Description
Movado Grp Inc. President - COO COTE RICHARD bought 13,903 shares on 6-13-2012 at $ 24.91
BUSINESS OVERVIEW
GENERAL
In this Form 10-K, all references to the “Company” or “Movado Group” include Movado Group, Inc. and its subsidiaries, unless the context requires otherwise.
Movado Group, Inc. designs, sources, markets and distributes fine watches. Its portfolio of brands is currently comprised of Movado®, Ebel®, Concord®, ESQ® by Movado, Coach® Watches, HUGO BOSS® Watches, Juicy Couture® Watches, Tommy Hilfiger® Watches, Lacoste® Watches and Ferrari® Watches. The Company is a leader in the design, development, marketing and distribution of watch brands sold in almost every major category comprising the watch industry.
The Company was incorporated in New York in 1967 under the name North American Watch Corporation to acquire Piaget Watch Corporation and Corum Watch Corporation, which had been, respectively, the exclusive importers and distributors of Piaget and Corum watches in the United States since the 1950’s. The Company sold its Piaget and Corum distribution businesses in 1999 and 2000, respectively, to focus on its own portfolio of brands. Since its incorporation, the Company has developed its brand-building reputation and distinctive image across an expanding number of brands and geographic markets. Strategic acquisitions of watch brands and their subsequent growth, along with license agreements, have played an important role in the expansion of the Company’s brand portfolio.
In 1970, the Company acquired the Concord brand and the Swiss company that had been manufacturing Concord watches since 1908. In 1983, the Company acquired the U.S. distributor of Movado watches and substantially all of the assets related to the Movado brand from the Swiss manufacturer of Movado watches. The Company changed its name to Movado Group, Inc. in 1996. In March 2004, the Company completed its acquisition of Ebel, one of the world’s premier luxury watch brands that was established in La Chaux-de-Fonds, Switzerland in 1911.
The Company is highly selective in its licensing strategy and chooses to enter into long-term partnerships with only powerful brands that are leaders in their respective businesses.
As of March 22, 2012, the Company entered into an exclusive worldwide license agreement with Ferrari S.p.A. to use certain well known trademarks of Ferrari including the S.F. and Prancing Horse device in shield, FERRARI OFFICIAL LICENSED PRODUCT and SCUDERIA FERRARI, in connection with the manufacture, advertising, merchandising, promotion, sale and distribution of watches with a suggested retail price not exceeding €1,500. The current term of the license is through December 31, 2017.
The following table sets forth the brands licensed by the Company and the year in which the Company launched each licensed brand for watches.
RECENT DEVELOPMENTS
On March 12, 2012, the Company amended its Amended and Restated Loan and Security Agreement, dated as of July 17, 2009, as previously amended, with Bank of America, N.A. and Bank Leumi USA to extend its maturity to 2015, to reflect more favorable current market rate conditions and to modify certain terms.
On March 27, 2012, as a result of Movado Group’s strong financial position in fiscal 2012, the Company’s Board of Directors decided to increase the quarterly cash dividend to $0.05 per share, subject, in each quarter, to the Board’s review of the Company’s financial performance and other factors as determined by the Board and effective March 29, 2012 the Board of Directors approved the payment on April 24, 2012 of a cash dividend in the amount of $0.05 for each share of the Company’s outstanding common stock and class A common stock held by shareholders of record as of the close of business on April 10, 2012. However, 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.
The Company also announced that on March 29, 2012 the Board of Directors approved the payment of a special cash dividend of $0.50 for each share of the Company’s outstanding common stock and class A common stock. This dividend will be paid on May 15, 2012 to all shareholders of record on April 30, 2012.
As of March 22, 2012, the Company entered into an exclusive worldwide license agreement with Ferrari S.p.A. to use certain well known trademarks of Ferrari including the S.F. and Prancing Horse device in shield, FERRARI OFFICIAL LICENSED PRODUCT and SCUDERIA FERRARI, in connection with the manufacture, advertising, merchandising, promotion, sale and distribution of watches with a suggested retail price not exceeding €1,500. The current term of the license is through December 31, 2017.
As of March 23, 2012, the Company donated $3.0 million to the Movado Group Foundation which consisted of both shares of the Company’s common stock and cash.
Exclusive Watches
Exclusive watches are usually made of precious metals, including 18 karat gold or platinum, and are often set with precious gems. These watches are primarily mechanical or quartz-analog watches. Mechanical watches keep time with intricate mechanical movements consisting of an arrangement of wheels, jewels and winding and regulating mechanisms. Quartz-analog watches have quartz movements in which time is precisely calibrated to the regular frequency of the vibration of quartz crystal. Exclusive watches are manufactured almost entirely in Switzerland. Well-known brand names of exclusive watches include Audemars Piguet, Patek Philippe, Piaget and Vacheron Constantin. The Company does not compete in the exclusive watch category.
Luxury Watches
Luxury watches are either quartz-analog watches or mechanical watches. These watches typically are made with either 14 or 18 karat gold, stainless steel or a combination of gold and stainless steel, and are occasionally set with precious gems. Luxury watches are primarily manufactured in Switzerland. In addition to a majority of the Company’s Ebel and Concord watches, well-known brand names of luxury watches include Baume & Mercier, Breitling, Cartier, Omega, Rolex and TAG Heuer.
Premium Watches
The majority of premium watches are quartz-analog watches. These watches typically are made with gold finish, stainless steel or a combination of gold finish and stainless steel. Premium watches are manufactured primarily in Switzerland, although some are manufactured in Asia. In addition to a majority of the Company’s Movado watches, well-known brand names of premium watches include Gucci, Rado and Raymond Weil.
Moderate Watches
Most moderate watches are quartz-analog watches. Moderate watches are manufactured primarily in Asia and Switzerland. These watches typically are made with gold finish, stainless steel, brass or a combination of gold finish and stainless steel. In addition to the Company’s ESQ, Coach, HUGO BOSS, Juicy Couture and Lacoste brands, well-known brand names of watches in the moderate category include Anne Klein, Bulova, Citizen, Guess, Seiko, Michael Kors and Wittnauer.
Fashion Watches
Watches comprising the fashion market are primarily quartz-analog watches but also include some digital watches. Watches in the fashion category are generally made with stainless steel, gold finish, brass and/or plastic and are manufactured primarily in Asia. Fashion watches feature designs that reflect current and emerging fashion trends. Many are sold under licensed designer and brand names that are well-known principally in the apparel industry. In addition to the Company’s Tommy Hilfiger brand, well-known brands of fashion watches include Anne Klein II, DKNY, Fossil, Guess, Kenneth Cole and Swatch.
Mass Market Watches
Mass market watches typically consist of digital watches and analog watches made from stainless steel, brass and/or plastic and are manufactured in Asia. Well-known brands include Casio, Pulsar, Seiko and Timex. The Company does not compete in the mass market watch category.
BRANDS
The Company designs, develops, sources, markets and distributes products under the following watch brands:
Movado
Founded in 1881 in La Chaux-de-Fonds, Switzerland, Movado is an icon of modern design. Today the brand includes a line of watches, inspired by the simplicity of the Bauhaus movement, including the world famous Movado Museum watch and a number of other watch collections with more traditional dial designs. The design for the Movado Museum watch was the first watch design chosen by the Museum of Modern Art for its permanent collection. It has since been honored by other museums throughout the world. The Movado brand also includes Series 800, a sport watch collection that incorporates Movado quality and craftsmanship with the characteristics of a true sport watch as well as Movado BOLD, an innovative collection introduced in late fiscal 2011, manufactured from high-tech composite materials and priced to be accessible to a more fashion-forward youthful customer. Movado watches have Swiss movements and are made with 14 or 18 karat gold, 18 karat gold finish, stainless steel or a combination of 18 karat gold finish and stainless steel.
Ebel
The Ebel brand, one of the world’s premier luxury watch brands, was established in La Chaux-de-Fonds, Switzerland in 1911. Since acquiring Ebel, Movado Group has returned Ebel to its roots as the “Architects of Time” through its product development, marketing initiatives and global advertising campaigns. All Ebel watches feature Swiss movements and are made with solid 18 karat gold, stainless steel or a combination of 18 karat gold and stainless steel. For fiscal 2013, the Company has designed new leadership product that will be introduced for the holiday season to further Ebel’s product positioning.
Concord
Concord was founded in 1908 in Bienne, Switzerland. Inspired by its avant garde roots, Concord is designed to be resolutely upscale with a modern, edgy point of view and has been repositioned as a niche luxury brand. The brand’s products center on its iconic C1 collection, a breakthrough in modern design. Concord watches have Swiss movements and are made with solid 18 karat gold, stainless steel or a combination of 18 karat gold and stainless steel.
