May 12, 2020
Dear Shareholders,
As I write to you, the fiscal year ended January 31, 2020 feels like a distant memory. I am now working from
home like most of our colleagues and customers throughout the world. COVID-19 has created a global health
and economic crisis whose impact will be felt for years to come. Today most of us know someone who has
been personally affected by the virus and our thoughts and prayers go out to them and their families. Before I
cover our response to the pandemic, I will briefly review our results for last year.
We were disappointed with our fiscal 2020 results as the watch category and our retail channels were more
challenged than anticipated. In an attempt to drive growth, we overinvested in the business, particularly in
our marketing expenses. As a result, for the year our sales grew 3.1% and our adjusted operating income
declined 37% to $50 million.* Our adjusted earnings per share were $1.57.* Our balance sheet remained
strong, ending the year with over $185 million in cash.
As we entered the current fiscal year, we had plans in place to reduce operating expenses and return to
growth in operating profit and operating cash flow despite a slight decrease in sales. These plans were
abruptly disrupted by an invisible adversary as COVID-19 began to spread throughout the world, wreaking
severe health and economic impacts. Our first focus was on the safety and wellbeing of our employees and
their families. We closed our stores and most of our offices around the world in the middle of the first quarter,
and the vast majority of our customers did the same. Realizing that no business is built to operate with very
little revenue relative to its expense structure, we were forced to take the difficult decision to furlough the
vast majority of our U.S. workforce and to implement similar measures around the world, consistent with local
regulations. We greatly reduced our cash outflows while at the same time drawing down $30 million on our
revolving credit facility to help us successfully navigate this crisis.
Over the last several weeks our leadership team has been working diligently on strategic initiatives to steer
our company through this crisis based on a realistic outlook for our customers and economies around the
world. Although it is impossible to accurately predict what the world will look like in the coming months as
businesses reopen and consumers return to work and stores, we are trying to do our best to prepare for
various scenarios. As I write this letter, some of our customers in Germany have begun to reopen stores as
coronavirus-related restrictions are being relaxed in that country. Similarly, our U.S. outlet mall partners are
beginning to open malls in certain states and we are making plans to reopen several of our Movado Company
Stores. We are implementing all necessary precautions as we take these actions, including increased cleaning
of our locations, mandatory face covering for our personnel, temperature checks for our teams and
customers, and ready availability of hand sanitizer at all locations. We will follow similar procedures as we
reopen our offices around the world, including staggering the days that our colleagues work from home or in
the office to allow for social distancing. As we begin to navigate this return to work at our major office
locations, we have the benefit of having already gone through this process in our operations in China and
Hong Kong. We have also reopened all our retail locations in China and are seeing business trends there
improve on a weekly basis.
It is widely believed that the COVID-19 pandemic will accelerate consumer and technology trends that would
have occurred over time in any event, such as video conferencing replacing a portion of business travel, more
people using technology to work from home, and brands increasingly connecting directly with consumers
through ecommerce. Over the last number of weeks we have made great use of video conferencing to
enhance collaboration with colleagues and to develop go-forward strategies. We have also worked hard to
maximize ecommerce sales and contribution as this has been our only significant source of revenues in
markets that have been closed due to government-imposed restrictions.
We know that as we navigate the new environment, connecting with our consumers directly and learning
more about them will be paramount to our success. Putting the consumer at the center of everything we do
will be our number one priority, including in the way in which we grow our ecommerce business. We have
already seen a significant improvement in our ecommerce sales trends, although not nearly to the extent
necessary to offset the losses that we are currently sustaining in wholesale. We believe the addition of our
digitally native brands, MVMT and Olivia Burton, combined with the further maturation of our digital center of
excellence, which we launched two years ago, will be invaluable moving forward.
While the world is changing, we remain steadfastly focused on delivering on our strategic priorities while
putting the consumer first in everything we do. Our priorities include realizing the potential of our great
brands, capturing the significant opportunities around the world, driving innovation throughout our
organization, and connecting directly with our consumers in the digital world. To win in the prevailing
business climate we need to be nimble – to minimize expenses while maximizing revenues. This current
environment will not be easy to navigate, but I am confident that our teams are up to the challenge and that
there will be many opportunities ahead in which Movado Group can excel. I would like to thank our
shareholders, our customers, our vendors, our licensing partners and very importantly our employees for their
support.
Sincerely Yours,
Efraim Grinberg, Chairman/CEO
_______________
* Adjusted operating income and adjusted earnings per share are operating income and earnings per share, respectively, under U.S.
Generally Accepted Accounting Principles adjusted to eliminate the following: $2.8 million in expenses related to the amortization
of acquired intangible assets for Olivia Burton, $4.6 million in expenses related to the amortization of acquired intangible assets,
accounting adjustments and deferred compensation for MVMT, a $0.3 million gain due to a change in estimate for severance and
occupancy expenses, and, in the case of adjusted earnings per share, $1.5 million of tax benefits associated with the foregoing as
well as an $11.7 million after-tax gain due to the remeasurement of the contingent consideration liability for the MVMT acquisition.
2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For fiscal year ended January 31, 2020
OR
☐ 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
(State or Other Jurisdiction
of Incorporation or Organization)
650 From Road, Ste. 375
Paramus, New Jersey
(Address of Principal Executive Offices)
13-2595932
(IRS Employer
Identification No.)
07652-3556
(Zip Code)
Title of Each Class
Common stock, par value $0.01 per share
Registrant’s Telephone Number, Including Area Code: (201) 267-8000
Securities Registered Pursuant to Section 12(b) of the Act:
Trading Symbol(s)
MOV
Name of Each Exchange on which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
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 the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Accelerated filer
Emerging growth company
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 ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant as of July 31, 2019, was approximately $425 million (based on the
closing sale price of the registrant’s Common Stock on that date as reported on the New York Stock Exchange). For purposes of this computation, each share
of Class A Common Stock is assumed to have the same market value as one share of Common Stock into which it is convertible and only shares of stock held
by directors, executive officers and holders of greater than 10% of the registrant’s total voting power were excluded.
The number of shares outstanding of the registrant’s Common Stock and Class A Common Stock as of March 23, 2020, were 16,424,224 and 6,608,548,
respectively.
Portions of the definitive proxy statement relating to registrant’s 2020 annual meeting of shareholders (the “Proxy Statement”) are incorporated by
reference in Part III hereof.
DOCUMENTS INCORPORATED BY REFERENCE
FORWARD-LOOKING STATEMENTS
Statements in this annual report on Form 10-K, including, without limitation, statements under Item 7 “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 (“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, operating efficiency initiatives and other items, cost savings initiatives, and operating expenses, effective tax rates,
margins, interest costs, and income as well as assumptions relating to the foregoing. Forward-looking statements are subject to certain
risks and uncertainties, some of which cannot be predicted or quantified. Actual results and future events could differ materially from
those indicated in the forward-looking statements, due to several important factors herein identified, among others, and other risks and
factors identified from time to time in the Company’s reports filed with the SEC, including, without limitation, the following: general
economic and business conditions which may impact disposable income of consumers in the United States and the other significant
markets (including Europe) where the Company’s products are sold; uncertainty regarding such economic and business conditions;
trends in consumer debt levels and bad debt write-offs; general uncertainty related to possible terrorist attacks, natural disasters,
pandemics, including the effect of COVID-19 and other diseases on travel and traffic in our retail stores and wholesale business, the
stability of the European Union (including the impact of the United Kingdom’s process to exit from the European Union), the stability
of the United Kingdom after its exit from the European Union, and defaults on or downgrades of sovereign debt and the impact of any
of those events on consumer spending; changes in consumer preferences and popularity of particular designs, new product development
and introduction; decrease in mall traffic and increase in e-commerce; the ability of the Company to successfully implement its business
strategies, competitive products and pricing; the impact of “smart” watches and other wearable tech products on the traditional watch
market; seasonality; availability of alternative sources of supply in the case of the loss of any significant supplier or any supplier’s
inability to fulfill the Company’s orders; the loss of or curtailed sales to significant customers; the Company’s dependence on key
employees and officers; the ability to successfully integrate the operations of acquired businesses without disruption to other business
activities; the possible impairment of acquired intangible assets including goodwill if the carrying value of any reporting unit were to
exceed its fair value; volatility in reported earnings resulting from changes in the estimated fair value of contingent acquisition
consideration; the continuation of the company’s major warehouse and distribution centers; the continuation of licensing arrangements
with third parties; losses possible from pending or future litigation; the ability to secure and protect trademarks, patents and other
intellectual property rights; the ability to lease new stores on suitable terms in desired markets and to complete construction on a timely
basis; the ability of the Company to successfully manage its expenses on a continuing basis; information systems failure or breaches of
network security; the continued availability to the Company of financing and credit on favorable terms; business disruptions; and general
risks associated with doing business outside the United States including, without limitation, import duties, tariffs (including retaliatory
tariffs), quotas, political and economic stability, changes to existing laws or regulations, and success of hedging strategies with respect
to currency exchange rate fluctuations.
These risks and uncertainties, along with the risk factors discussed under Item 1A. “Risk Factors” in this Annual Report on Form 10-K,
should be considered in evaluating any forward-looking statements contained in this report or incorporated by reference herein. All
forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date
of that document. All subsequent written and oral forward-looking statements attributable to the Company or any person acting on its
behalf are qualified by the cautionary statements in this section. The Company undertakes no obligation to update or publicly release
any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report.
1
Item 1. Business
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. The Company’s common stock is traded on the NYSE under the trading symbol MOV.
Movado Group designs, sources, markets and distributes quality watches. Its portfolio of watch brands is currently comprised of owned
brands MOVADO®, CONCORD®, EBEL®, OLIVIA BURTON® and MVMT® as well as licensed brands COACH®, TOMMY
HILFIGER®, HUGO BOSS®, LACOSTE®, SCUDERIA FERRARI®, REBECCA MINKOFF® and URI MINKOFF®. 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 also designs, sources, markets and distributes jewelry and other accessories under certain of its brands.
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. Since then, 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. Over time, the Company has
developed its brand-building reputation and distinctive image across an expanding number of brands and geographic markets.
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. The Company sold
its Piaget and Corum distribution businesses in 1999 and 2000, respectively, to focus on its own portfolio of brands. In March 2004, the
Company completed its acquisition of Ebel, one of the world’s premier luxury watch brands which was established in La Chaux-de-
Fonds, Switzerland in 1911. In July 2017, the Company completed its acquisition of Olivia Burton, which was founded in 2011 and has
been one of the United Kingdom’s fastest-growing fashion watch and jewelry brands. In October 2018, the Company completed its
acquisition of MVMT, which was founded in 2013, offering watches and accessories designed for the millennial consumer largely
through a direct-to-consumer business model.
The Company is highly selective in its licensing strategy and chooses to enter into long-term agreements with only powerful brands
which we deem to have strong positions in their respective businesses.
The following table sets forth the brands licensed by the Company and the year in which the Company launched each licensed brand for
watches.
Brand
Coach
Licensor
Tapestry, Inc.
Tommy Hilfiger
Tommy Hilfiger Licensing LLC
HUGO BOSS
HUGO BOSS Trade Mark Management GmbH & Co
Lacoste
Lacoste S.A., Sporloisirs S.A. and Lacoste Alligator
S.A.
Scuderia Ferrari
Ferrari Brand S.p.A.
Rebecca Minkoff and Uri Minkoff
Rebecca Minkoff, LLC
Calendar Year Launched
1999
2001
2006
2007
2013
2017
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INDUSTRY OVERVIEW
The largest markets for watches are North America, Europe, Latin America and Asia. The Company divides the watch market into five
principal categories as set forth in the following table.
Market Category
Exclusive
Luxury
Accessible Luxury
Moderate and Fashion
Suggested Retail Price Range
$10,000 and over
$1,300 to $9,900
$500 to $2,499
$75 to $500
Mass Market
Less than $75
Exclusive Watches
Primary Category of Movado Group,
Inc. Brands
—
Concord and Ebel
Movado
Coach, HUGO BOSS, Lacoste,
Olivia Burton, MVMT, Rebecca
Minkoff and Uri Minkoff, Scuderia
Ferrari and Tommy Hilfiger
—
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, Rolex, Patek Philippe, Piaget
and Vacheron Constantin. The Company does not compete in the exclusive watch category.
Luxury Watches
Luxury watches are either quartz-analog or mechanical watches. These watches typically are made with either 14 or 18 karat gold,
stainless steel, ceramic 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 and TAG Heuer.
Accessible Luxury Watches
The majority of accessible luxury watches are quartz-analog watches, some of which may also include connected technology for
transmitting data wirelessly between the watch and a smartphone or other device. These watches typically are made with gold finish,
stainless steel, ceramic or a combination of gold finish and stainless steel. Accessible luxury 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 accessible luxury watches include Gucci, Rado, Michele and Raymond Weil.
Moderate and Fashion Watches
Most moderate and fashion watches are quartz-analog watches, some of which may also include connected technology for transmitting
data wirelessly between the watch and a smartphone or other device. These watches typically are made with gold finish, stainless steel,
brass, plastic or a combination of gold finish and stainless steel. Moderate and fashion watches are manufactured primarily in Asia and
Switzerland. In addition to the Company’s Coach, HUGO BOSS, Lacoste, Olivia Burton, MVMT, Rebecca Minkoff and Uri Minkoff,
Scuderia Ferrari, and Tommy Hilfiger brands, well-known brand names of watches in the moderate and fashion category include Anne
Klein, Bulova, Citizen, Fossil, Guess, Seiko, Michael Kors, Daniel Wellington and Swatch. Market leaders for smartwatches include
Apple, Fitbit (now owned by Google) and Garmin.
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.
3
BRANDS
The Company designs, develops, sources, markets and distributes products under the following watch brands:
Owned Brands
Concord
Concord was founded through the collaboration of five Swiss visionaries in 1908. The brand has since gone on to build a lasting legacy
of harmonious collaboration. Concord was acquired by entrepreneur Gedalio Grinberg in 1970. In 1979, Concord spearheaded the Swiss
quartz revolution with one of the most important watches of the twentieth century: the Concord Delirium. This was the first watch ever
produced to be less than one millimeter thick – a world record to this day. To mark its 110th anniversary, Concord introduced a new
logo: the knot. The knot represents a harmonious unity, elemental to the foundation of Concord.
Ebel
Ebel’s success has been built upon the fusion of technical excellence and a passion for aesthetically daring and timeless, distinctive
design. A passion for innovation and excellence in watch design has always been at the heart of the Ebel brand. Ebel was founded by
husband and wife Eugène Blum and Alice Lévy, in La Chaux-de-Fonds, Switzerland in 1911. Since its inception, Ebel has remained
true to its core values, manufacturing fine Swiss watches that marry beauty and function. Renowned today for its iconic bracelet design
with signature wave-shaped links, Ebel continues to create timepieces that embody luxury and contemporary elegance with subtle, yet
exquisite detail.
Movado
The Movado brand is renowned for its iconic Museum® dial and modern design aesthetic. Since its founding in La Chaux-de-Fonds,
Switzerland in 1881, Movado has earned more than 100 patents and 200 international awards for artistry and innovation in watch design
and technology, and Movado timepieces have won world renown for their unique beauty and timeless design.
Movado is a hallmark of some of the most famous timepieces ever created, most notably, the Movado Museum® Watch. Designed in
1947 by Bauhaus-influenced artist Nathan George Horwitt, the watch dial defined by a solitary dot at 12 o’clock, symbolizing the sun
at high noon, has been acclaimed for purity of design unrivaled in the history of time-keeping. When Horwitt’s dial was selected for the
permanent design collection of the Museum of Modern Art, New York, in 1960, it became the first watch dial ever awarded this
distinction. Known today as the Movado Museum Watch, this legendary dial is regarded as an icon of Modernism. A trademarked and
award-winning design, the celebrated single dot dial now distinguishes a wide range of Movado timepieces.
Along with its long, rich heritage of design innovation, the Movado brand experience is also defined by a close, enduring association
with the arts. Expressions of Movado’s commitment to the fine and cultural arts encompass commissioned watch designs by famed
artists, affiliations with talented brand ambassadors, sponsorship of major arts institutions and support of emerging artists.
The Movado BOLD collection represents iconic Movado design re-imagined for the fashion-savvy, on-trend consumer. It is innovative
in both design and use of materials. The Movado Heritage collection, launched in the spring of 2016, is inspired by Movado’s rich pre-
Museum dial history. Heritage uses the past to create new designs that are modern and relevant.
In the fourth quarter of fiscal 2016, the Company launched the use of smart watch technology in its Movado brand watches.
Olivia Burton
Olivia Burton is a brand founded by two best friends who started out as fashion buyers who recognized a gap in the market for unique
and pretty women’s watch styles. Olivia Burton launched in Harvey Nichols in the UK, and the brand was well received from the
beginning, with some styles selling out very quickly. Inspired by vintage, fashion trends and nature, Olivia Burton releases new
collections every three months. This has helped to establish the brand in the global market. As well as innovative timepieces, including
vegan, eco-friendly and unisex collections, Olivia Burton has a growing collection of jewelry styles.
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MVMT
The MVMT brand was founded in 2013 by two young entrepreneurs. Originally empowered by crowdfunding and built digitally with a
community of social media followers, their philosophy was to create a brand offering beautiful quality products that are accessible to
young consumers. MVMT’s designs and messaging embody the spirit of adventuring, creating, and daring to disrupt the norm. This
spirit is embodied in the brand’s motto: “Live life on your own terms.” The brand includes watches, jewelry, other accessories,
sunglasses and glasses made for viewing digital screens.
Licensed Brands
Below is a description of the Company’s licensed brands. In March 2016, the Company announced the expansion of its use of smart
watch technology to its licensed brand portfolio.
Coach Watches
Coach watches reflect the Coach brand image and classic American style. The Coach brand stands for authenticity, innovation, and
relevance, as well as effortless New York style. It is an integral part of the American luxury landscape. With an expanding presence
globally, the Coach brand exemplifies modern luxury. As an extension of the brand, Coach watches offer a fresh and compelling
assortment of timepieces for women and men, with a wide variety of bracelets and straps constructed of stainless steel accented with
gold tone finishes and leather straps.
Tommy Hilfiger Watches and Jewelry
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, aluminum, silver-tone, two-tone or gold-tone cases and bracelets, and leather, fabric,
plastic or silicone straps. The watch line includes fashion and sport models and the Company produces and markets jewelry under the
brand as well.
HUGO BOSS Watches
HUGO BOSS is one of the market leaders in the global apparel market. HUGO BOSS focuses on developing and marketing premium
fashion and accessories for men and women under the HUGO and the BOSS brands. Licensed products such as watches and other
accessories complement the apparel collections. BOSS watches reflect the sophisticated character and craftsmanship for which all BOSS
products are known. HUGO watches and jewelry accessorize the open-minded, fashion-forward consumer.
Lacoste Watches
The Lacoste watch collection embraces the Lacoste lifestyle proposition which encompasses French elegance and sporting performance,
as well as innovation for style and freedom of movement. Mirroring key attributes of the Lacoste brand, the collection features stylish
timepieces with a contemporary and urban flair inspired by sport and French elegance.
Scuderia Ferrari Watches
Asserting Scuderia Ferrari’s proud racing heritage and Italian pedigree, Movado Group’s Scuderia Ferrari watch collection for men,
women and youth brings the excitement and distinctive style of the time-honored racing team to fans around the world.
Rebecca Minkoff and Uri Minkoff Watches
Designer Rebecca Minkoff credits her success to the many strong women who paved the way. Launched in 2005, her global lifestyle
brand is inspired by outspoken women who embody 21st-century femininity. Stylistic details, quality materials, and confident cuts
5
extend to handbags, clothes, shoes, jewelry, and accessories, all created to seamlessly transport from one occasion to another. The
Company launched Rebecca Minkoff and Uri Minkoff watches in 2017 with styles that are nuanced and complex.
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. Certain Movado watch collections, including Movado BOLD, and the Company’s licensed brand watches 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) licensors’ design teams. Watch product development for the licensed brands, Olivia Burton, MVMT and certain Movado
collections, including Movado BOLD, takes place in the Company’s Asia operations. For the Company’s Movado (with the exception
of certain Movado collections, including Movado BOLD), Ebel and Concord brands, the watch 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. For the Company’s Olivia Burton and MVMT watch brands, the design phase is performed by in-house
design teams in London and Los Angeles, respectively. The Company’s jewelry and other accessories are designed by in-house design
teams in cooperation with outside sources and are manufactured by independent contractors in Asia and, to a lesser extent, the United
States.
MARKETING
The Company’s marketing strategy is to communicate a consistent, brand-specific message to the consumer. As the consumer footprint
continues to evolve, the Company is increasingly focused on its digital marketing and online reach, including expanding and improving
its social media channels and its messaging through individuals with significant social media followings (i.e., “influencers”). In 2018,
the Company established a Digital Center of Excellence to help elevate its customers’ digital experience globally through innovative
technologies and consumer-facing initiatives. Recognizing that advertising is an integral component to the successful marketing of its
product offerings, the Company devotes significant resources to advertising and maintains 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 develops advertising campaigns individually for each of the
Company’s brands, utilizing outside agencies as deemed appropriate. These campaigns 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. Company advertising is placed in magazines and other print media, on radio and television, online,
including websites and social media platforms, in catalogs, on outdoor signs and through other promotional materials. Marketing
expenses totaled 19.3%, 15.9%, and 12.9% of net sales in fiscal 2020, 2019 and 2018, respectively. The increase in fiscal 2020 is due
primarily to the addition of MVMT and additional costs to support brand awareness.
OPERATING SEGMENTS
The Company conducts its business primarily in two operating segments: Watch and Accessory Brands and Company Stores. For
operating segment data and geographic segment data for the years ended January 31, 2020, 2019 and 2018, see Note 18 to the
Consolidated Financial Statements regarding Segment and Geographic Information.
The Company’s Watch and Accessory Brands segment includes the designing, manufacturing and distribution of watches of quality
owned and licensed brands, in addition to revenue generated from after-sales service activities and shipping. The Company Stores
segment includes the Company’s physical retail outlet locations in the United States and Canada.
6
The Company divides its business into two major geographic locations: United States operations, and International, which includes the
results of all non-U.S. Company operations. The vast majority of the Company’s tangible International assets are owned by the
Company’s Swiss and Hong Kong subsidiaries. For a discussion of the risks associated with the Company’s operations conducted
outside the United States, see “A significant portion of the Company’s business is conducted outside of the United States. Many factors
affecting business activities outside the United States could adversely impact this business” under Item 1A. Risk Factors, below.
Watch and Accessory Brands
Watch and Accessory Brands Business in the United States
The Company sells all of its brands in the U.S. Watch and Accessory Brands market primarily to department stores, such as Macy’s and
Nordstrom; major jewelry store chains, such as Signet Jewelers, Ltd. and Helzberg Diamonds Corp.; independent jewelers; and online
retailers, such as Amazon; as well as directly to consumers through the Company’s e-commerce platforms, such as www.movado.com
and www.mvmtwatches.com. 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, generally
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.
Watch and Accessory Brands Business in International Markets
Internationally, the Company’s brands are sold to department stores, jewelry chains, independent jewelers and online retailers, as well
as directly to consumers through the Company’s e-commerce platforms, such as www.oliviaburton.com and www.mvmtwatches.com.
The Company employs its own international sales force operating at the Company’s sales and distribution offices in Australia, Canada,
China, Germany, France, Hong Kong, Singapore, Spain, Switzerland, the United Kingdom, Mexico, Malaysia and the United Arab
Emirates. In addition, the Company sells all of its brands through a network of independent distributors operating in numerous countries
around the world. A majority of the Company’s arrangements with its international distributors are long-term, generally require certain
minimum purchases and minimum advertising expenditures and impose restrictions on the distributor’s sale of competitive products.
Company Stores
The Company’s subsidiary, Movado Retail Group, Inc., operates 45 retail outlet locations in outlet centers across the United States and
two retail outlet locations in outlet centers in Canada, which serve as an effective vehicle to sell current and discontinued models and
factory seconds of all of the Company’s watches.
SEASONALITY
The Company’s sales are traditionally greater during the Christmas and holiday season. Consequently, the Company’s net sales
historically have been higher during the second half of its fiscal year. The amount of net sales and operating profit generated during the
second half of each fiscal year depends upon the general level of retail sales during the Christmas and holiday season, as well as economic
conditions and other factors beyond the Company’s control. Major selling seasons in certain international markets center on significant
local holidays that occur in late winter or early spring. The second half of each fiscal year accounted for 56.6%, 60.1% (which includes
the acquisition of MVMT on October 1, 2018) and 59.8% (which included the acquisition of the Olivia Burton brand on July 3, 2017)
of the Company’s net sales for the fiscal years ended January 31, 2020, 2019, and 2018, respectively.
BACKLOG
At March 23, 2020, the Company had unfilled orders of $45.0 million compared to $47.2 million at March 22, 2019 and $42.9 million
at March 22, 2018. Unfilled orders include both confirmed orders and orders that the Company believes will be confirmed based on the
historical experience with the customers. It is customary for many of the Company’s customers not to confirm their future orders with
formal purchase orders until shortly before their desired delivery dates.
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CUSTOMER SERVICE, WARRANTY AND REPAIR
The Company assists in the retail sales process of its wholesale customers by monitoring their sales and inventories by product category
and style. The Company also assists in the conception, development and implementation of customers’ marketing vehicles. The
Company places considerable emphasis on cooperative advertising programs with its wholesale customers. The Company’s assistance
in the retail sales process has resulted in close relationships with its principal customers, often allowing for influence on the mix and
quantity. The Company believes that customers’ familiarity with its sales approach has facilitated, and should continue to facilitate, the
introduction of new products through its distribution network.
The Company permits the return of damaged or defective products. In addition, although the Company generally has no obligation to
do so, it accepts other returns from customers in certain instances.
The Company has service facilities around the world, including four Company-owned service facilities and multiple independent service
centers which are authorized to perform warranty repairs. A list of authorized service centers can be accessed online at
www.mgiservice.com. In order to maintain consistency and quality at its service facilities and authorized independent service centers,
the Company conducts training sessions and distributes technical information and updates to repair personnel. 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. Products that are returned
under warranty to the Company are generally serviced by the Company’s employees at its service facilities.
The Company retains adequate levels of component parts to facilitate after-sales service of its watches for an extended period of time
after the discontinuance of the manufacturing of such watches.
The Company makes available a web-based system at www.mgiservice.com providing immediate access for the Company’s retail
partners to information they may want or need about after sales service issues. The website allows the Company’s retailers to track their
repair status online 24 hours a day. The system also permits customers to authorize repairs, track repair status through the entire repair
life cycle, view repair information and obtain service order history.
SOURCING, PRODUCTION AND QUALITY
The Company does not manufacture any of the products it sells. The Company employs a flexible manufacturing model that relies on
independent manufacturers to meet shifts in marketplace demand and changes in consumer preferences. All product sources must
achieve and maintain the Company’s high-quality standards and specifications. With strong supply chain organizations predominantly
in Switzerland, China and Hong Kong, the Company maintains control over the quality of its products, wherever they are manufactured.
Compliance is monitored with strictly enforced quality control standards, including on-site quality inspections.
A majority of the Swiss watch movements used in the manufacture of Movado, Ebel and Concord watches are purchased from two
suppliers. The Company obtains other watch components for all of its brands, including movements, cases, hands, dials, bracelets and
straps from a number of other suppliers. The Company generally does not have long-term supply commitments with any of its component
parts suppliers.
Movado (with the exception of certain Movado collections, including Movado BOLD), Ebel and Concord watches are manufactured in
Switzerland by independent third-party assemblers using Swiss movements and other parts sourced by the Company’s Swiss operations.
Movado smart watches include connected technology licensed from third parties that also provide end users with the necessary
applications and cloud services. All of the Company’s products are manufactured using components obtained from third party suppliers.
Certain Movado collections of watches, including Movado BOLD, are manufactured by independent contractors in Asia using Swiss
movements. Coach, HUGO BOSS, Lacoste, Olivia Burton, MVMT, Rebecca Minkoff and Uri Minkoff, Scuderia Ferrari and Tommy
Hilfiger watches are manufactured by independent contractors in Asia and the licensed brands smart watches include connected
technology licensed from a third party.
TRADEMARKS, PATENTS AND LICENSE AGREEMENTS
The Company owns the trademarks CONCORD®, EBEL®, MOVADO®, MVMT® and OLIVIA BURTON®, as well as trademarks for
the Movado Museum dial design, and related trademarks for watches and jewelry in the United States and in numerous other countries.
The Company licenses the trademark COACH® and related trademarks on an exclusive worldwide basis for use in connection with the
manufacture, distribution, advertising and sale of watches pursuant to an amended license agreement with Tapestry, Inc. which expires
on June 30, 2025.
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Under an amended and restated license agreement with Tommy Hilfiger Licensing LLC entered into on March 20, 2020 and effective
as of January 1, 2020 (the “Tommy Hilfiger License Agreement”), the Company has the exclusive license to use the trademark TOMMY
HILFIGER® and related trademarks in connection with the manufacture of watches and jewelry worldwide and in connection with the
marketing, advertising, sale and distribution of watches and jewelry at wholesale (and at retail through its outlet locations) worldwide
(excluding certain accounts in Japan). The term of the Tommy Hilfiger License Agreement expires December 31, 2024 and may be
extended by the Company for an additional five years ending on December 31, 2029, subject to the satisfaction of minimum sales
requirements and approval of a new business plan in the licensor’s reasonable discretion.
On November 3, 2017, the Company entered into an agreement with HUGO BOSS Trade Mark Management GmbH & Co. that extended
the term and made certain other changes to the license agreement originally entered into by the parties on December 15, 2004 (the “Hugo
Boss License Agreement”), under which the Company received a worldwide exclusive license to use the trademark HUGO BOSS® and
any other trademarks containing the names “HUGO” or “BOSS”, in connection with the production, promotion and sale of watches.
After giving effect to the amendment, the term of the Hugo Boss License Agreement continues through December 31, 2023.
On March 28, 2014, the Company entered into an amended and restated license agreement with Lacoste S.A., Sporloisirs S.A. and
Lacoste Alligator S.A. (the “Lacoste License Agreement”), extending the term and making certain other changes to the license agreement
originally entered into by the parties in 2006, under which the Company received a worldwide exclusive license to use the Lacoste®
name and the distinctive “crocodile” logo to design, produce, market and distribute watches. The term of the Lacoste License Agreement
continues through December 31, 2022.
On November 23, 2017, the Company entered into an amended and restated license agreement with Ferrari S.p.A. to continue to use
certain well known trademarks of Ferrari including SCUDERIA FERRARI, the S.F. and Prancing Horse device in shield and FERRARI
OFFICIAL LICENSED PRODUCT, in connection with the manufacture, advertising, merchandising, promotion, sale and distribution
of watches with a suggested retail price not exceeding €2,500 (the “Amended Ferrari License Agreement”). The term of the Amended
Ferrari License Agreement is through December 31, 2022.
On October 21, 2016, the Company entered into a license and collaboration arrangement with Rebecca Minkoff, LLC to use the Rebecca
Minkoff and Uri Minkoff brand names, including any related logos and trademarks, in connection with the manufacture, advertising,
merchandising, promotion, sale and distribution of watches. This collection launched in calendar year 2017. The current term of the
Rebecca Minkoff license and collaboration agreement is through October 21, 2026.
The Company also owns, and has pending applications for, a number of design patents in the United States and internationally for
various watch designs, as well as designs of watch dials, cases, bracelets and jewelry.
The Company actively seeks to protect and enforce its intellectual property rights by working with industry associations, anti-
counterfeiting organizations, private investigators and law enforcement authorities, including customs authorities in the United States
and internationally, and, when necessary, suing infringers of its trademarks, patents and other intellectual property rights. Consequently,
the Company is involved from time to time in litigation or other proceedings to determine the enforceability, scope and validity of these
rights. The Company has registered the trademarks CONCORD®, EBEL®, MOVADO®, MVMT®, OLIVIA BURTON® and certain
other related trademarks with customs authorities in the United States and certain other countries in order to assist such authorities in
their efforts to prevent the importation of counterfeit goods or goods bearing confusingly similar trademarks. Customs regulations
generally do not, however, protect against the unauthorized importation of genuine products.
