UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
For
the Quarterly Period Ended April 30, 2007
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from to
Commission
File Number 1-16497
MOVADO
GROUP, INC.
(Exact
Name of Registrant as Specified in its Charter)
New
York
|
|
13-2595932
|
(State
of Other Jurisdiction
|
|
(IRS
Employer
|
of
Incorporation or Organization)
|
|
Identification
No.)
|
|
|
|
650
From Road, Paramus, New Jersey
|
|
07652
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
(201)
267-8000
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
that past 90 days. Yes
x No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer'' or "large accelerated filer'' in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer ¨ Accelerated
filer x Non-accelerated
filer ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
¨ No
x
The
number of shares outstanding of the registrant's common stock and class A
common
stock as of May 24, 2007 were 19,281,298 and 6,634,319, respectively.
MOVADO
GROUP, INC.
Index
to Quarterly Report on Form 10-Q
April
30, 2007
|
|
|
Page
|
Part
I
|
Financial
Information (Unaudited)
|
|
|
|
|
|
|
Item
1.
|
Consolidated
Balance Sheets at April 30, 2007, January 31, 2007 and April 30,
2006
|
3
|
|
|
|
|
|
|
Consolidated
Statements of Income for the three months ended April 30, 2007
and
2006
|
4
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the three months ended April 30, 2007
and
2006
|
5
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
6
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
11
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
19
|
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
20
|
|
|
|
Part
II
|
Other
Information
|
|
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
21
|
|
|
|
|
|
Item
6.
|
Exhibits
|
21
|
|
|
|
Signature
|
|
22
|
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements
MOVADO
GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share and per share amounts)
(Unaudited)
|
|
April
30, 2007
|
|
January
31, 2007
|
|
April
30, 2006
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
101,769
|
|
$
|
133,011
|
|
$
|
82,560
|
|
Trade
receivables, net
|
|
|
105,753
|
|
|
111,417
|
|
|
116,523
|
|
Inventories,
net
|
|
|
212,106
|
|
|
193,342
|
|
|
213,763
|
|
Other
current assets
|
|
|
39,510
|
|
|
35,109
|
|
|
34,199
|
|
Total
current assets
|
|
|
459,138
|
|
|
472,879
|
|
|
447,045
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
58,297
|
|
|
56,823
|
|
|
51,003
|
|
Other
non-current assets
|
|
|
63,597
|
|
|
47,916
|
|
|
39,774
|
|
Total
assets
|
|
$
|
581,032
|
|
$
|
577,618
|
|
$
|
537,822
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
5,000
|
|
$
|
5,000
|
|
$
|
5,000
|
|
Accounts
payable
|
|
|
26,304
|
|
|
32,901
|
|
|
26,949
|
|
Accrued
liabilities
|
|
|
39,946
|
|
|
45,610
|
|
|
42,231
|
|
Current
taxes payable
|
|
|
1,076
|
|
|
5,011
|
|
|
287
|
|
Deferred
taxes
|
|
|
963
|
|
|
935
|
|
|
871
|
|
Total
current liabilities
|
|
|
73,289
|
|
|
89,457
|
|
|
75,338
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
71,454
|
|
|
75,196
|
|
|
97,323
|
|
Deferred
and non-current income taxes
|
|
|
33,086
|
|
|
11,054
|
|
|
13,181
|
|
Other
non-current liabilities
|
|
|
24,130
|
|
|
23,087
|
|
|
20,244
|
|
Total
liabilities
|
|
|
201,959
|
|
|
198,794
|
|
|
206,086
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
536
|
|
|
443
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock, $0.01 par value, 5,000,000 shares authorized; no shares
issued
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Common
Stock, $0.01 par value, 100,000,000 shares authorized; 23,984,282,
23,872,262 and 23,260,013 shares issued, respectively
|
|
|
240
|
|
|
239
|
|
|
233
|
|
Class
A Common Stock, $0.01 par value, 30,000,000 shares authorized;
6,638,239,
6,642,159 and 6,766,909 shares issued and outstanding,
respectively
|
|
|
66
|
|
|
66
|
|
|
68
|
|
Capital
in excess of par value
|
|
|
119,566
|
|
|
117,811
|
|
|
109,387
|
|
Retained
earnings
|
|
|
273,147
|
|
|
280,495
|
|
|
237,850
|
|
Accumulated
other comprehensive income
|
|
|
38,975
|
|
|
32,307
|
|
|
34,742
|
|
Treasury
Stock, 4,706,904, 4,678,244 and 4,613,645 shares, respectively,
at
cost
|
|
|
(53,457
|
)
|
|
(52,537
|
)
|
|
(50,775
|
)
|
Total
shareholders’ equity
|
|
|
378,537
|
|
|
378,381
|
|
|
331,505
|
|
Total
liabilities and equity
|
|
$
|
581,032
|
|
$
|
577,618
|
|
$
|
537,822
|
|
See
Notes to Consolidated Financial Statements
MOVADO
GROUP, INC.