ESQ by Movado
ESQ competes in the entry level Swiss watch category and is defined by bold sport and fashion designs. In fiscal 2010, the Company began to market the brand as ESQ by Movado. All ESQ watches contain Swiss movements and are made with stainless steel, gold finish or a combination of stainless steel and gold finish, with leather straps, stainless steel bracelets or gold finish bracelets.
Coach Watches
Coach Watches are an extension of the Coach leathergoods brand and reflect the Coach brand image. A distinctive American brand, Coach delivers stylish, aspirational, well-made products that represent excellent value. Coach watches are made with stainless steel, gold finish or a combination of stainless steel and gold finish with leather straps, stainless steel bracelets or gold finish bracelets.
Tommy Hilfiger Watches
Reflecting the fresh, fun all-American style for which Tommy Hilfiger is known, Tommy Hilfiger watches feature quartz, digital or analog-digital movements, with stainless steel, titanium, aluminum, silver-tone, two-tone or gold-tone cases and bracelets, and leather, fabric, plastic or rubber straps. The line includes fashion and sport models.
HUGO BOSS Watches
HUGO BOSS is a global market leader in the world of fashion. The HUGO BOSS watch collection is an extension of the parent brand and includes classy, sporty, elegant and fashion timepieces with distinctive features, giving this collection a strong and coherent identity.
Juicy Couture Timepieces
Juicy Couture is a powerhouse lifestyle brand that delivers sophisticated, yet fun fashion for women, men and children. Juicy Couture timepieces reflect the brand’s clear vision, unique identity and leading brand position in the upscale contemporary category, encompassing both trend-right and core styling contemporary watches.
Lacoste Watches
The Lacoste watch collection embraces the Lacoste lifestyle proposition which encompasses elegance, refinement and comfort, as well as a dedication to quality and innovation. Mirroring key attributes of the Lacoste brand, the collection features stylish timepieces with a contemporary sport elegant feel.
Ferrari Watches
The Ferrari watch collection will feature compelling identifiable designs combined with high quality craftsmanship. The collection will be launched in the beginning of calendar year 2013.
DESIGN AND PRODUCT DEVELOPMENT
The Company’s offerings undergo two phases before they are produced for sale to customers: design and product development. The design phase includes the creation of artistic and conceptual renderings while product development involves the construction of prototypes. The Company’s Movado BOLD, ESQ and licensed brands are designed by in-house design teams in Switzerland and the United States in cooperation with outside sources, including (in the case of the licensed brands except for ESQ) licensors’ design teams. Product development for the licensed brands, ESQ and Movado BOLD takes place in the Company’s Asia operations. For the Company’s Movado (with the exception of Movado BOLD), Ebel and Concord brands, the design phase is performed by a combination of in-house and freelance designers in Europe and the United States while product development is carried out in the Company’s Swiss operations. Senior management of the Company is actively involved in the design and product development process.
MARKETING
The Company’s marketing strategy is to communicate a consistent, brand-specific message to the consumer. Recognizing that advertising is an integral component to the successful marketing of its product offerings, the Company devotes significant resources to advertising and, since 1972, has maintained its own in-house advertising department which focuses primarily on the implementation and management of global marketing and advertising strategies for each of the Company’s brands, ensuring consistency of presentation. The Company utilizes outside agencies for the creative development of advertising campaigns which are developed individually for each of the Company’s brands and are directed primarily to the end consumer rather than to trade customers. The Company’s advertising targets consumers with particular demographic characteristics appropriate to the image and price range of each brand. Most Company advertising is placed in magazines and other print media but some is also created for radio and television campaigns, online, catalogs, outdoor and other promotional materials. Marketing expenses totaled 13.7%, 15.4% and 15.6% of net sales in fiscal 2012, 2011 and 2010, respectively.
OPERATING SEGMENTS
The Company conducts its business primarily in two operating segments: Wholesale and Retail. For operating segment data and geographic segment data for the years ended January 31, 2012, 2011 and 2010, see Note 14 to the Consolidated Financial Statements regarding Segment Information.
The Company’s wholesale segment includes the design, development, sourcing, marketing and distribution of high quality watches, in addition to after-sales service activities and shipping. The retail segment includes the Company’s outlet stores and, also included until February 14, 2012, the Movado brand flagship store located at Rockefeller Center in New York City. Effective February 14, 2012 the Movado brand flagship store located at Rockefeller Center in New York City closed, as the Company did not renew its lease.
The Company divides its business into two major geographic locations: United States operations, and International, which includes the results of all other Company operations. The allocation of geographic revenue is based upon the location of the customer. The Company’s international operations are principally conducted in Europe, Asia, Canada, the Middle East, South America and the Caribbean. The Company’s international assets are substantially located in Switzerland.
Wholesale
United States Wholesale
The Company sells all of its brands in the U.S. wholesale market primarily to major jewelry store chains such as Helzberg Diamonds Corp., Sterling, Inc. and Zale Corporation; department stores, such as Macy’s, and Nordstrom, as well as independent jewelers. Sales to trade customers in the United States are made directly by the Company’s U.S. sales force and, to a lesser extent, independent sales representatives. Sales representatives are responsible for a defined geographic territory, specialize in a particular brand and sell to and service independent jewelers within their territory. The sales force also consists of account executives and account representatives who, respectively, sell to and service chain and department store accounts.
International Wholesale
Internationally, the Company’s brands are sold in department stores such as El Cortes Ingles in Spain and Galeries Lafayette in France, jewelry chain stores such as Christ in Switzerland and Germany and independent jewelers. The Company employs its own international sales force operating at the Company’s sales and distribution offices in Canada, China, France, Germany, Hong Kong, Japan, Singapore, Switzerland, the United Kingdom and the United Arab Emirates. In addition, the Company sells all of its brands other than ESQ through a network of independent distributors operating in numerous countries around the world. Distribution of ESQ watches, which outside of the United States are sold only in Canada and the Caribbean, is handled by the Company’s Canadian subsidiary and Caribbean based sales teams. A majority of the Company’s arrangements with its international distributors are long-term, generally require certain minimum purchases and minimum advertising expenditures and restrict the distributor from selling competitive products.
In France and Germany, the Company’s licensed brands are marketed and distributed by subsidiaries of a joint venture company owned 51% by the Company and 49% by Financiere TWC SA (“TWC”), a French company with established distribution, marketing and sales operations in France and Germany. The terms of the joint venture agreement include financial performance measures which, if not attained, give either party the right to terminate the agreement by the following April 30th after the tenth year (January 31, 2016); restrictions on the transfer of shares in the joint venture company; and a buy out right whereby the Company can purchase all of TWC’s shares in the joint venture company as of July 1, 2016 and every fifth anniversary thereafter at a pre-determined price.
In the UK, the Company signed a joint venture agreement (the “JV Agreement”) on May 11, 2007, with Swico Limited (“Swico”), an English company with established distribution, marketing and sales operations in the UK. Swico had been the Company’s exclusive distributor of HUGO BOSS watches in the UK since 2005. Under the JV Agreement, the Company and Swico control 51% and 49%, respectively, of MGS Distribution Limited, an English company (“MGS”) that is responsible for the marketing, distribution and sale in the UK of the Company’s licensed HUGO BOSS, Tommy Hilfiger, Lacoste and Juicy Couture brands, as well as future brands licensed to the Company, subject to the terms of the applicable license agreement. Swico is responsible for the day to day management of MGS, including staffing and providing logistical support, inventory management, order fulfillment, distribution and after sale services, systems and back office support. The terms of the JV Agreement include financial performance measures which, if not attained, give either party the right to terminate the JV Agreement after the tenth year (January 31, 2017); restrictions on the transfer of shares in MGS; and a buy out right whereby the Company can purchase all of Swico’s shares in MGS as of July 1, 2017 and every fifth anniversary thereafter at a pre-determined price.
CEO BACKGROUND
Margaret Hayes Adame is the President and Chief Executive Officer of Fashion Group International, Inc., an international, non-profit trade organization working with the fashion industry, which she joined in March 1993. From 1981 to March 1993, Ms. Hayes Adame was a Senior Vice President and general merchandise manager at Saks Fifth Avenue, a major retailer. Her expertise in the areas of retail and fashion provide her with a thorough understanding of numerous issues involving the Company’s products and customers and makes her very suitable for service on the Board. She is also a member of the board of directors of International Flavors & Fragrances, Inc.
Richard Coté joined the Company in January 2000 as Executive Vice President – Finance and Administration. In May 2001, Mr. Coté was promoted to Executive Vice President - Chief Operating Officer and in March 2010 he was promoted to the position of President and Chief Operating Officer. Prior to joining the Company, Mr. Coté worked for Colgate-Palmolive, a global consumer goods company, where, from 1998 to 2000, he was Vice President and Chief Financial Officer for U.S. operations, and from 1993 to 1998, he was Vice President and Chief Financial Officer for Asia/Pacific operations. Prior to joining Colgate-Palmolive, Mr. Coté spent eight years at KPMG LLP in public accounting. He is a licensed CPA. Mr. Coté’s extensive experience in the areas of international business, accounting and corporate operations make him well qualified to deal with the challenges and opportunities of overseeing the operations and general management of the Company and for service on the Board.