COMPETITION
The markets for each of the Company’s watch brands are highly competitive. With the exception of Swatch Group, Ltd., a large Swiss-
based competitor, no single company competes with the Company across all of its brands. Multiple companies, however, compete with
Movado Group with respect to one or more of its watch brands. Certain of these companies have, and other companies that may enter
the Company’s markets in the future may have, greater financial, distribution, marketing and advertising resources than the Company.
The Company’s future success will depend, to a significant degree, upon its continued ability to compete effectively with regard to,
among other things, the style, quality, price, advertising, marketing, distribution and availability of supply of the Company’s watches
and other products.
EMPLOYEES
As of January 31, 2020, the Company had approximately 1,145 full-time employees in its global operations. The Company has never
experienced a work stoppage due to labor difficulties and believes that its employee relations are good.
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AVAILABLE INFORMATION
The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available
free of charge on the Company’s website, located at www.movadogroup.com, as soon as reasonably practicable after the same are
electronically filed with, or furnished to, the SEC. The SEC maintains a website that contains reports, proxy and information statements,
and other information regarding the Company at www.sec.gov.
The Company has adopted a Code of Business Conduct and Ethics that applies to all directors, officers and employees, including the
Company’s Chief Executive Officer, Chief Financial Officer and principal accounting and financial officers, which is posted on the
Company’s website. The Company will post any amendments to the Code of Business Conduct and Ethics and any waivers that are
required to be disclosed by SEC regulations on the Company’s website. In addition, the committee charters for the audit committee, the
compensation committee and the nominating/corporate governance committee of the Board of Directors of the Company and the
Company’s corporate governance guidelines have been posted on the Company’s website.
Item 1A. Risk Factors
The following risk factors should be read carefully in connection with evaluating Movado Group’s business. These risks and
uncertainties could cause actual results and events to differ materially from those anticipated. Additional risks which the Company does
not presently consider material, or of which it is not currently aware, may also have an adverse impact on the business. Please also see
“Forward-Looking Statements” on page 1.
Risks Related to Macroeconomic Conditions and our International Operations
The recent COVID-19 novel coronavirus, or other public health threats and epidemics, could materially and adversely affect
our business.
In late 2019, there was an outbreak of a novel strain of coronavirus (COVID-19) that began in Wuhan, China that has since spread to
other regions in China and the rest of the world. To contain the outbreak, the Chinese central government extended the Lunar New Year
holiday and issued guidance pursuant to which local governments in China limited large gatherings and imposed travel restrictions. As
a result, the operations of our Chinese suppliers have been significantly disrupted and they are late in filling a significant number of
orders that were scheduled to be delivered to the Company in early fiscal 2021. Although the Chinese factories started returning to
normal production hours in early March 2020, it is unclear how long it will take for the Company’s Chinese suppliers to eliminate the
backlog in orders. In the U.S., President Donald Trump instituted a travel ban on 26 European countries, the U.K and Ireland, and
declared a national emergency to contain the spread of the coronavirus. Similar measures have been taken across Europe. For example,
in early March 2020, Italy and Spain imposed national quarantines which have resulted in nationwide lockdowns. The World Health
Organization subsequently recognized COVID-19 as a pandemic on March 11, 2020. In response to the outbreak, in mid-March 2020,
the Company and the majority of the Company’s wholesale customers temporarily closed all of their retail stores for an undefined period
of time due to health concerns associated with COVID-19. Significant outbreaks of contagious diseases like COVID-19 in the human
population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries,
resulting in an economic downturn that could affect consumer demand for our products. Furthermore, various containment and
mitigation measures that have been imposed by governmental and other authorities around the world (such as quarantines and other
social distancing requirements) have already adversely affected sales of our products, given that those sales are heavily dependent on
customer traffic in traditional retail stores, such as those of our wholesale partners, and our company stores. The continuation or
tightening of such measures could have a material adverse effect on our results of operations and financial condition. In addition, as our
potential customers face layoffs and other negative economic impact from the COVID-19 outbreak, their disposable income for
discretionary purchases and their actual or perceived wealth may be negatively impacted, potentially having a material and adverse
impact on our net sales. The impact of the outbreak of COVID-19 on the Company’s liquidity, revenues and results of operations cannot
be predicted at this time due to the high level of uncertainty, unknown future developments and duration of containment measures.
Adverse economic conditions in key markets, and the resulting declines in consumer confidence and spending, could have a
material adverse effect on the Company’s operating results.
The Company’s results are dependent on a number of factors impacting consumer confidence and spending in the U.S. and other key
markets, including, but not limited to, general economic and business conditions; wages and employment levels; volatility in the stock
market; home values; inflation; consumer debt levels; availability and cost of consumer credit; economic uncertainty; solvency concerns
of major financial institutions; fluctuations in foreign currency exchange rates; fuel and energy costs and/or shortages; tax issues; and
general political conditions, both domestic and abroad.
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Adverse economic conditions, including declines in employment levels, disposable income, consumer confidence and economic growth
could result in decreased consumer spending that would adversely affect sales of consumer goods, particularly those, such as the
Company’s products, that are viewed as discretionary items. In addition, events such as war, terrorism, natural disasters or outbreaks of
disease (such as the outbreak of a novel strain of coronavirus (COVID-19) in Wuhan, China in December 2019, which has since spread
to other regions of the world) has further suppressed consumer spending on discretionary items. If any of these events should occur (as
it relates to COVID-19, see risk factor titled “The recent COVID-19 novel coronavirus, or other public health threats and epidemics,
could materially and adversely affect our business”), the Company’s future sales could decline and the Company’s results of operations
could be materially adversely affected. This could also result in the potential for impairment surrounding our indefinite and long-lived
assets.
“Brexit” has created significant uncertainty for the Company’s U.K. business operations which could have a material adverse
effect on the Company’s financial condition and results of operations.
On June 23, 2016, the results of the United Kingdom (“U.K”) European Union (“E.U.”) Membership Referendum (“Brexit”) were
announced approving the withdrawal of the U.K. from the E.U. In March 2017, the U.K. government initiated the exit process under
Article 50 of the Treaty of the E.U., commencing the U.K.'s official withdrawal process from the E.U. and initiating negotiations with
the E.U. in June 2017. In January 2020, the U.K. parliament approved the terms of an agreement with the E.U. to determine the future
terms of the parties’ relationship, including the terms of trade between the U.K. and the E.U. and other nations, following the U.K.’s
exit from the E.U., which occurred on January 31, 2020. A transition period, lasting until December 31, 2020, has now begun, during
which the U.K. will continue to (i) be subject to E.U. rules and (ii) remain a member of the single market. While the agreement provides
for the possibility of one or more extensions of this transition period for up to two additional years, the U.K. has currently ruled out any
such extension. The E.U. and the U.K. will also continue to negotiate trading agreements and security cooperation during the transition
period. An update on these negotiations is expected in June 2020. While the full scope of implementation of Brexit is still unclear, the
Company may face significant regulatory and other changes and may incur additional costs and expenses as it adapts to potentially
divergent legal and regulatory frameworks. Brexit could also adversely affect business activity, restrict the movement of capital and the
mobility of personnel and goods, and otherwise impair political stability and economic conditions in the U.K., the Eurozone, the E.U.
and elsewhere. Because the Company’s U.K. subsidiary imports watches from other Company subsidiaries, Brexit could potentially
disrupt the Company’s ability to service the U.K. market and increase tariffs that the Company pays to import product into the U.K.
Furthermore, the announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations
that resulted in the weakening of the British Pound against other currencies in which the Company conducts business and has also caused
other members of the E.U. to consider exit as well, which could lead to further disruptions and uncertainty with respect to the Company’s
business. Any further weakening of the British Pound may adversely affect the Company’s results of operations in a number of ways,
including by increasing the Company’s U.K. subsidiary’s costs of goods sold and by reducing the U.S. dollar value of operating income
earned by the Company’s U.K. subsidiary. Any such disruption and uncertainty could affect the Company’s relationships with
customers, suppliers and employees, which could have an adverse effect on the Company’s results of operations and financial condition.
A significant portion of the Company’s business is conducted outside of the United States. Many factors affecting business
activities outside the United States could adversely impact this business.
Substantially all of the Company’s watches are assembled in Asia (particularly China) and Europe. The Company also generates
approximately 56.9% of its revenue from international sources.
Factors that could affect this business activity vary by region and market and generally include, without limitation:
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instability or changes in social, political, public health and/or economic conditions that could disrupt the trade activity in the
countries where the Company’s manufacturers, suppliers and customers are located;
the imposition of additional duties, taxes and other charges on imports and exports;
changes in foreign laws and regulations;
the adoption or expansion of trade sanctions;
recessions in foreign economies; and
a significant change in currency valuation in specific countries or markets.
The Company’s business is subject to foreign currency exchange rate risk.
A significant portion of the Company’s inventory purchases are denominated in Swiss Francs and, to a lesser extent, the Japanese Yen.
The Company also sells to third-party customers in a variety of foreign currencies, most notably the Euro and the British Pound. The
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Company reduces its exposure to the Swiss Franc, Euro, British Pound, Chinese Yuan and Japanese Yen exchange rate risks 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 under a hedging program to utilize forward exchange contracts and purchased foreign currency options to mitigate foreign
currency risk. If the Company does not utilize hedge instruments or if such instruments are unsuccessful at minimizing the risk or are
deemed ineffective, any fluctuation of the Swiss Franc, Euro, British Pound, Chinese Yuan, Hong Kong Dollar or Japanese Yen
exchange rates could impact the future results of operations. Changes in currency exchange rates may also affect relative prices at which
the Company and its foreign competitors sell products in the same market. Additionally, a portion of the Company’s net sales are
recorded in its foreign subsidiaries in a currency other than the local currency of that subsidiary. This predominantly occurs in the
Company’s Hong Kong and Swiss subsidiaries when they sell to Euro and British Pound based customers. The Company utilizes forward
exchange contracts to mitigate this exposure. To the extent not hedged, any fluctuation in the Euro and British Pound exchange rates in
relation to the Hong Kong dollar and Swiss Franc would have an effect on these sales that are recorded in Euros and British Pounds.
The currency effect on these sales has an equal effect on their recorded gross profit since the costs of these sales are recorded in the
entities’ respective local currency. As a result of these and other foreign currency sales, certain of the Company’s subsidiaries have
outstanding foreign currency receivables. Furthermore, since the Company’s consolidated financial statements are presented in U.S.
dollars, revenues, income and expenses, as well as assets and liabilities of foreign currency denominated subsidiaries must be translated
into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Fluctuations in foreign currency exchange rates
could adversely affect the Company’s reported revenues, earnings, financial position and the comparability of results of operations from
period to period.
U.S. Special Tariffs or other restrictions placed on imports from China, and any retaliatory trade measures taken by China,
may have a material adverse impact on the Company’s financial condition and results of operations.
Starting in July 2018, the Trump Administration announced a series of lists covering thousands of categories of Chinese origin products
subject to potential U.S. special tariffs of 10% to 25% of import value, in addition to the regular tariffs that have historically applied to
such products. Certain of the Company’s packaging products became subject to a U.S. special 10% tariff in September 2018, which was
increased to 25% effective May 10, 2019. In addition, all of the Company’s smart watches became subject to a U.S. special 15% tariff
on September 1, 2019, and in a third-party ruling, U.S. Customs and Border Patrol (“CBP”) has taken the position that this U.S. special
15% tariff applies broadly to China-sourced cases and bands on watches assembled in China and other countries. Under this position,
most of the cases and bands used in the production of the Company’s traditional watches imported into the U.S. became subject to the
U.S. special 15% tariff effective September 1, 2019. A pending request to CBP for reconsideration and revocation of the ruling has been
filed on behalf of the Company and certain other watch importers on the basis that the CBP ruling is inconsistent with CBP’s
longstanding position that the country of origin of the movement confers the country of origin of a traditional watch. On January 15,
2020, the United States and China signed a “Phase One” trade agreement pursuant to which this 15% U.S. special tariff was reduced to
7.5%, effective February 14, 2020.
If CBP declines the aforementioned reconsideration request, or if the U.S. special tariffs were to increase, the Company may be required
to raise prices for watches sold in the United States, which is the Company’s single largest market, and could result in the loss of
customers and harm its operating performance. Alternatively, the Company may seek to shift production outside of China, resulting in
significant costs and disruption to the Company’s operations and materially and adversely affecting its sales, costs and results of
operations. It is difficult to accurately estimate the impact on our business from tariffs. However, assuming no further offsets from price
increases, sourcing changes or other changes to regulatory rulings, the estimated gross profit exposure from the U.S. special tariffs
would be in the range of $2 to $3 million in fiscal 2021 if U.S. imports were to remain at fiscal 2020 levels, although this should not be
deemed to imply any forecast regarding fiscal 2021. In addition, the Company’s business may be impacted by retaliatory trade measures
taken by China or other countries in response to existing or future tariffs, causing the Company to raise prices or make changes to its
operations, any of which could materially harm its financial condition and results of operations.
Risks Related to our Business
The Company’s wholesale business could be negatively affected by the consumer shift toward online shopping, as well as by
further changes of ownership, contraction and consolidation in the retail industry.
Consumers’ growing preference for purchasing products online may continue to reduce foot traffic at traditional retail stores and increase
price competition for the Company’s products, which could discourage traditional retailers from investing in sales support for those
products. This could reduce consumer demand for the Company’s products and thereby materially adversely affect the Company’s
wholesale business.
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In addition, a large portion of the Company’s U.S. wholesale business is based on sales to major jewelry store chains and department
stores. The retail industry has experienced changes in ownership, contraction and consolidations. Future reorganizations, changes of
ownership and consolidations could further reduce the number of retail doors in which the Company’s products are sold and increase
the concentration of sales among fewer national or large regional retailers, which could materially adversely affect the Company’s
wholesale business.
The Company faces intense competition in the worldwide watch industry not only from competitors selling traditional watches
but also from those selling smart watches and other smart wearables.
The watch industry is highly competitive and the Company competes globally with numerous manufacturers, importers, distributors and
Internet-based retailers, some of which are larger than the Company and have greater financial, distribution, advertising and marketing
resources. The Company’s products compete on the basis of price, features, brand image, design, perceived desirability and reliability.
However, there can be no assurance that the Company’s products will compete effectively in the future and, unless the Company remains
competitive, its future results of operations and financial condition could be adversely affected. The Company also faces increasing
competition from companies introducing and selling smart wearable devices including smart watches. Many of these companies have
significantly greater financial, distribution, advertising and marketing resources than does the Company. The sale of these new smart
products could materially adversely impact the traditional watch market and the Company’s results of operations and financial condition
unless the Company is able to effectively compete in this new product area. The Company’s ability to successfully design, produce,
market and sell products which are competitive with smart watches and other similar wearables depends, among other things, on its
ability to obtain and maintain the necessary expertise in this area by enhancing its internal capabilities or by entering into and maintaining
business relationships with third parties that have such expertise. The Company may not be able to launch commercially successful
smart watch models or other such products in a timely manner or frequently enough to remain competitive. Any of these events could
have a material adverse effect on the Company’s results of operations and financial condition or could result in the Company’s products
not achieving market acceptance or becoming obsolete.
The design, sourcing, marketing, distribution and after-sales servicing of smart watches involve additional challenges to those
applicable to traditional watches.
Although smart watches share certain characteristics with traditional watches, there are important differences in the way the two sets of
products are designed, sourced, marketed, distributed, and serviced after they are sold. These differences may make it more difficult to
compete successfully in the smart watch market, particularly for competitors such as the Company that do not have significant experience
with similar consumer technology products. Although the Company has used and expects to continue to use reputable technology
companies to assist it in bringing smart watches to market and supporting end-user customers, there are technology-related and other
risks of competing in this market that cannot be eliminated. For example, smart watches’ significant reliance on technology increases
the risk of allegations of infringement on the intellectual property rights of others. In addition, technical difficulties or product defects
may adversely impact sales of smart watches and may have a negative impact on any brand under which an affected smart watch is sold.
In addition, although the Company does not currently provide longer warranties on its smart watches than it does for its traditional
watches, consumers may expect that smart watches purchased by them, particularly the more expensive models, will for many years
continue to function and be compatible with the smartphone operating systems with which they were intended to interface, including
future updates to such operating systems. Since the Company has no control over such operating system updates, it cannot assure such
continued compatibility. If the Company fails to meet consumers’ expectations regarding the long-term functioning of its smart watches,
the Company may suffer reputational damage that could adversely affect its business, results of operations and financial condition.
Maintaining favorable brand recognition is essential to the Company’s success, and failure to do so could materially and
adversely affect the Company’s results of operations.
Favorable brand recognition is an important factor to the future success of the Company. The Company sells its products under a variety
of owned and licensed brands. Factors affecting brand recognition are often outside the Company’s control, and the Company’s efforts
to create or enhance favorable brand recognition, such as making significant investments in marketing and advertising campaigns
(including increased exposure through social media, influencer messaging and other digital advertising channels), product design and
anticipation of fashion trends, may not have their desired effects. Additionally, the Company relies on its licensors to maintain favorable
brand recognition of their respective brands, and the Company has little or no control over the brand management efforts of its licensors.
Finally, although the Company’s independent distributors are subject to contractual requirements to protect the Company’s brands, it
may be difficult to monitor or enforce such requirements, particularly in foreign jurisdictions.
Any decline in perceived favorable recognition of the Company’s owned or licensed brands and any negative response to social media,
influencer or other digital media campaigns could materially and adversely affect future results of operations and profitability. If the
Company is unable to respond to changes in consumer demands and fashion trends in a timely manner, sales and profitability could be
adversely affected.
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Fashion trends and consumer demands and tastes often shift quickly. The Company attempts to monitor these trends in order to adapt
its product offerings to suit customer demand. There is a risk that the Company will not properly perceive changes in trends or tastes,
which may result in the failure to adapt the Company’s products accordingly. In addition, new model designs are regularly introduced
into the market for all brands to keep ahead of evolving fashion trends as well as to initiate new trends. The public may not favor these
new models or the models may not be ready for sale until after the trend has passed. If the Company fails to respond to and keep up to
date with fashion trends and consumer demands and tastes, its brand image, sales, profitability and results of operations could be
materially and adversely affected.
If the Company loses any of its license agreements, there may be significant loss of revenues and a negative effect on business.
The Company has the right to produce, market and distribute watches under the brand names of Coach, Tommy Hilfiger, HUGO BOSS,
Scuderia Ferrari, Lacoste and Rebecca Minkoff pursuant to license agreements with the respective owners of those trademarks. There
are certain minimum royalty payments as well as other requirements associated with the Company’s license agreements. Failure to meet
any of these requirements could result in the loss of the license. Additionally, after the term of any license agreement has concluded, the
licensor may decide not to renew with the Company. For the fiscal year ended January 31, 2020, the above-mentioned licensed brands
represented 49.2% of the Company’s net sales. While the Company is not substantially dependent on any one licensed brand, the loss
of a single licensed brand could have a material adverse effect on the Company’s results of operations and financial condition. In
addition, the Company’s revenues and profitability under its various license agreements may change from period to period due to various
factors, including the maturity of the Company's relationship with the respective licensor, changes in consumer preferences, brand
repositioning activities and other factors, some of which are outside of the Company's control.
Changes in the sales or channel mix of the Company’s products could impact gross profit margins.
The individual brands that are sold by the Company are sold at a wide range of price points and yield a variety of gross profit margins.
In addition, sales of excess and/or discontinued inventory into liquidation channels generate a lower gross profit margin than non-
liquidation sales. Thus, the mix of sales by brand as well as by distribution channel can have an impact on the gross profit margins of
the Company. If the Company’s sales mix shifts unfavorably toward brands with lower gross profit margins than the Company’s
historical consolidated gross profit margin or if a greater proportion of liquidation sales are made, it could have an adverse effect on the
results of operations.
The Company’s business is seasonal, so events and circumstances that adversely affect holiday consumer spending will have a
disproportionately adverse effect on the Company’s results of operations.
The Company’s sales are seasonal by nature. The Company’s U.S. sales are traditionally greater during the Christmas and holiday
season. Internationally, major selling seasons center on significant local holidays that occur in late winter or early spring. The amount
of net sales and operating income generated during these seasons depends upon the general level of retail sales at such times, as well as
economic conditions and other factors beyond the Company’s control. The second half of each year accounted for 56.6%, 60.1% (which
included the acquisition of MVMT on October 1, 2018) and 59.8% (which included the acquisition of the Olivia Burton brand on July
3, 2017) of the Company’s net sales for the fiscal years ended January 31, 2020, 2019, and 2018, respectively. If events or circumstances
were to occur that negatively impact consumer spending during such holiday seasons, it could have a material adverse effect on the
Company’s sales, profitability and results of operations.
Sales in the Company’s retail outlet locations are dependent upon customer foot traffic.
The success of the Company’s retail outlet locations is, to a certain extent, dependent upon the amount of customer foot traffic generated
by the outlet centers in which those stores are located.
Factors that can affect customer foot traffic include:
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changes in consumer discretionary spending;
the location of the outlet center;
the location of the Company’s store within the outlet center;
the other tenants in the outlet center;
the occupancy rate of the outlet center;
the success of the outlet center and tenant advertising to attract customers;
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changes in competition in areas surrounding the outlet center;
increased competition from shopping over the internet and other alternatives such as mail-order; and
desirability of the Company’s brands and products.
Additionally, since most of the Company’s retail outlets are located near vacation destinations, factors that affect travel could decrease
outlet center traffic. Such factors include the price and supply of fuel, travel concerns and restrictions (including those due to disease
outbreaks), international instability, terrorism and inclement weather. For example, the outbreak of a novel strain of coronavirus
(COVID-19) in Wuhan, China in December 2019, has since spread to other regions of the world and led to travel restrictions and a
reduction in voluntary travel. As a result, in mid-March 2020, the Company temporarily closed all of its retail outlets, which remain
closed at the time of filing, due to health concerns associated with COVID-19. Such closure is adversely affecting our results of
operations by eliminating revenues associated with the retail stores. The continued closure of the Company’s retail stores or even a
reduction in foot traffic in relevant shopping centers after the stores reopen could have a material adverse effect on retail sales and the
profitability of the Company Stores segment.
If the Company is unable to maintain existing space or to lease new space for its retail outlets in prime outlet center locations or
is unable to complete construction on a timely basis, the Company’s ability to achieve favorable results in its retail business
could be adversely affected.
The Company’s outlet stores are strategically located in top outlet centers in the United States and Canada, most of which are located
near vacation destinations. Due to significant industry consolidation in recent years, the remaining outlet center operators use their
significant market power to increase rents in prime locations when existing leases are renewed or new leases are executed.
If the Company cannot maintain and secure locations in prime outlet centers for its outlet stores on acceptable lease terms, it could
jeopardize the operations of the stores and business plans for the future. Additionally, if the Company cannot complete construction in
new stores within the planned timeframes, cost overruns and lost revenue could adversely affect the profitability of the Company Stores
segment.
The Company’s e-commerce business is subject to numerous risks that could have an adverse effect on the Company’s business
and results of operations.
Although sales through the Company’s e-commerce channels have constituted a relatively small portion of its net sales historically, such
sales are growing quickly, and the Company expects to continue to grow its e-commerce business in the future. The acquisitions of the
Olivia Burton and MVMT brands have further increased the importance of the Company’s e-commerce sales and marketing channels.
Though direct-to-consumer sales generally have higher profit margins and provide the Company with useful insight into the impact of
its marketing campaigns, further development of the Company’s e-commerce business also subjects the Company to a number of risks.
The Company’s online sales may negatively impact the Company’s relationships with wholesale customers and distributors and their
willingness to invest in the Company’s brands if they perceive that the Company is competing with them. There also is a risk that the
Company’s e-commerce business may divert sales from the Company’s own brick and mortar stores. The Company’s failure to
successfully respond to these risks might adversely affect sales in the Company’s e-commerce business as well as damage its reputation
and brands.
In addition, online commerce is subject to increasing regulation by states, the U.S. federal government, and various foreign jurisdictions.
Compliance with these laws may increase the Company’s costs of doing business, and the Company’s failure to comply with these laws
may subject the Company to potential fines, claims for damages and other remedies, any of which would have an adverse effect on the
Company’s financial condition and results of operations.
If the technology-based systems that give the Company’s customers the ability to shop online do not function effectively, the
Company’s operating results could be materially adversely affected.
Customers shop with the Company through its online platforms. Increasingly, customers are using mobile devices to shop online and to
do comparison shopping. The Company is increasingly using social media and proprietary mobile applications to interact with the
Company’s customers and as a means to enhance their shopping experience. Any failure on the Company’s part to provide attractive,
effective, reliable, user-friendly digital commerce platforms that offer a wide assortment of merchandise with rapid delivery options and
that continually meet the changing expectations of online shoppers could place the Company at a competitive disadvantage, result in the
loss of e-commerce and other sales, harm the Company’s reputation with customers, and have a material adverse impact on the growth
of the Company’s e-commerce business globally and its results of operations.
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Furthermore, the Company’s e-commerce operations subject the Company to risks related to the computer systems that operate the
Company’s websites and related support systems, such as system failures, viruses, computer hackers and similar disruptions. If the
Company is unable to continually add software and hardware, effectively upgrade its systems and network infrastructure and take other
steps to improve the efficiency of its systems, system interruptions or delays could occur that adversely affect the Company’s operating
results and harm the Company’s brands. The Company depends on its technology vendors to manage “up time” of the front-end e-
commerce stores, manage the intake of orders, and export orders for fulfillment. Any failure on the part of the Company’s third-party
e-commerce vendors or in the Company’s ability to transition third-party services effectively could result in lost sales and harm the
Company’s brands.
If the Company misjudges the demand for its products, high inventory levels could adversely affect future operating results and
profitability.
Consumer demand for the Company’s products can affect inventory levels. If consumer demand is lower than expected, inventory levels
can rise causing a strain on operating cash flows. If the inventory cannot be sold through the Company’s wholesale channel or retail
outlet locations, additional write-downs or write-offs to future earnings could be necessary. Conversely, if consumer demand is higher
than expected, insufficient inventory levels could result in unfilled customer orders, loss of revenue and an unfavorable impact on
customer relationships. In particular, volatility and uncertainty related to macro-economic factors make it difficult for the Company to
forecast customer demand in its various markets. Failure to properly judge consumer demand and properly manage inventory could have
a material adverse effect on profitability and liquidity.
If the Company were to lose its relationship with any of its key customers or distributors or any of such customers or distributors
were to experience financial difficulties, there may be a significant loss of revenue and operating results.
The Company’s customer base covers a wide range of distribution including national jewelry store chains, department stores,
independent regional jewelers, licensors’ retail stores and a network of independent distributors in many countries throughout the world.
Except for its agreements with independent distributors, the Company does not have long-term sales contracts with its customers.
Customer purchasing decisions could vary with each selling season. A material change in customers’ purchasing decisions could have
an adverse effect on the Company’s revenue and operating results.
The Company extends credit to its customers based on an evaluation of each customer’s financial condition, usually without requiring
collateral. Should any of the Company’s larger customers experience financial difficulties, it could result in the Company curtailing
business with them, an increased rate of product returns or an increase in the Company’s accounts receivable exposure. The inability to
collect on these receivables could have an adverse effect on the Company’s financial results and cash flows.
In many countries, independent distributors are entitled to seek compensation from the entity that granted them distribution rights upon
termination of the parties’ contractual relationship. Such compensation can equal or exceed one year’s worth of the distributor’s profits
attributable to the distribution of the relevant goods. Although the Company generally renews its agreements with most of its distributors
at the end of the then-current contractual term, if the Company elects not to renew its distribution agreements with large distributors or
with multiple smaller distributors, it may be required to make material termination payments to such distributors, which would have an
adverse effect on its operating results.
The inability or difficulty of the Company’s customers, suppliers and business partners to obtain credit could materially and
adversely affect its results of operations and liquidity.
Many of the Company’s customers, suppliers and business partners rely on a stable, liquid and well-functioning financial system to fund
their operations, and a disruption in their ability to access liquidity could cause serious disruptions to or an overall deterioration of their
businesses which could impair their ability to meet their obligations to the Company, including delivering product ordered by the
Company and placing or paying for future orders of the Company’s products, any of which could have a material adverse effect on the
Company’s results of operations and liquidity.
An increase in product returns could negatively impact the Company’s operating results and profitability.
The Company permits the return of damaged or defective products and accepts limited amounts of non-defective product returns in
certain instances. Accordingly, the Company provides allowances for the estimated amounts of these returns at the time of revenue
recognition based on historical experience. While such returns have historically been within management’s expectations and the
provisions established, future return rates may differ from those experienced in the past, in particular in light of the Company’s entry
into the smart watch market. Any significant increase in damaged or defective products or expected returns could have a material adverse
effect on the Company’s operating results for the period or periods in which such returns materialize.
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The Company relies on independent parties to manufacture its products. Any loss of an independent manufacturer, or the
Company’s inability to deliver quality goods in a timely manner, could have an adverse effect on customer relations, brand
image, net sales and results of operations.
The Company employs a flexible manufacturing model that relies on independent manufacturers to meet shifts in marketplace
demand. Most of these manufacturers rely on third-party suppliers for the various component parts needed to assemble finished watches
sold to the Company. All such independent manufacturers and suppliers must achieve and maintain the Company’s high-quality
standards and specifications. Their inability to do so could cause the Company to miss committed delivery dates with customers, which
could result in cancellation of the customers’ orders. In addition, delays in delivery of satisfactory products could have a material adverse
effect on the Company’s profitability, particularly during the fourth quarter. A majority of the Swiss watch movements used in the
manufacture of Movado, Ebel and Concord watches are purchased from two suppliers, one of which is a wholly-owned subsidiary of
one of the Company’s competitors. Additionally, the Company generally does not have long-term supply commitments with its
manufacturers and thus competes for production facilities with other organizations, some of which are larger and have greater
resources. Any loss of an independent manufacturer or disruption in the supply chain with respect to critical component parts may result
in the Company’s inability to deliver quality goods in a timely manner and could have an adverse effect on customer relations, brand
image, net sales and results of operations.
The Company contractually obligates its independent manufacturers to adhere to the Company’s vendor code of conduct and similar
codes of conduct adopted by the Company’s trademark licensors, and the Company monitors compliance with those codes by conducting
periodic factory audits. There can be no assurance, however, that all of the Company’s manufacturers and licensors will consistently
comply with labor and other laws and operate in accordance with ethical standards. Deviations from these laws and standards could
interrupt the shipment of finished products and damage the Company’s reputation and could have a material adverse effect on the
Company’s financial condition and results of operations.
Interruptions at any of the Company’s major warehouse and distribution centers could materially adversely affect its business.
The Company operates one distribution facility in New Jersey that is responsible for importing and warehousing products as well as
fulfilling and shipping most orders by the Company’s customers in the United States, Canada and the Caribbean and by many of the
Company’s customers in Latin America. The Company operates a smaller, similar facility in Bienne, Switzerland for the distribution of
its Swiss watch brands throughout Europe and the Middle East. In addition, the Company has contracted with third-party warehouse
and fulfillment providers as follows: in the Netherlands for the distribution of its licensed brands in Europe; in Hong Kong for the
distribution of its licensed brands in Asia; in the U.K. for the distribution of a significant portion of Olivia Burton brand sales; in Mexico
for the distribution of the Company’s products to customers in that country; and in the State of Kentucky for the distribution of MVMT
brand products directly to consumers primarily in the United States. The complete or partial loss or temporary shutdown of any of the
Company’s or third-parties’ warehouse and distribution facilities (including as a result of fire or other casualty or labor or other
disturbances) could have a material adverse effect on the Company’s business. In addition, the Company’s New Jersey warehouse and
distribution facility is operated in a special purpose sub-zone established by the U.S. Department of Commerce Foreign Trade Zone
Board and is highly regulated by U.S. Customs and Border Protection, which, under certain circumstances, has the right to shut down
the entire sub-zone and, therefore, the entire warehouse and distribution facility. If that were to occur, the Company’s ability to fill
orders for its U.S., Canadian, Latin American and Caribbean customers would be significantly impacted, which could have a material
adverse effect on the Company’s results of operations and financial condition.
Fluctuations in the pricing of commodities or the cost of labor could adversely affect the Company’s ability to produce products
at favorable prices.