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per share amounts)
(Unaudited)
|
|
Three
Months Ended April 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
101,363
|
|
$
|
97,744
|
|
Cost
of sales
|
|
|
39,711
|
|
|
38,154
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
61,652
|
|
|
59,590
|
|
Selling,
general and administrative
|
|
|
58,880
|
|
|
56,156
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
2,772
|
|
|
3,434
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(879
|
)
|
|
(943
|
)
|
Interest
income
|
|
|
1,247
|
|
|
891
|
|
|
|
|
|
|
|
|
|
Income
before income taxes and minority interest
|
|
|
3,140
|
|
|
3,382
|
|
Provision
for income taxes (Note 2)
|
|
|
647
|
|
|
606
|
|
Minority
interest
|
|
|
93
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,400
|
|
$
|
2,855
|
|
|
|
|
|
|
|
|
|
Basic
income per share:
|
|
|
|
|
|
|
|
Net
income per share
|
|
$
|
0.09
|
|
$
|
0.11
|
|
Weighted
basic average shares outstanding
|
|
|
25,916
|
|
|
25,436
|
|
|
|
|
|
|
|
|
|
Diluted
income per share:
|
|
|
|
|
|
|
|
Net
income per share
|
|
$
|
0.09
|
|
$
|
0.11
|
|
Weighted
diluted average shares outstanding
|
|
|
27,175
|
|
|
26,395
|
|
|
|
|
|
|
|
|
|
Dividends
paid per share
|
|
$
|
0.08
|
|
$
|
0.06
|
|
See
Notes to Consolidated Financial Statements
MOVADO
GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Three
Months Ended April 30,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
2,400
|
|
$
|
2,855
|
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
4,101
|
|
|
3,669
|
|
Deferred
income taxes
|
|
|
(1,304
|
)
|
|
(858
|
)
|
Provision
for losses on accounts receivable
|
|
|
324
|
|
|
684
|
|
Provision
for losses on inventory
|
|
|
161
|
|
|
180
|
|
Loss
on disposition of property, plant and equipment
|
|
|
1,075
|
|
|
-
|
|
Stock-based
compensation
|
|
|
915
|
|
|
539
|
|
Excess
tax benefit from stock-based compensation
|
|
|
(572
|
)
|
|
(460
|
)
|
Minority
interest
|
|
|
93
|
|
|
(79
|
)
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
6,626
|
|
|
(6,159
|
)
|
Inventories
|
|
|
(15,481
|
)
|
|
(12,142
|
)
|
Other
current assets
|
|
|
(1,628
|
)
|
|
(2,147
|
)
|
Accounts
payable
|
|
|
(6,999
|
)
|
|
(2,493
|
)
|
Accrued
liabilities
|
|
|
(4,983
|
)
|
|
(7,561
|
)
|
Current
taxes payable
|
|
|
(3,389
|
)
|
|
(6,965
|
)
|
Other
non-current assets
|
|
|
(1,691
|
)
|
|
(1,063
|
)
|
Other
non-current liabilities
|
|
|
1,039
|
|
|
748
|
|
Net
cash used in operating activities
|
|
|
(19,313
|
)
|
|
(31,252
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(6,080
|
)
|
|
(2,138
|
)
|
Trademarks
|
|
|
(66
|
)
|
|
(119
|
)
|
Net
cash used in investing activities
|
|
|
(6,146
|
)
|
|
(2,257
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
repayments of bank borrowings
|
|
|
(4,936
|
)
|
|
(9,391
|
)
|
Stock
options exercised and other changes
|
|
|
(650
|
)
|
|
423
|
|
Excess
tax benefit from stock-based compensation
|
|
|
572
|
|
|
460
|
|
Dividends
paid
|
|
|
(2,073
|
)
|
|
(1,523
|
)
|
Net
cash used in financing activities
|
|
|
(7,087
|
)
|
|
(10,031
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
1,304
|
|
|
2,475
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash
|
|
|
(31,242
|
)
|
|
(41,065
|
)
|
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
133,011
|
|
|
123,625
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$
|
101,769
|
|
$
|
82,560
|
|
See
Notes to Consolidated Financial Statements
MOVADO
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS
OF PRESENTATION
The
accompanying unaudited consolidated financial statements have been prepared
by
Movado Group, Inc. (the “Company”) in a manner consistent with that used in the
preparation of the consolidated financial statements included in the Company’s
fiscal 2007 Annual Report filed on Form 10-K. In the opinion of management,
the
accompanying consolidated financial statements reflect all adjustments,
consisting of only normal and recurring adjustments, necessary for a fair
statement of the financial position and results of operations for the periods
presented. These consolidated financial statements should be read in conjunction
with the aforementioned Annual Report. Operating results for the interim
periods
presented are not necessarily indicative of the results that may be expected
for
the full year.
NOTE
1 - RECLASSIFICATIONS
Certain
reclassifications were made to prior years’ financial statement amounts and
related note disclosures to conform to the fiscal 2008
presentation.
NOTE
2 - INCOME TAXES
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting
for
Uncertainty in Income Taxes (“FIN 48”), on February 1, 2007. As a result of the
adoption, the Company recognized a charge of approximately $7.7 million to
the
February 1, 2007 retained earnings balance. As of the date of adoption, the
Company had gross unrecognized tax benefits of $30.0 million (exclusive of
interest) of which $16.1 million, if recognized, would affect the effective
tax
rate. Interest and penalties, if any, related to unrecognized tax benefits
are
recorded in income tax expense. As of the date of adoption, the Company had
$2.5
million of accrued interest (net of tax) related to unrecognized tax benefits.
As of April 30, 2007 the Company accrued an additional $0.2 million of interest
(net of tax).
The
amount of unrecognized tax benefits (exclusive of interest) did not materially
change as of April 30, 2007.
The
Company conducts business globally and as a result, files income tax returns
with the United States and in various state and foreign jurisdictions. In
the
normal course of business the Company is subject to examination by taxing
authorities in many countries, including such major jurisdictions as
Switzerland, Hong Kong, Canada and the United States. The Company is no longer
subject to U.S. federal income tax examinations for years before the fiscal
year
ended January 31, 2004 and, with few exceptions, is no longer subject to
state
and local or foreign income tax examinations by tax authorities for years
before
the fiscal year ended January 31, 2003.
The
Internal Revenue Service commenced examinations of the Company’s consolidated
U.S. federal income tax returns for fiscal years 2004 through 2006 in the
second
quarter of fiscal 2007. It is likely that the examination phase of the audit
will conclude in fiscal 2008 and it is possible a change in the unrecognized
tax
benefits may occur; however, quantification of an estimated range cannot
be made
at this time.
Tax
expense for the three months ended April 30, 2007 and 2006 was $0.6 million
for
both periods. Taxes were recorded at a rate of 20.6% for the three months
ended April 30, 2007 which included two discrete adjustments; a decrease
to tax
expense of $0.4 million to adjust deferred tax assets for changes in state
tax
rates and the
previously
mentioned increase to tax expense of $0.2 million as a result of new FIN
48
requirements related to the recognition of accrued interest on tax
exposures. Taxes were recorded at a rate of 17.9% for the three months
ended April 30, 2006. Taxes for the prior year period included a discrete
adjustment related to the adoption of tax planning strategies in Switzerland
which utilized a greater portion of the Swiss net operating loss
carryforward.
