and several obligations of the
Borrowers and are also cross-guaranteed by each Borrower, except that the Swiss
Borrower is not liable for, nor does it guarantee, the obligations of the U.S.
Borrowers. In addition, the Borrowers' obligations under the Facility are
secured by first priority liens, subject to permitted liens, on substantially
all of the U.S. Borrowers' assets other than certain excluded assets. The Swiss
Borrower does not provide collateral to secure the obligations under the
Facility.
As of October 31, 2022, and October 31, 2021, there were no amounts in loans
outstanding under the Facility for either period. Availability under the
Facility was reduced by the aggregate amount 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, 2022 and October 31, 2021. At
October 31, 2022, the letters of credit have expiration dates through May 31,
2023. As of October 31, 2022, and October 31, 2021, availability under the
Facility was $99.7 million for both periods. For additional information
regarding the Facility, see Note 6 - Debt and Lines of Credit to the
Consolidated Financial Statements.
The Company had weighted average borrowings under the Facility of zero during
both the three months ended October 31, 2022 and 2021, respectively. The Company
had weighted average borrowings under the Facility of zero and $6.5 million
during the nine months ended October 31, 2022 and 2021, respectively, with a
weighted average interest rate of 2.8% during the nine months ended October 31,
2021.
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A Swiss subsidiary of the Company maintains unsecured lines of credit with a
Swiss bank that are subject to repayment upon demand. As of October 31, 2022,
and 2021, these lines of credit totaled 6.5 million Swiss Francs for both
periods, with a dollar equivalent of $6.5 million and $7.1 million,
respectively. As of October 31, 2022, and 2021, there were no borrowings against
these lines. As of October 31, 2022 and 2021, two European banks had guaranteed
obligations to third parties on behalf of two of the Company's foreign
subsidiaries in the dollar equivalent of $1.1 million and $1.3 million,
respectively, in various foreign currencies, of which $0.5 million and $0.6
million, as of October 31, 2022 and October 31, 2021, respectively, was a
restricted deposit as it relates to lease agreements.
Cash paid for interest, including unused commitments fees, was $0.2 million and
$0.4 million for the nine-month periods ended October 31, 2022 and October 31,
2021, 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 companies in media, entertainment,
information technology and technology-related fields and in digital assets.
During fiscal 2022, the Company committed to invest up to $21.5 million in such
investments. The Company funded approximately $2.0 million of these commitments
in fiscal 2022 and an additional $2.7 million during the first nine months of
fiscal 2023 and may be called upon to satisfy capital calls in respect of the
remaining $16.8 million in such commitments at any time during a period
generally ending ten years after the first capital call in respect of a given
commitment.
The Company paid cash dividends of $0.35 per share, or $7.9 million, during the
three months ended April 30, 2022, $0.35 per share, or $7.9 million, during the
three months ended July 31, 2022 and $0.35 per share, or $7.8 million, during
the three months ended October 31, 2022. During the three months ended April 30,
2021, the Company paid 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. In addition, the Company paid 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.
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 March 25, 2021, the Board approved a share repurchase program under which the
Company was 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, 2022, the Company
repurchased a total of 795,456 shares of its common stock under the March 25,
2021 share repurchase program and November 23, 2021 share repurchase program at
a total cost of $28.2 million, or an average of $35.39 per share. At October 31,
2022, zero remains available for purchase under the Company's March 25, 2021
repurchase program and $24.3 million remains available for purchase under the
Company's November 23, 2021 repurchase program. 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.
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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