Efraim Grinberg joined the Company in June 1980 and served as the Company's Vice President of Marketing from February 1985 until July 1986, at which time he was elected to the position of Senior Vice President of Marketing. From June 1990 to October 1995, Mr. Grinberg served as the Company’s President and Chief Operating Officer and, from October 1995 until May 2001, served as the Company’s President. In May 2001, Mr. Grinberg was elected to the position of President and Chief Executive Officer and, in addition, effective January 31, 2009, he was elected Chairman of the Board. In March 2010 Mr. Grinberg resigned as President. He continues to serve as the Company’s Chairman of the Board and Chief Executive Officer. Mr. Grinberg’s three decades of experience in the watch industry and in a variety of positions at the Company during this period of its growth provides him with a detailed and extensive knowledge of the Company’s brands, markets, competitors, customers and virtually every other aspect of its business and the industry as a whole and qualifies him for service on the Board. Mr. Grinberg also serves on the board of directors of Lincoln Center for the Performing Arts, Inc. and the Jeweler’s Fund for Children.
Alex Grinberg joined the Company in December 1994 as a territory manager for the Movado brand and was promoted to Vice President of International Sales for the Concord brand in June 1996. From February 1999 through October 2001 he was stationed in the Far East developing Movado Group brands in Hong Kong and Japan. Beginning in November 2001 he held a number of positions of increasing responsibility within the Concord brand in the United States until November 2010 when he was appointed to the position of Senior Vice President of Customer/Consumer Centric Initiatives with responsibility for creating programs to enhance the Company’s relationships with its retail partners and improve its worldwide customer service and after sales service performance. Mr. Grinberg’s many years with the Company during which time he has held a number of positions in sales and brand management and his international experience make him well qualified for service on the Board.
Alan Howard is the Managing Partner of Heathcote Advisors LLC, which he formed in March 2008 and which provides financial advisory services as well as makes principal investments. In addition, from September 2008 through June 2010 he was Managing Partner of S3 Strategic Advisors LLC which provides strategic advice to hedge funds and asset managers. Previously, from July 2006 until July 2007, he was a Managing Director of Greenbriar Equity Group, LLC, a private equity firm focusing on transportation and transportation related investments. Prior to July 2006, Mr. Howard was a Managing Director of Credit Suisse First Boston LLC (“CSFB”), an international provider of financial services. He had been with CSFB and its predecessor companies since 1986. As a Managing Director in the ... Global Industrial and Services Investment Banking Group, he was an advisor to several of the company's most important clients on mergers and acquisitions, corporate finance and capital raising assignments. Mr. Howard is also a member of the board of directors of Carbon Motors Corporation, a privately held company that is developing and will produce a portfolio of innovative purpose-built, specialty vehicles for the global law enforcement market. Mr. Howard recently joined the board of directors of Military Parts Exchange LLC, a privately held company that is a global supplier and service provider of military aircraft parts for multiple platforms and engines. With his broad experience in investment banking, Mr. Howard is able to provide the Board with insights into capitalization strategies, capital markets mechanics and strategic expansion opportunities.
Richard Isserman had a distinguished career of nearly 40 years with KPMG LLP and for 26 years served as Audit Partner in KPMG’s New York office. He also led KPMG’s real estate audit practice in New York and was a member of the firm’s SEC Reviewing Partner’s Committee. Mr. Isserman retired from KPMG in June 1995. A licensed New York state CPA, Mr. Isserman also serves as the chairman of the budget and finance committee and a member of the audit committee for Federation Employment and Guidance Services, a social service agency in New York City. Based on his years of demonstrated leadership in the field of public accounting, Mr. Isserman provides our Board with in-depth knowledge and experience in financial, accounting and risk management issues.
Nathan Leventhal served as Chief of Staff to Mayor John Lindsay, Deputy Mayor to Mayor Ed Koch, and Transition Chairman for both Mayors David Dinkins and Michael Bloomberg. He currently chairs Mayor Bloomberg’s Committee on Appointments and was a Commissioner on the New York City Planning Commission from 2007 to 2011. He also currently serves on the boards of a number of equity, fixed income and money market funds managed by the Dreyfus Corporation, an investment advisor. Mr. Leventhal is a former partner of the law firm Poletti Freidin Prashker Feldman & Gartner. Other New York City governmental positions held by Mr. Leventhal include Fiscal Director of the Human Resources Administration, Commissioner of Rent and Housing Maintenance, Commissioner of Housing Preservation and Development, and Secretary of the New York City Charter Revision Commission. In Washington, D.C., Mr. Leventhal served as an attorney in the Office of the Air Force General Counsel, Assistant to the Executive Director of the Equal Employment Opportunity Commission, and Chief Counsel to the U.S. Senate Subcommittee on Administrative Practice and Procedure. In the not-for-profit sector, Mr. Leventhal served for 17 years as President of Lincoln Center for the Performing Arts, where he is now President Emeritus and Chairman of the Avery Fisher Artist Program. Mr. Leventhal’s wealth of experience in the areas of government, law, public policy and management make him well qualified to serve on our Board.
Donald Oresman was Executive Vice President and General Counsel of Paramount Communications, Inc., a publishing and entertainment company, from December 1983 until his retirement in March 1994. Prior to joining Paramount, Mr. Oresman was engaged in the practice of law as a partner of Simpson Thacher & Bartlett. Mr. Oresmans’ career at Simpson Thacher spanned several decades in which he represented major corporate clients in the areas of federal securities law, mergers and acquisitions and other general corporate matters. He has served on the Board continuously since 1981 and therefore has a deep knowledge of our Company’s business and its history which, in addition to his expertise in the area of corporate law and corporate governance, qualifies him for continued service on the Board.
Maurice Reznik has served as the Chief Executive Officer and a member of the board of directors of Maidenform Brands, Inc., a global intimate apparel company, since July 2008. From May 2004 until assuming his current position as CEO, he was President of Maidenform Brands with responsibility for marketing, merchandising, design and sales for both branded and private label products. From April 1998 to May 2004, Mr. Reznik was President of the Maidenform division of Maidenform Brands’ predecessor company and, in the 19 years prior to joining Maidenform, held various sales and management positions in the intimate apparel industry, including President of Warner’s Intimate Apparel Group, a division of Warnaco, Inc., a global intimate apparel, swimwear and sportswear company. With over 30 years of experience working in positions of increasing responsibility in the intimate apparel industry and as the CEO of a public, consumer products company, Mr. Reznik has expertise in product design and sourcing, wholesale, retail, brand development and merchandising as well as in core business areas such as strategy and business development, operations, brand management, finance, compliance and risk management, all of which make him well qualified to serve on the Board. Mr. Reznick is also the founder of the For Love of Life Colon Cancer charity and serves on the boards of Dignity U Wear, Queens College and the American Apparel and Footwear Association and Fashion Institute of Technology.
Leonard Silverstein has been engaged in the practice of law at Buchanan Ingersoll & Rooney (formerly Silverstein and Mullens), in Washington, D.C., for over 40 years. Mr. Silverstein also serves as Vice President and Director of Tax Management, Inc., a wholly owned subsidiary of BNA, Inc. He is also an officer of the French Legion of Honor, a former Vice Chairman and currently an active honorary trustee of the John F. Kennedy Center for the Performing Arts, Past President of the Alliance Francaise of Washington, formerly President and currently a director of the National Symphony Orchestra Association, Treasurer of the Madison Council of the Library of Congress and President, French-American Cultural Foundation. By virtue of the knowledge and experience he has gained and the contributions he has made during his tenure as a director of the Company for the past 37 years, as well as his sound judgment gained from years of experience counseling clients in his legal practice, Mr. Silverstein is well qualified to serve on the Board.
MANAGEMENT DISCUSSION FROM LATEST 10K
GENERAL
Net sales. The Company operates and manages its business in two principal business segments – Wholesale and Retail. The Company also operates in two geographic locations – United States and International. The Company divides its watch brands into three distinct categories: luxury, accessible luxury and licensed brands. The luxury category consists of the Ebel and Concord brands. The accessible luxury category consists of the Movado and ESQ by Movado brands. The licensed brands category represents brands distributed under license agreements and includes Coach, HUGO BOSS, Juicy Couture, Lacoste, Tommy Hilfiger and effective as of March 22, 2012, certain trademarks owned by Ferrari S.p.A.
The primary factors that influence annual sales are general economic conditions in the Company’s U.S. and international markets, new product introductions, the level and effectiveness of advertising and marketing expenditures and product pricing decisions.
Approximately 50% of the Company’s total sales are from international markets, and therefore reported sales made in those markets are affected by foreign exchange rates. The Company’s international sales are billed in local currencies (predominantly Euros and Swiss francs) and translated to U.S. dollars at average exchange rates for financial reporting purposes.