Some of the Company’s higher-end watch offerings are made with materials such as diamonds, precious metals and gold. The Company
relies on independent contractors to manufacture and assemble its watch brands. A significant change in the prices of these commodities
or the cost of third-party labor could materially adversely affect the Company’s business by reducing gross profit margins and/or forcing
an increase in suggested retail prices, which could lead to a decrease in consumer demand and higher inventory levels.
Current or future cost reduction, streamlining, restructuring or business optimization initiatives could result in the Company
incurring significant charges.
In adapting to changing economic and industry conditions, the Company may be required to incur severance and relocation expenses,
write-offs or write-downs of assets, impairment charges, facilities closure costs or other business optimization costs. These costs will
reduce the Company’s operating income and net income (along with the associated per share measures) and could have a material
adverse effect on the Company’s results of operations.
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The Company depends on its information systems to run its business and any significant breach of or disruption to those systems
could materially disrupt the Company’s business.
The Company relies on its information systems to operate all aspects of its business, including, without limitation, order processing,
inventory and supply chain management, customer communications, purchasing and financial reporting. Although the Company
attempts to take reasonable steps to mitigate the risks to its computer hardware and software systems, including such measures as the
use of firewalls, automatically expiring passwords, encryption technology and periodic vulnerability tests, no system can be
completely secure, particularly given the increasing threat posed by computer hackers and cyber terrorists. The Company’s
information systems could experience system failures, viruses, security breaches, power outages, network and telecommunications
failures, usage errors by our employees, or other events which could disable or significantly impair the systems’ functionality.
Additionally, the Company’s systems may fail to operate properly or effectively, experience problems transitioning to upgraded or
replacement systems or difficulties in integrating new systems. Any material disruption or slowdown of the Company’s information
systems could result in the loss of critical data, the inability to process and properly record transactions and the material impairment
of the Company’s ability to conduct business, leading to cancelled orders and lost sales. In addition, the Company’s e-commerce
business is vulnerable to additional risks associated with the Internet, including changes in required technology interfaces, website
downtime and other technical failures, security breaches and consumer privacy concerns. A breach and loss of data could also subject
the Company to liability to its customers or suppliers and could also cause competitive harm if sensitive information is publicized.
In the event the Company is not successful in responding to these risks and uncertainties, its online sales may decline, the associated
costs with its e-commerce activity may increase and its reputation may be damaged.
If the Company is unable to successfully implement its growth strategies, its future operating results could suffer.
There are risks associated with the Company’s expansion through acquisitions, license agreements, joint ventures and similar initiatives.
New brands may not complement the brands in the Company’s existing portfolio and may not be viewed favorably by the consuming
public. In addition, the integration of a new business or licensed brand into the Company’s existing business can strain the Company’s
resources and infrastructure, and there can be no assurance that the integration will be successful or generate sales increases. The inability
to successfully implement its growth strategies could adversely affect the Company’s future financial condition and results of operations.
Acquisitions inherently involve significant risks and uncertainties.
We continually review acquisition opportunities that will enhance our market position, expand our product lines and provide synergies.
Any of the following risks associated with our past acquisitions or future acquisitions, individually or in aggregate, may have a material
adverse effect on our business, financial condition and operating results:
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difficulties in realizing anticipated financial or strategic benefits of such acquisition;
diversion of capital from other uses and potential dilution of stockholder ownership;
risks related to increased indebtedness;
significant capital and other expenditures may be required to integrate the acquired business into our operations;
disruption of our ongoing business or the ongoing acquired business, including impairment or loss of existing relationships
with our employees, distributors, suppliers or customers or those of the acquired companies;
diversion of management’s attention and other resources from current operations, including potential strain on financial and
managerial controls and reporting systems and procedures;
difficulty in integrating acquired operations, including restructuring and realigning activities, personnel, technologies and
products;
assumption of known and unknown liabilities, some of which may be difficult or impossible to quantify; and
non-cash impairment charges or other accounting charges relating to the acquired assets.
Impairment charges could have an adverse impact on our results of operations.
We are required, at least annually, or as facts and circumstances warrant, to test goodwill to determine if an impairment has occurred.
We are also required to test property plant and equipment and other long-lived assets for impairment as facts and circumstances warrant.
Impairment may result from any number of factors, including adverse changes in assumptions used for valuation purposes, such as
actual or projected net sales, growth rates, profitability or discount rates, or other variables. If testing indicates that impairment has
occurred, we are required to record a non-cash impairment charge. Should the value of our finite-lived intangible assets, property, plant
and equipment and other long-lived assets become impaired, it could have a material adverse effect on our results of operations.
The loss or infringement of the Company’s trademarks or other intellectual property rights could have an adverse effect on
future results of operations.
The Company’s trademarks and other intellectual property rights are vital to the competitiveness and success of its business and it
therefore takes actions to register and protect them. Such actions may not be adequate to prevent imitation of the Company’s products
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or infringement of its intellectual property rights, or to assure that others will not challenge the Company’s rights, or that such rights
will be successfully defended. Moreover, the laws of some foreign countries, including some in which the Company sells its products,
do not protect intellectual property rights to the same extent as do the laws of the United States, which could make it more difficult to
successfully defend such challenges to them. The Company’s inability to obtain or maintain rights in its trademarks, or the inability of
the Company’s licensors to obtain or maintain rights in their trademarks, could have an adverse effect on brand image and future results
of operations.
Changes to laws or regulations impacting the industries in which the Company operates could require it to alter its business
practices which could have a material adverse effect on its results of operations.
The Company conducts business, either directly or indirectly, in numerous countries and accordingly is subject to a multitude of legal
requirements impacting the industries in which it operates. Changes to existing laws and regulations or new laws and regulations could
impose new requirements and additional costs on the Company and its suppliers, making the Company’s products more costly to
produce, forcing the Company to change its existing business practices. For example, the Swiss Federal Government adopted a new
“Swissness” ordinance which became effective January 31, 2017, subject to a two-year transition period. This ordinance forbids marking
a watch with a Swiss indication of origin unless the design and prototyping occur in Switzerland and at least 60% of the manufacturing
costs are incurred in Switzerland. Compliance with the ordinance has increased the production costs of Movado, Ebel and Concord
watches. Continued increases in such costs could place the Company at a competitive disadvantage as compared to other watch brands
and sales of its products could decline, adversely affecting its financial condition and results of operations.
Changes to tax laws or regulations could have a material adverse effect on the Company’s financial condition and results of
operations.
The overall tax environment has made it increasingly challenging for multinational corporations to operate with certainty around taxation
in many jurisdictions. For example, the Organization for Economic Cooperation and Development, which represents a coalition of
western countries, is supporting changes to numerous long-standing tax principles through its base erosion and profit shifting project,
which is focused on a number of issues, including the shifting of profits among affiliated entities located in different tax jurisdictions.
Furthermore, a number of countries where the Company does business, including many European countries, are considering changes in
relevant tax, accounting and other laws, regulations and interpretations, including changes to tax laws applicable to multinational
corporations. Finally, the Tax Cuts and Jobs Act (“2017 Tax Act”) became law in the United States on December 22, 2017. This law
contains significant changes to corporate taxation, including, among other things, a reduction of the corporate tax rate to 21% from 35%,
a one-time taxation of accumulated foreign earnings regardless of whether they are repatriated, limitations on the deduction for interest
expense, immediate tax deductions for five years for new investments instead of deductions for depreciation expense over time,
disallowance of deductions for certain performance-based executive compensation, elimination of the deduction for certain domestic
production activities, and a migration from a “worldwide” system of taxation to a modified territorial system. The Internal Revenue
Service continues to issue proposed and final regulations for the provisions of the 2017 Tax Act. In addition, foreign countries may
decide to enact tax laws that may negatively affect the Company’s foreign tax liabilities in response to any real or perceived negative
effects of the U.S. tax changes on their countries, and/or states or local governments may decide to enact additional tax laws that may
increase tax liabilities for companies doing business in those jurisdictions as they see opportunities to capitalize on the reduction in the
federal corporate tax rate. This increasingly complex global tax environment could have a material adverse effect on the Company’s
effective tax rate, results of operations, cash flows and financial condition.
The Company is subject to complex and evolving laws and regulations regarding privacy and data protection that could result
in legal claims, changes to business practices and increased costs that could materially and adversely affect the Company’s
results of operations.
The Company is subject to a variety of U.S and foreign laws and regulations governing privacy and data protection. The introduction
of new products, such as smart watches, and the expansion of our business in certain jurisdictions, may subject us to additional such
laws and regulations. These U.S. federal and state and foreign laws and regulations are evolving and the restrictions imposed thereby
may increase and are not always clear. There are currently a number of proposals pending before federal, state, and foreign legislative
and regulatory bodies that may increase restrictions relating to the receipt, transfer and processing of personal data. In addition,
foreign court decisions and regulatory actions could impact our ability to receive, transfer and process personal data relating to our
employees and direct and indirect customers. For example, in October 2015 the European Union’s highest court, the European Court
of Justice, struck down an agreement with the U.S. government regarding a 15-year-old “safe harbor” relied upon by thousands of
companies, including the Company, to transfer personal information of European residents to the United States. The Company now
complies with the European Commission’s directives regarding transatlantic data flows through intercompany agreements between
its European and U.S. entities that regulate such flows with standard contractual clauses approved by the European Commission, but
the efficacy of such standard contractual clauses is subject to pending litigation. In addition, existing and proposed privacy and data
protection laws and regulations result and may continue to result in significant compliance and operating costs and negative publicity
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for the Company and may subject it to remedies that may harm its business, including fines and orders to modify or cease existing
business practices. In particular, the General Data Protection Regulation (“GDPR”) that went into effect in May 2018 and the
California Consumer Privacy Act of 2018 (“CCPA”) that went into effect in January 2020 set forth new requirements regarding the
handling of personal data and increases the compliance burden on the Company and other commercial entities that gather or process
personal information of citizens of E.U. countries and California, respectively. The Company’s efforts to comply with GDPR, CCPA
and other privacy and data protection laws may entail substantial expenses, may divert resources from other initiatives and projects
and could limit the services the Company is able to offer. Furthermore, enforcement actions and investigations by regulatory
authorities relate to data security incidents and privacy violations continue to increase. The enactment of more restrictive laws, rules,
regulations, or future enforcement actions or investigations could impact the Company through increased costs or restrictions on the
Company’s business and its ability to interact with its customers, and noncompliance could result in regulatory penalties and
significant legal liability. Any of the foregoing could materially adversely affect the Company’s results of operations and financial
condition.
If the Company were to experience a significant privacy breach, it could be subject to costly government enforcement actions
and private litigation and suffer significant negative publicity which could materially and adversely affect the Company’s results
of operations.
As part of the normal course of business the Company is involved in the receipt and storage of electronic information about customers
and employees, as well as proprietary financial and non-financial data. Practices regarding the collection, use, storage, transmission and
security of personal information by companies operating over the internet and mobile platforms have recently been subject to increased
public scrutiny. Although the Company believes it has taken reasonable and appropriate actions to protect the security of this
information, if the Company were to experience a security breach, acts of vandalism, computer viruses, misplaced or lost data,
programming and/or human errors or other similar events, it could result in government enforcement actions and private litigation,
attract a substantial amount of media attention, and damage the Company’s reputation and its relationships with its customers and
employees, materially adversely affecting the Company’s sales and results of operations. This risk has increased with the sale of the
Company’s smart watches, which collect and transmit personal data about the consumers who purchase and use them, and with the
Company’s increased focus on direct-to-consumer sales.
From time to time the Company is subject to legal proceedings that could result in significant expenses, fines and reputational
damage.
The Company is involved in legal proceedings and other disputes from time to time, including those involving consumers, employees
and contractual counterparties, as well as governmental audits and investigations. The most significant of these proceedings are
described in Item 3 “Legal Proceedings” of this report. The Company cannot predict the ultimate outcome of legal disputes. The
Company could in the future be required to pay significant amounts as a result of settlements, judgments or fines in these matters,
potentially in excess of accruals. The resolution of, or increase in accruals for, one or more of these matters could have a material adverse
effect on the Company's results of operations and cash flows.
If the Company were to lose key members of management or be unable to attract and retain the talent required for the business,
operating results could suffer.
The Company’s ability to execute key operating initiatives as well as to deliver product and marketing concepts appealing to target
consumers depends largely on the efforts and abilities of key executives and senior management’s competencies. The unexpected loss
of one or more of these individuals could have an adverse effect on the future business. The Company cannot guarantee that it will be
able to attract and retain the talent and skills needed in the future.
If the Company cannot secure and maintain financing and credit on favorable terms, the Company’s financial condition and
results of operations may be materially adversely affected.
Credit and equity markets remain sensitive to world events and macro-economic developments. Therefore, the Company’s cost of
borrowing may increase and it may be more difficult to obtain financing for the Company’s operations or to refinance long-term
obligations as they become payable. In addition, the Company’s borrowing costs can be affected by independent rating agencies’ short
and long-term debt ratings which are based largely on the Company’s performance as measured by credit metrics including interest
coverage and leverage ratios. A decrease in these ratings would likely also increase the Company’s cost of borrowing and make it more
difficult for it to obtain financing. A significant increase in the costs that the Company incurs to finance its operations may have a
material adverse impact on its business results and financial condition. In addition, any failure by the Company to comply with the
various covenants contained in its corporate credit facility, including financial maintenance covenants, could result in the termination
of the facility and the acceleration of the Company’s repayment obligations thereunder, which could have a material adverse effect on
the Company’s financial condition and liquidity.
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Changes to the method of determining LIBOR or the selection of a replacement for LIBOR may affect our financial instruments.
In July 2017, the U.K. Financial Authority announced that it intends to stop collecting LIBOR rates from banks after 2021. The
announcement indicates that LIBOR will not continue to exist on the current basis. It is unclear whether new methods of calculating
LIBOR will be established such that it continues to exist after 2021. The Alternative Reference Rates Committee, a steering committee
comprised of large U.S. financial institutions convened by the Federal Reserve, has recommended the Secured Overnight Financing
Rate (“SOFR”) as a more robust reference rate alternative to U.S. Dollar LIBOR. SOFR is calculated based on overnight transactions
under repurchase agreements, backed by Treasury securities. SOFR is observed and backward looking, which stands in contrast with
LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment
of submitting panel members. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question. We are
unable to predict the effect of any changes to LIBOR, the establishment and success of any alternative reference rates, or any other
reforms to LIBOR or any replacement of LIBOR that may be enacted in the United Kingdom or elsewhere. Such changes, reforms or
replacements relating to LIBOR could have an adverse impact on the market for or value of any LIBOR-linked securities, loans,
derivatives or other financial instruments or extensions or credit held by or due to us.
Risks Related to an Investment in our Common Stock
The Grinberg family owns a majority of the voting power of the Company’s stock.
Each share of common stock of the Company is entitled to one vote per share while each share of class A common stock of the Company
is entitled to ten votes per share. While the members of the Grinberg family do not own a majority of the Company’s outstanding
common stock, by their significant holdings of class A common stock they control a majority of the voting power represented by all
outstanding shares of both classes of stock. Consequently, the Grinberg family is in a position to determine or significantly influence
any matters that are brought to a vote of the shareholders including, but not limited to, the election of the Board of Directors, any
amendments to the Company’s certificate of incorporation, mergers or sales of all or substantially all of the Company’s assets. This
concentration of ownership also may delay, defer or even prevent a change in control of the Company and make some transactions more
difficult or impossible without the support of the Grinberg family. These transactions might include proxy contests, tender offers,
mergers or other purchases of shares of common stock that could give stockholders the opportunity to realize a premium over the then-
prevailing market price for shares of the Company’s common stock.
The Company’s stock price could fluctuate and possibly decline due to changes in revenue, operating results and cash flows.
The Company’s revenue, results of operations and cash flows can be affected by several factors, some of which are not within its control.
Those factors include, but are not limited to, those described as risk factors in this Item 1A. and under “Forward-Looking Statements”
on page 1.
Any or all of these factors could cause a decline in revenues or an increase in expenses, either of which would have an adverse effect on
the results of operations. If the Company’s earnings failed to meet the expectations of the investing public in any given period, the
Company’s stock price could fluctuate and decline.
Item 1B. Unresolved Staff Comments
None.
21
Item 2. Properties
The Company leases various facilities in North America, Europe, the Middle East and Asia for its corporate, watch assembly, distribution
and sales operations. As of January 31, 2020, the Company’s leased facilities individually comprising more than 20,000 square feet
were as follows:
Location
Moonachie, New Jersey
Paramus, New Jersey
Hong Kong
Bienne, Switzerland
Bienne, Switzerland
Function
Watch distribution and repair
Executive offices
Watch distribution
Corporate functions and watch sales
Watch distribution, assembly and repair
Square
Footage
100,000
90,100
44,800
31,700
20,700
Lease
Expiration
February 2025
June 2030
April 2024
June 2022
October 2021
The foregoing facilities, as well as 21 additional leased facilities worldwide averaging approximately 5,000 square feet, are used
exclusively in connection with the Watch and Accessory Brands segment of the Company’s business except that a portion of the
Company’s executive office space in Paramus, New Jersey is used in connection with management of its retail business.
Since acquiring Ebel in 2004, the Company owns an architecturally significant building in La Chaux-de-Fonds, Switzerland.
The Company also leases retail space averaging 1,700 square feet per store with leases expiring from January 2020 (under negotiation)
to September 2029 for the operation of the Company’s 47 retail outlet locations.
The Company believes that its existing facilities are suitable and adequate for its current operations.
Item 3. Legal Proceedings
The Company is involved in legal proceedings and claims from time to time, in the ordinary course of its business. Legal reserves are
recorded in accordance with the accounting guidance for contingencies. Contingencies are inherently unpredictable and it is possible
that results of operations, balance sheets or cash flows could be materially and adversely affected in any particular period by unfavorable
developments in, or resolution or disposition of, such matters. For those legal proceedings and claims for which the Company believes
that it is probable that a reasonably estimable loss may result, the Company records a reserve for the potential loss. For proceedings and
claims where the Company believes it is reasonably possible that a loss may result that is materially in excess of amounts accrued for
the matter, the Company either discloses an estimate of such possible loss or range of loss or includes a statement that such an estimate
cannot be made.
In December 2016, U.S. Customs and Border Protection (“U.S. Customs”) issued an audit report concerning the methodology used by
the Company to allocate the cost of certain watch styles imported into the U.S. among the component parts of those watches for tariff
purposes. The report disputes the reasonableness of the Company’s historical allocation formulas and proposes an alternative
methodology that would imply approximately $5.1 million in underpaid duties over the five-year period covered by the statute of
limitations, plus possible penalties and interest. The Company believes that U.S. Customs’ alternative duty methodology and estimate
are not consistent with the Company’s facts and circumstances and is disputing U.S. Customs’ position. The Company continues to
provide U.S. Customs with supplemental analyses and information supporting the Company’s historical allocation formulas. Although
the Company disagrees with U.S. Customs’ position, it cannot predict with any certainty the outcome of this matter. The Company
intends to continue to work with U.S. Customs to reach a mutually-satisfactory resolution.
In addition to the above matters, the Company is involved in other legal proceedings and contingencies, the resolution of which is not
expected to materially affect its financial condition, future results of operations, or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
22
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
As of March 23, 2020, there were 47 holders of record of the Company’s class A common stock and 323 holders of record of the
Company’s common stock (including nominee holders such as banks and brokerage firms who hold shares for beneficial owners),
although we believe that the number of beneficial owners is much higher. The Company’s common stock is traded on the New York
Stock Exchange under the symbol “MOV” and on March 23, 2020, the closing price of the Company’s common stock was $8.74. In
connection with the October 7, 1993 public offering, each share of the Company’s then currently existing class A common stock was
converted into 10.46 shares of new class A common stock, par value of $0.01 per share (the “class A common stock”). Each share of
common stock is entitled to one vote per share and each share of class A common stock is entitled to 10 votes per share on all matters
submitted to a vote of the shareholders. Each holder of class A common stock is entitled to convert, at any time, any and all such shares
into the same number of shares of common stock. Each share of class A common stock is converted automatically into common stock
in the event that the beneficial or record ownership of such shares of class A common stock is transferred to any person, except to certain
family members or affiliated persons deemed “permitted transferees” pursuant to the Company’s Restated Certificate of Incorporation
as amended. The class A common stock is not publicly traded and, consequently, there is currently no established public trading market
for these shares.
During each quarter of fiscal 2020, the Company declared cash dividends on its common stock and class A common stock. In light of
the uncertainty caused by the COVID-19 pandemic, the Company’s Board of Directors has discontinued the regular quarterly dividend
until further notice. 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 remains committed to paying a dividend over the long-term and it would seek to resume a dividend when appropriate following
stabilization in the environment.
On August 29, 2017, the Board approved a share repurchase program under which the Company is authorized to purchase up to $50.0
million of its outstanding common stock from time to time through August 29, 2020, depending on market conditions, share price and
other factors. The Company may purchase shares of its common stock through open market purchases, repurchase plans, block trades
or otherwise. During the fiscal year ended January 31, 2020, the Company repurchased a total of 131,402 shares of its common stock at
a total cost of $4.2 million, or an average of $31.96 per share.
At the election of an employee, upon the vesting of a stock award or the exercise of a stock option, shares of common stock having an
aggregate value on the vesting of the award or the exercise date of the option, as the case may be, equal to the employee’s withholding
tax obligation may be surrendered to the Company by netting them from the vested shares issued. Similarly, shares having an aggregate
value equal to the exercise price of an option may be tendered to the Company in payment of the option exercise price and netted from
the shares of common stock issued upon the option exercise. An aggregate of 43,414 shares were repurchased during the fiscal year
ended January 31, 2020 as a result of the surrender of shares of common stock in connection with the vesting of certain restricted stock
awards and stock options.
The following table summarizes information about the Company’s purchases of shares of its common stock in the fourth quarter of
fiscal 2020.
Issuer Repurchase of Equity Securities
Period
November 1, 2019 – November 30, 2019
December 1, 2019 – December 31, 2019
January 1, 2020 – January 31, 2020
Total
Total Number
of Shares
Purchased
Average
Price Paid
Per Share
Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
Maximum
Amount
that May Yet Be
Purchased Under
the Plans or
Programs
683 $
—
—
683 $
24.18
—
—
24.18
— $ 36,405,816
— 36,405,816
— 36,405,816
— $ 36,405,816
23
PERFORMANCE GRAPH
The performance graph set forth below compares the cumulative total shareholder return of the Company’s shares of common stock for
the last five fiscal years through the fiscal year ended January 31, 2020 with that of the Broad Market (NYSE Stock Market – U.S.
Companies), the S&P SmallCap 600 Index and the Russell 2000 Index. Each index assumes an initial investment of $100 on January 31,
2015 and the reinvestment of dividends (where applicable).
Comparison of Cumulative Five Year Total Return
$200
$150
$100
$50
$0
01/31/15
01/31/16
01/31/17
01/31/18
01/31/19
01/31/20
Movado Group, Inc.
S&P SmallCap 600 Index
NYSE Composite Index
Russell 2000 Index
Company Name / Index
Movado Group, Inc.
S&P SmallCap 600 Index
NYSE (U.S. Companies)
Russell 2000 Index
Comparis on of cumu lative five year total return $ 200 $1 50 $100 $50 $0 01/3 1/15 0 1/31 /16 01 /31/1 7 01/31/18 01/31 /19 01 /31/20 movado group, inc. s&p smallcap 600 in dex nyse comp osite index russell 2000 index
1/31/15
100.00
100.00
100.00
100.00
1/31/16
1/31/17
1/31/18
1/31/19
1/31/20
108.60 117.21 134.83 143.55
95.31 128.04 149.25 147.39
93.70 112.09 136.83 129.14
90.08 120.28 140.95 135.98
79.95
157.07
146.66
148.51
24
Item 6. Selected Financial Data
The selected financial data presented below has been derived from the Consolidated Financial Statements. This information should be
read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” contained in Item 7 of this report. Amounts are in thousands except per
share amounts:
2020
Fiscal Year Ended January 31,
2018
2017
2019
2016
Statement of income data:
Net sales
Cost of sales (1) (3) (5) (6) (9)
Gross profit
Selling, general and administrative (1) (3) (5) (6) (7) (9)
Operating income (1) (3) (5) (6) (7) (9)
Other income (expense) (2) (8)
Interest expense
Interest income
Income before income taxes
Provision for income taxes (4)
Net income / (loss)
Less: Net income / (loss) attributable to noncontrolling
interests
Net income / (loss) attributable to Movado Group, Inc.
Basic income per share:
Weighted basic average shares outstanding
Net income / (loss) per share attributable to Movado
Group, Inc.
Diluted income per share:
Weighted diluted average shares outstanding
Net income / (loss) per share attributable to Movado
Group, Inc.
Cash dividends paid per share
Balance sheet data (end of period):
Working capital (10)
Total assets (11)
Total long-term debt
Total equity
326,077 310,209
374,889 369,358
331,898 307,161
62,197
$ 700,966 $ 679,567 $ 567,953 $ 552,752 $ 594,923
277,993
316,930
246,823
70,107
—
(1,109 )
127
69,125
23,360
45,765
257,935
294,817
240,836
53,981
(1,282 )
(1,464 )
219
51,454
16,315
35,139
269,875
298,078
254,878
43,200
—
(1,510 )
452
42,142
57,367
(15,225 )
42,991
15,356
(930 )
86
57,503
15,124
42,379
—
(771 )
307
61,733
162
61,571
(320 )
42,699 $
(53 )
61,624 $
-
(15,225 ) $
78
35,061 $
671
45,094
$
23,123
23,197
23,073
23,070
23,525
$
1.85 $
2.66 $
(0.66 ) $
1.52 $
1.92
23,297
23,600
23,073
23,267
23,774
$
$
1.83 $
0.80 $
2.61 $
0.80 $
(0.66 ) $
0.52 $
1.51 $
0.52 $
1.90
0.44
$ 355,254 $ 355,463 $ 381,304 $ 433,378 $ 410,853
$ 847,308 $ 759,701 $ 645,380 $ 607,802 $ 585,170
35,000
$
$ 527,244 $ 496,655 $ 470,335 $ 473,993 $ 441,147
25,000 $
51,910 $
50,280 $
- $
(1) Fiscal 2020 cost of sales include a pre-tax charge of $0.2 million and selling, general and administrative expenses include a pre-
tax charge of $4.4 million related to amortization of acquired intangible asset and accounting adjustments resulting from the
MVMT acquisition, $2.8 million related to the amortization of intangible assets resulting from the Olivia Burton acquisition and
$0.3 million of income related to a change in estimate related to the Company’s fiscal 2018 cost savings initiatives.
(2) Fiscal 2020 other income consists of a change in contingent consideration related to updated revenue and EBITDA (as defined in
the acquisition agreement) performance expectations during the earn-out period for MVMT.
(3) Fiscal 2019 cost of sales include a pre-tax charge of $0.6 million and selling, general and administrative expenses include a pre-
tax charge of $13.8 million, related to transaction charges and the amortization of acquisition accounting adjustments and
intangible assets associated with the purchase of the MVMT brand, $2.9 related to a full year of amortization related to the
intangible assets resulting from the Olivia Burton acquisition and $0.3 million of income related to a change in estimate related to
the Company’s fiscal 2018 cost savings initiatives.
(4) Fiscal 2019 provision for taxes include a benefit of $7.4 million related to the 2017 Tax Act in accordance with Staff Accounting
Bulletin No. 118 (“SAB 118”), and a benefit of $5.0 million related to other foreign tax items. Fiscal 2018 provision for income
taxes include a provisional charge of $45.0 million related to the 2017 Tax Act.
(5) Fiscal 2018 cost of sales include a pre-tax charge of $0.8 million and selling, general and administrative expenses include a pre-
tax charge of $6.0 million, related to transaction charges and the amortization of acquisition accounting adjustments associated
with the purchase of the Olivia Burton brand.
25
(6) Fiscal 2018 cost of sales include a pre-tax charge of $1.3 million and selling, general and administrative expenses include a pre-
tax charge of $12.3 million as part of the Company’s cost savings initiatives. In fiscal 2018, the Company took actions to better
align its global infrastructure with the current business environment by consolidating certain operations and streamlining functions
to reduce costs and improve profitability. Also, in light of the changing retail landscape and the growing importance of digital
marketing and online sales, the Company decided to cease its participation in the Baselworld Watch and Jewelry Show.
(7) Fiscal 2017 selling, general and administrative expenses include a pre-tax charge of $1.8 million, as a result of the immediate
vesting of stock awards and certain other compensation related to the announcement of the retirement of the Company’s former
Vice Chairman and Chief Operating Officer, in fiscal 2017.
(8) Fiscal 2017 other expense consists of a pre-tax charge of $1.3 million for the impairment of a long-term investment in a privately
held company.
(9) Fiscal 2016 cost of sales include a pre-tax charge of $0.6 million and selling general and administrative expenses include a pre-
tax charge of $3.4 million, as a result of actions taken by the Company in fiscal 2016 to achieve greater operating efficiencies and
streamline its operations.
(10) The Company defines working capital as current assets less current liabilities. As a result of early adoption of ASU 2015-17,
“Income Taxes: Balance Sheet Classification of Deferred Taxes” during fiscal 2016, current deferred tax liabilities and assets
were reclassified to non-current in all periods presented.
(11) In Fiscal 2020, total assets include $89.5 million of operating lease right-of-use assets recorded as a result of the Company’s
adoption of ASU 2016-02 on February 1, 2019.
26
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
GENERAL
Net Sales
The Company operates and manages its business in two principal business segments: Watch and Accessory Brands and Company Stores.
The Company also operates in two geographic locations: United States and International.
The Company divides its watch and accessory business into two principal categories: the owned brands category and the licensed brands
category. The owned brands category consists of the Movado®, Concord®, Ebel®, Olivia Burton® and MVMT® brands. Products in
the licensed brands category include the following brands manufactured and distributed under license agreements with the respective
brand owners: Coach®, Tommy Hilfiger®, HUGO BOSS®, Lacoste®, SCUDERIA FERRARI®, Rebecca Minkoff® and Uri
Minkoff®.
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.
56.9% of the Company’s total sales are from international markets (see Note 18 to the Consolidated Financial Statements), and therefore
reported sales made in those markets are affected by foreign exchange rates. The Company’s international sales are primarily billed in
local currencies (predominantly Euros, British Pounds and Swiss Francs) and translated to U.S. dollars at average exchange rates for
financial reporting purposes.
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 in Europe, the Americas (excluding the United States), the Middle East and Asia account for 33.4%,
9.0%, 7.9% and 6.6%, respectively, of the Company’s total net sales for fiscal 2020. A vast majority of the Company’s tangible
International assets are owned by the Company’s Swiss and Hong Kong subsidiaries.
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 fiscal year accounted for 56.6% and 60.1% (which
includes the acquisition of MVMT on October 1, 2018) of the Company’s net sales for the fiscal years ended January 31, 2020 and
2019, respectively.
The Company’s retail operations consist of 45 retail outlet locations in the United States and two locations in Canada.
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 retail outlet locations are near vacation destinations and, therefore, the seasonality
of these stores is driven by the peak tourist seasons associated with these locations.
In December 2019, there was an outbreak of a novel strain of coronavirus (COVID-19) in Wuhan, China that has since spread to other
regions in China and the rest of the world. In addition to the delivery delays from our Chinese suppliers that resulted from factory
closures in China during the early initial phase of this crisis, the virus has now reached pandemic proportions, resulting in travel
restrictions, closed borders, and the closing of all of the Company’s outlet stores and many retail stores of the Company’s direct and
indirect customers. These developments could materially adversely affect sales although the precise impact cannot be estimated at this
time. See “The recent COVID-19 Novel coronavirus, or other public health threats and epidemics, could materially and adversely affect
our business” under Item 1A. Risk Factors, above.
Gross Margins
The Company’s overall gross margins are primarily affected by four major factors: channel 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, British Pound 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 warehousing and distribution facilities nor the occupancy costs for the Company Stores segment in the cost
of sales line item. Those costs are included in selling, general and administrative expenses.
27
Gross margins vary among the brands included in the Company’s portfolio and also among watch models within each brand. Watches
in the Company’s owned brands category generally earn higher gross margin percentages than watches in the licensed brands category.