NOTE
3 - COMPREHENSIVE INCOME
The
components of comprehensive income for the three months ended April 30, 2007
and
2006 are as follows (in thousands):
|
|
Three
Months Ended April 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,400
|
|
$
|
2,855
|
|
Net
unrealized gain on investments, net of tax
|
|
|
18
|
|
|
7
|
|
Effective
portion of unrealized gain on hedging contracts, net of
tax
|
|
|
806
|
|
|
1,905
|
|
Foreign
currency translation adjustment (1)
|
|
|
5,844
|
|
|
5,157
|
|
Total
comprehensive income
|
|
$
|
9,068
|
|
$
|
9,924
|
|
(1)
The
currency translation adjustments are not adjusted for income taxes as they
relate to permanent investments in international subsidiaries.
NOTE
4 - SEGMENT INFORMATION
The
Company follows SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." The statement requires disclosure of segment data
based on how management makes decisions about allocating resources to segments
and measuring their performance.
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, in addition to revenue generated from
after
sales service activities and shipping. The Retail segment includes the Movado
Boutiques and outlet stores.
The
Company divides its business into two major geographic segments: 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.
Operating
Segment Data for the Three Months Ended April 30, 2007 and 2006 (in
thousands):
|
|
|
|
|
|
Net
Sales
|
|
Operating
Income (Loss)
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
83,147
|
|
$
|
81,003
|
|
$
|
4,427
|
|
$
|
4,686
|
|
Retail
|
|
|
18,216
|
|
|
16,741
|
|
|
(1,655
|
)
|
|
(1,252
|
)
|
Consolidated
total
|
|
$
|
101,363
|
|
$
|
97,744
|
|
$
|
2,772
|
|
$
|
3,434
|
|
|
|
Total
Assets
|
|
|
|
April
30, 2007
|
|
January
31, 2007
|
|
April
30, 2006
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
512,865
|
|
$
|
510,380
|
|
$
|
474,521
|
|
Retail
|
|
|
68,167
|
|
|
67,238
|
|
|
63,301
|
|
Consolidated
total
|
|
$
|
581,032
|
|
$
|
577,618
|
|
$
|
537,822
|
|
Geographic
Segment Data for the Three Months Ended April 30, 2007 and 2006 (in
thousands):
|
|
|
|
|
|
Net
Sales
|
|
Operating
(Loss) Income
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
60,875
|
|
$
|
64,383
|
|
$
|
(3,825
|
)
|
$
|
(3,820
|
)
|
International
|
|
|
40,488
|
|
|
33,361
|
|
|
6,597
|
|
|
7,254
|
|
Consolidated
total
|
|
$
|
101,363
|
|
$
|
97,744
|
|
$
|
2,772
|
|
$
|
3,434
|
|
United
States and International net sales are net of intercompany sales of $61.4
million and $49.5 million for the three months ended April 30, 2007 and 2006,
respectively.
|
|
Total
Assets
|
|
|
|
April
30, 2007
|
|
January
31, 2007
|
|
April
30, 2006
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
344,252
|
|
$
|
357,650
|
|
$
|
321,611
|
|
International
|
|
|
236,780
|
|
|
219,968
|
|
|
216,211
|
|
Consolidated
total
|
|
$
|
581,032
|
|
$
|
577,618
|
|
$
|
537,822
|
|
|
|
Long-Lived
Assets
|
|
|
|
April
30, 2007
|
|
January
31, 2007
|
|
April
30, 2006
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
43,451
|
|
$
|
42,702
|
|
$
|
36,393
|
|
International
|
|
|
14,846
|
|
|
14,121
|
|
|
14,610
|
|
Consolidated
total
|
|
$
|
58,297
|
|
$
|
56,823
|
|
$
|
51,003
|
|
NOTE
5 - INVENTORIES, NET
Inventories
consist of the following (in thousands):
|
|
April
30, 2007
|
|
January
31, 2007
|
|
April
30, 2006
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
140,285
|
|
$
|
129,082
|
|
$
|
139,476
|
|
Component
parts
|
|
|
64,345
|
|
|
55,930
|
|
|
67,561
|
|
Work-in-process
|
|
|
7,476
|
|
|
8,330
|
|
|
6,726
|
|
|
|
$
|
212,106
|
|
$
|
193,342
|
|
$
|
213,763
|
|
NOTE
6 - EARNINGS PER SHARE
The
Company presents net income per share on a basic and diluted basis. Basic
earnings per share are computed using weighted-average shares outstanding
during
the period. Diluted earnings per share are computed using the weighted-average
number of shares outstanding adjusted for dilutive common stock
equivalents.
The
weighted-average number of shares outstanding for basic earnings per share
were
25,916,000 and 25,436,000 for the three months ended April 30, 2007 and 2006,
respectively. For diluted earnings per share, these amounts were increased
by
1,259,000 and 959,000 for the three months ended April 30, 2007 and 2006,
respectively, due to potentially dilutive common stock equivalents issuable
under the Company’s stock compensation plans.
NOTE
7 - COMMITMENTS AND CONTINGENCIES
At
April
30, 2007, the Company had outstanding letters of credit totaling $1.2 million
with expiration dates through June 7, 2008. One bank in the domestic bank
group
has issued irrevocable standby letters of credit for retail and operating
facility leases to various landlords, for the administration of the Movado
Boutique private-label credit card and Canadian payroll to the Royal Bank
of
Canada.
As
of
April 30, 2007, two European banks have guaranteed obligations to third parties
on behalf of two of the Company’s foreign subsidiaries in the amount of $1.7
million in various foreign currencies.
The
Company is involved from time to time in legal claims involving trademarks
and
other intellectual property, contracts, employee relations and other matters
incidental to the Company’s business. Although the outcome of such matters
cannot be determined with certainty, the Company’s general counsel and
management believe that the final outcome would not have a material effect
on
the Company’s consolidated financial position, results of operations or cash
flows.