The Company’s business is seasonal. There are two major selling seasons in the Company’s markets: the spring season, which includes school graduations and several holidays and, most importantly, the Christmas and holiday season. Major selling seasons in certain international markets center on significant local holidays that occur in late winter or early spring. The Company’s net sales historically have been higher during the second half of the fiscal year. The second half of each year accounted for 56.6%, 58.6%, and 58.8% of the Company’s net sales for the fiscal years ended January 31, 2012, 2011 and 2010, respectively.
The Company’s retail operations consist of 33 outlet stores located throughout the United States and, until February 14, 2012, also included the Movado brand flagship store located at Rockefeller Center in New York City. The Company does not have any retail operations outside of the United States. Effective February 14, 2012 the Movado brand flagship store located at Rockefeller Center in New York City closed, as the Company did not renew its lease.
The significant factors that influence annual sales volumes in the Company’s retail operations are similar to those that influence U.S. wholesale sales. In addition, most of the Company’s outlet stores are located near vacation destinations and, therefore, the seasonality of these stores is driven by the peak tourist seasons associated with these locations.
Gross Margins. The Company’s overall gross margins are primarily affected by four major factors: brand and product sales mix, product pricing strategy, manufacturing costs and fluctuation in foreign currency exchange rates, in particular the relationship between the U.S. dollar and the Swiss franc and the Euro. Gross margins for the Company may not be comparable to those of other companies, since some companies include all the costs related to their distribution networks in cost of sales whereas the Company does not include the costs associated with its U.S. and Asia warehousing and distribution facilities nor the occupancy costs for the retail segment in the cost of sales line item.
Gross margins vary among the brands included in the Company’s portfolio and also among watch models within each brand. Watches in the luxury category generally earn lower gross margin percentages than watches in the accessible luxury category. Gross margins in the Company’s outlet business are lower than a majority of those in the wholesale business since the outlets primarily sell seconds and discontinued models that generally command lower selling prices.
All of the Company’s brands compete with a number of other brands on the basis of not only styling but also wholesale and retail price. The Company’s ability to improve margins through price increases is therefore, to some extent, constrained by competitors’ actions.
Cost of sales of the Company’s products consists primarily of component costs, royalties, assembly costs and unit overhead costs associated with the Company’s supply chain operations in Switzerland and Asia. The Company’s supply chain operations consist of logistics management of assembly operations and product sourcing in Switzerland and Asia and minor assembly in Switzerland. Through productivity improvement efforts, the Company has controlled the level of overhead costs and maintained flexibility in its cost structure by outsourcing a significant portion of its component and assembly requirements.
Effective February 1, 2011, the Company changed its method of valuing its U.S. inventories to the average cost method. In prior years, primarily all U.S. inventories were valued using the first-in, first-out (“FIFO”) method. With this change, all of the Company’s inventories are now valued using the average cost method. The comparative consolidated financial statements of prior periods presented have been adjusted to apply the new accounting method retroactively. For more information regarding these inventory related charges, see Critical Accounting Policies and Estimates – Inventories.
In the fourth quarter of fiscal 2012, the Company recorded a sale of certain mechanical movements that had been written down in the previous year. As a result, the Company recorded a pre-tax net profit of $2.3 million related to those movements. In the fourth quarter of fiscal 2011, the Company recorded a non-cash charge of $24.1 million to write-down certain inventories to market value, primarily inventories of certain non-core gold watches and related parts and mechanical movements. In fiscal 2010, the Company recorded a non-cash charge of $8.8 million primarily for excess non-core component inventory. For more information regarding these inventory related charges, see Critical Accounting Policies and Estimates – Inventories.
Since a substantial amount of the Company’s product costs are incurred in Swiss francs, fluctuations in the U.S. dollar/Swiss franc exchange rate can impact the Company’s cost of goods sold and, therefore, its gross margins. The Company reduces its exposure to the Swiss franc exchange rate risk through a hedging program. Under the hedging program, the Company manages most of its foreign currency exposures on a consolidated basis, which allows it to net certain exposures and take advantage of natural offsets. In the event these exposures do not offset, the Company has the ability to hedge its Swiss franc purchases using a combination of forward contracts and purchased currency options. The Company’s hedging program had the effect of reducing the exchange rate impact on product costs and gross margins for fiscal years 2012 and 2011. In fiscal 2010, the Company decided not to hedge a significant portion of the Company’s Swiss francs purchases which, as a result of the unfavorable Swiss franc foreign exchange rate, had a negative effect on the recorded gross margins.
Selling, General and Administrative (“SG&A”) Expenses . The Company’s SG&A expenses consist primarily of marketing, selling, distribution, general and administrative expenses. In fiscal 2012, the Company recorded a $3.0 million pre-tax charge related to a donation made to the Movado Group Foundation. In fiscal 2011, the Company recorded a non-cash pre-tax charge of $3.1 million related to the write-down of certain assets related to intangible assets, tooling costs and trade booths for the Basel Fair. In fiscal 2011, the Company recorded a benefit of $4.3 million resulting from the reversal of a previously recorded liability for a retirement agreement with the Company’s former Chairman. In fiscal 2010, the Company recorded a non-cash pre-tax charge of $2.5 million related to the write-down of certain assets related to trade booths for the Basel Fair.
Annual marketing expenditures are based principally on overall strategic considerations relative to maintaining or increasing market share in markets that management considers to be crucial to the Company’s continued success as well as on general economic conditions in the various markets around the world in which the Company sells its products. Marketing expenses include various forms of media advertising, digital advertising and co-operative advertising with customers and distributors and other point-of-sale marketing and promotion spending. For fiscal 2012 and 2011, the Company increased its investment in marketing and advertising in order to elevate its connection to consumers and better position its brands in the marketplace.
Selling expenses consist primarily of salaries, sales commissions, sales force travel and related expenses, expenses associated with Baselworld, the annual watch and jewelry trade show, and other industry trade shows and operating costs incurred in connection with the Company’s retail business. Sales commissions vary with overall sales levels. Retail selling expenses consist primarily of payroll related and store occupancy costs.
Distribution expenses consist primarily of salaries of distribution staff, rental and other occupancy costs, security, depreciation and amortization of furniture and leasehold improvements and shipping supplies.
General and administrative expenses consist primarily of salaries and other employee compensation including performance based compensation, employee benefit plan costs, office rent, management information systems costs, professional fees, bad debts, depreciation and amortization of furniture, computer software and leasehold improvements, patent and trademark expenses and various other general corporate expenses.
Interest Expense. The Company records interest expense on its revolving credit facility. Additionally, interest expense includes the amortization of deferred financing costs associated with the Company’s revolving credit facility.
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. 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, impairments 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.
Management believes the following are the critical accounting policies requiring significant judgments and estimates used in the preparation of its consolidated financial statements.
Revenue Recognition
In the wholesale segment, the Company recognizes revenue upon transfer of title and risk of loss in accordance with its FOB shipping point terms of sale and after the sales price is fixed and determinable and collectability is reasonably assured. In the retail segment, transfer of title and risk of loss occurs at the time of register receipt. The Company records estimates for sales returns and sales and cash discount allowances as a reduction of revenue in the same period that the sales are recorded. These estimates are based upon historical analysis, customer agreements and/or currently known factors that arise in the normal course of business. While returns have historically been within the Company’s expectations and the provisions established, future return rates may differ from those experienced in the past. In the event that returns are authorized at a rate significantly higher than the Company’s historic rate, the resulting returns could have an adverse impact on its operating results for the period in which such results materialize.
Allowance for Doubtful Accounts
Accounts receivable are reduced by an allowance for amounts that may be uncollectible in the future. Estimates are used in determining the allowance for doubtful accounts and are based on an analysis of the aging of accounts receivable, assessments of collectability based on historic trends, the financial condition of the Company’s customers and an evaluation of economic conditions. In general, the actual bad debt losses have historically been within the Company’s expectations and the allowances it established. As of January 31, 2012, except for those accounts provided for in the reserve for doubtful accounts, the Company knew of no situations with any of the Company’s major customers which would indicate the customer’s inability to make their required payments.
Inventories
The Company values its inventory at the lower of cost or market. Effective February 1, 2011, the Company changed its method of valuing its U.S. inventories to the average cost method. In prior years, primarily all U.S. inventories were valued using the first-in, first-out (“FIFO”) method. With this change, all of the Company’s inventories are now valued using the average cost method. The Company believes that the average cost method of inventory valuation is preferable because (1) it permits the Company to use a single method of accounting for all of the Company’s U.S. and international inventories, (2) it aligns costing with the Company’s forecasting and procurement decisions, and (3) since a number of the Company’s key competitors use the average cost method, it improves comparability of the Company’s financial statements. The consolidated financial statements of prior periods presented have been adjusted to apply the new accounting method retroactively, as described in the applicable accounting guidance for accounting changes and error corrections. The Company performs reviews of its on-hand inventory to determine amounts, if any, of inventory that is deemed discontinued, excess, or unsaleable. Inventory classified as discontinued, together with the related component parts which can be assembled into saleable finished goods, is sold primarily through the Company’s outlet stores. When management determines that finished product is unsaleable or that it is impractical to build the remaining components into watches for sale, a charge is recorded to value those products and components at the lower of cost or market.