The difference in gross margin percentages within the licensed brands category is primarily due to the impact of royalty payments made
on the licensed brands. Gross margins in the Company’s e-commerce business generally earn higher gross margin percentages than
those of the traditional wholesale business. Gross margins in the Company’s outlet business are affected by the mix of product sold and
may exceed those of the wholesale business since the Company earns margins on its outlet store sales from manufacture to point of sale
to the consumer.
All of the Company’s brands compete with a number of other brands not only on styling but also on 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 costs for raw materials, component costs, royalties, depreciation,
amortization, assembly costs, shipping to e-commerce customers, design costs and unit overhead costs associated with the Company’s
supply chain operations predominately in Switzerland and Asia. The Company’s supply chain operations consist of logistics
management of assembly operations and product sourcing predominately 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.
Since a significant 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 mitigated the impact of the exchange rate fluctuations on product
costs and gross margins for fiscal years 2020 and 2019.
Selling, General and Administrative (“SG&A”) Expenses
The Company’s SG&A expenses consist primarily of marketing, selling, distribution, general and administrative expenses.
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 salaries, various forms of media
advertising, digital advertising (including social media), customer acquisition costs and co-operative advertising with customers and
distributors and other point of sale marketing and promotion spending.
Selling expenses consist primarily of salaries, sales commissions, sales force travel and related expenses, credit card fees, depreciation
and amortization, expenses associated with the Company’s annual worldwide customer conference 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 costs of running distribution centers and customer service and include salaries, 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, leasehold improvements, amortization of finite lived intangible assets,
patent and trademark expenses and various other general corporate expenses.
Other Non-Operating Income
Based on updated revenue and EBITDA (as defined in the acquisition agreement) performance expectations during the earn-out period
for MVMT, the Company recorded a non-cash gain on remeasurement of the contingent consideration of $15.4 million for the fiscal
year ended January 31, 2020. As the remeasurement is not a direct benefit realized from operating the MVMT business, the Company
has recorded the change in contingent consideration within non-operating income.
28
Interest Expense
To the extent it borrows, the Company records interest expense on its revolving credit facility. Additionally, interest expense includes
the amortization of deferred financing costs, and unused commitment fees associated with the Company’s revolving credit facility.
Income Taxes
The Company follows the asset and liability method of accounting for income taxes as prescribed under the Accounting Standards
Codification guidance for Income Taxes (“ASC Topic 740”). ASC Topic 740 requires the Company to recognize deferred tax assets
and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts and tax bases
of existing assets and liabilities.
The 2017 Tax Act that was signed into law on December 22, 2017 significantly changed existing U.S. corporate income tax laws by,
among other things, lowering the corporate tax rate from 35% to 21%, limiting the deductibility of interest expense and executive
compensation, implementing a modified territorial tax system, and imposing a one-time mandatory deemed repatriation transition tax
(“Transition Tax”) on undistributed foreign earnings which have not been previously taxed. The SEC also issued SAB 118 which
allowed the Company to record provisional amounts related to the 2017 Tax Act and provided a measurement period of up to one year
from the enactment date for companies to complete their accounting under ASC Topic 740. Under SAB 118, the Company elected to
account for the tax on Global Intangible Low-Tax Income (“GILTI”) as a period cost and therefore has not recorded deferred taxes
related to GILTI.
At January 31, 2020, the Company had no deferred tax liability for the undistributed foreign earnings of approximately $182.6 million
because the Company intends to permanently reinvest such earnings in its foreign operations. It is not practicable to estimate the tax
liability related to a future distribution of these permanently reinvested foreign earnings.
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, useful lives of property, plant and equipment, impairments, stock-based compensation and contingencies and
litigation. Management bases its estimates and judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources on historical experience, contractual commitments and on various other factors that are believed to be reasonable
under the circumstances. Actual results could differ from these estimates. 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 channel, revenue is recognized and recorded when a contract is in place, obligations under the terms of a contract with
the customer are satisfied and control is transferred to the customer. Such revenue is measured as the ultimate amount of consideration
the Company expects to receive in exchange for transferring goods including variable consideration. Direct to consumer and after-sales
service revenue is recognized at time of register receipt or delivery to customer. The Company records estimates of variable
consideration, which includes sales returns, markdowns, volume-based programs 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 the expected value method considering all
reasonably available information including historical analysis, customer agreements and/or currently known factors that arise in the
normal course of business. Returns, discounts and allowances have historically been within the Company’s expectations and the
provisions established. The future provisional rates may differ from those experienced in the past. The Company considers transfer of
control to take place either when the goods ship or when goods are delivered depending on the shipping terms in the contract. Factors
considered in the transfer of control include the right to payment, transfer of legal title, physical possession and customer acceptance of
the goods and whether the significant risks and rewards for the goods belong with the customer. Taxes imposed by governmental
authorities on the Company's revenue-producing activities with customers, such as sales taxes and value added taxes, are excluded from
net sales.
29
The Company’s sale of smart watches contains multiple performance obligations. The Company allocates revenue to each performance
obligation using the relative standalone selling price method. The Company determines the standalone selling prices based on the prices
charged to customers. Amounts allocated to the delivered smart watch collections and the related essential software are recognized at
the time of sale. The Company’s smart watch collections have been available in limited quantities and in limited distribution, and, as a
result, the amounts related to cloud service and app updates were immaterial to all periods presented and thereby recognized at time of
sale.
The Company has considered each transaction to sell goods as separate and distinct, with no additional promises made. The Company
uses the understanding of what the customer expects to receive as the final product to determine whether goods or services should be
combined and accounted for as a single performance obligation. The Company does not incur significant costs to obtain or fulfill its
contracts.
Goodwill
At the time of an acquisition, in accordance with applicable guidance, the Company records all acquired net assets at their estimated fair
values. These estimated fair values are based on management’s assessments and independent third-party appraisals. The excess of the
purchase consideration plus the fair value of any noncontrolling interest in the acquired company over the aggregate estimated fair
values of the acquired net assets, including any contingent consideration, is recorded as goodwill.
Goodwill is not amortized but is assessed for impairment at least annually on November 1st. Under applicable guidance, the Company
generally performs its annual goodwill impairment analysis using a qualitative approach to determine whether it is more likely than not
that the fair value of goodwill is less than its carrying value. If, based on the results of the qualitative assessment, it is concluded that it
is more likely than not that the fair value of goodwill is less than its carrying value, a quantitative test is performed.
The quantitative impairment test is performed to measure the amount of impairment loss, if any. The quantitative impairment test
identifies the existence of potential impairment by comparing the fair value of each reporting unit with its carrying value, including
goodwill. If a reporting unit’s carrying amount exceeds its fair value, the Company will record an impairment charge, as an operating
expense item, based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit.
Determination of the fair value of a reporting unit and the fair value of individual assets and liabilities of a reporting unit is based on
management’s assessment, including the consideration of independent third-party appraisals when necessary. Furthermore, this
determination is subjective in nature and involves the use of significant estimates and assumptions. These estimates and assumptions
could have a significant impact on whether or not an impairment charge is recognized and the amount of any such charge. Estimates of
fair value are primarily determined using discounted cash flows, market comparisons, and recent transactions. These approaches use
significant estimates and assumptions, including projected future cash flows, discount rates, growth rates, and determination of
appropriate market comparisons.
At November 1, 2019 and 2018, the Company evaluated goodwill for impairment. There were no indicators of impairment under this
analysis and, accordingly, no impairment charge was recorded in fiscal 2020 or in fiscal 2019, respectively.
Intangibles
Intangible assets consist primarily of trade names, customer relationships and trademarks. In accordance with applicable guidance, the
Company estimates and records the fair value of purchased intangible assets at the time of their acquisition. The fair values of these
intangible assets are estimated based on independent third-party appraisals. Finite-lived intangible assets are amortized over their
respective estimated useful lives, which range from three to ten years, and are evaluated for impairment periodically and whenever
events or changes in circumstances indicate that their related carrying values may not be fully recoverable. Estimates of fair value for
finite-lived intangible assets are primarily determined using discounted cash flows analysis of such assets, with consideration of market
comparisons and recent transactions. This approach uses significant estimates and assumptions, including projected future cash flows,
discount rates and growth rates. In addition to goodwill, the Company assesses intangible assets for impairments at least annually on
November 1st. The Company determined that there was no impairment in fiscal 2020 or in fiscal 2019, respectively.
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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 historical 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, 2020,
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 net realizable value. Cost is determined using the average cost method. 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 that can be assembled into saleable finished
goods, is sold primarily through the Company’s retail outlet locations.
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 asset groups with their estimated future undiscounted cash flows. If it is determined
that an impairment has occurred, the fair value of the asset group is determined and compared to its carrying value. The excess of the
carrying value over the fair value, if any, is recognized as a loss during that period. The impairment is calculated as the difference
between asset carrying values and their estimated fair values. No impairment charge was recorded in fiscal 2020 or in fiscal 2019,
respectively.
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, they could
have an adverse effect on the Company’s operating results.
Stock-Based Compensation
The Company utilizes the Black-Scholes option-pricing model which requires that certain assumptions be made to calculate the fair
value of each option at the grant date. 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 based on the U.S.
treasury note interest rate in effect on the date of grant for 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 Company’s historical average of annualized dividend yields and applied over the expected term of the
option. Management monitors stock option exercises and employee termination patterns to estimate forfeitures rates within the valuation
model. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes.
In addition to stock options, the Company may also grant stock awards to employees and directors. The stock awards are generally in
the form of time-vesting restricted stock unit awards (pursuant to which unrestricted shares of Common Stock are issued to the grantee
when the award vests) or performance-based awards (under which vesting occurs only if one or more predetermined financial goals are
achieved within the relevant performance period); both are subject to the participant’s continued employment (or board service) with
the Company through such vesting date. Stock awards generally are cliff-vested after three years from the date of grant (one year in the
case of directors’ awards). The fair value of stock awards is equal to the closing price of the Company’s publicly-traded common stock
on the grant date.
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Compensation expense for all awards is accrued based on the estimated number of instruments for which the requisite service is expected
to be rendered. This estimate is reflected in the period the stock option and stock awards are either granted or canceled. Expense related
to stock options and stock awards compensation is recognized on a straight-line basis over the vesting term.
Collaborative Arrangement
The Company participates in a collaborative arrangement with Rebecca Minkoff, LLC relating to the Rebecca Minkoff and Uri Minkoff
brand names. Both parties to the arrangement are active participants in the collaboration and are exposed to significant risks and rewards
dependent on the commercial success of the activities. The arrangement involves various activities including the design, development,
distribution and marketing of watches under the brand names. Amounts due between the parties to the arrangement related to sales and
related activities are recorded in the Company’s cost of sales while those amounts related to general and administrative activities are
recorded as an adjustment to selling, general and administrative expenses. The Company generated immaterial revenues and incurred
immaterial expenses under its collaborative arrangement during fiscal 2020.
Contingent Consideration
Under the MVMT acquisition agreement (see Note 3 to the Company’s consolidated financial statements), the estimated fair value of
the contingent consideration was determined using a Monte Carlo simulation with key assumptions that include revenue and brand
EBITDA (as defined in the acquisition agreement), volatilities, estimated discount rates, risk-free interest rate, and correlation. Each
reporting period after the acquisition, the Company will revalue the contingent purchase price liability and record increases or decreases
in the fair value of the liability in its Consolidated Statements of Operations. Changes in fair value can result from the estimated
achievement of the revenue and brand EBITDA performance hurdles, and movement in discounts rates, volatilities, and the other key
assumptions. The inputs and assumptions are not observable in the market but reflect the assumptions the Company believes would be
made by a market participant. The possible outcomes for the contingent consideration range from $0 to $100 million on an undiscounted
basis. As a result, changes in the estimated fair value of the contingent consideration over time may result in significant volatility in the
Company’s reported earnings.
Based on updated revenue and EBITDA (as defined in the acquisition agreement) performance expectations during the earn-out period
for MVMT, the Company remeasured the contingent consideration to $1.9 million at July 31, 2019 and to zero at January 31, 2020. Of
the $16.9 million decrease in the liability, $15.4 million is included in non-operating income (portion of contingent consideration
allocated to purchase price) in the Consolidated Statements of Operations for the fiscal year ended January 31, 2020, and 0.5 million
and $1.0 million are reflected as a reduction of deferred compensation (portion of contingent consideration allocated to deferred
compensation based on future service requirements) within other current assets and other non-current assets, respectively, in the
Consolidated Balance Sheets. As the remeasurement is not a direct benefit realized from operating the MVMT business, the Company
has recorded the change in contingent consideration within non-operating income in the Consolidated Statements of Operations, and as
such, has not included it in operating income for the Watch and Accessory Brands segment. Refer to Note 18 to the Company’s
consolidated financial statements for Segment and Geographic Information.
Pension Benefit Obligation
The Company sponsors a plan in Switzerland which was amended to a defined benefit plan effective December 31, 2018. The pension
expense and obligation are developed from actuarial valuations. Two critical assumptions in determining pension expense and
obligations are discount rate and expected long-term return on plan assets. The Company will evaluate these assumptions annually.
Other assumptions reflect demographic factors such as retirements, mortality and turnover and are evaluated periodically and updated
to reflect actual experience. Actual results may differ from actuarial assumptions. The discount rate represents the market rate for high-
quality AAA and AA-rated corporate bonds with durations corresponding to the expected durations of the benefit obligations and service
time and is used to calculate the present value of the expected future cash flows for benefit obligations under the pension plan. A decrease
in the discount rate increases the present value of pension benefit obligations. A 25-basis point decrease in the discount rate would
increase the present value of pension obligation by approximately $0.5 million at January 31, 2020. The Company considers the current
and expected asset allocations of the pension plan, as well as historical and expected long-term rates of return on those types of plan
assets, in determining the expected long-term return on plan assets. A 25 basis point decrease in the expected long-term return on plan
assets would not have resulted in a material impact on the Company’s pension expense for fiscal 2020.
Income Taxes
The Company, under ASC Topic 740, 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
32
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.
The Company follows guidance for accounting for uncertainty in income taxes. This guidance clarifies the accounting for uncertainty
in income taxes recognized in a company’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 for de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and
transitions.
The 2017 Tax Act that was signed into law on December 22, 2017 significantly changed existing U.S. corporate income tax laws by,
among other things, lowering the corporate tax rate from 35% to 21%, limiting the deductibility of interest expense and executive
compensation, implementing a modified territorial tax system, and imposing a one-time mandatory deemed Transition Tax on
undistributed foreign earnings which have not been previously taxed. The SEC also issued SAB 118 which allowed the Company to
record provisional amounts related to the 2017 Tax Act and provided a measurement period of up to one year from the enactment date
for companies to complete their accounting under ASC Topic 740. Under SAB 118, the Company elected to account for the tax on
GILTI as a period cost and therefore has not recorded deferred taxes related to GILTI.
Comparable Stores Sales
The Company considers comparable outlet store sales to be sales of stores that were open as of February 1st of the prior fiscal year and
that remained open through January 31st of the current fiscal year. The Company had 39 comparable outlet stores for the year ended
January 31, 2020. The sales from stores that have been relocated, renovated or refurbished are included in the calculation of comparable
store sales. The method of calculating comparable store sales varies across the retail industry. As a result, the Company’s method for
the calculation of comparable store sales may not be the same as measures used or reported by other companies.
RESULTS OF OPERATIONS
The following is a discussion of the results of operations for fiscal 2020 compared to fiscal 2019 along with a discussion of the changes
in financial condition during fiscal 2020. For a discussion of our results of operations in fiscal year 2019 compared to fiscal year 2018,
please see “Results of Operations” in Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations)
of our Annual Report on Form 10-K for the fiscal year ended January 31, 2019, filed with the SEC on March 28, 2019.
In light of the COVID-19 pandemic, our results of operations for fiscal 2020 should not be deemed indicative of the results that we will
experience in fiscal 2021. In addition to the delivery delays from our Chinese suppliers that resulted from factory closures in China
during the initial phase of the crisis, the virus has now reached pandemic proportions. In response to the outbreak, in mid-March 2020,
the Company and the majority of the Company’s wholesale customers temporarily closed all of their retail stores for an undefined period
of time due to health concerns associated with COVID-19. Furthermore, various containment and mitigation measures that have been
imposed by governmental and other authorities around the world (such as quarantines and other social distancing requirements) have
already adversely affected sales of our products, which are heavily dependent on customer traffic in our company stores and in the stores
of our wholesale customers. The continuation or tightening of such measures could have a material adverse effect on our results of
operations and financial condition. In addition, as our potential customers face layoffs and other negative economic impact from the
COVID-19 outbreak, their disposable income for discretionary purchases and their actual or perceived wealth may be negatively
impacted, potentially having a material and adverse impact on our net sales. The impact of the outbreak of COVID-19 on the Company’s
liquidity, revenues, impairment considerations surrounding our indefinite and long-lived assets and results of operations cannot be
predicted at this time due to the high level of uncertainty, unknown future developments, duration of containment measures and the
timeline for recovery.
The following are net sales by business segment and geographic location (in thousands):
Watch and Accessory Brands:
United States
International
Company Stores
Net sales
33
Fiscal Year Ended January 31,
2020
2019
$
$
216,171 $
396,227
88,568
700,966 $
225,813
370,063
83,691
679,567
The following are net sales by category (in thousands):
Watch and Accessory Brands:
Owned brands category
Licensed brands category
After-sales service and all other
Total Watch and Accessory Brands
Company Stores
Consolidated total
Fiscal Year Ended January 31,
2020
2019
$
$
257,954 $
344,681
9,763
612,398
88,568
700,966 $
263,904
320,911
11,061
595,876
83,691
679,567
The following table presents the Company’s results of operations expressed as a percentage of net sales for the fiscal years indicated:
Net sales
Gross margin
Selling, general and administrative expenses
Operating income
Change in contingent consideration
Interest expense
Interest income
Provision for income taxes
Noncontrolling interests
Net income attributable to Movado Group, Inc.
Fiscal 2020 Compared to Fiscal 2019
Net Sales
Fiscal Year Ended January 31,
2020
2019
100.0 %
53.5 %
47.3 %
6.1 %
2.2 %
0.1 %
0.0 %
2.2 %
0.0 %
6.1 %
100.0 %
54.4 %
45.2 %
9.2 %
0.0 %
0.1 %
0.0 %
0.0 %
0.0 %
9.1 %
Net sales in fiscal 2020 were $701.0 million, $21.4 million or 3.1% above the prior year. For fiscal 2020, fluctuations in foreign currency
exchange rates negatively impacted net sales by $12.1 million when compared to the prior year.
Watch and Accessory Brands Net Sales
Net sales in fiscal 2020 in the Watch and Accessory Brands segment were $612.4 million, above the prior year period by $16.5 million
or 2.8%. The increase in net sales was attributable to increases in net sales in the International locations partially offset by decreases in
net sales in the United States locations of the Watch and Accessory Brands segment.
United States Watch and Accessory Brands Net Sales
Net sales in fiscal 2020 in the United States locations of the Watch and Accessory Brands segment were $216.2 million, below the prior
year period by $9.6 million or 4.3%, resulting from net sales decreases in the owned brands category. The net sales recorded in the
owned brands category decreased by $9.5 million, or 5.4%, primarily due to a decrease in sales in the Movado brand, partially offset by
sales attributable to the addition of the MVMT brand. The net sales in the licensed brands category remained flat when compared to the
prior year period.
International Watch and Accessory Brands Net Sales
Net sales in fiscal 2020 in the International locations of the Watch and Accessory Brands segment were $396.2 million, above the prior
year by $26.1 million or 7.1%, which included fluctuations in foreign currency exchange rates which unfavorably impacted net sales by
$12.1 million when compared to the prior year. This increase was driven by net sales increases in both the licensed and owned brands
categories. The net sales increase in the licensed brands category was $23.7 million, or 8.6%, primarily due to net sales increases in the
Middle East, Europe, Asia and Latin America. The net sales increase recorded in the owned brands category, including the addition of
the MVMT brand, was $3.5 million, or 4.0% and is due to sales increases primarily in Europe, Latin America and the Middle East.
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Company Stores Net Sales
Net sales in fiscal 2020 in the Company Stores segment were $88.6 million, above the prior year period by $4.9 million, or 5.8%.
Although the Company’s conversion rate remained strong as products continue to resonate well with customers, net sales in comparable
stores decreased primarily as a result of changes in customer foot traffic generated by the outlet centers in which certain of the Company
stores are located. This decrease was offset by the addition of new store openings in fiscal 2020. As of January 31, 2020, and 2019, the
Company operated 47 and 44 retail outlet locations, respectively.
Gross Profit
Gross profit for fiscal 2020 was $374.9 million or 53.5% of net sales as compared to $369.4 million or 54.4% of net sales in the prior
year. The increase in gross profit of $5.5 million was primarily due to higher net sales partially offset by a lower gross margin percentage.
The decrease in the gross margin percentage of approximately 90 basis points for fiscal year 2020 resulted primarily from the negative
impact of fluctuations in foreign currency exchange rates of approximately 80 basis points, an unfavorable impact of sales mix of
approximately 30 basis points and additional U.S. special tariffs of approximately 20 basis points, partially offset by the increased
leveraging of certain fixed costs as a result of higher sales of approximately 30 basis points.
Selling, General and Administrative (“SG&A”)
SG&A expenses in fiscal 2020 were $331.9 million, representing an increase from the prior year period of $24.7 million or 8.1%.
Included in the prior year are $13.8 million of transaction costs and amortization expenses related to the MVMT acquisition. Excluding
these fiscal 2019 costs, SG&A expenses increased in fiscal 2020 by $38.5 million resulting primarily from higher marketing expenses
of $22.3 million due primarily to the addition of MVMT and additional costs to support brand awareness; an increase in payroll related
expenses of $10.6 million primarily as a result of the acquisition of MVMT and the opening of new company stores; higher rent related
expenses of $5.7 million as a result of new company store openings, expansion of one of the Company’s distribution centers and the
addition of MVMT; $4.6 million of operating expenses related to the Company’s new joint ventures in Spain and Australia; and an
increase of $1.0 million in credit card charges primarily as a result of the increase in e-commerce sales. Included in the current year are
$4.4 million of expenses related to the amortization of MVMT’s intangible assets and deferred compensation arrangements. The
increases were partially offset by a decrease in performance-based compensation of $13.1 million. For the year ended January 31, 2020,
fluctuations in foreign currency exchange rates positively impacted SG&A expenses by $2.0 million when compared to the prior year.
Watch and Accessory Brands Operating Income
For fiscal 2020 and 2019, the Company recorded Watch and Accessory Brands segment operating income of $29.5 million and $45.2
million, respectively, which includes $29.0 million and $43.5 million of unallocated corporate expenses as well as $73.3 million and
$53.8 million, respectively, of certain intercompany profits related to the Company’s supply chain operations. The $15.7 million
decrease in operating income was the net result of higher SG&A expenses of $21.1 million, partially offset by an increase in gross profit
of $5.4 million when compared to the prior year. The increase in gross profit was the result of higher net sales partially offset by a
decrease in gross margin percentage. Included in SG&A expenses in the prior year period are $13.8 million of transaction costs and
amortization expenses (and $0.6 million in cost of goods sold related to certain accounting adjustments) related to the MVMT acquisition.
Excluding these fiscal 2019 costs, SG&A expenses increased in fiscal 2020 by $34.9 million resulting primarily from higher marketing
expenses of $22.3 million due primarily to the addition of MVMT and additional costs to support brand awareness; an increase in payroll
related expenses of $9.5 million due primarily to the addition of MVMT; higher rent related expense of $4.1 million as a result of
expansion of one of the Company’s distribution centers and the addition of MVMT; $4.6 million of operating expenses related to the
Company’s new joint ventures in Spain and Australia; and an increase of $0.9 million in credit card charges primarily as a result of the
increase in e-commerce sales. Included in SG&A expenses in the current period are $4.4 million of SG&A expenses related to the
amortization of MVMT’s intangible assets and deferred compensation arrangements (and $0.2 million in cost of goods sold related to
certain accounting adjustments). The increases were partially offset by a decrease in performance-based compensation of $13.0 million.
Fluctuations in foreign currency exchange rates negatively impacted Watch and Accessory Brands segment operating income by $4.8
million when compared to the prior year.
U.S. Watch and Accessory Brands Operating Loss
In the United States locations of the Watch and Accessory Brands segment, for fiscal 2020 and 2019, the Company recorded an operating
loss of $35.7 million and $20.5 million, respectively, which includes unallocated corporate expenses of $29.0 million and $43.5 million,
respectively. The increase in operating loss of $15.2 million was the net result of lower gross profit of $8.9 million and higher SG&A
expenses of $6.3 million. The decrease in gross profit of $8.9 million was due to lower net sales combined with a lower gross margin
percentage. Included in SG&A expenses in the prior year period are $13.8 million of transaction costs and amortization expenses (and
$0.6 million in cost of goods sold related to certain accounting adjustments) related to the MVMT acquisition. Excluding these fiscal
35
2019 costs, SG&A expenses increased in fiscal 2020 by $20.1 million resulting primarily from higher marketing costs of $15.2 million
due primarily to the addition of MVMT and additional costs to support brand awareness; higher payroll related expenses of $7.1 million
primarily due to MVMT; an increase of $0.4 million in credit card charges primarily as a result of the increase in e-commerce sales; and
$1.4 million of higher rent related expenses primarily due to MVMT. Included in SG&A expenses in the current period are $4.4 million
of SG&A expenses related to the amortization of MVMT’s intangible assets and deferred compensation arrangements (and $0.2 million
in cost of goods sold related to certain accounting adjustments). The increases were partially offset by a decrease in performance-based
compensation of $8.7 million.
International Watch and Accessory Brands Operating Income
In the International locations of the Watch and Accessory Brands segment, for fiscal 2020 and 2019, the Company recorded operating
income of $65.2 million and $65.7 million, respectively, which includes $73.3 million and $53.8 million of certain intercompany profits
related to the Company’s International supply chain operations, respectively. The decrease in operating income of $0.5 million was
primarily related to higher SG&A expenses of $14.8 million partially offset by higher gross profit of $14.3 million. The increase in
gross profit of $14.3 million was primarily related to higher net sales while gross margin percentage remained relatively flat. The increase
in SG&A expenses of $14.8 million was attributable to higher marketing expenses of $7.1 million; higher payroll related expenses of
$2.4 million; an increase of $2.7 million in rent related expenses primarily as a result of expansion of one of the Company’s distribution
centers; $4.6 million of operating expenses related to the Company’s new joint ventures in Spain and Australia; and an increase of $0.5
million in credit card charges primarily as a result of the increase in e-commerce sales. The increases were partially offset by a decrease
in performance-based compensation of $4.3 million. Fluctuations in foreign currency exchange rates negatively impacted operating
income by $4.8 million when compared to the prior year.
Company Stores Operating Income
The Company recorded operating income of $13.5 million and $17.0 million in the Company Stores segment for fiscal 2020 and 2019,
respectively. The decrease in operating income of $3.5 million was the result of higher SG&A expenses of $3.6 million partially offset
by higher gross profit of $0.1 million. The higher gross profit was the result of higher net sales, partially offset by a lower gross margin
percentage. The increase in SG&A expenses of $3.6 million was primarily due to rent and payroll related expenses associated with the
opening of new outlet locations.
Other Non-Operating Income
Based on updated revenue and EBITDA (as defined in the acquisition agreement) performance expectations during the earn-out period
for MVMT, the Company recorded a non-cash gain on remeasurement of the contingent consideration of $15.4 million for fiscal 2020.
Interest Expense
Interest expense was $0.9 million for fiscal 2020 as compared to $0.8 million for fiscal 2019. The increase was due to higher weighted
average borrowings outstanding partially offset by a lower weighted average interest rate under the Company’s revolving credit facility
during fiscal 2020 as compared to fiscal 2019.
Income Taxes
The Company recorded a tax expense of $15.1 million and $0.2 million for fiscal 2020 and 2019, respectively. The effective tax rate for
fiscal 2020 was 26.3% primarily due to a limitation on a portion of the foreign tax credits related to the GILTI tax. The effective tax rate
for fiscal 2019 was 0.3% primarily due to the impact of the 2017 Tax Act and the release of certain foreign valuation allowances.
Net Income Attributable to Movado Group, Inc.
The Company recorded net income attributable to Movado Group, Inc. of $42.7 million for fiscal 2020 as compared to net income
attributable to Movado Group, Inc. of $61.6 million for fiscal 2019.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2020 and January 31, 2019, the Company had $185.9 million and $189.9 million, respectively, of cash and cash
equivalents. Of this total, $121.3 million and $167.5 million, respectively, consisted of cash and cash equivalents at the Company’s
foreign subsidiaries.
36
At January 31, 2020 the Company had working capital of $355.3 million as compared to $355.5 million at January 31, 2019. Working
capital is relatively flat with respect to the previous year, primarily as a result of the addition of current operating lease liabilities of
$15.1 million in accordance with the Company’s adoption of ASU 2016-02 “Leases” and a decrease in trade receivables due to improved
collections, partially offset by an increase in inventories primarily driven by sales under-performance and a decrease in accrued payroll
and benefits mainly due to a reduction in performance-based compensation accrual. The Company defines working capital as the
difference between current assets and current liabilities.
The Company had $32.1 million of cash provided in operating activities for fiscal 2020 as compared to $86.2 million for fiscal 2019.
Cash provided by operating activities included net income attributable to the Movado Group, Inc. of $42.7 million, positively adjusted
by $16.6 million related to non-cash items and a decrease in trade receivable of $5.9 million due to improved collections. Cash used by
operating activities included a decrease in accrued payroll and benefits of $12.5 million primarily as a result of payments of performance
based compensation attributable to the prior period, a decrease in accrued liabilities, accounts payable and income taxes payable totaling
$14.0 million as a result of timing of payments and an increase in investment in inventories of $5.5 million primarily due to sales under-
performance.
Cash used in investing was $13.4 million for fiscal 2020 as compared to $109.0 million for fiscal 2019. The cash used in fiscal 2020
was primarily due to $12.7 million in capital expenditures primarily related to the opening and renovation of the Company stores and to
the construction of shop-in-shops at some of the Company’s wholesale customers and $0.6 million for the purchase of a 51% interest in
a joint venture in Australia. During fiscal 2019 cash used in investing activities was primarily for the acquisitions, net of cash acquired,
of MVMT and 51% of the shares of City Time Distribución, S.L.U., the Company’s distributor in Spain.
The Company expects that capital expenditures in fiscal 2021 will be $8.0 million as compared to $12.7 million in fiscal 2020. The
capital spending will be primarily for projects in the ordinary course of business including facilities improvements, shop-in-shops,
website development, computer hardware and software and tooling costs. The Company has the ability to manage a portion of its capital
expenditures on discretionary projects.
Cash used in financing activities was $23.9 million for fiscal 2020 as compared to $3.7 million of cash provided by financing activities
for fiscal 2019. The cash used in fiscal 2020 included $18.4 million dividends paid, $4.2 million in stock repurchased in the open market,
and $1.3 million stock options and awards exercised, net of $1.4 million of shares repurchased as a result of the surrender of shares in
connection with the vesting of certain stock awards. During fiscal 2019, cash provided by financing activities included proceeds from
bank borrowings of $50.3 million, partially offset by $25.0 million repayment of bank borrowings, $18.5 million of dividends paid and
$7.4 million in stock repurchased in the open market.
Management believes that the cash on hand in addition to the expected cash flows 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.
On October 12, 2018, the Company, together with Movado Group Delaware Holdings Corporation, Movado Retail Group, Inc. and
Movado LLC (together with the Company, the “U.S. Borrowers”), each a wholly-owned domestic subsidiary of the Company, and
Movado Watch Company S.A. and MGI Luxury Group S.A. (collectively, the “Swiss Borrowers” and, together with the U.S. Borrowers,
the “Borrowers”), each a wholly-owned Swiss subsidiary of the Company, entered into an Amended and Restated Credit Agreement
(the “Credit Agreement”) with the lenders party thereto and Bank of America, N.A. as administrative agent (in such capacity, the
“Agent”). The Credit Agreement amends and restates the Company’s prior credit agreement dated as of January 30, 2015 (the “Prior
Credit Agreement”) and extends the maturity of the $100.0 million senior secured revolving credit facility (the “Facility”) provided
thereunder to October 12, 2023. The Facility includes a $15.0 million letter of credit subfacility, a $25.0 million swingline subfacility
and a $75.0 million sublimit for borrowings by the Swiss Borrowers, with provisions for uncommitted increases to the Facility of up to
$50.0 million in the aggregate subject to customary terms and conditions.