NOTE
8 - RECENTLY
ISSUED ACCOUNTING STANDARDS
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, ‘‘Fair Value Measurements’’ (“SFAS 157”). SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
This statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company is currently evaluating the impact of SFAS 157 on the
Company’s consolidated financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities -
Including an Amendment of FAS 115” (“SFAS 159”). SFAS 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value. Unrealized gains and losses on items for which the fair value option
has
been elected will be recognized in earnings at each subsequent reporting
date.
This statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The Company is currently evaluating the
impact of SFAS 159 on the Company’s consolidated financial
statements.
NOTE
9 - SUBSEQUENT EVENT
On
May
11, 2007, the Company signed a joint venture agreement ("JV Agreement") with
Swico Limited ("Swico"), an English company with established distribution,
marketing and sales operations in the UK. Swico has been the Company's exclusive
distributor of HUGO BOSS® watches in the UK since 2005. Under the JV
Agreement,
the Company and Swico will control 51% and 49%, respectively, of MGS
Distribution Limited, a newly formed English company ("MGS") that will be
responsible for the marketing, distribution and sale in the United Kingdom
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 will be 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.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
FORWARD-LOOKING
STATEMENTS
Statements
in this Quarterly Report on Form 10-Q, including, without limitation, statements
under this Item 2, “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and elsewhere in this report, as well as statements
in future filings by the Company with the Securities and Exchange Commission
(the “SEC”), in the Company’s press releases and oral statements made by or with
the approval of an authorized executive officer of the Company, which are
not
historical in nature, are intended to be, and are hereby identified as,
“forward-looking statements” for purposes of the safe harbor provided by the
Private Securities Litigation Reform Act of 1995. These statements are based
on
current expectations, estimates, forecasts and projections about the Company,
its future performance, the industry in which the Company operates and
management’s assumptions. Words such as “expects”, “anticipates”, “targets”,
“goals”, “projects”, “intends”, “plans”, “believes”, “seeks”, “estimates”,
“may”, “will”, “should” and variations of such words and similar expressions are
also intended to identify such forward-looking statements. The Company cautions
readers that forward-looking statements include, without limitation, those
relating to the Company’s future business prospects, projected operating or
financial results, revenues, working capital, liquidity, capital needs, plans
for future operations, expectations regarding capital expenditures and operating
expenses, effective tax rates, margins, interest costs, and income as well
as
assumptions relating to the foregoing. Forward-looking statements are subject
to
certain risks and uncertainties, some of which cannot be predicted or
quantified. Actual results and future events could differ materially from
those
indicated in the forward-looking statements, due to several important factors
herein identified, among others, and other risks and factors identified from
time to time in the Company’s reports filed with the SEC including, without
limitation, the following: general economic and business conditions which
may
impact disposable income of consumers in the United States and the other
significant markets where the Company’s products are sold, general uncertainty
related to possible terrorist attacks and the impact on consumer spending,
changes in consumer preferences and popularity of particular designs, new
product development and introduction, competitive products and pricing,
seasonality, availability of alternative sources of supply in the case of
the
loss of any significant supplier, the loss of significant customers, the
Company’s dependence on key employees and officers, the ability to successfully
integrate the operations of acquired businesses without disruption to other
business activities, the continuation of licensing arrangements with third
parties, the ability to secure and protect trademarks, patents and other
intellectual property rights, the ability to lease new stores on suitable
terms
in desired markets and to complete construction on a timely basis, the continued
availability to the Company of financing and credit on favorable terms, business
disruptions, disease, general risks associated with doing business outside
the
United States including, without limitation, import duties, tariffs, quotas,
political and economic stability, and success of hedging strategies with
respect
to currency exchange rate fluctuations.
These
risks and uncertainties, along with the risk factors discussed under Item
1A
“Risk Factors” in the Company’s Annual Report on Form 10-K, should be considered
in evaluating any forward-looking statements contained in this Quarterly
Report
on Form 10-Q or incorporated by reference herein. All forward-looking statements
speak only as of the date of this report or, in the case of any document
incorporated by reference, the date of that document. All subsequent written
and
oral forward-looking statements attributable to the Company or any person
acting
on its behalf are qualified by the cautionary statements in this section.
The
Company undertakes no obligation to update or publicly release any revisions
to
forward-looking statements to reflect events, circumstances or changes in
expectations after the date of this report.
Critical
Accounting Policies and Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the consolidated
financial
statements.
These estimates and assumptions also affect the reported amounts of revenues
and
expenses. Estimates by their nature are based on judgments and available
information. Therefore, actual results could materially differ from those
estimates under different assumptions and conditions.
Critical
accounting policies are those that are most important to the portrayal of
the
Company’s financial condition and the results of operations and require
management’s most difficult, subjective and complex judgments as a result of the
need to make estimates about the effect of matters that are inherently
uncertain. The Company’s most critical accounting policies have been discussed
in the Company’s Annual Report on Form 10-K for the year ended January 31, 2007.
In applying such policies, management must use significant estimates that
are
based on its informed judgment. Because of the uncertainty inherent in these
estimates, actual results could differ from estimates used in applying the
critical accounting policies. Changes in such estimates, based on more accurate
future information, may affect amounts reported in future periods.
As
of
April 30, 2007, except as noted below, there have been no material changes
to
any of the critical accounting policies as disclosed in its Annual Report
on
Form 10-K for the fiscal year ended January 31, 2007.
On
February 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (an interpretation of FASB Statement No. 109). This interpretation
clarifies the accounting for uncertainty in income taxes recognized in the
financial statements by prescribing a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. As a result of the
adoption, the Company recognized a charge of approximately $7.7 million to
the
February 1, 2007 retained earnings balance.
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 Movado
Boutiques and outlet stores.
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® brands. The licensed brands category represents
brands distributed under license agreements and includes Coach®, HUGO BOSS®,
Juicy Couture®, LACOSTE® and Tommy Hilfiger®.