During the fourth quarter of fiscal 2012, the Company recorded a net pre-tax profit of $2.3 million related to the sale of certain Ebel proprietary watch movements that were previously written down in the prior year. In the fourth quarter of fiscal 2011, there were events and circumstances, as described below, that resulted in the Company recording a non-cash charge of approximately $24.1 million to write-down certain inventories to market value, primarily inventories of certain non-core gold watches and related parts and mechanical movements. Certain watches in the Ebel brand line used proprietary watch movements that were assembled by the Company from parts purchased from third party suppliers. In the fourth quarter of fiscal 2011, the Company performed a strategic review of the Ebel brand and concluded that the future direction for the brand would not include the production of these proprietary movements, making inventory of these movement parts excess and obsolete. As a result, the Company recorded a charge to cost of sales for the future disposition of such inventory, net of estimated recovery. Additionally, in the fourth quarter of fiscal 2011, the Company concluded it would significantly reduce its offering of gold watches, considering particularly the recent increases in the price of gold, and therefore recorded a charge to cost of sales related to non-core gold inventory. Ordinarily, the Company would utilize its outlet stores to dispose of this excess inventory; however, in performing a detailed review of the non-core inventory, the Company concluded that the time, effort and costs to sell most of the gold watches were excessive and that the current salvage value provided a quicker and adequate return. These gold watches and components were valued at market, which resulted in a charge to cost of sales. As of January 31, 2012, the Company substantially completed its initiative to recover gold from this non-core gold inventory.
In fiscal 2010, the Company conducted a review and identified excess non-core component inventory. The Company made the decision that it was not economically prudent to invest additional cash and effort to convert these components into finished goods, and subsequently recorded a charge of $8.8 million in cost of sales.
Long-Lived Assets
The Company periodically reviews the estimated useful lives of its depreciable assets based on factors including historical experience, the expected beneficial service period of the asset, the quality and durability of the asset and the Company’s maintenance policy including periodic upgrades. Changes in useful lives are made on a prospective basis unless factors indicate the carrying amounts of the assets may not be recoverable and an impairment is necessary.
The Company performs an impairment review of its long-lived assets once events or changes in circumstances indicate, in management’s judgment, that the carrying value of such assets may not be recoverable. When such a determination has been made, management compares the carrying value of the assets with their estimated future undiscounted cash flows. If it is determined that an impairment loss has occurred, the loss is recognized during that period. The impairment loss is calculated as the difference between asset carrying values and the fair value of the long-lived assets.
In the first quarter of fiscal 2011, the Company determined that the carrying value of its long-lived assets with respect to certain Movado boutiques was not recoverable. The review was performed because of the closing of the boutique division and as a result, the Company recorded a non-cash pre-tax charge of $3.4 million related to the write-downs of property, plant and equipment. This charge was included in discontinued operations in the Consolidated Statements of Operations. In the fourth quarter of fiscal 2011, the Company recorded a non-cash pre-tax charge of $3.1 million, primarily related to the write-down of certain intangible assets, tooling costs and trade booths for the Basel Fair. The review was performed because of fiscal 2011 fourth quarter losses and future forecasted losses of specific business areas. This charge was included in the selling, general and administrative expenses in the Consolidated Statements of Operations. In the fourth quarter of fiscal 2010, the Company determined that the carrying value of its long-lived assets primarily with respect to certain Movado boutiques and trade booths for the Basel Fair was not recoverable. The review was performed because of the ongoing difficult economic conditions that had a negative effect on the Company’s fourth quarter ended January 31, 2010, the retail segment’s largest quarter of the year in terms of sales and profitability. As a result, the Company recorded a non-cash pre-tax charge of $7.6 million related to the write-downs of property, plant and equipment. Of these charges, $5.1 million was included in discontinued operations and $2.5 million was included in the selling, general and administrative expenses in the Consolidated Statements of Operations. All of the above impairment charges were calculated as the difference between the assets’ carrying values and their estimated fair value. In each case, the estimated fair value of the assets was zero as the future undiscounted cash flow was negative.
Warranties
All watches sold by the Company come with limited warranties covering the movement against defects in material and workmanship for periods ranging from two to three years from the date of purchase, with the exception of Tommy Hilfiger watches, for which the warranty period is ten years. In addition, the warranty period is five years for the gold plating on certain Movado watch cases and bracelets. The Company records an estimate for future warranty costs based on historical repair costs. Warranty costs have historically been within the Company’s expectations and the provisions established. If such costs were to substantially exceed estimates, this could have an adverse effect on the Company’s operating results.
Stock-Based Compensation
Under the accounting guidance for share-based payments, the Company utilizes the Black-Scholes option-pricing model to calculate the fair value of each option at the grant date which requires that certain assumptions be made. The expected life of stock option grants is determined using historical data and represents the time period during which the stock option is expected to be outstanding until it is exercised. The risk free interest rate is the yield on the grant date of U.S. Treasury constant maturities with a maturity date closest to the expected life of the stock option. The expected stock price volatility is derived from historical volatility and calculated based on the estimated term structure of the stock option grant. The expected dividend yield is calculated using the expected annualized dividend which remains constant during the expected term of the option.
Compensation expense for equity instruments is accrued based on the estimated number of instruments for which the requisite service is expected to be rendered. Additionally, for performance based awards, compensation expense is accrued only if it is probable that the performance condition will be achieved. The Company reviews the estimates of forfeitures and the probability of performance conditions being achieved at each reporting period. Any changes to compensation expense as a result of a change in these estimates are reflected in the period of change. Expense related to stock option compensation is recognized on a straight-line basis over the vesting term. During fiscal 2010, as a result of the deteriorating global economy, it became apparent that the performance goals for certain performance based awards would not be achieved. This resulted in the reversal of previously accrued stock-based compensation expenses of approximately $0.7 million. No performance based awards were granted in fiscal years 2012 or 2011.
Income Taxes
The Company follows the asset and liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax laws and tax rates in each jurisdiction where the Company operates, and applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income in the period that includes the enactment date. In addition, the amounts of any future tax benefits are reduced by a valuation allowance to the extent such benefits are not expected to be realized on a more-likely-than-not basis. The Company calculates estimated income taxes in each of the jurisdictions in which it operates. This process involves estimating actual current tax expense along with assessing temporary differences resulting from differing treatment of items for both book and tax purposes. See Note 7 to the Company’s Consolidated Financial Statements for further information regarding income taxes.
The Company follows guidance for accounting for uncertainty in income taxes. This guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. This guidance also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview
The Company conducts its business primarily in two operating segments: Wholesale and Retail. The Company’s Wholesale segment includes the designing, manufacturing and distribution of quality watches. The Retail segment includes the Company’s outlet stores and, until February 14, 2012, also included the Movado brand flagship store located at Rockefeller Center in New York City. Effective February 14, 2012 the Rockefeller Center store closed, as the Company was not able to renew its lease. The Company also operates in two major geographic locations: United States operations and International, the latter of which includes the results of all other Company operations.
The Company divides its watch business into distinct categories. The luxury category consists of the Ebel ® and Concord ® brands. The accessible luxury category consists of the Movado ® and ESQ ® by Movado brands. The licensed brands category represents brands distributed under license agreements and includes Coach ® , HUGO BOSS ® , Juicy Couture ® , Lacoste ® and Tommy Hilfiger ® . Movado Group, Inc. also plans to launch a collection of SCUDERIA FERRARI ® watches beginning in fiscal 2014.
Net sales for the three months ended April 30, 2012 were $103.7 million, above prior year by $13.8 million or 15.4%. For the period ended April 30, 2012, fluctuations in foreign currency exchange rates unfavorably impacted net sales by $1.1 million when compared to the prior year period.
Net sales for the three months ended April 30, 2012 in the wholesale segment were $93.5 million, above the prior year period by $13.5 million or 16.9%. The increase in net sales was driven by growth in both the United States and International locations of the wholesale segment.
Net sales for the three months ended April 30, 2012 in the United States location of the wholesale segment were $40.8 million, above the prior year period by $5.4 million or 15.2%, driven by sales increases in both the licensed and accessible luxury brand categories. Net sales in the accessible luxury category were above prior year by $3.4 million, or 16.1%, which in the current year period included a $1.8 million sales reserve for anticipated returns of older ESQ by Movado watch styles pursuant to the Company’s new strategy to minimize non-go forward inventory and maximize go-forward inventory at the retail level. The increase in sales in the accessible luxury category was primarily due to strong sell-through in the Company’s distribution channels, higher sales of the Movado BOLD collection and continued focus and investment in marketing and advertising. Net sales in the licensed brand category were above the prior year period by $2.6 million, or 23.1%, primarily due to increased demand driven by innovative product designs and key price points that are resonating well with customers. These sales increases were partially offset by lower net sales in the luxury category of $0.2 million when compared to the prior year period.