As of January 31, 2020, and January 31, 2019, there were 50.0 million in Swiss Francs for both periods (with a dollar equivalent of
$51.9 million and $50.3 million, respectively), in loans outstanding under the Facility. Availability under the Facility was reduced by
the aggregate number of letters of credit outstanding, issued in connection with retail and operating facility leases to various landlords
and for Canadian payroll to the Royal Bank of Canada, totaling approximately $0.3 million at both January 31, 2020 and January 31,
2019. At January 31, 2020, the letters of credit have expiration dates through June 1, 2020. As of January 31, 2020, and January 31,
2019, availability under the Facility was $47.8 million and $49.4 million, respectively. For additional information regarding the Facility,
see Note 6 to the Consolidated Financial Statements.
The Company had weighted average borrowings under the Facility of $51.1 million and $15.8 million, with a weighted average interest
rate of 1.00% and 1.25% during fiscal 2020 and 2019, respectively.
37
A Swiss subsidiary of the Company maintains unsecured lines of credit with an unspecified maturity with a Swiss bank. As of January
31, 2020, and 2019, these lines of credit totaled 6.5 million Swiss Francs for both periods, with a dollar equivalent of $6.7 million and
$6.5 million, respectively. As of January 31, 2020, and 2019, there were no borrowings against these lines. As of January 31, 2020, and
2019, two European banks had guaranteed obligations to third parties on behalf of two of the Company’s foreign subsidiaries in the
dollar equivalent of and $1.2 million, for both periods, in various foreign currencies, of which $0.6 million and $0.5 million, was a
restricted deposit as it relates to lease agreements, respectively.
As a precautionary measure in order to increase its cash position, preserve financial flexibility and maintain liquidity and flexibility in
response to the COVID-19 outbreak, the Company borrowed an additional $30 million on its revolving credit facility in March of 2020
under terms and conditions that are consistent with the Company’s borrowings which existed at January 31, 2020.
Cash paid for interest, including unused commitments fees, was $0.7 million and $0.5 million during fiscal 2020 and 2019, respectively.
The Company paid cash dividends of $0.80 per share or $18.4 million for fiscal 2020. The decision of whether to declare any future
cash dividend, including the amount of any such dividend and the establishment of record and payment dates, will be determined, in
each quarter, by the Board of Directors, in its sole discretion.
On August 29, 2017, the Board approved a share repurchase program under which the Company is authorized to purchase up to $50.0
million of its outstanding common stock from time to time, depending on market conditions, share price and other factors. Under this
program the Company may purchase shares of its common stock through open market purchases, repurchase plans, block trades or
otherwise through August 29, 2020. During the fiscal year ended January 31, 2020, the Company repurchased a total of 131,402 shares
of its common stock at a total cost of $4.2 million, or an average of $31.96 per share. At January 31, 2020, $36.4 million remains
available for purchase under the company’s repurchase program.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Payments due by period (in thousands):
Contractual Obligations:
Operating and Finance Lease Obligations (1)
Purchase Obligations (2)
Other Long-Term Obligations (3)
Transition Tax (4)
Total Contractual Obligations
Total
Less than
1 year
2-3
years
4-5
years
More than
5 years
$ 111,766 $
69,222
269,246
23,768
18,399 $
69,222
50,647
2,264
31,671 $
—
118,774
4,527
25,261 $
—
88,596
9,903
$ 474,002 $ 140,532 $ 154,972 $ 123,760 $
36,435
—
11,229
7,074
54,738
(1)
Includes store operating and finance leases, which generally provide for payment of direct operating costs in addition to rent.
These obligation amounts only include future minimum lease payments and exclude direct operating costs.
(2) The Company had outstanding purchase obligations with suppliers at the end of fiscal 2020 for raw materials, finished watches
and packaging in the normal course of business. These purchase obligation amounts do not represent total anticipated purchases
but represent only amounts to be paid for items required to be purchased under agreements that are enforceable, legally binding
and specify minimum quantity, price and term.
(3) Other long-term obligations primarily consist of minimum commitments related to the Company’s license agreements and
endorsement agreements with brand ambassadors, and also include service agreements. The Company sources, distributes,
advertises and sells watches pursuant to its exclusive license agreements with unaffiliated licensors. Royalty amounts are generally
based on a stipulated percentage of revenues, although most of these agreements contain provisions for the payment of minimum
annual royalty amounts. The license agreements have various terms and some have renewal options, provided that minimum sales
levels are achieved. Additionally, the license agreements require the Company to pay minimum annual advertising amounts.
(4) The Transition Tax obligation is due to the enactment of the 2017 Tax Act and will be paid in installments over eight years, with
the first payment having been made in fiscal 2019.
Liabilities for unrecognized income tax benefits are excluded from the table above as the Company is unable to reasonably predict the
ultimate amount or timing of a settlement of such liabilities. See Note 11, Income Taxes for more information.
Long-term liabilities associated with the Company’s defined benefit plan in Switzerland are excluded from the table above due to the
uncertainty of the timing of these cash disbursements. The amount and timing of cash funding related to these benefit plans will generally
depend on local regulatory requirements, various economic assumptions and Company contributions.
38
Management’s estimate of contributions the Company will make to its Swiss pension plan for the fiscal year ending 2021 is
approximately $1.2 million. In addition, total benefit payments to be paid to participants in the Swiss pension plan for the fiscal year
ending 2021 from the Company’s plan are estimated to be approximately $0.3 million.
Off-Balance Sheet Arrangements
The Company does not have off-balance sheet financing or unconsolidated special-purpose entities.
Accounting Changes and Recent Accounting Pronouncements
See Note 2 to the accompanying audited consolidated financial statements for a description of recent accounting pronouncements which
may impact the consolidated financial statements in future reporting periods.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Foreign Currency Exchange Rate Risk
The Company’s primary market risk exposure relates to foreign currency exchange risk (see Note 7 to the Consolidated Financial
Statements). A significant portion of the Company’s purchases are denominated in Swiss Francs and, to a lesser extent, the Japanese
Yen. The Company also sells to third-party customers in a variety of foreign currencies, most notably the Euro, Swiss Franc and the
British Pound. The Company reduces its exposure to the Swiss Franc, Euro, British Pound, Chinese Yuan and Japanese Yen 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 earnings impact is mostly offset
by the effects of currency movements on the underlying hedged transactions. To the extent that the Company does not engage in a
hedging program, any change in the Swiss Franc, Euro, British Pound, Chinese Yuan and Japanese Yen exchange rates to local currency
would have an equal effect on the Company’s earnings.
From time to time the Company uses forward exchange contracts, which do not meet the requirements of qualified hedges, to offset its
exposure to certain foreign currency receivables and liabilities. These forward contracts are not designated as qualified hedges and,
therefore, changes in the fair value of these derivatives are recognized in earnings in the period they arise, thereby offsetting the current
earnings effect resulting from the revaluation of the related foreign currency receivables and liabilities.
As of January 31, 2020, the Company’s entire net forward contracts hedging portfolio consisted of 42.1 million Chinese Yuan equivalent,
22.0 million Swiss Francs equivalent, 17.9 million US Dollars equivalent, 29.9 million Euros equivalent and 4.4 million British Pounds
equivalent with various expiry dates ranging through July 8, 2020, compared to a portfolio of 33.0 million Swiss Francs equivalent, 8.3
million Euros equivalent and 0.4 million British Pounds equivalent, with various expiry dates ranging through July 10, 2019, as of
January 31, 2019. If the Company were to settle its Swiss Franc forward contracts at January 31, 2020, the net result would be an
immaterial loss. As of January 31, 2020, the Company’s British Pound, Chinese Yuan, US Dollar and Euro forward contracts had no
gain or loss. The Company had no cash flow hedges as of January 31, 2020 and January 31, 2019, respectively.
Commodity Risk
The Company considers its exposure to fluctuations in commodity prices to be primarily related to gold used in the manufacturing of
the Company’s watches. Under its hedging program, the Company can purchase various commodity derivative instruments, primarily
futures contracts. When held, these derivatives are documented as qualified cash flow hedges, and the resulting 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. The Company did not hold any future contracts in its gold
hedge portfolio as of January 31, 2020 and 2019; thus, any changes in the gold purchase price will have an equal effect on the Company’s
cost of sales.
Debt and Interest Rate Risk
Floating rate debt at January 31, 2020 and 2019 totaled $51.9 million (50 million in Swiss Francs) and $50.3 million (50 million in
Swiss Francs), respectively. The debt outstanding at January 31, 2020 is based on LIBOR plus a spread ranging from 1.00% to 1.75%
per annum or on a base rate plus a spread ranging from 0% to 0.75% per annum, with the spread in each case being based on the
Company’s consolidated leverage ratio (as defined in the Company’s credit agreement). For fiscal 2020, the Company had weighted
average borrowings of $51.1 million with a weighted average of 1.00%. As of January 31, 2020, the Company’s spreads were 1.25%
over LIBOR and 0.25% over the base rate. The Company does not hedge these interest rate risks. Based on the average floating rate
debt outstanding during fiscal 2020, a one-percent increase or decrease in the average interest rate during the period would have resulted
in a change to interest expense of $0.4 million for the fiscal year ended January 31, 2020.
39
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at January 31, 2020 and 2019
Consolidated Statements of Operations for the fiscal years ended January 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the fiscal years ended January 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the fiscal years ended January 31, 2020, 2019 and 2018
Consolidated Statements of Changes in Equity for the fiscal years ended January 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
Valuation and Qualifying Accounts
Schedule
Number
Page
Number
47
49
50
51
52
53
54-87
S-1
II
40
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. However,
it should be noted that a control system, no matter how well conceived or operated, can only provide reasonable, not absolute, assurance
that its objectives will be met and may not prevent all errors or instances of fraud.
The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief
Financial Officer, has 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 of 1934, as amended (the “Exchange Act”). Based on that evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective at a
reasonable assurance level as of the end of the period covered by this report.
The Company’s Chief Executive Officer and Chief Financial Officer have furnished the Sections 302 and 906 certifications required by
the U.S. Securities and Exchange Commission in this annual report on Form 10-K. In addition, the Company’s Chief Executive Officer
certified to the NYSE in July 2019 that he was not aware of any violation by the Company of the NYSE’s corporate governance listing
standards.
Management’s Annual Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining internal control over financial reporting, as such term
is defined in Rule 13a-15(f) under the Exchange Act, for the Company. With the participation of the Chief Executive Officer and the
Chief Financial Officer, the Company’s management conducted an evaluation of the effectiveness of the Company’s internal control
over financial reporting based on the framework and criteria established in the Internal Control – Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, the Company’s
management has concluded that the Company’s internal control over financial reporting was effective as of January 31, 2020.
The Company’s internal control over financial reporting as of January 31, 2020 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report, which appears in this report.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange
Act) during the three months ended January 31, 2020, that has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
See Consolidated Financial Statements and Supplementary Data for the Report of Independent Registered Public Accounting Firm.
Item 9B. Other Information
None.
41
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item will be included in the Company’s Proxy Statement for the 2020 annual meeting of shareholders
under the captions “Election of Directors” and “Management” and is incorporated herein by reference.
Information on the beneficial ownership reporting for the Company’s directors and executive officers will be contained in the Company’s
Proxy Statement for the 2020 annual meeting of shareholders under the caption “Section 16(a) Beneficial Ownership Reporting
Compliance” and is incorporated herein by reference.
Information on the Company’s Audit Committee and Audit Committee Financial Expert will be contained in the Company’s Proxy
Statement for the 2020 annual meeting of shareholders under the caption “Information Regarding the Board of Directors and Its
Committees” and is incorporated herein by reference.
The Company has adopted and posted on its website at www.movadogroup.com a Code of Business Conduct and Ethics that applies to
all directors, officers and employees, including the Company’s Chief Executive Officer, Chief Financial Officer and principal financial
and accounting officers. The Company will post any amendments to the Code of Business Conduct and Ethics, and any waivers that are
required to be disclosed by SEC regulations, on the Company’s website.
Item 11. Executive Compensation
The information required by this item will be included in the Company’s Proxy Statement for the 2020 annual meeting of shareholders
under the captions “Executive Compensation” and “Compensation of Directors” and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be included in the Company’s Proxy Statement for the 2020 annual meeting of shareholders
under the caption “Security Ownership of Certain Beneficial Owners and Management” and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this item will be included in the Company’s Proxy Statement for the 2020 annual meeting of shareholders
under the caption “Certain Relationships and Related Transactions” and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by this item will be included in the Company’s Proxy Statement for the 2020 annual meeting of shareholders
under the caption “Fees Paid to PricewaterhouseCoopers LLP” and is incorporated herein by reference.
42
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report
1. Financial Statements:
See Financial Statements Index on page 43 included in Item 8 of Part II of this annual report.
2. Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, or not required, or because the required information is included
in the Consolidated Financial Statements or notes thereto.
Index to Exhibits:
3.
Exhibit
Number
Description
2.1
2.2
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1
10.2
10.3
Sale and Purchase Agreement dated July 3, 2017 between MGS Distribution Ltd and Lesa Bennett and Jemma Fennings in
respect of the share capital of JLB Brands Ltd. Incorporated by reference to Exhibit 2.1 to the Registrant’s Quarterly Report
on Form 10-Q for the quarter ended July 31, 2017 filed on August 29, 2017.
Securities Purchase Agreement, dated as of August 15, 2018, relating to the acquisition of MVMT Watches, Inc.
Incorporated by reference to Exhibit 2.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October
31, 2018 filed on December 4, 2018.
Restated By-Laws of the Registrant. Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-
K filed on July 14, 2014.
Restated Certificate of Incorporation of the Registrant as amended. Incorporated by reference to Exhibit 3.2 to the
Registrant’s Annual Report on Form 10-K for the year ended January 31, 2019 filed on March 28, 2019.
Specimen Common Stock Certificate. Incorporated herein by reference to Exhibit 4.1 to the Registrant’s Annual Report on
Form 10-K for the year ended January 31, 1997 filed on April 18, 1997.
Description of Securities. ***
Master Credit Agreement dated August 17, 2004 and August 20, 2004 between MGI Luxury Group S.A. and UBS AG.
Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
July 31, 2004. *
Amended and Restated Credit Agreement, dated as of October 12, 2018, among the Company, certain U.S. and Swiss
subsidiaries thereof, the lenders party thereto and Bank of America, N.A. as administrative agent. Incorporated herein by
reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 31, 2018 filed on
December 4, 2018. *
Security and Pledge Agreement, dated as of January 30, 2015, by and among Movado Group, Inc., Movado Group Delaware
Holdings Corporation, Movado Retail Group, Inc. and Movado LLC, as Grantors, and Bank of America, N.A., as
administrative agent. Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed
February 5, 2015. *
Movado Group, Inc. 1996 Stock Incentive Plan, Amended and Restated as of April 4, 2013. Incorporated herein by reference
to Annex A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on May 2, 2013. **
Form of Stock Award Agreement under the Movado Group, Inc. 1996 Stock Incentive Plan, amended and restated as of
April 4, 2013. Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended April 30, 2015. **
Form of Option Award Agreement under the Movado Group, Inc. 1996 Stock Incentive Plan, amended and restated as of
April 4, 2013. Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended April 30, 2015. **
43
Exhibit
Number
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
Description
Movado Group, Inc. Amended and Restated Deferred Compensation Plan for Executives, effective January 1, 2013.
Incorporated herein by reference to Annex B to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on
May 2, 2013. **
Lease made December 21, 2000 between the Registrant and Mack-Cali Realty, L.P. for premises in Paramus, New Jersey
together with First Amendment thereto made December 21, 2000. Incorporated herein by reference to Exhibit 10.22 to the
Registrant’s Annual Report on Form 10-K for the year ended January 31, 2001.
Second Amendment of Lease dated July 26, 2001 between Mack-Cali Realty, L.P., as landlord, and Movado Group, Inc.,
as tenant, further amending lease dated as of December 21, 2000. Incorporated herein by reference to Exhibit 10.2 to the
Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended October 31, 2001.
Third Amendment of Lease dated November 6, 2001 between Mack-Cali Realty, L.P., as lessor, and Movado Group, Inc.,
as lessee, for additional space at Mack-Cali II, One Mack Drive, Paramus, New Jersey. Incorporated herein by reference to
Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended October 31, 2001.
Fifth Amendment of Lease dated October 20, 2003 between Mack-Cali Realty, L.P. as landlord, and the Registrant as tenant
further amending the lease dated as of December 21, 2000. Incorporated herein by reference to Exhibit 10.29 to the
Registrant’s Annual Report on Form 10-K for the year ended January 31, 2004.
Tenth Amendment to Lease dated March 10, 2011 between Mack-Cali Realty, L.P., as landlord, and the Registrant, as
tenant, further amending the lease dated as of December 21, 2000. Incorporated herein by reference to Exhibit 10.36 to the
Registrant’s Annual Report on Form 10-K for the year ended January 31, 2011.
Thirteenth Amendment to Lease dated October 24, 2017 between Mack-Cali Realty, L.P., as landlord, and the Registrant,
as tenant, further amending the lease dated as of December 21, 2000. Incorporated herein by reference to Exhibit 10.1 to
the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 31, 2017 filed on November 21, 2017.
Lease Agreement dated May 22, 2000 between Forsgate Industrial Complex and the Registrant for premises located at 105
State Street, Moonachie, New Jersey. Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report
on Form 10-Q for the quarter ended April 30, 2000.
First Amendment dated as of February 27, 2009 to Lease dated May 22, 2000 between Forsgate Industrial Complex as
Landlord and Movado Group, Inc. as Tenant for the premises known as 105 State Street, Moonachie, New Jersey.
Incorporated herein by reference to Exhibit 10.42 to the Registrant’s Annual Report on Form 10-K for the year ended
January 31, 2009.
Third Amendment dated as of November 14, 2019 to Lease dated May 22, 2000 between Forsgate Industrial Complex as
Landlord and Movado Group, Inc. as Tenant for the premises known as 105 State Street, Moonachie, New Jersey. ***
Amended and Restated License Agreement dated January 13, 2015 between the Registrant, Swissam Products Limited and
Coach, Inc. Incorporated herein by reference to Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K for the year
ended January 31, 2015.
First Amendment dated January 6, 2020, to the Amended and Restated License Agreement dated January 13, 2015 between
the Registrant, Swissam Products Limited and Tapestry, Inc. (f/k/a Coach, Inc.). Incorporated herein by reference to Exhibit
10.1 to the Registrant’s Current Report on Form 8-K filed January 8, 2020.
Amended and Restated License Agreement between MGI Luxury Group, S.A., a wholly-owned Swiss subsidiary of
Movado Group, Inc., Lacoste S.A., Sporloisirs S.A. and Lacoste Alligator S.A., dated March 28, 2014 with an effective
date as of January 1, 2015. Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-
K/A filed, December 30, 2014.
Amended and Restated License Agreement among Tommy Hilfiger Licensing LLC, Movado Group, Inc. and Swissam
Products Limited, dated as of September 16, 2009. Incorporated herein by reference to Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended October 31, 2009.
Second Amendment entered into as of September 30, 2012 to Amended and Restated License Agreement dated
September 16, 2009 by and between the Registrant, Swissam Products Limited and Tommy Hilfiger Licensing, LLC.
Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
October 31, 2012.
44
Exhibit
Number
10.19
10.20
10.21
10.22
21.1
23.1
31.1
31.2
32.1
32.2
101
Description
Third Amendment entered into as of November 13, 2013 to Amended and Restated License Agreement dated September 16,
2009 by and between the Registrant, Swissam Products Limited and Tommy Hilfiger Licensing, LLC. Incorporated herein
by reference to Exhibit 10.43 to the Registrant’s Annual Report on Form 10-K for the year ended January 31, 2014.
Amended and Restated License Agreement, effective as of January 1, 2012 by and between MGI Luxury Group, S.A. and
Hugo Boss Trademark Management GmbH & Co. KG. Incorporated herein by reference to Exhibit 10.39 to the Registrant’s
Annual Report on Form 10-K for the year ended January 31, 2012.
Term Sheet dated October 11, 2017 governing the amendment and restatement of the Amended and Restated License
Agreement, effective as of January 1, 2012 by and between MGI Luxury Group, S.A. and Hugo Boss Trademark
Management GmbH & Co. KG. Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended October 31, 2017 filed on November 21, 2017.
Amended and Restated License Agreement entered into as of November 23, 2017 by and between the Registrant and Ferrari
S.p.A. Incorporated herein by reference to Exhibit 10.24 to the Registrant’s Annual Report on Form 10-K for the year ended
January 31, 2018.
Subsidiaries of the Registrant. ***
Consent of PricewaterhouseCoopers LLP. ***
Certification of Chief Executive Officer. ***
Certification of Chief Financial Officer. ***
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. ***
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. ***
The following financial information from Movado Group, Inc.’s Form 10-K for the year ended January 31, 2020 filed with
the SEC, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Consolidated Balance Sheets; (ii)
the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Income; (iv) the
Consolidated Statements of Cash Flows; (v) Consolidated Statements of Changes in Equity; (vi) the Notes to the
Consolidated Financial Statements and (vii) Schedule II – Valuation and Qualifying Accounts and Reserves. XBRL
Instance Document – the XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are
embedded within the Inline XBRL Document.
104
Cover Page Interactive Data File, formatted in Inline Extensible Business Reporting Language (iXBRL).
*
Pursuant to Item 601(b)(4) of Regulation S-K, certain instruments with respect to long-term debt not exceeding 10 percent of the
total assets of Registrant and its subsidiaries on a consolidated basis are not filed as exhibits to this report. Registrant agrees to
furnish a copy of any such instrument to the Commission upon request.
** Constitutes a compensatory plan or arrangement.
*** Filed herewith.
Item 16. Form 10-K Summary
None.
45
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Dated: March 26, 2020
MOVADO GROUP, INC.
(Registrant)
By: /s/ Efraim Grinberg
Efraim Grinberg
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the date indicated.
Dated: March 26, 2020
Dated: March 26, 2020
Dated: March 26, 2020
Dated: March 26, 2020
Dated: March 26, 2020
Dated: March 26, 2020
Dated: March 26, 2020
Dated: March 26, 2020
Dated: March 26, 2020
Dated: March 26, 2020
Dated: March 26, 2020
/s/ Efraim Grinberg
Efraim Grinberg
Chairman of the Board of Directors, Director
and Chief Executive Officer
/s/ Sallie A. DeMarsilis
Sallie A. DeMarsilis
Senior Vice President, Chief Financial Officer
and Principal Accounting Officer
/s/ Peter Bridgman
Peter Bridgman
Director
/s/ Richard J. Coté
Richard J. Coté
Director
/s/ Alex Grinberg
Alex Grinberg
Director
/s/ Alan H. Howard
Alan H. Howard
Director
/s/ Richard D. Isserman
Richard D. Isserman
Director
/s/ Ann Kirschner
Ann Kirschner
Director
/s/ Nathan Leventhal
Nathan Leventhal
Director
/s/ Maurice Reznik
Maurice Reznik
Director
/s/ Stephen Sadove
Stephen Sadove
Director
46
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Movado Group, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Movado Group, Inc. and its subsidiaries (the “Company”) as of
January 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive income, of changes in equity and
of cash flows for each of the three years in the period ended January 31, 2020, including the related notes and schedule of valuation and
qualifying accounts for each of the three years in the period ended January 31, 2020 appearing on page S-1 (collectively referred to as
the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of January 31,
2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of January 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period
ended January 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion,
the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2020, based on
criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in
fiscal 2020.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's
Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the
Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We
are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Subsequent Event
As discussed in Note 20 to the consolidated financial statements, in mid-March 2020, the Company and the majority of the Company’s
wholesale customers temporarily closed all of their retail stores due to health concerns associated with COVID-19. While the Company
expects this matter to negatively impact its business, results of operations and financial position, the related financial impact cannot be
reasonably estimated at this time.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
47
accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 26, 2020
We have served as the Company’s auditor since 1976.
48
MOVADO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
January 31,
2020
January 31,
2019
$
$
$
ASSETS
Current assets:
Cash and cash equivalents
Trade receivables, net
Inventories
Other current assets
Total current assets
Property, plant and equipment, net
Operating lease right-of-use assets
Deferred and non-current income taxes
Goodwill
Other intangibles, net
Other non-current assets
Total assets
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Accrued payroll and benefits
Current operating lease liabilities
Income taxes payable
Total current liabilities
Loans payable to bank
Deferred and non-current income taxes payable
Non-current operating lease liabilities
Other non-current liabilities
Total liabilities
Commitments and contingencies (Note 9)
Redeemable noncontrolling interest
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;
27,859,328 and 27,701,742 shares issued and outstanding, respectively
Class A Common Stock, $0.01 par value, 30,000,000 shares authorized;
6,603,645 and 6,586,780 shares issued and outstanding, respectively
Capital in excess of par value
Retained earnings
Accumulated other comprehensive income
Treasury Stock, 11,443,308 and 11,268,492 shares, respectively, at cost
Total Movado Group, Inc. shareholders' equity
Noncontrolling interest
Total equity
Total liabilities, redeemable noncontrolling interest and equity
$
See Notes to Consolidated Financial Statements
49
185,872 $
78,388
171,406
28,888
464,554
29,238
89,523
25,403
136,366
42,359
59,865
847,308 $
35,488 $
44,210
6,302
15,083
8,217
109,300
51,910
25,419
81,877
48,393
316,899
189,911
84,026
165,311
28,898
468,146
26,067
—
24,503
136,033
48,183
56,769
759,701
38,650
44,429
18,773
—
10,831
112,683
50,280
29,242
—
67,120
259,325
3,165
3,721
—
279
65
208,473
455,479
85,050
(222,809 )
526,537
707
527,244
847,308 $
—
277
65
201,814
431,180
80,507
(217,188 )
496,655
—
496,655
759,701
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Net sales
Cost of sales
Gross profit
Selling, general and administrative
Operating income
Non-operating income/(expense):
Change in contingent consideration (Note 8)
Interest expense
Interest income
Income before income taxes
Provision for income taxes (Note 11)
Net income / (loss)
Less: Net loss attributable to noncontrolling interest
Net income / (loss) attributable to Movado Group, Inc.
Basic income per share:
Weighted basic average shares outstanding
Net income / (loss) per share attributable to Movado Group, Inc.
Diluted income per share:
Weighted diluted average shares outstanding
Net income / (loss) per share attributable to Movado Group, Inc.
2020
Fiscal Year Ended January 31,
2019
2018
$
$
$
$
700,966 $
326,077
374,889
331,898
42,991
15,356
(930 )
86
57,503
15,124
42,379
(320 )
42,699 $
679,567 $
310,209
369,358
307,161
62,197
—
(771 )
307
61,733
162
61,571
(53 )
61,624 $
23,123
1.85 $
23,197
2.66 $
23,297
1.83 $
23,600
2.61 $
567,953
269,875
298,078
254,878
43,200
—
(1,510 )
452
42,142
57,367
(15,225 )
—
(15,225 )
23,073
(0.66 )
23,073
(0.66 )
See Notes to Consolidated Financial Statements
50
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income / (loss)
Other comprehensive income / (loss):
Net unrealized gain / (loss) on investments, net of tax provision / (benefit) of $2,
($14) and ($13), respectively
Net change in effective portion of hedging contracts, net of tax provision / (benefit)
of $0, $7 and ($9), respectively
Prior service cost arising during the period, net of tax benefit of ($118)
Amortization of prior service cost, net of tax provision of $15, $1 and $0,
respectively
Net actuarial loss arising during period, net of tax benefit of ($15)
Foreign currency translation adjustments
Total other comprehensive income / (loss), net of taxes
Less:
Comprehensive (loss) / income attributable to noncontrolling interests:
Net loss
Foreign currency translation adjustments
Total comprehensive loss attributable to noncontrolling interests
Total comprehensive income attributable to Movado Group, Inc.
Fiscal Year Ended January 31,
2019
2020
$
42,379 $
61,571
$
2018
(15,225 )
5
(72 )
—
—
38
(425 )
53
(52 )
4,537
4,543
5
—
(19,382 )
(19,836 )
(320 )
(143 )
(463 )
47,385 $
(53 )
26
(27 )
41,762
$
$
(6 )
(52 )
—
—
—
23,621
23,563
—
—
—
8,338
See Notes to Consolidated Financial Statements
51
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
2020
Fiscal Year Ended January 31,
2019
2018
$
42,699
$
61,624
$
(15,225 )
Cash flows from operating activities:
Net income/(loss) attributable to Movado Group, Inc.
Adjustments to reconcile net income/(loss) to net cash (used in)/provided
by operating activities:
Change in contingent consideration
Depreciation and amortization
Transactional losses/(gains)
Provision for inventories and accounts receivable
Deferred income taxes
Stock-based compensation
Cost savings initiatives
(Benefit)/Charge for 2017 tax act
Other
Changes in assets and liabilities:
Trade receivables
Inventories
Other current assets
Accounts payable
Accrued liabilities
Accrued payroll and benefits
Income taxes payable
Other non-current assets
Other non-current liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Trademarks and other intangibles
Restricted cash deposits
Acquisitions, net of cash acquired
Proceeds from sale of an asset held for sale
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from bank borrowings
Repayments of bank borrowings
Stock awards and options exercised and other changes
Stock repurchase
Purchase of incremental ownership of joint venture
Debt issuance cost
Dividends paid
Net cash (used in)/provided by financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net decrease in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of year
$
(15,356 )
16,381
1,457
3,152
4,352
6,373
(320 )
—
603
5,908
(5,549 )
709
(3,642 )
(4,944 )
(12,469 )
(5,393 )
(2,398 )
507
32,070
(12,713 )
(255 )
—
(639 )
240
(13,367 )
—
14,165
275
4,910
(11,388 )
6,042
(281 )
(7,446 )
70
(2,640 )
(4,234 )
5,375
6,082
2,623
3,851
5,252
721
1,169
86,170
(10,635 )
(492 )
—
(97,882 )
—
(109,009 )
—
—
(1,266 )
(4,199 )
—
—
(18,400 )
(23,865 )
1,141
(4,021 )
190,459
186,438
$
50,296
(25,000 )
4,968
(7,418 )
—
(689 )
(18,469 )
3,688
(5,801 )
(24,952 )
215,411
190,459
$
—
13,457
(1,011 )
3,792
461
4,874
13,587
45,002
—
(9,286 )
6,624
(3,824 )
(4,006 )
(416 )
1,672
(1,898 )
(6,630 )
7,551
54,724
(5,810 )
(556 )
1,018
(78,991 )
—
(84,339 )
—
(5,000 )
(159 )
(3,631 )
(162 )
—
(11,934 )
(20,886 )
9,033
(41,468 )
256,879
215,411
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents
Restricted cash included in other non-current assets
Cash, cash equivalents, and restricted cash
$
$
185,872 $
566
186,438 $
189,911 $
548
190,459 $
214,811
600
215,411
See Notes to Consolidated Financial Statements
52
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except per share amounts)
Preferred
Stock
Common
Stock (1)
Class A
Common
Stock (2)
Capital
in Excess
of Par
Value
Retained
Earnings
Accumulat
ed
Other
Comprehe
nsive
Income
Treasury
Stock
Noncontro
lling
Interests
Total
Movado
Group,
Inc.
Shareholde
rs'
Equity
Redeemable
Noncontrolli
ng
Interests
—
Balance, January 31, 2017
$
— $
272 $
66 $ 185,354 $ 415,919 $ 76,780 $ (204,398 ) $
Net income/ (loss) attributable to Movado
Group, Inc.
Dividends ($0.52 per share)
Tax effect of rate change on marketable
securities (4)
Stock options exercised
Stock repurchase
Supplemental executive retirement plan
Stock-based compensation expense (5)
Net unrealized loss on investments, net of tax
benefit of $13
Net change in effective portion of hedging
contracts, net of tax benefit of $9
Foreign currency translation adjustment (3)
(15,225 )
(11,934 )
(21 )
21
(865 )
(3,631 )
1
705
124
3,625
(27 )
(52 )
23,621
Balance, January 31, 2018
—
273
66 189,808 388,739 100,343 (208,894 )
Net income/ (loss) attributable to Movado
Group, Inc.