Results
of operations for the three months ended April 30, 2007 as compared to the
three
months ended April 30, 2006
Net
Sales:
Comparative net sales by business segment were as follows (in
thousands):
|
|
Three
Months Ended April 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Wholesale:
|
|
|
|
|
|
United
States
|
|
$
|
42,659
|
|
$
|
47,642
|
|
International
|
|
|
40,488
|
|
|
33,361
|
|
Total
Wholesale
|
|
|
83,147
|
|
|
81,003
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
18,216
|
|
|
16,741
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
101,363
|
|
$
|
97,744
|
|
Net
sales
for the three months ended April 30, 2007 were $101.4 million, above prior
year
by $3.6 million or 3.7%. The liquidation of excess discontinued inventory
accounted for approximately $2.7 million of the increase. Net sales excluding
the liquidation of excess discontinued inventory were $98.6 million,
representing an increase of $0.9 million, or 0.9%, over the prior year period.
Net
sales
in the wholesale segment increased by $2.1 million or 2.6% to $83.1 million.
The
increase was driven by the growth in the licensed brand category, which was
above prior year by $6.0 million or 38.2%. The expansion of the global HUGO
BOSS
market penetration and the continued international growth in Tommy Hilfiger,
were the primary reasons for the increase. The luxury brands were flat year
over
year. Excluding the liquidation of $1.4 million in the fiscal 2008 first
quarter, the luxury category was below prior year by $1.4 million or 7.7%.
The
decrease was the result of the timing of deliveries of new model introductions
as well as reduced volume resulting from the repositioning of the Concord
brand.
Accessible luxury brand sales were below prior year by $3.9 million or 9.2%.
Excluding the liquidation of $1.3 million, the accessible luxury category
was
below prior year by 12.2%. The principal reason for the change was the shift
in
the retail calendar which shifted retailer purchases from the first quarter
to
the second quarter of fiscal 2008. The retail calendar primarily affects
United
States chain jewelers and department stores, which make up a larger portion
of
the accessible luxury brands’ customer base.
Net
sales
in the U.S. wholesale segment were $42.7 million for the three months ended
April 30, 2007, representing a 10.5% decrease when compared to prior year
sales
of $47.6 million. The decrease in net sales was primarily attributable to
lower
sales in the accessible luxury brands of $5.1 million. This decrease was
primarily the result of the impact of the shift in the retail calendar. Sales
in
the accessible luxury category include $1.3 million of excess discontinued
inventory. Net sales in the luxury category were relatively flat year over
year.
Excluding sales of excess discontinued inventory of approximately $0.4 million,
the luxury category was below prior year by 12.0%. The licensed brand category
was flat year over year.
Net
sales
in the international wholesale segment were $40.5 million for the three months
ended April 30, 2007, representing an increase of $7.1 million or 21.4% above
prior year sales of $33.4 million. The increase in net sales was primarily
attributable to higher sales in the licensed brands of $6.0 million. This
increase was primarily the result of new market expansion and continued strong
demand in existing markets. Net sales in the luxury category were relatively
flat year over year. Excluding sales of excess discontinued inventory of
approximately $1.1 million, the luxury category was below prior year by 6.6%.
This primarily reflects the re-
positioning
of the Concord brand. Net sales in the accessible luxury category were $8.0
million or above prior year by $1.1 million or 16.7%. The increase was primarily
driven by stronger demand for the Movado brand in the Middle East.
Net
sales
in the retail segment were $18.2 million for the three months ended April
30,
2007, representing an 8.8% increase above prior year sales of $16.7 million.
The
increase was driven by an overall 6.9% increase in Movado Boutique sales,
resulting from increases in sales from non-comparable stores somewhat offset
by
a 1.5% comparable store sales decrease. Sales by the Company’s outlet stores
were above prior year by 10.8%, resulting from a 2.1% comparable store sales
increase along with sales from non-comparable stores. The Company operated
29
Movado Boutiques and 31 outlet stores at April 30, 2007, compared to 27 Movado
Boutiques and 28 outlet stores at April 30, 2006.
The
Company considers comparable store sales to be sales of stores that were
open as
of February 1st
of the
last year through January 31st
of the
current year. The Company had 25 comparable Movado Boutiques and 28
comparable outlet stores for the three months ended April 30, 2007. The sales
from stores that have been relocated, renovated or refurbished are included
in
the calculation of comparable store sales. During the quarter ended April
30,
2007, two Movado Boutiques, one in Soho, NY and the other in Northbrook,
IL,
were closed because they were underperforming. The sales from these two stores
are excluded from the comparable store sales total. The closing of the two
boutiques did not have a material effect on the financial results. The method
of
calculating comparable store sales varies across the retail industry. As a
result, the Company’s calculation of comparable store sales may not be the same
as measures reported by other companies.
Gross
Profit.
Gross
profit for the three months ended April 30, 2007 was $61.7 million or 60.8%
of
net sales as compared to $59.6 million or 61.0% of net sales for the three
months ended April 30, 2006. The increase in gross profit of $2.1 million
was
the result of the higher sales volume and higher gross margin percentages
in
each of the businesses. Gross margin percentage excluding the liquidation
of
excess discontinued inventory was 62.9%, above the 61.0% margin recorded
in the
prior year. The increase in gross margin percentage was driven by higher
brand
margins on new model introductions, higher margins in the Movado Boutiques
and
higher effective margin as a result of the mix of sales by market.
Selling,
General and Administrative (“SG&A”).
SG&A
expenses for the three months ended April 30, 2007 were $58.9 million or
58.1%
of net sales as compared to $56.2 million or 57.5% of net sales for the three
months ended April 30, 2006. The increase of $2.7 million includes higher
spending to support retail expansion of $1.6 million, higher spending for
customer support of $0.7 million and increased equity compensation expense
of
$0.4 million.
Wholesale
Operating Income.