Net sales for the three months ended April 30, 2012 in the International location of the wholesale segment were $52.7 million, above the prior year period by $8.1 million or 18.2%, driven by sales increases in the licensed brand category, partially offset by a sales decrease in the luxury and accessible luxury brand categories. Net sales in the licensed brand category were above the prior year period by $9.5 million, or 32.8%, primarily due to continued growth in existing markets resulting from higher demand, as well as new market expansion. Net sales in the luxury category were below the prior year period by $0.9 million, or 15.5% primarily due to the category being less promotional when compared to the prior year period. Net sales in the accessible luxury category were below the prior year period by $0.6 million, or 8.3%, primarily driven by lower sales in South America and Canada. For the three months ended April 30, 2012, fluctuations in foreign currency exchange rates unfavorably impacted net sales by $1.1 million when compared to the prior year period.
Net sales for the three months ended April 30, 2012 in the retail segment were $10.1 million, above the prior year period by $0.3 million or 3.0%. As of April 30, 2012 and 2011, the Company operated 33 outlet stores.
Gross Profit. Gross profit for the three months ended April 30, 2012 was $59.0 million or 56.9% of net sales as compared to $48.6 million or 54.1% of net sales for the three months ended April 30, 2011. The increase in gross profit of $10.4 million was primarily due to higher net sales and, to a lesser extent, the higher gross margin percentage achieved. The gross margin percentage for the three months ended April 30, 2012 was favorably impacted by approximately 190 basis points related to a shift in channel and product mix and 130 basis points resulting from leverage gained on certain fixed costs due to the increase in sales volume year-over-year. When compared to the prior year, the gross margin for the three months ended April 30, 2012 was unfavorably impacted by approximately 40 basis points due to fluctuations in foreign currency exchange rates.
Selling, General and Administrative (“SG&A”). SG&A expenses for the three months ended April 30, 2012 were $50.5 million, representing an increase above the prior year period of $3.5 million or 7.4%. The increase in SG&A expense included higher compensation and benefit expense of $2.8 million during the current year period resulting from salary increases, certain employee benefits and performance-based compensation. Additionally, higher marketing expense of $1.1 million was recorded during the current year period resulting from the Company’s decision to continue investment in this area to drive sales growth. The effect of fluctuations in foreign currency exchange rates favorably impacted SG&A expenses for the three months ended April 30, 2012 by $0.4 million, which was the result of lower transactional losses recorded year-over-year related to foreign denominated assets held in strengthening currencies.
Wholesale Operating Income. Operating income of $7.1 million and $1.0 million was recorded in the wholesale segment for the three months ended April 30, 2012 and 2011, respectively. The $6.1 million increase in operating income was the net result of an increase in gross profit of $9.7 million, partially offset by an increase in SG&A expenses of $3.6 million. The increase in gross profit of $9.7 million was primarily due to higher net sales and, to a lesser extent, the higher gross margin percentage achieved. The increase in SG&A expense included higher compensation and benefit expense of $2.8 million during the current year period resulting from salary increases, certain employee benefits and performance-based compensation. Additionally, higher marketing expense of $1.1 million was recorded during the current year period resulting from the Company’s decision to continue investment in this area to drive sales growth. The effect of fluctuations in foreign currency exchange rates favorably impacted SG&A expenses for the three months ended April 30, 2012 by $0.4 million, which was the result of lower transactional losses recorded year-over-year related to foreign denominated assets held in strengthening currencies.
Retail Operating Income. Operating income of $1.4 million and $0.6 million was recorded in the retail segment for the three months ended April 30, 2012 and 2011, respectively. The $0.8 million increase in operating income was the net result of an increase in gross profit of $0.7 million and a slight decrease in SG&A expenses. The increase in gross profit of $0.7 million was primarily attributed to higher gross margin percentage achieved and, to a lesser extent, an increase in sales volume year-over-year.
Interest Expense . Interest expense for the three months ended April 30, 2012 and 2011 was $0.1 million and $0.4 million, respectively, which primarily consisted of the amortization of deferred financing costs.
Interest Income . Interest income for both the three months ended April 30, 2012 and 2011 was immaterial.
Income Taxes . The Company recorded a tax expense of $1.6 million and $0.7 million for the three months ended April 30, 2012 and 2011, respectively. The effective tax rate for the three month period ended April 30, 2012 was 19.1%. The effective tax rate for the three month period ended April 30, 2011 was 58.3%. The effective tax rates for both periods include the application of guidelines related to accounting for income taxes in interim periods.
Net Income Attributed to Movado Group, Inc. For the three months ended April 30, 2012, the Company recorded net income of $6.6 million, compared to a net income of $0.5 million recorded for the three months ended April 30, 2011.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2012 and April 30, 2011 the Company had $158.8 million and $109.3 million of cash and cash equivalents, $113.7 million and $86.9 million of which consisted of cash and cash equivalents at the Company’s foreign subsidiaries, respectively. The majority of the foreign cash balances are associated with earnings that the Company has asserted are permanently reinvested, and which are required to support continued growth outside the U.S. through funding of capital expenditures, operating expenses and similar cash needs of the foreign operations. The Company intends to repatriate certain excess cash balances in Hong Kong and Switzerland, and has provided tax accordingly.
Cash used in operating activities was $24.4 million for three months ended April 30, 2012 compared to cash provided by operations of $3.6 million for the three months ended April 30, 2011. The $24.4 million of cash used in operating activities for the fiscal 2013 period was primarily due to the change in working capital of $34.5 million offset by net income for the period of $6.8 million and favorable non-cash items of $3.6 million. The change in working capital of $34.5 million was primarily due to the pay down of liabilities and an increase in inventory. The $3.6 million of cash provided by operating activities for the fiscal 2012 period was the result of net income for the period of $0.5 million and favorable non-cash items of $3.5 million.
Cash used in investing activities amounted to $0.8 million for the three months ended April 30, 2012 and $1.6 million for the three months ended April 30, 2011. The cash used during both periods consisted of capital expenditures which included integration of computer hardware and software, as well as spending for tooling and design.
Cash used in financing activities amounted to $0.8 million for both the three months ended April 30, 2012 and 2011, respectively, primarily to pay dividends. Cash used in financing activities for both the three months ended April 30, 2012 and 2011, was primarily to pay dividends. Cash used in financing activities for the three months ended April 30, 2012 was slightly offset by the result of stock option exercises for the quarter.
On July 17, 2009, the Company, together with Movado Group Delaware Holdings Corporation, Movado Retail Group, Inc. and Movado LLC (together with the Company, the “Borrowers”), each a wholly-owned domestic subsidiary of the Company, entered into an Amended and Restated Loan and Security Agreement (the “Original Loan Agreement”) with Bank of America, N.A. and Bank Leumi USA, as lenders (“Lenders”), and Bank of America, N.A., as agent (in such capacity, the “Agent”). The parties amended the Original Loan Agreement by entering into Amendment No. 1 thereto (“First Amendment”) on April 5, 2011 and Amendment No. 2 thereto (“Second Amendment”) on March 12, 2012 (the Original Loan Agreement, as so amended, the “Loan Agreement”). The Loan Agreement provides for a $25.0 million asset based senior secured revolving credit facility (the “Facility”), including a $15.0 million letter of credit subfacility, and provides that Borrowers are entitled to request that Lenders increase the Facility up to $50 million subject to any additional terms and conditions the parties may agree upon. The maturity date of the Facility is March 12, 2015.
Availability under the Facility is determined by reference to a borrowing base which is based on the sum of a percentage of eligible accounts receivable and eligible inventory of the Borrowers. $10.0 million in availability is blocked unless the Borrowers have achieved for the most recently ended four fiscal quarter period a consolidated fixed charge coverage ratio of at least 1.25 to 1.0 with domestic EBITDA greater than $10.0 million. The Borrowers are not currently subject to the availability block. The availability block, if applicable, will be reduced by the amount by which the borrowing base exceeds $25.0 million, up to a maximum reduction of $5.0 million. Availability under the Facility may be further reduced by certain reserves established by the Agent in its good faith credit judgment. The Second Amendment reduced the Lenders’ total commitment under the Loan Agreement from $55 million to $25 million and consequently availability was correspondingly reduced. As of April 30, 2012, total availability under the Facility, giving effect to an availability block of $0, no outstanding borrowings and the letters of credit outstanding under the subfacility, was $20.4 million.