Dividends ($0.80 per share)
Adoption of new revenue recognition standard
(Topic 606)
Stock options exercised
Joint venture purchase
Stock repurchase
Supplemental executive retirement plan
Stock-based compensation expense
Net unrealized loss on investments, net of tax
benefit of $14
Net change in effective portion of hedging
contracts, net of tax provision of $7
Prior service cost, net of tax benefit of $117
Conversion of Class A Stock to Common
Stock
Foreign currency translation adjustment (3)
61,624
(18,469 )
(714 )
3
5,841
123
6,042
1
(1 )
Balance, January 31, 2019
—
277
65 201,814 431,180
(876 )
(7,418 )
(72 )
38
(420 )
— $ 473,993 $
(15,225 )
(11,934 )
-
(159 )
(3,631 )
124
3,625
(27 )
(52 )
23,621
— 470,335
61,624
(18,469 )
(714 )
4,968
-
(7,418 )
123
6,042
(72 )
38
(420 )
(19,382 )
80,507 (217,188 )
-
(19,382 )
— 496,655
Net income/ (loss) attributable to Movado
Group, Inc.
Dividends ($0.80 per share)
Stock options exercised
Joint venture purchase
Stock repurchase
Supplemental executive retirement plan
Stock-based compensation expense
Net unrealized gain in investments, net of tax
provision of $2
Amortization of prior service cost, net of tax
provision of $15
Net actuarial loss arising during period, net of
tax benefit of $15
Foreign currency translation adjustment (3)
2
154
42,699
(18,400 )
132
6,373
5
53
(52 )
4,537
107
614
(1,422 )
(4,199 )
42,806
(18,400 )
(1,266 )
614
(4,199 )
132
6,373
5
53
Balance, January 31, 2020
$
— $
279 $
65 $ 208,473 $ 455,479 $ 85,050 $ (222,809 ) $
(52 )
(14 )
4,523
707 $ 527,244 $
(129 )
3,165
—
(53 )
3,748
26
3,721
(427 )
(1) Each share of common stock is entitled to one vote per share on all matters submitted to a vote of the shareholders.
(2) Each share of class A common stock is entitled to 10 votes per share on all matters submitted to a vote of the shareholders. Each holder of class A common stock is
entitled to convert, at any time, any and all of such shares into the same number of shares of common stock. Each share of class A common stock is converted
automatically into common stock in the event that the beneficial or record ownership of such shares of class A common stock is transferred to any person, except to
certain family members or affiliated persons deemed “permitted transferees” pursuant to the Company’s Restated Certificate of Incorporation as amended. The class
A common stock is not publicly traded and consequently, there is currently no established public trading market for these shares.
(3) The currency translation adjustment is not adjusted for income taxes to the extent that it relates to permanent investments of earnings in international subsidiaries.
(4) Due to the early adoption of ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”.
(5) Stock-based compensation expense in fiscal 2018 includes $1.2 million related to the Company’s cost savings initiatives.
See Notes to Consolidated Financial Statements
53
NOTES TO MOVADO GROUP, INC.’S CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Movado Group, Inc. (together with its subsidiaries, the “Company”) designs, sources, markets and distributes quality watches with
prominent brands across most price categories of the watch industry. In fiscal 2020, the Company marketed the following distinct brands
of watches: Movado, Concord, Ebel, Olivia Burton, Coach, Tommy Hilfiger, HUGO BOSS, Lacoste, Scuderia Ferrari and Rebecca
Minkoff/Uri Minkoff. On October 1, 2018, the Company acquired all the outstanding equity interests of MVMT Watches, Inc., the
owner of the MVMT global aspirational lifestyle brand (“MVMT”). The Company also designs, sources, markets and distributes jewelry
and other accessories under certain of its brands.
Movado (with the exception of certain Movado collections, including Movado BOLD), Ebel and Concord watches are manufactured in
Switzerland by independent third-party assemblers using Swiss movements and other parts sourced by the Company’s Swiss operations.
Movado smart watches include connected technology licensed from third parties that also provide end users with the necessary
applications and cloud services. All of the Company’s products are manufactured using components obtained from third party suppliers.
Certain Movado collections of watches, including Movado BOLD, are manufactured by independent contractors in Asia using Swiss
movements. Coach, HUGO BOSS, Lacoste, Olivia Burton, MVMT, Rebecca Minkoff and Uri Minkoff, Scuderia Ferrari and Tommy
Hilfiger watches are manufactured by independent contractors in Asia and the licensed brands smart watches include connected
technology licensed from a third party. The Company’s jewelry and other accessories are manufactured by independent contractors in
Asia and, to a lesser extent, the United States.
In addition to its sales to trade customers and independent distributors, the Company sells directly to consumers via its e-commerce
platforms and also operates 45 retail outlet locations throughout the United States and two in Canada, through which it sells current and
discontinued models and factory seconds of all of the Company’s watches.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany
transactions and balances have been eliminated. To the extent a subsidiary is not wholly-owned, any related noncontrolling interests are
included as a separate component of Shareholders’ Equity.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
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 dates of the financial statements and the reported amounts of revenues and expenses during the
reporting periods. These estimates and assumptions are based on management’s best estimates and judgment. On an on-going basis, the
Company evaluates its estimates and judgement. These estimates include accounting for sales discounts, returns, allowances and
incentives, warranties, income taxes, depreciation, amortization, inventory write-downs, stock-based compensation, pensions,
contingencies, impairments and asset and liability valuations. Actual results could differ from those estimates.
Translation of Foreign Currency Financial Statements and Foreign Currency Transactions
The financial statements of the Company’s international subsidiaries have been translated into United States dollars by translating
balance sheet accounts at year-end exchange rates and the weighted average exchange rate for each period for revenues, expenses, gains,
losses and cash flows. Foreign currency transaction gains and losses are charged or credited to earnings as incurred. Foreign currency
translation gains and losses are reflected in the equity section of the Company’s consolidated balance sheets in Accumulated Other
Comprehensive Income.
Cash and Cash Equivalents and Restricted Cash
Cash equivalents include all highly liquid investments with original maturities at date of purchase of three months or less.
Restricted cash is comprised of cash or cash equivalents which has been placed into an account that is restricted for a specific use and
from which the Company cannot withdraw the cash on demand.
54
Trade Receivables
Trade receivables as shown on the consolidated balance sheets are net of various allowances. The allowance for doubtful accounts is
determined through an analysis of the aging of accounts receivable, assessments of collectability based on historical trends, the financial
condition of the Company’s customers and an evaluation of economic conditions. The Company writes off uncollectible trade
receivables once collection efforts have been exhausted and third parties confirm the balance is not recoverable.
The Company’s trade customers include department stores, jewelry store chains and independent jewelers. All of the Company’s watch
brands are also marketed outside the U.S. through a network of independent distributors. Accounts receivable are stated net of doubtful
accounts, returns and allowances of $25.5 million, $23.8 million, and $21.6 million at January 31, 2020, 2019 and 2018, respectively.
Additionally, $2.2 million, $2.2 million and $2.3 million of receivables and allowances were recorded in non-current assets as of
January 31, 2020, 2019 and 2018, respectively. Accounts receivable are also stated net of co-operative advertising allowances of $8.6
million, $9.4 million, and $9.4 million at January 31, 2020, 2019, and 2018, respectively. Co-operative advertising allowances are credits
taken by the customer at a future date on previously executed co-operative advertising.
The Company’s concentrations of credit risk arise primarily from accounts receivable related to trade customers during the peak selling
seasons. The Company has significant accounts receivable balances due from major national chain and department stores. The
Company’s results of operations could be materially adversely affected in the event any of these customers or a group of these customers
defaulted on all or a significant portion of their obligations to the Company as a result of financial difficulties. As of January 31, 2020,
except for those accounts provided for in the allowance for doubtful accounts, the Company knew of no situations with any of the
Company’s major customers which would indicate any such customer’s inability to make its required payments.
No single customer accounted for more than 10% of net sales during any of the years in the three-year period ended January 31, 2020.
No single customer accounted for more than 10% of the Company’s account receivable balance at January 31, 2020 or 2019.
Inventories
The Company values its inventory at the lower of cost or net realizable value. Cost is determined using the average cost method. 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 retail outlet locations.
Property, Plant and Equipment
Property, plant and equipment, including computer software, are stated at cost less accumulated depreciation. The Company capitalizes
certain computer software costs after technological feasibility has been established. Depreciation and amortization are computed using
the straight-line method based on the estimated useful lives of the assets. The cost of property, plant and equipment and related
depreciation and amortization are removed from the accounts upon the disposition or retirement of such assets and the resulting gain or
loss is reflected in operating income.
Goodwill
At the time of an acquisition, in accordance with applicable guidance, the Company records all acquired net assets at their estimated fair
values. These estimated fair values are based on management’s assessments and independent third-party appraisals. The excess of the
purchase consideration plus the fair value of any noncontrolling interest in the acquired company over the aggregate estimated fair
values of the acquired net assets, including any contingent consideration, is recorded as goodwill.
Goodwill is not amortized but is assessed for impairment at least annually on November 1st. Under applicable guidance, the Company
generally performs its annual goodwill impairment analysis using a qualitative approach to determine whether it is more likely than not
that the fair value of goodwill is less than its carrying value. If, based on the results of the qualitative assessment, it is concluded that it
is more likely than not that the fair value of goodwill is less than its carrying value, a quantitative test is performed.
The quantitative impairment test is performed to measure the amount of impairment loss, if any. The quantitative impairment test
identifies the existence of potential impairment by comparing the fair value of each reporting unit with its carrying value, including
goodwill. If a reporting unit’s carrying amount exceeds its fair value, the Company will record an impairment charge, as an operating
expense item, based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit.
Determination of the fair value of a reporting unit and the fair value of individual assets and liabilities of a reporting unit is based on
management’s assessment, including the consideration of independent third-party appraisals when necessary. Furthermore, this
55
determination is subjective in nature and involves the use of significant estimates and assumptions. These estimates and assumptions
could have a significant impact on whether or not an impairment charge is recognized and the amount of any such charge. Estimates of
fair value are primarily determined using discounted cash flows, market comparisons, and recent transactions. These approaches use
significant estimates and assumptions, including projected future cash flows, discount rates, growth rates, and determination of
appropriate market comparisons. Fair value determinations require considerable judgement and are sensitive to changes in underlying
assumptions, estimates and market factors. If the Company’s current assumptions and estimates are not met, or if valuation factors
outside of its control change unfavorably, the estimated fair value of its goodwill could be adversely affected, leading to a potential
impairment in the future.
At November 1, 2019 and 2018, the Company evaluated goodwill for impairment. There were no indicators of impairment under this
analysis and, accordingly, no impairment charge was recorded in fiscal 2020 or in fiscal 2019, respectively.
Intangibles
Intangible assets consist primarily of trade names, customer relationships and trademarks. In accordance with applicable guidance, the
Company estimates and records the fair value of purchased intangible assets at the time of their acquisition. The fair values of these
intangible assets are estimated based on independent third-party appraisals. Finite-lived intangible assets are amortized over their
respective estimated useful lives, which range from three to ten years, and are evaluated for impairment periodically and whenever
events or changes in circumstances indicate that their related carrying values may not be fully recoverable. Estimates of fair value for
finite-lived intangible assets are primarily determined using discounted cash flow analysis of such assets, with consideration of market
comparisons and recent transactions. This approach uses significant estimates and assumptions, including projected future cash flows,
discount rates and growth rates. In addition to goodwill, the Company assesses intangible assets for impairments whenever events or
changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company determined that there
was no impairment in fiscal 2020 or in fiscal 2019, respectively.
Noncontrolling Interest
Redeemable noncontrolling interests in subsidiaries that are redeemable for cash or other assets outside of the Company’s control are
classified as mezzanine equity, outside of equity and liabilities, at the greater of the carrying value or the redemption value. The increases
and decreases in the redemption amount are recorded with corresponding adjustments against the Capital in excess of par value and are
reflected in the computation of earnings per share using the two-class method.
Noncontrolling interest is recognized as equity in the Company’s consolidated balance sheets and represents ownership interests in the
Company’s subsidiaries held by third parties.
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 asset groups with their estimated future undiscounted cash flows. If it is determined
that an impairment has occurred, the fair value of the asset group is determined and compared to its carrying value. The excess of the
carrying value over the fair value, if any, is recognized as a loss during that period. The impairment is calculated as the difference
between asset carrying values and the fair value of the long-lived assets. No impairment charge was recorded in fiscal 2020 or in fiscal
2019, respectively.
56
Derivative Financial Instruments
The Company accounts for its derivative financial instruments in accordance with the accounting guidance which requires that an entity
recognize all derivatives as either assets or liabilities in the consolidated balance sheets and measure those instruments at fair value. A
significant portion of the Company’s purchases are denominated in Swiss Francs and, to a lesser extent, the Japanese Yen. The Company
also sells to third-party customers in a variety of foreign currencies, most notably the Euro, Swiss Francs and the British Pound. The
Company reduces its exposure to the Swiss Franc, Euro, British Pound, Chinese Yuan and Japanese Yen exchange rate risks 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 earnings impact is mostly offset by the effects of
currency movements on the underlying hedged transactions.
The Company uses forward exchange contracts, which do not meet the requirements of qualified hedges, to offset its exposure to certain
foreign currency receivables and liabilities. These forward contracts are not designated as qualified hedges and, therefore, changes in
the fair value of these derivatives are recognized in earnings in the period they arise, thereby offsetting the current earnings effect
resulting from the revaluation of the related foreign currency receivables and liabilities.
All of the Company’s derivative instruments have liquid markets to assess fair value. The Company does not enter into any derivative
instruments for trading purposes.
Revenue Recognition
Wholesale revenue is recognized and recorded when a contract is in place, obligations under the terms of a contract with the customer
are satisfied and control is transferred to the customer. Such revenue is measured as the ultimate amount of consideration the Company
expects to receive in exchange for transferring goods including variable consideration. Direct to consumer and after-sales service
revenue is recognized at time of register receipt or delivery to customer. The Company records estimates of variable consideration,
which includes sales returns, markdowns, volume-based programs 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 the expected value method considering all reasonably
available information including historical analysis, customer agreements and/or currently known factors that arise in the normal course
of business. Returns, discounts and allowances have historically been within the Company’s expectations and the provisions established.
The future provisional rates may differ from those experienced in the past. The Company considers transfer of control to take place
either when the goods ship or when goods are delivered depending on the shipping terms in the contract. Factors considered in the
transfer of control include the right to payment, transfer of legal title, physical possession and customer acceptance of the goods and
whether the significant risks and rewards for the goods belong with the customer. Taxes imposed by governmental authorities on the
Company's revenue-producing activities with customers, such as sales taxes and value added taxes, are excluded from net sales.
The Company’s sale of smart watches contains multiple performance obligations. The Company allocates revenue to each performance
obligation using the relative standalone selling price method. The Company determines the standalone selling prices based on the prices
charged to customers. Amounts allocated to the delivered smart watch collections and the related essential software are recognized at
the time of sale. The Company’s smart watch collections have been available in limited quantities and in limited distribution, and, as a
result, the amounts related to cloud service and app updates were immaterial to all periods presented and thereby recognized at time of
sale.
The Company has considered each transaction to sell goods as separate and distinct, with no additional promises made. The Company
uses the understanding of what the customer expects to receive as the final product to determine whether goods or services should be
combined and accounted for as a single performance obligation. The Company does not incur significant costs to obtain or fulfill its
contracts.
Cost of Sales
Cost of sales of the Company’s products consist primarily of costs for raw materials, component costs, royalties, depreciation,
amortization, assembly costs, shipping to e-commerce customers, design costs and unit overhead costs associated with the Company’s
supply chain operations predominately in Switzerland and Asia. The Company’s supply chain operations consist of logistics
management of assembly operations and product sourcing predominately in Switzerland and Asia and minor assembly in Switzerland.
Selling, General and Administrative (“SG&A”) Expenses
The Company’s SG&A expenses consist primarily of marketing, selling, distribution, general and administrative expenses.
57
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 salaries, various forms of media
advertising, digital advertising (including social media), customer acquisition costs and co-operative advertising with customers and
distributors and other point of sale marketing and promotion spending.
Selling expenses consist primarily of salaries, sales commissions, salesforce travel and related expenses, credit card fees, depreciation
and amortization, expenses associated with the Company’s annual worldwide customer conference, 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 and related expenses and store occupancy costs.
Distribution expenses consist of costs of running distribution centers and customer service, and include primarily salaries, 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, leasehold improvements, amortization of finite-lived intangible assets,
patent and trademark expenses and various other general corporate expenses.
Warranty Costs
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 for Movado watch cases and bracelets.
When changes in warranty costs are experienced, the Company will adjust the warranty liability as required. 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, they could have an adverse effect on
the Company’s operating results.
Warranty liability, included in accrued liabilities in the consolidated balance sheets, and activity for the fiscal years ended January 31,
2020, 2019 and 2018 was as follows (in thousands):
Balance, beginning of year
Provision charged to operations
Settlements made
Balance, end of year
2020
2019
2018
$
$
2,703 $
2,203
(2,272 )
2,634 $
3,288 $
2,249
(2,834 )
2,703 $
2,728
2,845
(2,285 )
3,288
Pre-opening Costs
Marketing and administrative costs associated with the opening of retail stores are expensed in the period incurred.
58
Marketing
The Company expenses the production costs of an advertising campaign at the commencement date of the advertising campaign.
Included in marketing expenses are costs associated with co-operative advertising, media advertising, digital advertising, customer
acquisition costs, production costs, costs of point of sale materials and displays and internal payroll related costs. These costs are
recorded as SG&A expenses. The Company participates in co-operative advertising programs on a voluntary basis and receives a
“separately identifiable benefit in exchange for the consideration.” Since the amount of consideration paid to the retailer does not exceed
the fair value of the benefit received by the Company, these costs are recorded as SG&A expenses as opposed to being recorded as a
reduction of revenue. Marketing expense for fiscal 2020, 2019 and 2018 was $135.3 million, $108.2 million and $73.1 million,
respectively.
Included in other current assets and non-current assets in the consolidated balance sheets are the costs of certain prepaid advertising,
including principally product displays and point of sale materials and to a lesser extent licensing agreements and sponsorships. Prepaid
advertising accounted for $7.5 million and $5.4 million in other current assets at January 31, 2020 and 2019, respectively. Prepaid
advertising accounted for $2.5 million and $1.5 million in other non-current assets at January 31, 2020 and 2019, respectively.
Shipping and Handling Costs
Amounts charged to customers for shipping and handling were $2.5 million, $2.2 million and $1.8 million for fiscal years 2020, 2019
and 2018, respectively. The costs related to shipping and handling were $12.8 million, $9.8 million and $5.2 million for fiscal years
2020, 2019 and 2018, respectively. The amounts charged and incurred by the Company related to shipping and handling are included in
net sales and cost of goods sold, respectively.
Collaborative Arrangement
The Company participates in a collaborative arrangement with Rebecca Minkoff, LLC relating to the Rebecca Minkoff and Uri Minkoff
brand names. Both parties to the arrangement are active participants in the collaboration and are exposed to significant risks and rewards
dependent on the commercial success of the activities. The arrangement involves various activities including the design, development,
distribution and marketing of watches under the brand names. Amounts due between the parties to the arrangement related to sales and
related activities are recorded in the Company’s cost of sales while those amounts related to general and administrative activities are
recorded as an adjustment to selling, general and administrative expenses. The Company generated immaterial revenues and incurred
immaterial expenses under its collaborative arrangement during fiscal 2020, 2019 and 2018, respectively.
Income Taxes
The Company, under ASC Topic 740, 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.
The Company follows guidance for accounting for uncertainty in income taxes. This guidance clarifies the accounting for uncertainty
in income taxes recognized in a company’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 for de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and
transitions.
59
The 2017 Tax Act signed into law on December 22, 2017 significantly changed existing U.S. corporate income tax laws by, among
other things, lowering the corporate tax rate from 35% to 21%, limiting the deductibility of interest expense and executive compensation,
implementing a modified territorial tax system, and imposing a one-time mandatory deemed Transition Tax on undistributed foreign
earnings which have not been previously taxed. The SEC also issued SAB 118 which allowed the Company to record provisional
amounts related to the 2017 Tax Act and provided a measurement period of up to one year from the enactment date for companies to
complete their accounting under ASC Topic 740. Under SAB 118, the Company elected to account for the tax on GILTI as a period cost
and therefore has not recorded deferred taxes related to GILTI.
Comparable Stores Sales
The Company considers comparable outlet store sales to be sales of stores that were open as of February 1st of the prior fiscal year
through January 31st of the current fiscal year. The Company had 39 comparable outlet stores for the year ended January 31, 2020. The
sales from stores that have been relocated, renovated or refurbished are included in the calculation of comparable store sales. The method
of calculating comparable store sales varies across the retail industry. As a result, the Company’s method for the calculation of
comparable store sales may not be the same as measures used or reported by other companies.
Earnings Per Share
The Company presents net income/(loss) attributable to Movado Group, Inc. after adjusting for noncontrolling interests, as applicable,
per share on a basic and diluted basis. Basic earnings per share is computed using weighted-average shares outstanding during the period.
Diluted earnings per share is computed using the weighted-average number of shares outstanding adjusted for dilutive common stock
equivalents.
The number of shares used in calculating basic and diluted earnings (loss) per share is as follows (in thousands):
Weighted average common shares outstanding:
Basic
Effect of dilutive securities:
Stock awards and options to purchase shares of common
stock
Diluted
Fiscal Years
Ended
January 31,
2020
2019
2018
23,123
23,197
23,073
174
23,297
403
23,600
—
23,073
For the fiscal years ended January 31, 2020, 2019 and 2018, approximately 447,000, 81,000 and 796,000 respectively, of potentially
dilutive common stock equivalents were excluded from the computation of diluted earnings per share because their effect would have
been antidilutive. For the fiscal year ended January 31, 2018, the Company also had approximately 199,000 stock options outstanding
that could potentially dilute earnings per share in future periods that were excluded from the computation of diluted EPS because their
effect would have been anti-dilutive given the net loss during the period.
Stock-Based Compensation
The Company utilizes the Black-Scholes option-pricing model which requires that certain assumptions be made to calculate the fair
value of each option at the grant date. 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 based on the U.S.
treasury note interest rate in effect on the date of grant for 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 Company’s historical average of annualized dividend yields and applied over the expected term of the
option. Management monitors stock option exercises and employee termination patterns to estimate forfeitures rates within the valuation
model. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes.
In addition to stock options, the Company may also grant stock awards to employees and directors. The stock awards are generally in
the form of time-vesting restricted stock unit awards (pursuant to which unrestricted shares of Common Stock are issued to the grantee
when the award vests) or performance-based awards (under which vesting occurs only if one or more predetermined financial goals are
achieved within the relevant performance period); both are subject to the participant’s continued employment (or board service) with
the Company through such vesting date. Stock awards generally are cliff-vested after three years from the date of grant (one year in the
60
case of directors’ awards). The fair value of stock awards is equal to the closing price of the Company’s publicly-traded common stock
on the grant date.
Compensation expense for all awards is accrued based on the estimated number of instruments for which the requisite service is expected
to be rendered as well as awards expected to be paid in cash. This estimate is reflected in the period the stock option and stock awards
are either granted or canceled. Expense related to stock options and stock awards compensation is recognized on a straight-line basis
over the vesting term.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) attributable to the Movado Group, Inc. and other gains and losses that are
not included in net income (loss), but are recorded directly in the consolidated statements of shareholders’ equity, such as the unrealized
gains and losses on the translation of the assets and liabilities of the Company’s foreign operations, unrealized gains or losses on available
for sale securities and prior service costs actuarial gains (losses) associated with pension benefits, net of tax, that have not been
recognized as components of net periodic benefit cost.
Reclassifications
Certain reclassifications have been made to the fiscal 2018 consolidated financial statement amounts and related note disclosures to
conform to fiscal 2019 presentation. The Company reclassified restricted cash to cash and cash equivalents when reconciling the
beginning of period and end of period total amounts shown on the statement of cash flows in accordance with ASU 2016-18, “Statement
of Cash Flows (Topic 230) — Restricted Cash”.
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. ASU
2019-12 simplifies the accounting for income taxes by removing certain exceptions to general principles in “Income Taxes (Topic 740)”.
It also clarifies and amends existing guidance to improve consistent application. The guidance is effective for fiscal years beginning
after December 15, 2020. The Company is currently evaluating the impact of the adoption of this standard on its related disclosures.
In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework—Changes to the Disclosure Requirements for Fair Value
Measurement”, which modifies the disclosure requirements in ASC 820, Fair Value Measurement. This guidance is effective for fiscal
years beginning after December 15, 2019, which will be the Company’s first quarter of fiscal 2021, with early adoption permitted. The
Company does not expect this standard to have a material impact on the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, which simplifies the accounting for share-based payments granted to nonemployees for
goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements
for share-based payments granted to employees. The Company adopted ASU 2018-07 during the first quarter of fiscal 2020. The
adoption of this guidance did not have an impact on the Company’s consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12. ASU 2017-12 amends and simplifies hedge accounting guidance in order to enable
entities to better portray the economics of their risk management activities. The Company adopted ASU 2017-12 on February 1, 2019,
the first day of fiscal 2020. The adoption of the standard did not have an impact on the Company's consolidated financial statements.
The Company adopted ASU 2016-02, “Leases”, which was further modified in ASU No. 2018-10, “Codification Improvements to Topic
842, Leases”, ASU No. 2018-11, “Leases (Topic 842) Targeted Improvements” and ASU No. 2019-01 “Leases (Topic 842) Codification
Improvements” on February 1, 2019, the first day of fiscal 2020, using the modified retrospective approach and accordingly the
Company recognized a cumulative effect adjustment in the first quarter of fiscal 2020, rather than restating any prior periods. The
Company has elected to use the package of practical expedients permitted under the transition guidance, which does not require
reassessment of prior conclusions related to contracts containing a lease, lease classification and initial direct costs for any expired or
existing leases. The transition practical expedient allows Companies to recognize a cumulative-effect adjustment to the opening balance
of retained earnings in the period of adoption rather than the earliest period presented. The adoption did not result in any adjustments to
the opening balance of retained earnings.
Adoption of ASU 2016-02 resulted in recording right-of-use lease assets of $97.0 million which were reduced to $91.1 million as a
result of $5.9 million of previously recorded deferred rent liabilities and tenant allowances, and lease liabilities of $97.0 million as of
February 1, 2019. The standard did not have a material impact on the Company's consolidated results of operations or cash flows. See
Note 10 – Leases for additional lease disclosures.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments” and subsequently issued additional guidance that modified ASU 2016-13. This standard introduces a forward-
looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables.
61
The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information
and reasonable and supportable forecasts. This may result in the earlier recognition of allowance for losses. This guidance is effective
for fiscal years beginning after December 15, 2019, which will be the Company’s first quarter of fiscal 2021, with early adoption
permitted. The Company does not expect this standard to have a material impact on the Company’s consolidated financial statements.
NOTE 3 – ACQUISITIONS
Australia
On November 22, 2019, the Company entered into an agreement and formed a joint venture with GDL Accessories PTY Ltd. (“GDL”),
an Australian based company. The agreement established a joint venture, MGDL Distribution Pty Ltd (“MGDL”), and set out the terms
in which both parties will govern their relationship as shareholders of MGDL, and terms on which the joint venture will be managed.
The joint venture was formed to more cost effectively market and distribute Movado products to customers in Australia and in New
Zealand (GDL was sole distributor prior to agreement).
The Company contributed $0.9 million Australian dollars, or $0.6 million US dollars to the joint venture and is a 51% interest holder.
The Company controls all of the significant participating rights of the joint venture. As the Company controls all of the significant
participating rights of the joint venture and is the majority interest holder in MGDL, the assets, liabilities and results of operations of
the joint venture are consolidated and included in the Company’s consolidated financial statements. GDL’s interest is reflected in Net
income attributable to noncontrolling interest in the Consolidated Statements of Operations and Noncontrolling interest in the
Consolidated Balance Sheets. As of January 31, 2020, all amounts in the consolidated financial statements related to MGDL were
immaterial.
City Time
On December 3, 2018, the Company acquired 51% of City Time Distribucion, S.L.U, (“City Time”), the Company’s distributor in Spain,
and simultaneously signed a joint venture agreement. The purchase price was $4.2 million Euros, or $4.8 million, net of cash acquired,
and was funded with cash on hand. The results of City Time have been included in the consolidated financial statements since the date
of acquisition within the International locations of the Watch and Accessory Brands segment. Of the total purchase consideration, there
were no material amounts allocated to assets acquired and liabilities assumed.
Pursuant to the joint venture agreement, the noncontrolling interest holder has the right to sell its interest in City Time to the Company
on two specific dates in the future. The noncontrolling interest is not redeemable until such dates. The Company will adjust the carrying
value of the redeemable interest to the redemption amount assuming it was redeemable at the balance sheet date. At January 31, 2020,
the Company concluded that the remeasurement adjustment is immaterial. If the noncontrolling interest holder does not exercise its right
to sell its interest in City Time to the Company, the Company nevertheless has the option to purchase the noncontrolling interest holder’s
interest on each of the same two dates and at the same price as would have applied if the noncontrolling interest holder had exercised
its sale option.
MVMT
On October 1, 2018, the Company acquired MVMT Watches, Inc., owner of MVMT, for an initial payment of $100.0 million and two
future contingent payments that combined could total up to an additional $100.0 million before tax benefits. The exact amount of the
future payments will be determined by MVMT's future financial performance with no minimum required future payment. After giving
effect to the closing adjustments, the purchase price was $108.4 million, net of cash acquired of $3.8 million. The acquisition was funded
with cash on hand and adds a new brand with significant global growth potential to the Company’s portfolio.
The results of the MVMT brand have been included in the consolidated financial statements since the date of acquisition within the U.S.
and International locations of the Watch and Accessory Brands segment. For the fiscal year ended January 31, 2020 and 2019,
consolidated operating income included $4.6 million and $14.4 million, respectively, of expenses primarily related to acquisition costs,
amortization of acquired intangible assets and adjustments in acquisition accounting, as a result of the Company’s acquisition of MVMT.
The acquisition was accounted for in accordance with FASB Topic ASC 805-Business Combinations, which requires that the total cost
of an acquisition be allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values
at the date of acquisition.
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The following table summarizes the fair value of the assets acquired and liabilities assumed as of the October 1, 2018, acquisition date
(in thousands):
Assets Acquired and Liabilities Assumed
Cash and cash equivalents
Trade receivables
Inventories
Prepaid expenses and other current assets
Property, plant and equipment
Other non-current assets
Goodwill
Trade name and other intangibles
Total assets acquired
Accounts payable
Accrued liabilities
Other non-current liabilities
Total liabilities assumed
Total purchase price
Fair Value
3,848
370
14,552
2,325
179
6,500
77,542
28,928
134,244
5,982
9,018
7,064
22,064
112,180
$
$
Inventories (as of October 1, 2018) included a step-up adjustment of $0.7 million, which was amortized over 5 months. The components
of Trade name and other intangibles (as of October 1, 2018) included a trade name of $24.7 million (amortized over 10 years), and
customer relationships of $4.2 million (amortized over 10 years).
The acquisition agreement also includes a contingent consideration arrangement based on the MVMT brand achieving certain revenue
and EBITDA (as defined in the acquisition agreement) targets. In connection therewith, the Company recorded a non-current liability
of $16.5 million as of the date of acquisition to reflect the estimated fair value of the contingent purchase price. $14.5 million was
allocated to purchase price and $2.0 million to deferred compensation expense based on future employee service requirements.
The estimated fair value of the contingent consideration was determined using a Monte Carlo simulation that includes key assumptions
regarding MVMT’s projected financial performance during the earn-out period (through 2023), volatilities, estimated discount rates,
risk-free interest rate, and correlation. Each reporting period after the acquisition, the Company remeasures the fair value of the
contingent purchase price liability and will record increases or decreases in the fair value of the liability in its Consolidated Statements
of Operations. Changes in fair value will result from changes in actual and projected financial performance, discount rates, volatilities,
and the other key assumptions. The inputs and assumptions are not observable in the market but reflect the assumptions the Company
believes would be made by a market participant. The possible outcomes for the contingent consideration range from $0 to $100 million
on an undiscounted basis. As a result, changes in the estimated fair value of the contingent consideration over time may result in
significant volatility in the Company’s reported earnings.