Operating income in the wholesale segment decreased by $0.3 million to $4.4
million. The decrease was the net result of higher gross profit of $1.0 million,
more than offset by the increase in SG&A expenses of $1.3 million. The
higher gross profit of $1.0 million was primarily the result of improved
gross
margin percentages achieved over the prior year. The increase in SG&A
expenses of $1.3 million related principally to higher spending on customer
support of $0.7 million and increased equity compensation expense of $0.4
million.
Retail
Operating Loss. Operating
losses of $1.7 million and $1.3 million were recorded in the retail segment
for
the three months ended April 30, 2007 and 2006, respectively. The $0.4 million
increase in the loss was the net result of higher gross profit of $1.1 million
more than offset by higher SG&A expenses of $1.5 million. The increased
gross profit was primarily attributable to the higher sales as well as an
increase in the gross margin percentage primarily due to product mix as well
as
higher gross profit on jewelry. The increase in SG&A expenses was primarily
the result of increased selling and occupancy expenses due to the increase
in
the number of stores.
Interest
Expense.
Interest expense for the three months ended April 30, 2007 and 2006 was $0.9
million for both periods. Average borrowings were $80.6 million at an average
borrowing rate of 4.2% for the three months ended April 30, 2007 compared
to
average borrowings of $106.5 million at an average rate of 3.4% for the three
months ended April 30, 2006.
Interest
Income.
Interest income was $1.2 million for the three months ended April 30, 2007
as
compared to $0.9 million for the three months ended April 30, 2006. The cash
invested generated interest income at the rate of 5.2% and 4.5% for the periods
ending April 30, 2007 and 2006, respectively.
Income
Taxes.
Tax
expense for the three months ended April 30, 2007 and 2006 was $0.6 million
for
both periods. Taxes were recorded at a rate of 20.6% for the three months
ended April 30, 2007 which included two discrete adjustments; a decrease
to tax
expense of $0.4 million to adjust deferred tax assets for changes in state
tax
rates and an increase to tax expense of $0.2 million as a result of new FIN
48
requirements related to the recognition of accrued interest on tax
exposures. Taxes were recorded at a rate of 17.9% for the three months
ended April 30, 2006. Taxes for the prior year period included a discrete
adjustment related to the adoption of tax planning strategies in Switzerland
which utilized a greater portion of the Swiss net operating loss
carryforward.
Net
Income.
For the
three months ended April 30, 2007, the Company recorded net income of $2.4
million as compared to $2.9 million for the three months ended April 30,
2006.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
used
in operating activities was $19.3 million for the three months ended April
30,
2007 as compared to $31.3 million for the three months ended April 30, 2006.
The
cash used in operating activities for the first quarter was primarily the
result
of an inventory build of $15.5 million. This reflects the historic pattern
of
the Company funding its working capital needs based on the seasonal nature
of
the business.
Cash
used
in investing activities amounted to $6.1 million and $2.3 million for the
three
months ended April 30, 2007 and 2006, respectively. The cash used during
both
periods consisted of the capital expenditures primarily related to the expansion
and renovations of retail stores. In addition, for the three months ended
April
30, 2007, cash was used for the construction of new booths to be used at
the
Basel World Fair for the Company’s new and existing brands.
Cash
used
in financing activities amounted to $7.1 million for the three months ended
April 30, 2007 compared to cash used of $10.0 million for the three months
ended
April 30, 2006. Cash used in financing activities for both periods was primarily
used to pay down long-term debt and to pay out dividends.
During
fiscal 1999, the Company issued $25.0 million of Series A Senior Notes under
a
Note Purchase and Private Shelf Agreement dated November 30, 1998. These
notes
bear interest of 6.90% per annum, mature on October 30, 2010 and are subject
to
annual repayments of $5.0 million commencing October 31, 2006. These notes
contain certain financial covenants including an interest coverage ratio
and
maintenance of consolidated net worth and certain non-financial covenants
that
restrict the Company’s activities regarding investments and acquisitions,
mergers, certain transactions with affiliates, creation of liens, asset
transfers, payment of dividends and limitation of the amount of debt
outstanding. At April 30, 2007, the Company was in compliance with all financial
and non-financial covenants and $20.0 million of these notes were issued
and
outstanding.
As
of
March 21, 2004, the Company amended its Note Purchase and Private Shelf
Agreement, originally dated March 21, 2001. This agreement, which expired
on
March 21, 2007, allowed for the issuance of senior promissory notes in the
aggregate principal amount of up to $40.0 million with maturities up to 12
years
from
their
original date of issuance. On
October 8, 2004, the Company issued, pursuant to the Note Purchase Agreement,
4.79% Senior Series A-2004 Notes due 2011 (the "Senior Series A-2004 Notes")
in
an aggregate principal amount of $20.0 million, which will mature on October
8,
2011 and are subject to annual repayments of $5.0 million commencing
on October 8, 2008.
Proceeds of the Senior Series A-2004 Notes have been used by the Company
for
capital expenditures, repayment of certain of its debt obligations and general
corporate purposes.
These
notes contain certain financial covenants, including an interest coverage
ratio
and maintenance of consolidated net worth and certain non-financial covenants
that restrict the Company’s activities regarding investments and acquisitions,
mergers, certain transactions with affiliates, creation of liens, asset
transfers, payment of dividends and limitation of the amount of debt
outstanding. As of April 30, 2007, the Company was in compliance with all
financial and non-financial covenants and $20.0 million of these notes were
issued and outstanding.
On
December 15, 2005, the Company as parent guarantor, and its Swiss subsidiaries,
MGI Luxury Group S.A. and Movado Watch Company SA as borrowers, entered into
a
credit agreement with JPMorgan Chase Bank, N.A., JPMorgan Securities, Inc.,
Bank
of America, N.A., PNC Bank and Citibank, N.A. (the "Swiss Credit Agreement")
which provides for a revolving credit facility of 90.0 million Swiss francs
and
matures on December 15, 2010. The obligations of the Company’s two Swiss
subsidiaries under this credit agreement are guaranteed by the Company under
a
Parent Guarantee, dated as of December 15, 2005, in favor of the lenders.