The initial applicable margin for LIBOR rate loans was 4.25% and for base rate loans was 3.25%. After July 17, 2010, the applicable margins decreased or increased by 0.25% per annum from the initial applicable margins depending on whether average availability for the most recently completed fiscal quarter was either greater than $12.5 million, or was $5.0 million or less, respectively. The First Amendment reduced the applicable margins for both LIBOR rate loans and base rate loans by 1.25% and the Second Amendment further reduced the applicable margins by 0.75%. Accordingly, as of April 30, 2012 and based on current availability, the applicable margins were 2.00% and 1.00% for LIBOR and base rate loans, respectively.
After the date (the “Block Release Date”) when availability under the Facility is no longer subject to any blocked amount, if borrowing availability is less than $12.5 million, the Borrowers will be subject to a minimum fixed charge coverage ratio until such time as borrowing availability has been greater than $12.5 million for at least 90 consecutive days.
After the Block Release Date, cash dominion will be imposed if borrowing availability is less than $10.0 million and will continue until such time as borrowing availability has been greater than $10.0 million for at least 45 consecutive days. As of April 30, 2012, the Borrowers were not subject to cash dominion nor do the Borrowers expect to be subject to such a requirement in the foreseeable future.
The Loan Agreement contains additional affirmative and negative covenants binding on the Borrowers and their subsidiaries that are customary for asset based facilities, including, but not limited to, restrictions and limitations on the incurrence of debt for borrowed money and liens, dispositions of assets, capital expenditures, dividends and other payments in respect of equity interests, the making of loans and equity investments, prepayments of subordinated and certain other debt, mergers, consolidations, liquidations and dissolutions, and transactions with affiliates. The Loan Agreement permits Borrowers to pay distributions as dividends and make share repurchases up to $150.0 million (less the amount of any charitable donations made by the Company which are permitted up to an aggregate amount of $14 million) and make acquisitions up to $50.0 million, as long as Borrowers either have cash assets of at least $60.0 million with no revolver loans outstanding, or (i) the consolidated fixed charge coverage ratio is at least 1.25 to 1.00, (ii) availability is greater than $12.5 million and (iii) positive EBITDA plus repatriated cash dividends minus restricted payments are greater than $0. The Company believed that, as of April 30, 2012, it was in compliance with these financial covenants and, therefore, that it is permitted to pay dividends. The Company presently expects that it will be able to pay dividends through the remaining term of the Facility.
The Loan Agreement contains events of default that are customary for facilities of this type, including, but not limited to, nonpayment of principal, interest, fees and other amounts when due, failure of any representation or warranty to be true in any material respect when made or deemed made, violation of covenants, cross default, material judgments, material ERISA liability, bankruptcy events, material loss of collateral in excess of insured amounts, asserted or actual revocation or invalidity of the loan documents, change of control and events or circumstances having a material adverse effect. The borrowings under the Facility are joint and several obligations of the Borrowers and also cross-guaranteed by each Borrower. In addition, the Borrowers’ obligations under the Facility are secured by first priority liens, subject to permitted liens, on substantially all of the Borrowers’ U.S. assets (other than certain excluded assets).
A Swiss subsidiary of the Company maintains unsecured lines of credit with an unspecified length of time with a Swiss bank. As of April 30, 2012 and 2011, these lines of credit totaled 10.0 million Swiss francs for both periods, with dollar equivalents of $11.0 million and $11.4 million, respectively. As of April 30, 2012 and 2011, there were no borrowings against these lines. As of April 30, 2012, two European banks have guaranteed obligations to third parties on behalf of two of the Company’s foreign subsidiaries in the amount of $1.9 million in various foreign currencies.
The Company paid dividends of $0.05 per share or approximately $1.2 million compared to $0.03 per share or approximately $0.7 million for the three months ended April 30, 2012 and 2011, respectively. The Company also declared a special cash dividend of $0.50 per share or approximately $12.6 million, which was paid on May 15, 2012 to all shareholders of record on April 30, 2012.
On April 15, 2008, the Board authorized a program to repurchase up to one million shares of the Company’s common stock. Under this authorization, the Company has the option to repurchase shares over time, with the amount and timing of repurchases depending on market conditions and corporate needs. The Company entered into a Rule 10b5-1 plan to facilitate repurchases of its shares under this authorization. A Rule 10b5-1 plan permits a company to repurchase shares at times when it might otherwise be prevented from doing so, provided the plan is adopted when the company is not aware of material non-public information. The Company may suspend or discontinue the repurchase of stock at any time. Under this share repurchase program, the Company had repurchased a total of 937,360 shares of common stock in the open market during the first and second quarters of fiscal 2009 at a total cost of approximately $19.5 million or $20.79 average per share. During the three months ended April 30, 2012, the Company did not repurchase shares of common stock under this program.
Cash at April 30, 2012 amounted to $158.8 million compared to $109.3 million at April 30, 2011. The increase in cash is primarily the result of cash provided by operations.
Management believes that the cash on hand in addition to the expected cash flow from operations and the Company’s short-term borrowing capacity will be sufficient to meet its working capital needs for at least the next twelve months.
Off-Balance Sheet Arrangements
The Company does not have off-balance sheet financing or unconsolidated special-purpose entities.
CONF CALL
Leigh Parrish
Good morning everyone and thank you for joining us today. With me on the call is Efraim Grinberg, Chairman, President and CEO; Rick Cote, Chief Operating Officer and Sallie DeMarsilis, Chief Financial Officer. Before we begin I would like to note that this conference call contains forward-looking statements which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Factors which could cause actual results to be materially different from any future results expressed or implied are discussed in our filings with the SEC. Such forward-looking statements include statements regarding Movado Group’s performance for fiscal 2010 and beyond. However, the failure to update this information should not be taken as Movado’s acceptance of these estimates on a continuing basis. Movado Group may also choose to discontinue presenting future estimates at any time.
Let me now outline the order of speakers and topics for today’s conference call. Efraim will begin with the highlights of the second quarter, Sallie will review the financial details and Rick will then provide you with an update on our operating in initiatives along with the company’s financial outlook. The Company would then be glad to answer any questions you might have.
I would now like to turn the call over to Efraim.
Efraim Grinberg
Thank you. Good morning everyone. Since early last year we have discussed the challenges of the global economy and the significant impact on the retail environment, consumer spending and more specifically on the watch and jewelry industry. We are neither expecting nor are we planning our business around any type of fast recovery in the world economy. We are beginning to see some stability in the market, particularly in the U.S., although it should come as no surprise that the European market which began to experience the economic downturn later than the U.S. was somewhat more challenging in the second quarter.
With all this in mind I am pleased with our results during the second quarter and our ability to return to profitability earlier than anticipated. We have maintained a disciplined approach to managing our business including stringent expense management coupled with a keen focus on our capital position. At the same time we continue to provide products at a variety of price points and offer compelling marketing and advertising campaigns that differentiate our brands in the marketplace. We believe we are doing the right things to position Movado Group in a challenging environment.
Further, we are beginning to see more consistent orders from many of our retail customers in the U.S. after significant de-stocking late last year and earlier this year. We have also had a number of important retailers go out of business. Collectively, our strategic initiatives and our team’s steadfast execution have enabled us to efficiently address the current sales environment while helping us to achieve better than expected results during the quarter.
Although we recognize consumers are maintaining a conservative posture on spending, we are encouraged by some bright spots we are seeing as we have introduced new products and more acceptable price points within each of our brands. Within our Movado brand we have been encouraged by the enthusiastic response and strong sell through we have received for our new Sub Sea Collection priced from $795-995, the Movado sweet spot.
This month we are also introducing a new collection of watches designed by the artist Kenny Scharf. This series of watches has already been featured in leading fashion publications in September. The collection, which is made up of six different designs will predominately be sold in our Movado Boutiques.
In addition we are also launching a new Pinnacle Collection for Movado. The Movado Master features an automatic movement, a natural rubber strap and a sapphire bezel. The collection ranges in price from $3,000 to $5,000. The Movado Master will be heavily advertised this fall. Overall we believe the Movado brand has maintained a leadership position in its category and we are pleased with the exciting opportunities to build on the aspirational nature of the brand.
Turning to our boutiques, as you may recall we implemented the unified Movado brand strategy early in 2008 and we leveraged the strength of the Movado brand across all distribution channels. This included enhancing the performance of our boutiques as we plan to dedicate increased space to watches and to offer more unique and exclusive products while being more selective in our jewelry assortment.
Our boutiques provide us an exclusive and proprietary opportunity to feature Movado jewelry and we believe this really sets our store apart. With that in mind we will launch several new Movado jewelry collections in our Boutiques this fall supported by a strong advertising program this holiday season. We remain confident our boutiques will continue to play an important role in the future of the Movado brand in both jewelry and watches.
In February we established a new subsidiary in China, first to distribute the Movado brand in China and also to provide a platform for the distribution of our other brands in this fast growing market. We are very pleased with our recent performance of Movado in this high potential market place and we will begin launching our licensed brands in China this fall.