The contingent purchase price liability had been remeasured at July 31, 2019 to $1.9 million and to zero at January 31, 2020. Of the
$16.9 million decrease in the liability, $15.4 million is included in non-operating income (portion of contingent consideration allocated
to purchase price) in the Consolidated Statements of Operations for the year ended January 31, 2020, and $0.5 million and $1.0 million
are reflected as a reduction of deferred compensation (portion of contingent consideration allocated to deferred compensation based on
future service requirements) within other current assets and other non-current assets, respectively, in the Consolidated Balance Sheets.
In connection with the remeasurement of the contingent consideration during the fiscal year ended January 31, 2020, the Company
assessed the undiscounted cash flows associated with the long-lived assets pertaining to MVMT. Current estimates indicate that carrying
amounts are expected to be recovered. The undiscounted cash flows related to the MVMT long-lived assets as of January 31, 2020
exceeded the carrying value by approximately 33%. Given the relatively small excess of fair value over carrying value, if profitability
trends decline during fiscal 2021 from those that are expected, it is possible that a triggering event test, whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be recoverable, could result in an impairment of these assets. Refer
to Note 8 for further discussion of fair value measurements.
The Company recorded goodwill (as of October 1, 2018) of $77.5 million based on the amount by which the purchase price exceeded
the fair value of the net assets acquired. As the structure of the acquisition allowed for a step up in basis for tax purposes, the full amount
of the goodwill balance will be deductible for federal income tax purposes over 15 years.
63
The following table provides the Company’s unaudited pro forma net sales, net income and net income per basic and diluted common
share as if the results of operations of the MVMT brand had been included in the Company’s operations commencing on February 1,
2018, based on available information relating to operations of the MVMT brand. This pro forma information is not necessarily indicative
either of the combined results of operations that actually would have been realized by the Company had the MVMT brand acquisition
been consummated at the beginning of the period for which the pro forma information is presented, or of future results.
(In thousands, except per share data)
Net sales
Net income attributable to Movado Group,
Inc.
Basic income per share:
Net income per share attributable to Movado
Group, Inc.
Diluted income per share:
Net income per share attributable to Movado
Group, Inc.
Fiscal Year Ended
January 31,
2020
2019 (1)
(Unaudited)
$
$
700,966 $
42,699 $
712,587
56,995
$
1.85 $
2.46
$
1.83 $
2.42
(1)
Includes non-recurring transaction costs of $7.0 million associated with the acquisition.
Olivia Burton
On July 3, 2017, the Company, through a wholly-owned U.K. subsidiary, acquired JLB Brands Ltd. (“JLB”), the owner of the Olivia
Burton brand, which was one of the United Kingdom’s fastest growing fashion watch and jewelry brands, for $78.2 million, or £60.0
million in cash, subject to working capital and other closing adjustments. After giving effect to the closing adjustments, the purchase
price was $79.0 million, or £60.7 million, net of cash acquired of $5.9 million, or £4.5 million. The acquisition was funded with cash
on hand of the Company’s non-U.S. subsidiaries, and no debt was assumed in the acquisition. The acquisition added a new brand with
significant global growth potential to the Company’s portfolio.
The results of JLB’s operations have been included in the consolidated financial statements since the date of acquisition within the
International locations of the Watch and Accessory Brands segment. In the Watch and Accessory Brands segment, for the fiscal year
ended January 31, 2020, 2019 and 2018, operating income included $2.8 million, $2.9 million and $6.8 million, respectively, of expenses
primarily related to transaction costs and adjustments in acquisition accounting, as a result of the Company’s purchase of JLB.
The acquisition was accounted for in accordance with ASC 805, which requires that the total cost of an acquisition be allocated to the
tangible and intangible assets acquired and liabilities assumed based upon their respective fair values at the date of acquisition.
The following table summarizes the fair value of the assets acquired and liabilities assumed as of the July 3, 2017 acquisition date (in
thousands):
Assets Acquired and Liabilities Assumed
Cash and cash equivalents
Trade receivables, net
Inventories
Prepaid expenses and other current assets
Property, plant and equipment, net
Goodwill
Trade name and other intangibles
Total assets acquired
Accounts payable
Accrued liabilities
Income taxes payable
Deferred and non-current income taxes payable
Total liabilities assumed
Total purchase price
64
Fair Value
5,909
3,106
4,164
913
131
55,322
21,415
90,960
608
844
643
3,965
6,060
84,900
$
$
Inventories (as of July 3, 2017) included a step-up adjustment of $0.8 million, which was expensed over the sell-through cycle of three
months. The components of Trade name and other intangibles (as of July 3, 2017) include a trade name of $12.8 million (amortized over
10 years), and customer relationships of $8.6 million (amortized over 6 years).
The Company recorded goodwill (as of July 3, 2017) of $55.3 million based on the amount by which the purchase price exceeded the
fair value of the net assets acquired. Goodwill related to the acquisition of the Olivia Burton brand is not deductible for income tax
purposes.
The operating results of JLB have been included in the Company’s Consolidated Financial Statements beginning July 3, 2017. Net sales
and operating income of JLB since the date of acquisition through January 31, 2018 were $17.8 million and $5.3 million, respectively.
JLB’s operating results exclude sales recognized and expenses incurred by certain wholly-owned subsidiaries of the Company in support
of the Olivia Burton brand.
During fiscal 2020, there were no events or changes in circumstances which indicate, in management’s judgement, that the carrying
value of the Olivia Burton assets may not be recoverable.
Goodwill and Intangible Assets
The changes in the carrying amount of goodwill during the fiscal years ended January 31, 2020, 2019 and 2018 are as follows (in
thousands):
Balance at January 31, 2018
Acquisition of MVMT
Acquisition of City Time
Foreign exchange impact
Balance at January 31, 2019
Foreign exchange impact
Balance at January 31, 2020
JLB (2)
Total
MVMT (1) City Time (2)
— $
$
77,542
—
—
77,542
—
77,542 $
— $ 60,269 $ 60,269
77,542
—
-
2,833
2,833
-
(4,629 )
(4,611 )
18
55,640 136,033
2,851
(88 )
333
56,061 136,366
2,763
421
$
(1) Goodwill associated with the MVMT brand is included in the United States locations of the Watch and Accessory Brands segment.
(2) Goodwill associated with City Time and JLB are included in the International locations of the Watch and Accessory Brands
segment.
At November 1, 2019, the Company evaluated goodwill for impairment. There were no indicators of impairment under this analysis
and, accordingly, no impairment charge was recorded in fiscal 2020.
65
The changes in the carrying amount of other intangible assets during the fiscal years ended January 31, 2020, 2019 and 2018 are as
follows (in thousands):
Weighted Average Amortization Period (in years)
Balance at January 31, 2017
Acquisition of JLB
Additions
Amortization
Foreign exchange impact
Balance at January 31, 2018
Acquisition of MVMT
Acquisition of City-Time
Additions
Amortization
Foreign exchange impact
Balance at January 31, 2019
Additions
Amortization
Foreign exchange impact
Balance at January 31, 2020
Trade names
10
$
$
— $
12,797
—
(781 )
1,080
13,096
24,700
—
—
(2,126 )
(899 )
34,771
—
(3,723 )
27
31,075 $
Customer
relationships Other (1)
Total
7
— $
8,618
—
(876 )
715
8,457
4,200
1,672
—
(1,628 )
(520 )
12,181
—
(1,991 )
(36 )
10,154 $
9
1,633 $
—
556
(434 )
(184 )
1,571
28
—
492
(597 )
(263 )
1,231
255
(377 )
21
1,130 $
1,633
21,415
556
(2,091 )
1,611
23,124
28,928
1,672
492
(4,351 )
(1,682 )
48,183
255
(6,091 )
12
42,359
(1) Other includes fees paid related to trademarks and non-compete agreement related to Olivia Burton brand.
The estimated future amortization expense during each of the next five fiscal years is as follows:
For the fiscal year ending January 31,
2021
2022
2023
2024
2025
Thereafter
Total estimated future amortization expense
(in thousands)
6,079
$
6,013
5,980
5,105
4,483
14,699
42,359
$
NOTE 4 – INVENTORIES
Inventories consisted of the following (in thousands):
Finished goods
Component parts
Work-in-process
As of January 31,
2020
125,603 $
41,708
4,095
171,406 $
2019
123,947
39,752
1,612
165,311
$
$
66
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT
A summary of the components of property, plant and equipment and their estimated useful lives is as follows (in thousands):
As of January 31,
2020
2019
Estimated Useful Lives
Land and buildings
Furniture and equipment
Computer software
Leasehold improvements
Design fees and tooling costs
$
1,212 $
56,800
34,151
38,155
2,867
133,185
Less: Accumulated depreciation and
amortization
Property, plant and equipment, net
$
(103,947 )
29,238 $
1,176 40 years for buildings
52,314 4 to 10 years
33,289 5 to 10 years
36,727 Lesser of lease term or useful life
2,250 3 years
125,756
(99,689 )
26,067
Depreciation and amortization expense from operations related to property, plant and equipment for fiscal 2020, 2019 and 2018 was
$10.1 million, $9.4 million and $11.8 million, respectively, which includes computer software amortization expense for fiscal 2020,
2019 and 2018 of $2.4 million, $3.2 million and $3.6 million, respectively.
NOTE 6 – DEBT AND LINES OF CREDIT
On October 12, 2018, the Company, together with Movado Group Delaware Holdings Corporation, Movado Retail Group, Inc. and
Movado LLC (together with the Company, the “U.S. Borrowers”), each a wholly-owned domestic subsidiary of the Company, and
Movado Watch Company S.A. and MGI Luxury Group S.A. (collectively, the “Swiss Borrowers” and, together with the U.S. Borrowers,
the “Borrowers”), each a wholly-owned Swiss subsidiary of the Company, entered into an Amended and Restated Credit Agreement
(the “Credit Agreement”) with the lenders party thereto and Bank of America, N.A. as administrative agent (in such capacity, the
“Agent”). The Credit Agreement amends and restates the Company’s prior credit agreement dated as of January 30, 2015 (the “Prior
Credit Agreement”) and extends the maturity of the $100.0 million senior secured revolving credit facility (the “Facility”) provided
thereunder to October 12, 2023. The Facility includes a $15.0 million letter of credit subfacility, a $25.0 million swingline subfacility
and a $75.0 million sublimit for borrowings by the Swiss Borrowers, with provisions for uncommitted increases to the Facility of up to
$50.0 million in the aggregate subject to customary terms and conditions.
As of January 31, 2020, and January 31, 2019, there were 50.0 million in Swiss Francs for both periods (with a dollar equivalent of
$51.9 million and $50.3 million, respectively), in loans outstanding under the Facility. Availability under the Facility was reduced by
the aggregate number of letters of credit outstanding, issued in connection with retail and operating facility leases to various landlords
and for Canadian payroll to the Royal Bank of Canada, totaling approximately $0.3 million at both January 31, 2020 and January 31,
2019. At January 31, 2020, the letters of credit have expiration dates through June 1, 2020. As of January 31, 2020, and January 31,
2019, availability under the Facility was $47.8 million and $49.4 million, respectively.
The Company had weighted average borrowings under the Facility of $51.1 million and $15.8 million, with a weighted average interest
rate of 1.00% and 1.25% during fiscal 2020 and 2019, respectively.
Borrowings under the Credit Agreement bear interest at rates based on either LIBOR or a specified base rate, as selected periodically
by the Company. The LIBOR-based loans bear interest at LIBOR plus a spread ranging from 1.00% to 1.75% per annum and the base
rate loans bear interest at the base rate plus a spread ranging from 0% to 0.75% per annum, with the spread in each case being based on
the Company’s consolidated leverage ratio (as defined in the Credit Agreement). As of January 31, 2020, the Company’s spreads were
1.25% over LIBOR and 0.25% over the base rate. As of January 31, 2019, the Company’s spreads were 1.00% over LIBOR and 0%
over the base rate. Prior to October 12, 2018, borrowings under the Prior Credit Agreement bore interest at LIBOR plus a spread ranging
from 1.25% to 1.75% per annum or at a base rate plus a spread ranging from 0.25% to 0.75% per annum, with the spread in each case
being based on the Company’s consolidated leverage ratio. Under the Credit Agreement, the Company also agreed to pay certain fees
and expenses, included in interest expense in the consolidated statements of operations, and to provide certain indemnities, all of which
are customary for such financings.
67
The borrowings under the Facility are joint and several obligations of the Borrowers and are also cross-guaranteed by each Borrower,
except that the Swiss Borrowers are not liable for, nor do they guarantee, the obligations of the U.S. Borrowers. In addition, the
Borrowers’ obligations under the Facility are secured by first priority liens, subject to permitted liens, on substantially all of the U.S.
Borrowers’ assets other than certain excluded assets. The Swiss Borrowers do not provide collateral to secure the obligations under the
Facility. The security agreement under the Company’s existing credit agreement remains in place in connection with the Facility and
contains customary representations and warranties and covenants relating to the creation and perfection of security interests in favor of
the Agent over various categories of the U.S. Borrowers’ assets.
The Credit Agreement contains affirmative and negative covenants binding on the Company and its subsidiaries that are customary for
credit facilities of this type, including, but not limited to, restrictions and limitations on the incurrence of debt and liens, dispositions of
assets, capital expenditures, dividends and other payments in respect of equity interests, the making of loans and equity investments,
mergers, consolidations, liquidations and dissolutions, and transactions with affiliates (in each case, subject to various exceptions).
A Swiss subsidiary of the Company maintains unsecured lines of credit with an unspecified maturity with a Swiss bank. As of January 31,
2020, and 2019, these lines of credit totaled 6.5 million Swiss Francs for both periods, with a dollar equivalent of $6.7 million and
$6.5 million, respectively. As of January 31, 2020, and 2019, there were no borrowings against these lines. As of January 31, 2020, and
2019, two European banks had guaranteed obligations to third parties on behalf of two of the Company’s foreign subsidiaries in the
dollar equivalent of $1.2 million in various foreign currencies, of which $0.6 million and $0.5 million, respectively, was a restricted
deposit as it relates to lease agreements.
During fiscal 2019, the Company incurred and capitalized $0.7 million of fees related to the amendment. These fees, along with the
unamortized fees of $0.3 million paid related to the base Credit Agreement, are being amortized on a straight-line basis over 60 months,
the revised term of the Facility, and are included in other non-current assets on the consolidated balance sheets.
Cash paid for interest, including unused commitment fees, during fiscal 2020, 2019 and 2018 was $0.7 million, $0.5 million and $1.2
million, respectively.
NOTE 7 – DERIVATIVE FINANCIAL INSTRUMENTS
As of January 31, 2020, the Company’s entire net forward contracts hedging portfolio consisted of 42.1 million Chinese Yuan
equivalent, 22.0 million Swiss Francs equivalent, 17.9 million US dollars equivalent, 29.9 million Euros equivalent and 4.4 million
British Pounds equivalent with various expiry dates ranging through July 8, 2020. These forward contracts are not designated as qualified
hedges in accordance with ASC 815, Derivatives and Hedging, and, therefore, changes in the fair value of these derivatives are
recognized in earnings in the period they arise. Net gains or losses related to these forward contracts are included in cost of sales, selling
and general and administrative expenses in the Consolidated Statements of Operations. The cash flows related to these foreign currency
contracts are classified in operating activities.
See Note 8 for fair value and presentation in the Consolidated Balance Sheets for derivatives.
For the year ended January 31, 2020, the Company did not have any cash flow hedges.
NOTE 8 - FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Accounting guidance establishes a fair value hierarchy which prioritizes the inputs used in
measuring fair value into three broad levels as follows:
• Level 1 - Quoted prices in active markets for identical assets or liabilities.
• Level 2 - Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
• Level 3 - Unobservable inputs based on the Company’s assumptions.
The guidance requires the use of observable market data if such data is available without undue cost and effort.
68
The following tables present the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of
January 31, 2020 and 2019 (in thousands):
Assets:
Available-for-sale securities
Short-term investment
SERP assets - employer
SERP assets - employee
Defined benefit plan assets (1)
Hedge derivatives
Total
Liabilities:
SERP liabilities - employee
Contingent consideration
Total
Assets:
Available-for-sale securities
Short-term investment
SERP assets - employer
SERP assets - employee
Defined benefit plan assets (1)
Hedge derivatives
Total
Liabilities:
SERP liabilities - employee
Hedge derivatives
Contingent consideration
Total
Balance Sheet Location
Level 1
Level 2
Level 3
Total
Fair Value at January 31, 2020
Other current assets
Other current assets
Other non-current assets
Other non-current assets
Other non-current liabilities
Other current assets
Other non-current liabilities
Other non-current liabilities
$
$
$
$
184 $
156
988
45,256
—
—
46,584 $
45,264 $
—
45,264 $
— $
—
—
—
—
347
347 $
— $
—
— $
— $
—
—
—
24,227
—
24,227 $
184
156
988
45,256
24,227
347
71,158
— $
—
— $
45,264
—
45,264
Balance Sheet Location
Level 1
Level 2
Level 3
Total
Fair Value at January 31, 2019
Other current assets
Other current assets
Other non-current assets
Other non-current assets
Other non-current liabilities
Other current assets
Other non-current liabilities
Accrued liabilities
Other non-current liabilities
$
$
$
$
177 $
155
860
38,170
—
—
39,362 $
38,170 $
—
—
38,170 $
— $
—
—
—
—
22
22 $
— $
—
—
—
33,223
—
33,223 $
— $
156
—
156 $
— $
—
16,718
16,718 $
177
155
860
38,170
33,223
22
72,607
38,170
156
16,718
55,044
(1) See Note 16 for a discussion of the fair value of the assets held in the Company’s defined benefit plan in Switzerland.
The fair values of the Company’s available-for-sale securities are based on quoted prices. The fair value of the short-term investment,
which is a guaranteed investment certificate, is based on its purchase price plus one half of a percent calculated annually. The assets
related to the Company’s defined contribution supplemental executive retirement plan (“SERP”) consist of both employer (employee
unvested) and employee assets which are invested in investment funds with fair values calculated based on quoted market prices. The
SERP liability represents the Company’s liability to the employees in the plan for their vested balances. The hedge derivatives are
entered into by the Company principally to reduce its exposure to Swiss Franc and Euro exchange rate risks. Fair values of the
Company’s hedge derivatives are calculated based on quoted foreign exchange rates and quoted interest rates. The carrying amount of
debt approximated fair value as of January 31, 2020 and January 31, 2019, due to the availability and floating rate for similar instruments.
The Company sponsors a pension plan in Switzerland which was amended to a defined benefit plan effective December 31, 2018. The
plan covers certain international employees and is based on years of service and compensation on a career-average pay basis. The assets
within the plan are classified as a Level 3 asset within the fair value hierarchy and consist of an investment in pooled assets and include
separate employee accounts that are invested in equity securities, debt securities and real estate. The values of the separate accounts
invested are based on values provided by the administrator of the funds that cannot be readily derived from or corroborated by observable
market data. The value of the assets is part of the funded status of the defined benefit plan and included in other non-current liabilities
in the consolidated balance sheets at January 31, 2020 and January 31, 2019.
69
The contingent purchase price liability related to the acquisition of MVMT Watches, Inc., owner of the MVMT brand, is considered a
Level 3 liability. This liability is measured using a Monte Carlo simulation with key assumptions that include revenue and brand
EBITDA, (as defined in the acquisition agreement) of the acquired business during the earn-out period, volatilities, estimated discount
rates, risk-free rate, and correlation. The liability is revalued each reporting period after the acquisition and increases or decreases in the
fair value of the liability are recorded in the Consolidated Statements of Operations. Changes in fair value can result from the estimated
achievement of the revenue and brand EBITDA performance hurdles, and movements in discount rates, volatilities, and the other key
assumptions. The inputs and assumptions are not observable in the market but reflect the assumptions the Company believes would be
made by a market participant. The possible outcomes for the contingent consideration range from $0 to $100 million on an undiscounted
basis. As a result, changes in the estimated fair value of the contingent consideration over time may result in significant volatility in the
Company’s reported earnings.
Based on updated revenue and EBITDA (as defined in the acquisition agreement) performance expectations during the earn-out period
for MVMT, the Company remeasured the contingent consideration to $1.9 million at July 31, 2019 and to zero at January 31, 2020. Of
the $16.9 million decrease in the liability, $15.4 million is included in non-operating income (portion of contingent consideration
allocated to purchase price) in the Consolidated Statements of Operations for the year ended January 31, 2020, and 0.5 million and $1.0
million are reflected as a reduction of deferred compensation (portion of contingent consideration allocated to deferred compensation
based on future service requirements) within other current assets and other non-current assets, respectively, in the Consolidated Balance
Sheets. As the remeasurement is not a direct benefit realized from operating the MVMT business, the Company has recorded the change
in contingent consideration within non-operating income in the Consolidated Statements of Operations and, as such, has not included it
in operating income for the Watch and Accessory Brands segment. Refer to Note 18 for Segment and Geographic Information.
The following table presents the change in the Level 3 contingent purchase price liability during the twelve months ended January 31,
2020:
(In thousands)
Balance at the beginning of the period
Acquisition of MVMT
Payments
Adjustments included in income before income taxes
Adjustments to deferred compensation
Ending balance
Fiscal
Year Ended
January 31,
2020
Fiscal
Year Ended
January 31,
2019
$
$
16,718 $
—
—
(15,159 )
(1,559 )
— $
—
16,500
—
—
218
16,718
There were no transfers between any levels of the fair value hierarchy for any of the Company’s fair value measurements.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Licensing Agreements:
The Company has minimum commitments related to the Company’s license agreements and endorsement agreements with brand
ambassadors. The Company sources, distributes, advertises and sells watches pursuant to its exclusive license agreements with
unaffiliated licensors. Royalty amounts under the license agreements are generally based on a stipulated percentage of revenues,
although most of these agreements contain provisions for the payment of minimum annual royalty amounts. The license agreements
have various terms, and some have renewal options, provided that minimum sales levels are achieved. Additionally, the license
agreements require the Company to pay minimum annual advertising amounts. As of January 31, 2020, the total amount of the
Company’s minimum commitments related to its license agreements and endorsement agreements was $263.0 million, payable in the
next six years.
Operating Lease Commitments:
The Company leases office, distribution, retail and manufacturing facilities, and office equipment under operating and finance leases,
which expire at various dates through June 2030. Certain leases include renewal options and the payment of real estate taxes and other
occupancy costs. Some leases also contain rent escalation clauses (step rents) that require additional rent amounts in the later years of
the term. Rent expense for leases with step rents is recognized on a straight-line basis over the minimum lease term. Rent expense for
equipment and distribution, factory and office facilities under operating and finance leases was $26.9 million, $20.2 million and $17.8
million in fiscal 2020, 2019 and 2018, respectively.
70
Minimum annual rentals under noncancelable operating and finance leases as of January 31, 2020, excluding real estate taxes and
operating costs, are as follows (in thousands):
2021
2022
2023
2024
2025
Thereafter
Fiscal Year
Ending
January 31,
$
$
18,399
16,945
14,726
13,918
11,343
36,435
111,766
Purchase Obligations:
The Company had outstanding purchase obligations of $69.2 million with suppliers at the end of fiscal 2020 primarily for raw materials,
finished watches and packaging in the normal course of business. These purchase obligation amounts do not represent total anticipated
purchases but represent only amounts to be paid for items required to be purchased under agreements that are enforceable, legally
binding and specify minimum quantity, price and term.
Tax:
The Company had previously recorded an obligation of $28.2 million due to the 2017 Tax Act, which was signed into law on December
22, 2017 and imposed a one-time mandatory deemed repatriation tax on cumulative undistributed foreign earnings which have not been
previously taxed. The obligation, which was recorded in prior years, is payable in installments over eight years, with the first payment
having been made in the second quarter of fiscal 2019. At January 31, 2020, the Company had an outstanding obligation of $23.8
million.
The Company believes that income tax reserves are adequate; however, amounts asserted by taxing authorities could be greater or less
than amounts accrued and reflected in the consolidated balance sheet. Accordingly, the Company could record adjustments to the
amounts for federal, state, and foreign liabilities in the future as the Company revises estimates or settles or otherwise resolves the
underlying matters. In the ordinary course of business, the Company may take new positions that could increase or decrease
unrecognized tax benefits in future periods.
Acquisition Related:
The purchase consideration for the MVMT business includes two future contingent payments that combined could total up to $100
million. Based on updated revenue and EBITDA (as defined in the acquisition agreement) performance expectations during the earn-
out period for MVMT, the Company remeasured the contingent consideration to zero at January 31, 2020 (see Note 3 – Acquisitions
and Note 8 – Fair Value Measurements).
Litigation:
The Company is involved in legal proceedings and claims from time to time, in the ordinary course of its business. Legal reserves are
recorded in accordance with the accounting guidance for contingencies. Contingencies are inherently unpredictable and it is possible
that results of operations, balance sheets or cash flows could be materially and adversely affected in any particular period by unfavorable
developments in, or resolution or disposition of, such matters. For those legal proceedings and claims for which the Company believes
that it is probable that a reasonably estimable loss may result, the Company records a reserve for the potential loss. For proceedings and
claims where the Company believes it is reasonably possible that a loss may result that is materially in excess of amounts accrued for
the matter, the Company either discloses an estimate of such possible loss or range of loss or includes a statement that such an estimate
cannot be made.
On October 23, 2018, Swiss Time Watch & Jewellry GmbH (“ST Germany”) filed a lawsuit against the Company in the Superior Court
of California for the County of Los Angeles. The lawsuit, which was subsequently moved to the United States District Court for the
Central District of California, primarily alleged that the Company, as legal successor to MVMT Watches, Inc., failed to perform its
obligations under the parties’ August 1, 2018 distribution agreement (the “ST Germany Agreement”). Under this agreement, ST
Germany was granted the right, subject to certain limitations, to distribute a curated collection of MVMT watch styles in Germany. ST
Germany also alleged various related torts and statutory violations and sought specific performance of the ST Germany Agreement as
well as unspecified monetary damages. In February 2019, the parties settled the matter and the lawsuit was subsequently dismissed. The
71
settlement terms included an immaterial cash payment by the Company and certain amendments to the ST Germany Agreement,
including an extension of the agreement through early fiscal 2023.
In December 2016, U.S. Customs and Border Protection (“U.S. Customs”) issued an audit report concerning the methodology used by
the Company to allocate the cost of certain watch styles imported into the U.S. among the component parts of those watches for tariff
purposes. The report disputes the reasonableness of the Company’s historical allocation formulas and proposes an alternative
methodology that would imply $5.1 million in underpaid duties over the five-year period covered by the statute of limitations, plus
possible penalties and interest. The Company believes that U.S. Customs’ alternative duty methodology and estimate are not consistent
with the Company’s facts and circumstances and is disputing U.S. Customs’ position. On February 24, 2017, the Company provided
U.S. Customs with supplemental analyses and information supporting the Company’s historical allocation formulas and thereafter
provided additional information for U.S. Customs’ review. Although the Company disagrees with U.S. Customs’ position, it cannot
predict with any certainty the outcome of this matter. The Company intends to continue to work with U.S. Customs to reach a mutually-
satisfactory resolution.
In addition to the above matters, as of January 31, 2020, the Company is involved in other legal proceedings and contingencies, the
resolution of which is not expected to materially affect its financial condition, future results of operations or cash flows.
NOTE 10 – LEASES
The Company leases certain real estate properties, vehicles and equipment in various countries around the world. Leased properties are
typically used for retail, office and distribution.
The Company evaluates contractual arrangements at inception to determine if individual agreements are a lease or contain an identifiable
lease component as defined by ASC 842. When evaluating contracts to determine appropriate classification and recognition under ASC
842, significant judgment may be necessary to determine, among other criteria, if an embedded leasing arrangement exists, the length
of the term, classification as either an operating or financing lease and whether renewal or termination options are reasonably certain to
be exercised. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation
to make lease payments arising from the lease. These assets and liabilities are recognized on the lease commencement date based on the
present value of lease payments over the lease term calculated using the Company’s incremental borrowing rate, adjusted for the lease
term and lease country, unless the implicit rate is readily determinable. Lease assets also include any upfront lease payments made and
are reduced by lease incentives. The Company’s leases are classified as operating leases with remaining terms of 1 to 11 years, some of
which include an option to extend or renew. If the exercise of an option to extend or renew is determined to be reasonably certain, the
associated right-of-use asset and liability reflects the extended period of payments.
Lease expense for operating leases consist of both fixed and variable components. Expenses related to fixed lease payments are
recognized on a straight-line basis over the lease term. Variable lease payments are generally expensed as incurred and include certain
index-based changes in rent, certain non-lease components such as maintenance and other services provided by the lessor and other
charges included in the lease. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The depreciable life
of lease assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option
reasonably certain of exercise.
The components of lease expense were as follows (in thousands):
Lease Expense
Operating lease expense
Short-term lease cost
Variable lease cost
Total operating lease expense
Finance lease cost:
Amortization of right-of-use assets
Interest on lease liabilities
72
Consolidated
Statements of
Operation
Location
SG&A
SG&A
SG&A
For the Year
Ended
January 31, 2020
19,301
$
736
9,229
29,266
$
SG&A
Interest
expense
$
$
117
13
The following table discloses supplemental balance sheet information for the Company’s leases (in thousands):
Assets
Operating
Finance
Liabilities
Current:
Operating
Finance
Noncurrent:
Operating
Finance
Leases
Consolidated Balance Sheets Location
Operating lease right-of-use assets
Other non-current assets
Current operating lease liabilities
Accrued liabilities
Non-current operating lease liabilities
Other non-current liabilities
January 31,
2020
$ 89,523
282
$
$ 15,083
117
$
$ 81,877
170
$
The following table discloses the weighted-average remaining lease term and weighted-average discount rate for the Company's leases:
Lease Term and Discount Rate
Weighted-average remaining lease term - in years
January 31, 2020
Operating leases
Finance leases
Weighted-average discount rate:
Operating leases
Finance leases
7.4
2.4
3.71 %
3.86 %
Future minimum lease payments by year as of January 31, 2020 were as follows (in thousands):
Fiscal Year
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less: Interest
Total lease obligations
Operating Leases Finance Leases
125
$
125
50
-
-
-
300
(13 )
287
18,274 $
16,820
14,676
13,918
11,343
36,435
111,466 $
(14,506 )
96,960 $
$
$
Future minimum lease payments by year as of January 31, 2019 were as follows (in thousands):
Fiscal Year Ending January 31,
2020
2021
2022
2023
2024
Thereafter
$
$
14,036
11,325
10,135
8,279
7,683
35,020
86,478
73
Supplemental cash flow information related to leases was as follows (in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
Leased assets obtained in exchange for new operating lease liabilities
Leased assets obtained in exchange for new financing lease liabilities
Year Ended
January 31, 2020
$
17,637
13
112
9,863
399
As of January 31, 2020, the Company did not have any material operating or finance leases that have been signed but not commenced.
NOTE 11 - INCOME TAXES
Income/(loss) before provision/(benefit) for income taxes for the fiscal year ended January 31, 2020, 2019, and 2018 on a legal entity
basis consists of the following (in thousands):
U.S. income/(loss) before taxes
Non-U.S. income before taxes
Income before income taxes
2020
2019
2018
$
$
(1,226 ) $
58,729
57,503 $
6,795 $
54,938
61,733 $
11,731
30,411
42,142
The Company conducts business globally and, as a result, is subject to income taxes in the U.S. federal, state, local and foreign
jurisdictions. In the normal course of business, the Company is subject to examinations by taxing authorities in many countries, such as
Germany, Hong Kong, Switzerland and the United States. The Company is no longer subject to income tax examination for years ended
prior to January 31, 2016, with few exceptions.
Cash paid for income taxes during fiscal 2020, 2019, and 2018 was $16.0 million, $9.5 million and $20.4 million respectively.