The
Swiss Credit Agreement contains financial covenants, including an interest
coverage ratio, average debt coverage ratio and limitations on capital
expenditures and certain non-financial covenants that restrict the Company’s
activities regarding investments and acquisitions, mergers, certain transactions
with affiliates, creation of liens, asset transfers, payment of dividends
and
limitation of the amount of debt outstanding. Borrowings under the Swiss
Credit
Agreement bear interest at a rate equal to the LIBOR (as defined in the Swiss
Credit Agreement) plus a margin ranging from .50% per annum to .875% per
annum
(depending upon a leverage ratio). As of April 30, 2007, the Company was
in
compliance with all financial and non-financial covenants and had 44.0 million
Swiss francs, with a dollar equivalent of $36.5 million, outstanding under
this
revolving credit facility.
On
December 15, 2005, the Company and its Swiss subsidiaries, MGI Luxury Group
S.A.
and Movado Watch Company SA, entered into a credit agreement with JPMorgan
Chase
Bank, N.A., JPMorgan Securities, Inc., Bank of America, N.A., PNC Bank and
Citibank, N.A. (the "US Credit Agreement") which provides for a revolving
credit
facility of $50.0 million (including a sublimit for borrowings in Swiss francs
of up to an equivalent of $25.0 million) with a provision to allow for an
increase of an additional $50.0 million subject to certain terms and conditions.
The US Credit Agreement will mature on December 15, 2010. The obligations
of MGI
Luxury Group S.A. and Movado Watch Company SA are guaranteed by the Company
under a Parent Guarantee, dated as of December 15, 2005, in favor of the
lenders. The obligations of the Company are guaranteed by certain domestic
subsidiaries of the Company under subsidiary guarantees, in favor of the
lenders. The US Credit Agreement contains financial covenants, including
an
interest coverage ratio, average debt coverage ratio and limitations on capital
expenditures and certain non-financial covenants that restrict the Company’s
activities regarding investments and acquisitions, mergers, certain transactions
with affiliates, creation of liens, asset transfers, payment of dividends
and
limitation of the amount of debt outstanding. Borrowings under the US Credit
Agreement bear interest, at the Company’s option, at a rate equal to the
Adjusted LIBOR (as defined in the US Credit Agreement) plus a margin ranging
from .50% per annum to .875% per annum (depending upon a leverage ratio),
or the
Alternate Base Rate (as defined in the US Credit Agreement). As of April
30,
2007, the Company was in compliance with all financial and non-financial
covenants, and there were no outstanding borrowings against this
line.
On
June
16, 2006, the Company renewed a line of credit letter agreement with Bank
of
America and an amended and restated promissory note in the principal amount
of
up to $20.0 million payable to Bank of America, originally dated December
12,
2005. Pursuant to the line of credit letter agreement, Bank of America will
consider requests for short-term loans and documentary letters of credit
for the
importation of merchandise
inventory,
the aggregate amount of which at any time outstanding shall not exceed $20.0
million. The Company's obligations under the agreement are guaranteed by
its
subsidiaries, Movado Retail Group, Inc. and Movado LLC. Pursuant to the amended
and restated promissory note, the Company promised to pay to Bank of America
$20.0 million, or such lesser amount as may then be the unpaid balance of
all
loans made by Bank of America to the Company thereunder, in immediately
available funds upon the maturity date of June 16, 2007. The Company has
the
right to prepay all or part of any outstanding amounts under the promissory
note
without penalty at any time prior to the maturity date. The amended and restated
promissory note bears interest at an annual rate equal to either (i) a floating
rate equal to the prime rate or (ii) such fixed rate as may be agreed upon
by
the Company and Bank of America for an interest period which is also then
agreed
upon. The amended and restated promissory note contains various representations
and warranties and events of default that are customary for instruments of
that
type. As
of
April 30, 2007, there were no outstanding borrowings against this
line.
On
July
31, 2006, the Company renewed a promissory note, originally dated December
13,
2005, in the principal amount of up to $37.0 million, at a revised amount
of up
to $7.0 million, payable to JPMorgan Chase Bank, N.A. ("Chase"). Pursuant
to the promissory note, the Company promised to pay to Chase $7.0 million,
or
such lesser amount as may then be the unpaid balance of each loan made or
letter
of credit issued by Chase to the Company thereunder, upon the maturity date
of
July 31, 2007. The Company has the right to prepay all or part of any
outstanding amounts under the promissory note without penalty at any time
prior
to the maturity date. The promissory note bears interest at an annual rate
equal
to (i) a floating rate equal to the prime rate, (ii) a fixed rate equal to
an
adjusted LIBOR plus 0.625% or (iii) a fixed rate equal to a rate of interest
offered by Chase from time to time on any single commercial borrowing. The
promissory note contains various events of default that are customary for
instruments of that type. In addition, it is an event of default for any
security interest or other encumbrance to be created or imposed on the Company's
property, other than as permitted in the lien covenant of the US Credit
Agreement. Chase
issued 11 irrevocable standby letters of credit for retail and operating
facility leases to various landlords, for the administration of the Movado
Boutique private-label credit card and Canadian payroll to the Royal Bank
of
Canada totaling $1.2 million with expiration dates through June 7, 2008.
As of
April 30, 2007, there were no outstanding borrowings against this promissory
note.
A
Swiss
subsidiary of the Company maintains unsecured lines of credit with an
unspecified length of time with a Swiss bank. Available credit under these
lines
totaled 8.0 million Swiss francs, with dollar equivalents of $6.6 million
and
$6.5 million at April 30, 2007 and 2006, respectively. As of April 30, 2007,
two
European banks have guaranteed obligations to third parties on behalf of
two of
the Company’s foreign subsidiaries in the amount of $1.7 million in various
foreign currencies. As of April 30, 2007, there were no outstanding borrowings
against these lines.
The
Company paid dividends of $0.08 per share or approximately $2.1 million,
for the
three months ended April 30, 2007 and $0.06 per share or approximately $1.5
million for the three months ended April 30, 2006.
Cash
at
April 30, 2007 amounted to $101.8 million compared to $82.6 million at April
30,
2006. The increase in cash is as a result of strong cash flow from operations
during the prior year.