This spring we began the rebranding of ESQ to ESQ by Movado. The initial results appear to be promising and can help to provide an entry level product for our retailers with a strong association to the Movado brand. This fall we will begin a comprehensive online and print marketing program to communicate the ESQ by Movado initiative.
Our licensed brand category has also been affected during the first half by the economic environment especially by the impact of the consumer in Latin America and Europe. However, we have introduced sharper price points in each of our brands and believe this will have a positive impact along with exciting new product introductions. We are already beginning to see positive results as we address consumer needs for an improved value proposition.
The luxury segment remains weak across the board. We are now positioning our luxury brands Ebel and Concord for recovery in 2010 with focused product introductions and innovative marketing programs beginning next spring. We have our two most challenging quarters behind us and I am satisfied with our execution and performance despite the headwinds we faced in the global environment. We are operating as a much more efficient organization and giving close attention to consumers as we see a new economy emerging where they are looking for excellent value.
As such, we are adapting our new products to address their needs by delivering value across our strong portfolio of brands from the high end of the luxury market to the more affordable fashion watch category. As a result, we believe we are well positioned to capture growth and market share. Before I turn the call over to Sallie I would like to remember David Taylor, a long-time shareholder and supporter of our company who recently passed away. David was a frequent participant on these calls and will be missed.
Now let me turn the call over to Sallie.
Sallie DeMarsilis
Thank you Efraim. Good morning everyone. On a GAAP basis we reported a second quarter net income of $500,000 or $0.02 per diluted share compared to net income of $8.1 million or $0.32 per diluted share in the prior year. Sales for the second quarter were $89.7 million, down from last year by $40 million or 30.8%. Net sales for this year included $1 million of excess discontinued inventory.
Including the sales of discontinued products, sales declined by 31.6%. The balance [inaudible] as it relates to sales and gross margin excludes the excess discontinued product sales reported in the second quarter of fiscal 2010. Year-ago sales and gross margin results do not include any such sales.
For the second quarter sales in our wholesale segment were $68.6 million or 35.9% of prior year sales of $107 million. Sales were below prior year in all categories, most significantly in the luxury and accessible luxury categories. The U.S. wholesale was below prior year by $15.9 million or 33%. The decrease was primarily driven by the luxury and accessible luxury categories.
Sales in the licensed brand category were flat to last year. The international wholesale business was down by $22.6 million or 38.3% year-over-year. Lower sales were recorded in all categories as compared to last year. The retail business posted an 11.2% sales decrease over last year. The company outlet store sales were below prior year by 6.3% and sales in the Movado Boutiques decreased by 19.7%. At July 31, the company operated 27 Movado Boutiques and 31 outlet stores.
Gross profit in the second quarter was $52.6 million versus $83.2 million last year. Gross margin for the quarter was 59.3% as compared to 64.1% last year. The overall decrease in gross margin was primarily driven by promotional activity in our retail business and the overall mix of the business.
Results for the second quarter of the current year include a $1.3 million charge for one-time costs incurred in connection with the repayment of $25 million that was outstanding under our former note agreement and other costs related to the refinancing of our revolving credit facility. The results of the second quarter of the prior year included a $2.2 million charge or $0.06 per diluted share related to severance associated with our previously announced expense reduction programs.
The balance of my comments as they relate to the quarter will exclude these charges for comparison purposes. Operating expenses for the quarter were $49.5 million below prior year by $29.3 million or 29%. The decrease was primarily the result of initiatives to streamline operations and reduce expenses which included lower marketing expenses of $7.5 million and lower expenses across all other operating expense categories of $12.8 million.
The operating income for the quarter was $3.1 million compared to operating income of $13.3 million last year. Income tax expense of $1 million reflects a 42.8% tax rate in the second quarter compared to income tax expense of $3.2 million or a 24.6% tax rate reported last year. The tax rate in the current period included adjustments of $200,000. The effective tax rate excluding these adjustments was 24.5%.
On an adjusted basis, second quarter net income was $1.4 million or $0.06 per diluted share compared to net income of $9.8 million or $0.39 per diluted share in the prior year.
Now looking at our year-to-date results, on a GAAP basis for the six month period we reported a net loss of $8.4 million or $0.34 per diluted share compared to net income of $9.4 million or $0.36 per diluted share in the prior year. Sales for the six month period were $157.3 million. The net sales for this year included $5.3 million in excess and discontinued inventory. Excluding the sales of discontinued products, net sales decreased by 34.2%.
Once again let me remind you the balance of my remarks as they relate to sales and gross margins will exclude the excess discontinued product sales reported this year. Sales in our wholesale segment were $116.2 million or 39.6% from the prior year sales of $192.3 million. Sales were below prior year in all categories, most significantly in the luxury and accessible luxury categories.
The U.S. wholesale business was below prior year by $34.6 million or 40.6%. The international wholesale business was down by $41.5 million or 38.8% year-over-year. Net sales in the retail segment were $35.9 million or below prior year by 7.5%. Gross profit for the six months was $90.4 million versus $147.5 million last year. Gross margin for the six months was 59.5% as compared to 63.8% last year. The decrease in gross margin was primarily driven by promotional activity in our retail business and the overall mix of business.
As previously discussed, year-to-date sales included a $1.3 million charge related to the repayment and refinancing of our revolving credit facility and the results for the six months of the prior year include a $2.2 million charge or $0.06 per diluted share related to our previously announced expense reduction programs. The balance of my comments for the six month period will exclude these charges for comparative purposes.
Operating expenses for the six months were $97.7 million below prior year by $34.9 million or 26.3%. The decrease was primarily the result of initiatives to streamline operations and reduce expenses which included lower marketing expenses of $13.7 million and lower expenses across all other operating expense categories of $21.2 million.
Income taxes were provided at a 16.9% effective tax rate versus a 25.4% rate for the prior year. The tax rate for the six month period included adjustments of $400,000. The effective tax rate excluding these adjustments was 24.5%. On an adjusted basis for the six months period, net loss was $7.2 million or $0.29 per diluted share compared to net income of $11 million or $0.42 per diluted share in the prior year.
Now taking a quick look at our balance sheet our cash at July 31, 2009 was $47.5 million compared to $84.5 million last year. Our debt has been reduced to $40 million at the end of the current period. Accounts receivable of $76.7 million are below prior year by $19.7 million. The lower receivables year-over-year were primarily due to the decline in our sales.
Inventory of $248.2 million increased from $238.7 million last year. Due to the lead times required when purchasing inventory orders were placed well in advance of the downturn of the economy. The decrease in sales volume causes these receipts to remain in inventory.
Lastly, capital expenditures for the six months were $2.9 million and depreciation expense was $9 million which includes depreciation for our new ERT system.
Now let me turn the call over to Rick.
Richard Cote
Thank you Sallie. Good morning everyone. The aggressive actions we took last year to enhance our operational efficiencies are continuing to translate into tangible improvement in our financial results. As a reminder, throughout the year we are focused on improving our cost structure, preserving cash, maintaining a strong balance sheet and funding our business appropriate for future growth.
First, let me update you on the progress we have continued to make against the cost savings initiatives we began implementing last year. Through continued execution of our expense management program we have successfully reduced operating expenses by $37.1 million or 27% from the first half of last year. As Efraim mentioned, this was achieved while supporting our brands’ strong advertising and marketing programs. As a result of our efforts, we remain on track to reach our goal of annualized savings between $50-60 million most of which we expect to realize this year.
Second, capital expenditure reductions. As we have continued to focus on preserving capital we have only budgeted spending this year for those projects being deemed absolutely necessary. As a result, we continue to expect CapEx in fiscal 2010 to be no more than $10 million versus $23 million last year.
Third, we are continuing to focus on cash flow management as well as reducing inventory levels to align with current sales trends. We remain committed to curtailing orders while being very selective and strategic with the new products we are bringing to the market place. We continue to believe the benefits of these actions coupled with retailers replenishing ahead of the holiday season will begin to be seen in our inventory levels and cash flow during the second half of this year. Importantly, we expect to return to being free cash flow positive this year.
Now I would like to turn to our financial outlook for fiscal 2010. While our visibility has improved since early this year, the economic environment remains extremely challenging. As I mentioned earlier, we are gaining traction with our cost reduction initiatives which have helped to mitigate the effects of the difficult consumer landscape.
We continue to expect a high single digit sales decline for the year and to maintain current adjusted gross margin levels of approximately 60%. With these factors in mind and as you may have seen in our press release this morning we reiterated we estimate fiscal 2010 fully diluted earnings per share to be approximately $0.50. I would like to note that this includes a $0.04 one-time charge reported in the second quarter. This guidance continues to be predicated on the improvement in sales trends during the second half of fiscal 2010 as retailers purchase inventory in preparation for the holiday season.
With that I would now like to open up the call to your questions.
|
|
Fund Letters