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 12 months.
Off-Balance
Sheet Arrangements
The
Company does not have off-balance sheet financing or unconsolidated
special-purpose entities.
RECENTLY
ISSUED ACCOUNTING STANDARDS
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, ‘‘Fair Value Measurements’’ (“SFAS 157”). SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
This statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company is currently evaluating the impact of SFAS 157 on the
Company’s consolidated financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities -
Including an Amendment of FAS 115” (“SFAS 159”). SFAS 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value. Unrealized gains and losses on items for which the fair value option
has
been elected will be recognized in earnings at each subsequent reporting
date.
This statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The Company is currently evaluating the
impact of SFAS 159 on the Company’s consolidated financial
statements.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Foreign
Currency and Commodity Price Risk
A
significant portion of the Company’s purchases are denominated in Swiss francs.
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. The Company uses
various derivative financial instruments to further reduce the net exposures
to
currency fluctuations, predominately forward and option contracts. These
derivatives either (a) are used to hedge the Company’s Swiss franc liabilities
and are recorded at fair value with the changes in fair value reflected in
earnings or (b) are documented as cash flow hedges with the gains and losses
on
this latter hedging activity first reflected in other comprehensive income,
and
then later classified into earnings in accordance with Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging
Activities" (“SFAS No. 133”), as amended by SFAS No. 137, SFAS No. 138 and SFAS
No. 149. In both cases, the earnings impact is partially offset by the effects
of currency movements on the underlying hedged transactions. If the Company
did
not engage in a hedging program, any change in the Swiss franc to local currency
would have an equal effect on the Company’s cost of sales. In addition, the
Company hedges its Swiss franc payable exposure with forward contracts. As
of
April 30, 2007, the Company’s entire net forward contracts hedging portfolio
consisted of 127.0 million Swiss francs equivalent for various expiry dates
ranging through May 30, 2008. If
the
Company were to settle its Swiss franc forward contracts at April 30, 2007,
the
net result would have been a gain of $0.5 million, net of tax of $0.3
million. As
of
April 30, 2007, the Company had 16.0 million Swiss franc option contracts
related to cash flow hedges for various expiry dates ranging through April
30,
2008. If
the
Company were to settle its Swiss franc option contracts at April 30, 2007,
the
net result would have been a net gain of less than $0.1 million.
The
Company’s Board of Directors authorized the hedging of the Company’s Swiss franc
denominated investment in its wholly-owned Swiss subsidiaries using purchase
options under certain limitations. These hedges are treated as net investment
hedges under SFAS No. 133. As of April 30, 2007, the Company did not hold
a
purchased option hedge portfolio related to net investment hedging.
Commodity
Risk
Additionally,
the Company has a hedging program related to gold used in the manufacturing
of
the Company’s watches. Under this hedging program, the Company purchases various
commodity derivative instruments, primarily future contracts. These derivatives
are documented as SFAS No. 133 cash flow hedges, and gains and losses on
these
derivative instruments are first reflected in other comprehensive income,
and
later reclassified into earnings, partially offset by the effects of gold
market
price changes on the underlying actual gold purchases. If the Company did
not
engage in a gold hedging program, any changes in the gold price would have
an
equal effect on the Company’s cost of sales. The Company did not hold any
futures contracts in its gold hedge portfolio related to cash flow hedges
as of
April 30, 2007.
Debt
and Interest Rate Risk
In
addition, the Company has certain debt obligations with variable interest
rates,
which are based on Swiss LIBOR plus a fixed additional interest rate. The
Company does not hedge these interest rate risks. The Company also has certain
debt obligations with fixed interest rates. The differences between the market
based interest rates at April 30, 2007, and the fixed rates were unfavorable.
The Company believes that a 1% change in interest rates would affect the
Company’s net income by approximately $0.4 million.
Item
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
The
Company, under the supervision and with the participation of its management,
including the Chief Executive Officer and the Chief Financial Officer, evaluated
the effectiveness of the Company's disclosure controls and procedures, as
such
terms are defined in Rule 13a-15(e) under the Securities Exchange Act, as
amended. Based on that evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective as of the end of the period covered by this report.
It
should
be noted that while the Company’s Chief Executive Officer and Chief Financial
Officer believe that the Company’s disclosure controls and procedures provide a
reasonable level of assurance that they are effective, they do not expect
that
the Company’s disclosure controls and procedures or internal control over
financial reporting will prevent all errors and fraud. A control system,
no
matter how well conceived or operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are
met.
Changes
in Internal Control Over Financial Reporting
There
has
been no change in the Company's internal control over financial reporting
during
the three months ended April 30, 2007, that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART
II - OTHER INFORMATION
Item
1A. Risk
Factors
As
of
April 30, 2007, there have been no material changes to any of the risk factors
previously reported in the Annual Report on Form 10-K for the fiscal year
ended
January 31, 2007.
Item
6. Exhibits
10.1 |
Third
Amendment to License Agreement dated as of January 1, 1992 between
Registrant and Hearst Magazines, a Division of Hearst Communications,
Inc., effective February 15, 2007.*
|
10.2 |
Fifth
Amendment to License Agreement dated December 9, 1996 between Registrant
and Coach, Inc. effective March 9, 2007.*
|
10.3 |
Sixth
Amendment to License Agreement dated June 3, 1999 between Registrant
and
Tommy Hilfiger Licensing, Inc. effective April 11,
2007.*
|
31.1 |
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2 |
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1 |
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.2 |
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
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*
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Confidential
portions of Exhibits 10.1, 10.2 and 10.3 have been omitted and
filed
separately with the Securities and Exchange Commission pursuant
to Rule
24b-2 of the Securities Exchange Act of
1934.
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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MOVADO
GROUP, INC.
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(Registrant)
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Dated: May
31, 2007
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By:
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/s/
Eugene J. Karpovich
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Eugene
J. Karpovich
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Senior
Vice President,
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Chief
Financial Officer and
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Principal
Accounting Officer
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