The provision (benefit) for income taxes for the fiscal years ended January 31, 2020, 2019 and 2018 consists of the following components
(in thousands):
Current:
U.S. Federal
U.S. State and Local
Non-U.S.
Deferred:
U.S. Federal
U.S. State and Local
Non-U.S.
Provision for income taxes
2020
2019
2018
$
$
558 $
905
9,309
10,772
2,337
107
1,908
4,352
15,124 $
6,665 $
3,556
8,775
18,996
(12,706 )
(2,339 )
(3,789 )
(18,834 )
162 $
31,599
960
7,145
39,704
16,671
622
370
17,663
57,367
74
Significant components of the Company’s deferred income tax assets and liabilities for the fiscal years ended January 31, 2020 and 2019
are as follows (in thousands):
Net operating loss carryforwards
Inventory
Unprocessed returns
Receivables allowances
Deferred compensation
Unrepatriated earnings
Depreciation/amortization
Other provisions/accruals
Deferred occupancy costs
Miscellaneous
Valuation allowance
Total deferred tax assets and liabilities
2020 Deferred Taxes
2019 Deferred Taxes
Assets
Liabilities
Assets
Liabilities
$
$
7,597 $
1,557
898
301
15,643
2,826
—
1,555
1,803
323
32,503
(5,481 )
27,022 $
— $
—
—
—
—
—
4,289
—
—
—
4,289
—
4,289 $
9,738 $
1,848
980
336
14,953
—
—
1,498
1,222
271
30,846
(5,257 )
25,589 $
—
—
—
—
—
3,540
1,212
—
—
—
4,752
—
4,752
As of January 31, 2020, the Company had no U.S. federal net operating loss carryforwards and had U.S. state and foreign net operating
loss carryforwards of $3.6 million and $28.5 million, respectively, with expiration dates ranging from 1-10 years and some foreign
jurisdictions with an indefinite carryforward period. Of the foreign net operating losses, $13.9 million are related to China and the
remaining is related to Germany and other foreign countries.
A valuation allowance is required to be established unless management determines it is more likely than not that the Company will
ultimately utilize the tax benefit associated with a deferred tax asset. The Company has foreign valuation allowances of $5.5 million,
which are primarily related to net operating loss carryforwards.
Management will continue to evaluate the appropriate level of valuation allowance on all deferred tax assets considering such factors as
prior earnings history, expected future earnings, carryback and carryforward periods, and tax and business strategies that could
potentially enhance the likelihood of realization of the deferred tax assets.
The 2017 Tax Act that was signed into law on December 22, 2017 significantly changed existing U.S. corporate income tax laws by,
among other things, lowering the corporate tax rate from 35% to 21%, limiting the deductibility of interest expense and executive
compensation, implementing a modified territorial tax system and imposing a one-time mandatory deemed Transition Tax on
undistributed foreign earnings which have not been previously taxed. The SEC also issued SAB 118 which allowed the Company to
record provisional amounts related to the 2017 Tax Act and provided a measurement period of up to one year from the enactment dated
for companies to complete their accounting under ASC Topic 740. Under SAB 118, the Company elected to account for the tax on
Global Intangible Low-Tax Income (“GILTI”) as a period cost and therefore has not recorded deferred taxes related to GILTI.
75
The provision for income taxes for the fiscal years ended January 31, 2020, 2019, and 2018 differs from the U.S. federal statutory rate
due to the following (in thousands):
Fiscal Year Ended January 31,
2019
2018
2020
Provision for income taxes at the U.S. statutory rate
Lower effective non-U.S. income tax rate
Change in valuation allowance
U.S. tax provided on earnings of non-U.S. subsidiaries
Change in liabilities for uncertain tax positions, net
State and local taxes, net of federal benefit
Impact of 2017 Tax Act
Excess tax (benefits)/deficiencies from stock-based
compensation
GILTI, net of foreign tax credits
Foreign-derived intangible income
Other permanent differences
Other, net
Total provision for income taxes
$
$
12,076 $
(1,876 )
404
—
(375 )
800
(16 )
(117 )
2,703
—
1,027
498
15,124 $
12,964 $
(1,303 )
(2,138 )
—
(1,346 )
962
(7,446 )
(118 )
116
(918 )
(957 )
346
162 $
14,248
(4,378 )
136
—
(381 )
626
45,002
1,094
—
—
978
42
57,367
Due to the 2017 Tax Act, the Company had a U.S. federal statutory rate of 21% for its fiscal year ended January 31, 2020, and 2019,
and a blended rate of 33.8% for fiscal year ended January 31, 2018. The effective tax rate for fiscal 2020 was 26.3%, primarily due to a
limitation on a portion of the foreign tax credits related to the GILTI tax. The effective tax rate for fiscal 2019 was 0.3%, primarily due
to the impact of the 2017 Tax Act and the release of certain foreign valuation allowances. The effective tax rate for fiscal 2018 was
136.1%, primarily due to the impact of the 2017 Tax Act and excess tax deficiencies related to stock-based compensation, partially
offset by foreign profits being taxed in lower taxing jurisdictions.
A windfall tax benefit of $0.1 million and $0.1 million and a shortfall tax expense of $1.1 million were recorded in income tax expense
during fiscal years 2020, 2019 and 2018, respectively.
A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits (exclusive of interest) for the fiscal years ended
January 31, 2020, 2019 and 2018 are as follows (in thousands):
Beginning balance
Tax positions taken in the current year
Tax positions taken in prior years
Lapse of statute of limitations
Settlements
Non-U.S. currency exchange fluctuations
Ending balance
2020
2019
2018
$
$
1,351 $
106
(125 )
(114 )
(389 )
(3 )
826 $
2,354 $
234
(774 )
(122 )
(236 )
(105 )
1,351 $
2,619
180
148
(630 )
(149 )
186
2,354
Included in the balances at January 31, 2020, January 31, 2019 and January 31, 2018 are $0.8 million, $1.2 million and $2.3 million, of
unrecognized tax benefits which would impact the Company’s effective tax rate, if recognized. Interest and penalties, if any, related to
unrecognized tax benefits are recorded as income tax expense in the consolidated statement of operations. As of January 31,
2020, January 31, 2019 and January 31, 2018, the Company had $0.5 million, $0.7 million and $0.8 million, respectively of accrued
interest (net of tax benefit) and penalties related to unrecognized tax benefits. During fiscal years 2020, 2019 and 2018, the Company
accrued $0.1 million, $0.0 million and $0.1 million of interest (net of tax benefit) and penalties.
At January 31, 2020, the Company had no deferred tax liability for the undistributed foreign earnings of approximately $182.6 million
because the Company intends to permanently reinvest such earnings in its foreign operations. It is not practicable to estimate the tax
liability related to a future distribution of these permanently reinvested foreign earnings.
76
NOTE 12 – TREASURY STOCK
On August 29, 2017, the Board approved a share repurchase program under which the Company is authorized to purchase up to $50.0
million of its outstanding common stock from time to time, depending on market conditions, share price and other factors. The program
had replaced a prior share repurchase program approved by the Board on March 31, 2016, under which the Company was authorized to
purchase up to $50.0 million of its outstanding common stock from time to time and under which $5.5 million had been repurchased.
Under the existing program, the company may purchase shares of its common stock through open market purchases, repurchase plans,
block trades or otherwise. This authorization expires on August 29, 2020.
During the fiscal year ended January 31, 2020, under the existing repurchase program, the Company repurchased a total of 131,402
shares of its common stock at a total cost of $4.2 million, or an average of $31.96 per share. During the fiscal year ended January 31,
2019, the Company repurchased a total of 200,088 shares of its common stock at a total cost of $7.4 million, or an average of $37.08
per share. During the fiscal year ended January 31, 2018, under both the existing and previously authorized repurchase plans, the
Company repurchased a total of 140,507 shares of its common stock at a total cost of $3.6 million, or an average of $25.84 per share,
which included 40,000 shares repurchased from the Movado Group Foundation at a total cost of $1.1 million, or an average of $27.13
per share.
At January 31, 2020, $36.4 million remains under the Company’s current repurchase program.
There were 43,414, 21,733 and 36,843 shares of common stock repurchased during the fiscal years ended January 31, 2020, 2019 and
2018, respectively, as a result of the surrender of shares in connection with the vesting of certain stock awards. At the election of an
employee, shares having an aggregate value on the vesting date equal to the employee’s withholding tax obligation may be surrendered
to the Company.
NOTE 13 – ACCUMULATED OTHER COMPREHENSIVE INCOME
The accumulated balances at January 31, 2020, 2019 and 2018, related to each component of accumulated other comprehensive income
(loss) are as follows (in thousands):
Foreign currency translation adjustments
Available-for-sale securities
Hedging contracts
Unrecognized prior service cost related to defined benefit
pension plan
Net actuarial loss related to defined benefit pension plan
Total accumulated other comprehensive income
$
$
2020
2019
85,345 $
124
—
80,808 $
119
—
2018
100,190
191
(38 )
(367 )
(52 )
85,050 $
(420 )
—
80,507 $
—
—
100,343
Amounts reclassified from accumulated other comprehensive income (loss) to operating income in the Consolidated Statements of
Operations during fiscal 2020, 2019 and 2018 were $0, $0.4 million and $(0.9) million, respectively.
NOTE 14 – REVENUE
On February 1, 2018, the Company adopted ASC 606 using the modified retrospective method and recognized the cumulative effect of
initially applying the new revenue standard as an adjustment to opening retained earnings.
Under the modified retrospective method, the Company recognized a reduction of $0.7 million to opening retained earnings as the
cumulative effect of adopting the new revenue standard. This adjustment did not have a material impact on the Company’s Consolidated
Financial Statements. Results for reporting periods beginning after February 1, 2018 are presented under Topic 606, while prior period
amounts are not adjusted.
The impact from the adoption of ASC 606 related principally to the timing of the recognition of markdowns and returns in the Company’s
Watch and Accessory Brands segment.
For a discussion of revenue recognition, please see “Critical Accounting Policies and Estimates” in Item 7 (Management’s Discussion
and Analysis of Financial Condition and Results of Operations).
77
Disaggregation of Revenue
The following table presents the Company’s net sales disaggregated by customer type. Sales and usage-based taxes are excluded from
net sales (in thousands).
Customer Type
Wholesale
Direct to consumer
After-sales service
Net Sales
Fiscal Year
Ended
January 31,
2020
Fiscal Year
Ended
January 31,
2019
$
$
530,140 $
166,877
3,949
700,966 $
532,565
142,439
4,563
679,567
The Company’s revenue from contracts with customers is recognized at a point in time. The Company’s net sales disaggregated by
geography are based on the location of the Company’s customer (see Note 18 Segment and Geographic Information).
Wholesale Revenue
The Company’s wholesale revenue consists primarily of revenues from independent distributors, and from department stores, and chain
and independent jewelry stores. The Company recognizes and records its revenue when obligations under the terms of a contract with
the customer are satisfied, and control is transferred to the customer. Wholesale revenue is measured as the amount of consideration the
Company ultimately expects to receive in exchange for transferring goods. Wholesale revenue is included entirely within the Watch and
Accessory Brands Segment (see Note 18 Segment and Geographic Information), consistent with how management makes decisions
regarding the allocation of resources and performance measurement.
Direct to Consumer Revenue
The Company’s direct to consumer revenue primarily consists of revenues from the Company’s outlet stores, concession stores,
ecommerce, and consumer repairs. Revenue is recognized as the end consumer obtains delivery of the merchandise. Direct to Consumer
revenue derived from concession stores, ecommerce and consumer repairs is included within the Watch and Accessory Brands Segment;
revenue derived from outlet stores is included within the Company Stores Segment (see Note 18 Segment and Geographic Information).
Direct to Consumer revenue is included in either the Watch and Accessory Brands or Company Stores Segments based on how the
Company makes decisions about the allocation of resources and performance measurement.
After-sales service
All watches sold by the Company come with limited warranties covering the movement against defects in material workmanship. The
Company does not sell warranties separately.
The Company’s after-sales service revenues consists of out of warranty service provided to customers and authorized third party repair
centers, and sale of watch parts. The Company recognizes and records its revenue when obligations under the terms of a contract with
the customer are satisfied and control is transferred to the customer. After-sales service revenue is measured as the amount of
consideration the Company ultimately expects to receive in exchange for transferring goods. Revenue from after sales service, including
consumer repairs, is included entirely within the Watch and Accessory Brands Segment, consistent with how management makes
decisions about the allocation of resources and performance measurement.
NOTE 15 – STOCK-BASED COMPENSATION
Under the Company’s Employee Stock Option Plan, as amended and restated as of April 4, 2013 (the “Plan”), the Compensation
Committee of the Board of Directors, which consists of four of the Company’s non-employee directors, has the authority to grant
participants incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights and stock awards, for up to
11,000,000 shares of common stock.
78
Stock Options:
Stock options granted to participants under the Plan generally become exercisable in equal installments over three years or cliff-vested
after three years and remain exercisable until the tenth anniversary of the date of grant. All stock options granted under the Plan have
an exercise price equal to or greater than the fair market value of the Company’s common stock on the grant date.
The table below presents the weighted average assumptions used with the Black-Scholes option-pricing model for the calculation of the
fair value of stock options granted during the fiscal year ended January 31, 2018. There were no stock options granted during the fiscal
years ended January 31, 2020 and 2019.
Expected volatility
Expected life in years
Risk-free interest rates
Dividend rate
Weighted average fair value per option at date of grant
Fiscal Year Ended
January 31,
2018
46.16 %
6.0
1.93 %
1.51 %
9.15
$
The fair value of the stock options, less expected forfeitures, is amortized on a straight-line basis over the vesting term. Total
compensation expense for stock option grants recognized during the fiscal years ended January 31, 2020, 2019 and 2018 was $0.4
million (net of tax of $0.1 million), $0.8 million (net of tax of $0.2 million), and $0.5 million (net of tax of $0.3 million), respectively.
As of January 31, 2020, there was $0.1 million of unrecognized compensation cost related to unvested stock options. These costs are
expected to be recognized over a weighted-average period of 0.2 years. Total consideration received for stock option exercises during
the fiscal years ended January 31, 2020, 2019 and 2018 was $0.2 million, $5.9 million and $2.0 million, respectively. The windfall tax
provision realized on these exercises in fiscal 2020 was approximately $4,000.
The following table summarizes the Company’s stock option plan as of January 31, 2020 and changes during each of the fiscal years in
the three-year period ended January 31, 2020:
Weighted
Average
Exercise
Price per
Option
Option
Price Per
Share
Outstanding
Options
Weighted
Average
Remaining
Contractual
Term
(years)
Aggregate
Intrinsic
Value
$(000)
Options outstanding at January 31,
2017 (482,255 options exercisable)
Granted
Exercised
Cancelled
Options outstanding at January 31,
2018 (394,455 options exercisable)
Granted
Exercised
Cancelled
Options outstanding at January 31,
2019 (264,244 options exercisable)
Granted
Exercised
Cancelled
Options outstanding at January 31,
2020
Exercisable at January 31, 2020
Expected to vest at January 31,
2020
859,358 $
161,205 $
(85,600 ) $
(173,262 ) $
761,701 $
—
(189,941 ) $
(5,500 ) $
566,260 $
—
(5,150 ) $
—
561,110 $
399,905 $
29.83
23.35
23.18
30.21
29.12
—
30.77
42.12
28.43 $ 23.35-$42.12
6.2
$
2,654
—
30.36 $
—
30.36
28.41 $ 23.35-$42.12
30.45
5.2
4.4
$
$
-
-
-
161,101 $
23.35
7.2
$
79
The table below presents information related to stock option activity for the years ended January 31, 2020, 2019 and 2018:
Total fair value of stock options exercised
Total fair value of stock options vested
Non-vested Stock Options
2020
Fiscal Year Ended
January 31,
2019
(in thousands)
2018
$
$
63 $
1,621 $
1,912 $
803 $
454
1,275
A summary of the Company’s non-vested stock options at January 31, 2020 and changes during fiscal 2020 are presented below:
Non-vested stock options:
Non-vested at January 31, 2019
Vested
Non-vested at January 31, 2020
Stock Awards:
Shares
Weight Average
Grant Date Fair
Value
302,016 $
(140,811 ) $
161,205 $
10.25
11.51
9.15
Under the Plan, the Company can also grant stock awards to employees. For fiscal years 2020, 2019 and 2018, compensation expense
for stock awards was $4.4 million (net of tax of $1.4 million), $3.8 million (net of tax of $1.2 million), and $1.8 million (net of tax of
$1.1 million), respectively. As of January 31, 2020, there was $6.9 million of unrecognized compensation cost related to unvested stock
awards. These costs are expected to be recognized over a weighted-average period of 2.4 years.
Transactions for stock award units under the Plan since fiscal 2017 are summarized as follows:
Weighted-
Average
Grant
Date Fair
Value
Weighted-
Average
Remaining
Contractual
Term
(years)
Aggregate
Intrinsic
Value
($(000's)
Number of
Stock
Award
Units
January 31, 2017
Units granted
Units vested
Units forfeited
January 31, 2018
Units granted
Units vested
Units forfeited
Units outstanding at January 31, 2019
Units granted
Units granted adjustment for fiscal year 2019
grants (a)
Units granted adjustment for fiscal year 2020
grants (b)
Units vested
Units forfeited
Units outstanding at January 31, 2020
381,158 $ 31.71
133,245 $ 23.31
(115,574 ) $ 39.44
(56,059 ) $ 30.27
342,770 $ 26.07
228,310 $ 39.22
(112,170 ) $ 27.60
(11,888 ) $ 30.82
447,022 $ 32.27
274,133 $ 32.47
20,409 $ 39.95
(73,067 ) $ 32.91
(151,448 ) $ 29.27
(26,810 ) $ 34.80
490,239 $ 33.50
1.4 $ 8,442
(a) Grant adjustment made due to exceeding the fiscal 2019 financial goal.
(b) Grant adjustment made due to not reaching the fiscal 2020 financial goal.
80
Outstanding stock awards can be classified as either time-based stock awards or performance-based stock awards. Time-based stock
awards vest over time subject to continued employment. Performance-based stock awards vest over time subject both to continued
employment and to the achievement of corporate financial performance goals. Upon the vesting of a stock award, shares are issued from
the pool of authorized shares. For performance-based stock awards, the number of shares issued related to the performance units granted
can vary from 0% to 150% of the target number of underlying stock award units, depending on the extent of the achievement of
predetermined financial goals. The total fair value of stock award units that vested during fiscal 2020, 2019 and 2018 was $4.4 million,
$3.1 million and $2.6 million, respectively. There were 43,414, 21,733 and 36,843 shares of common stock of the Company tendered
by the employee for the payment of the employee’s withholding tax obligation totaling $1.4 million, $0.9 million and $0.9 million
during the fiscal years ended January 31, 2020, 2019 and 2018, respectively. Unvested stock award units had a total fair value of $16.4
million, $14.3 million and $10.5 million, for fiscal 2020, 2019 and 2018, respectively. The windfall tax benefit realized on the vested
stock awards for fiscal 2020 was $0.1 million. The number of shares issued related to the remaining stock awards are established at
grant date.
NOTE 16 – PENSION AND RETIREMENT SAVINGS PLAN
Defined Contribution Plans
401(k) Savings Plan
All employees in the United States are eligible to participate in the Company’s Employee Savings and Investment Plan (“401(k) Plan”),
a tax-qualified defined contribution retirement savings plan. The Company matches 50% of each 1% contributed by the employee up to
a maximum of 6% of pay (totaling a company maximum match of 3%), subject to the contribution limits imposed by the Internal
Revenue Code. Employees vest in the Company match after three years of service. In fiscal 2020, 2019 and 2018, the Company
contributed $1.3 million, $1.1 million and $1.1 million, respectively, in cash to the 401(k) Plan.
Other Defined Contribution Plans
The Company sponsors defined contribution benefit plans for its employees located in Switzerland (prior to amendment effective
December 31, 2018 – see below for discussion) Asia and the United Kingdom. Company contributions and expenses of administering
the plans were $0.9 million, $0.6 million and $2.0 million in fiscal 2020, 2019 and 2018, respectively. Contributions in fiscal 2018
included employees located in Switzerland.
The Company maintains a defined contribution Deferred Compensation Plan (also known as a supplemental employee retirement plan
or SERP). The SERP provides eligible executives with supplemental retirement benefits in addition to amounts received under the
Company’s other retirement plans. The Company makes a matching contribution, up to either 5% or 10% of the executive’s salary,
which vests in equal annual installments over five years. Twenty percent of the Company’s matching contribution is in the form of rights
to the Company’s common stock. During fiscal 2020, 2019 and 2018, the Company recorded expenses related to the SERP of $0.6
million, $0.7 million and $0.6 million, respectively.
Defined Benefit Plan
The Company sponsors a plan in Switzerland which was amended to a defined benefit plan effective December 31, 2018. The plan
covers certain international employees and is based on years of service and compensation on a career-average pay basis.
The components of the net periodic pension costs for the fiscal years ended January 31, 2020 and 2019 are as follows:
(Amounts in thousands)
Service cost
Interest cost
Expected return on assets
Amortization of prior service costs
Net Periodic Pension Cost
2020
2019
$
$
1,121 $
300
(205 )
68
1,284 $
93
25
(25 )
6
99
The other components of the net periodic pension costs, including the interest cost, expected return on assets and the amortization of the
prior service cost, are all included in selling, general and administrative expenses in the consolidated statement of operations.
The estimated prior service cost that will be amortized from accumulated other comprehensive income into net periodic pension cost
in the fiscal year ended January 31, 2021 is $70,000.
81
A reconciliation of the change in benefit obligation, the change in plan assets and the net amount recognized in the consolidated balance
sheets shown below (based on a January 31 measurement date):
(Amounts in thousands)
Change in benefit obligation:
Pension benefit obligation at beginning of period
Service cost
Interest cost
Benefit and expense payments
Employee contributions
Settlements
Actuarial losses
Foreign currency exchange rate impact
Pension benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of period
Company contributions
Benefit and expense payments
Actual return on plan assets
Employee contributions
Settlements
Foreign currency exchange rate impact
Fair value of plan assets at end of year
Funded status - consolidated
Amounts recognized in the consolidated balance sheets
consist of:
Other long-term liabilities
Amounts recognized in accumulated other
comprehensive (loss):
Prior service cost
Net actuarial loss
Tax effect
Net amount recognized, after tax
Accumulated benefit obligation
2020
2019
$ 33,754
1,121
300
(2,996 )
818
(10,022 )
1,032
806
24,813
$ 34,088
93
25
(81 )
70
-
-
(441 )
33,754
$ 33,223
1,229
(2,996 )
1,187
818
(10,022 )
788
24,227
(586 )
$
$ 33,538
105
(81 )
25
70
-
(434 )
33,223
(531 )
$
$
586
$
531
484
52
(117 )
$
419
$ 24,621
537
-
(117 )
$
420
$ 30,083
Investment Policy:
It is the objective of the plan sponsor to maintain an adequate level of diversification to balance market risk, to prudently invest to
preserve capital and to provide sufficient liquidity while maximizing earnings for near-term payments of benefits accrued under the
plans and to pay plan administrative expenses. The assumption used for the expected long-term rate of return on plan assets is based on
the long-term expected returns for the investment mix of assets currently in the portfolio. Historical return trends for the various asset
classes in the class portfolio are combined with current and anticipated future market conditions to estimate the rate of return for each
class. These rates are then adjusted for anticipated future inflation to determine estimated nominal rates of return for each class.
The assets are classified as a Level 3 asset within the fair value hierarchy and consist of an investment in pooled assets and include
separate employee accounts that are invested in equity securities, debt securities and real estate. The values of the separate accounts
invested are based on values provided by the administrator of the funds that cannot be readily derived from or corroborated by observable
market data.
The weighted-average assumptions that were used to determine the Company’s benefit obligations as of the measurement date (January
31) were as follows:
Discount rate
Salary progression rate
Expected long-term rate of return on plan assets
82
2020
2019
0.00 %
1.10 %
1.50 %
0.90 %
1.10 %
0.90 %
The assumptions used at the amendment date were materially consistent with those used at the measurement date.
The discount rates used are based on high quality AAA- and AA-rated corporate bonds with durations corresponding to the expected
durations of the benefit obligations and service time.
The weighted-average assumptions that were used to determine the Company’s net periodic benefit cost were as follows:
Discount rate
Salary progression rate
Expected long-term rate of return on plan assets
2020
2019
0.90 %
1.10 %
0.90 %
0.90 %
1.10 %
0.90 %
The overall expected long-term rate of return on plan assets is a weighted-average expectation based on the targeted portfolio
composition. Historical experience and current benchmarks are considered to arrive at expected long-term rates of return in each asset
category.
The Company expects the following benefit payments to be paid out for the fiscal years indicated. The expected benefit payments are
based on the same assumptions used to measure the Company’s benefit obligation at January 31, 2020 and include estimated future
employee service. The Company does not expect any plan assets to be returned to it during the fiscal year ending January 31, 2020.
Payments from the pension plan are made from the plan assets.
Fiscal Year ending January 31,
2021
2022
2023
2024
2025
2026-2030
(in thousands)
$
272
202
215
361
261
1,709
During fiscal 2021, the Company expects to contribute $1.2 million to its Swiss defined benefit plan.
NOTE 17 – COST SAVINGS INITIATIVES
In fiscal 2018, the Company took actions to better align its global infrastructure with the current business environment by consolidating
certain operations and streamlining functions to reduce costs and improve profitability. Also, in light of the changing retail landscape
and the growing importance of digital marketing and online sales, the Company decided to cease its participation in the Baselworld
Watch and Jewelry Show. As a result, the Company recorded $13.6 million of pre-tax expenses primarily for severance and payroll
related expenses, fixed assets, other and occupancy charges, predominantly impacting the Company’s North American and Swiss
operations. The Company substantially completed the actions under the cost savings initiatives as of January 31, 2018.
83
A summary rollforward of costs related to the cost savings initiatives is as follows (in thousands):
Fiscal 2018 Charges (2)
Cash payments
Non-cash adjustments
Foreign exchange
Accrued balance at January 31, 2018
Cash payments
Non-cash adjustments (3)
Foreign exchange
Accrued balance at January 31, 2019
Cash payments
Non-cash adjustments (4)
Foreign exchange
Accrued balance at January 31, 2020
Severance and
payroll related (1)
$
Fixed
assets (1)
Other (1)
Occupancy
Charges (1)
Total
5,166 $
—
(5,166 )
—
—
—
—
—
—
—
—
—
— $
2,692 $
(1,847 )
—
74
919
(589 )
(251 )
(52 )
27
(13 )
(14 )
—
— $
99 $
(34 )
—
9
74
(45 )
—
(4 )
25
(19 )
(6 )
—
— $
13,587
(7,776 )
(4,042 )
155
1,924
(1,235 )
(281 )
(56 )
352
(32 )
(320 )
—
—
5,630 $
(5,895 )
1,124
72
931
(601 )
(30 )
—
300
—
(300 )
—
— $
$
(1) The total severance and payroll related charges of $5.6 million include $4.3 million in SG&A and $1.3 million in Cost of Sales in
the Consolidated Statement of Operations for the fiscal year ended January 31, 2018. The fixed assets charges of $5.2 million,
other charges of $2.7 million and occupancy charges of $0.1 million are included in SG&A in the Consolidated Statement of
Operations for the fiscal year ended January 31, 2018. These accrued balances are located in accrued liabilities in the Company’s
Consolidated Balance Sheets.
(2) The United States and International locations of the Watch and Accessory Brands segment include a pre-tax charge of $3.9 million
and $9.7 million, respectively, for the fiscal year ended January 31, 2018.
(3) Non-cash adjustments during fiscal 2019 relate to a change in estimate for severance and other. The United States and International
locations of the Watch and Accessory Brands segment include pre-tax income of approximately $43,000 and $238,000,
respectively.
(4) Non-cash adjustments during fiscal 2020 relate to a change in estimate for severance, occupancy charges and other. The United
States and International locations of the Watch and Accessory Brands segment include pre-tax income of approximately $300,000
and $20,000, respectively.
NOTE 18 – SEGMENT AND GEOGRAPHIC INFORMATION
The Company follows accounting guidance related to disclosures about segments of an enterprise and related information. This guidance
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 in two operating segments: Watch and Accessory Brands and Company Stores. The Company’s
Watch and Accessory Brands segment includes the designing, manufacturing and distribution of watches and, to a lesser extent, jewelry
and other accessories, of owned and licensed brands, in addition to revenue generated from after-sales service activities and shipping.
The Company Stores segment includes the Company’s physical retail outlet locations. Chief Executive Officer of the Company is the
chief operating decision maker (“CODM”) and regularly reviews operating results for each of the two operating segments to assess
performance and make operating decisions about the allocation of the Company’s resources.
The Company divides its business into two major geographic locations: United States operations, and International, which includes the
results of all non-U.S. Company operations. The allocation of geographic revenue is based upon the location of the customer. The
Company’s International operations in Europe, the Americas (excluding the United States), the Middle East and Asia accounted for
33.4%, 9.0%, 7.9% and 6.6%, respectively, of the Company’s total net sales for fiscal 2020. For fiscal 2019, the Company’s International
operations in Europe, the Americas (excluding the United States), the Middle East and Asia accounted for 31.6%, 8.8%, 7.7% and 6.5%,
respectively, of the Company’s total net sales. For fiscal 2018, the Company’s International operations in Europe, the Americas
(excluding the United States), the Middle East and Asia accounted for 32.1%, 9.2%, 7.7% and 5.1%, respectively, of the Company’s
total net sales. A vast majority of the Company’s tangible International assets are owned by the Company’s Swiss and Hong Kong
subsidiaries.
84
Operating Segment Data as of and for the Fiscal Year Ended January 31, (in thousands):
Watch and Accessory Brands:
Owned brands category
Licensed brands category
After-sales service and all other
Total Watch and Accessory Brands
Company Stores
Consolidated total
Watch and Accessory Brands
Company Stores
Consolidated total
2020
Net Sales
2019
2018
$
$
257,954 $
344,681
9,763
612,398
88,568
700,966 $
263,904 $
320,911
11,061
595,876
83,691
679,567 $
204,897
277,323
9,862
492,082
75,871
567,953
Operating Income
(1) (2) (3)
2019
2020
$
$
29,529 $
13,462
42,991 $
45,194 $
17,003
62,197 $
2018
28,296
14,904
43,200
Watch and Accessory Brands
Company Stores
Consolidated total
Total Assets
2020 (7)
2019
2020
Capital Expenditures
2019
2018
$ 782,339 $ 735,244 $
24,457
$ 847,308 $ 759,701 $
64,969
7,616 $
5,097
12,713 $
6,508 $
4,127
10,635 $
3,133
2,677
5,810
Watch and Accessory Brands
Company Stores
Consolidated total
$
$
14,013 $
2,368
16,381 $
12,446 $
1,719
14,165 $
11,765
1,692
13,457
Depreciation and Amortization
2019
2018
2020
Geographic Location Data as of and for the Fiscal Year Ended January 31, (in thousands):
2020
Net Sales (4)
2019
2018
(629 )
$ 302,426 $ 308,420 $ 260,606 $ (22,719 ) $
398,540 371,147 307,347 65,710
43,829
$ 700,966 $ 679,567 $ 567,953 $ 42,991 $ 62,197 $ 43,200
2020
2018
Operating (Loss) / Income
(1) (2) (3) (5) (6)
2019
(3,856 ) $
66,053
Total Assets
Property, Plant and Equipment, Net
2020 (8)
2019
2020
2019
$ 425,018 $ 328,014 $
431,687
$ 847,308 $ 759,701 $
422,290
18,852 $
10,386
29,238 $
17,030
9,037
26,067
United States
International
Consolidated total
United States
International
Consolidated total
(1) Fiscal 2020 operating loss in the United States locations of the Watch and Accessory Brands segment included a charge of
$4.6 million related to the amortization of intangible assets, deferred compensation and certain accounting adjustments associated
with the MVMT brand. In the United States locations of the Watch and Accessory Brands segment for fiscal 2019 operating loss
included $14.4 million of expenses primarily related to transaction costs, the amortization of intangible assets, deferred
compensation and certain acquisition accounting adjustments as a result of the Company’s acquisition of the MVMT brand.
(2) Fiscal 2020 and 2019 operating income in the International locations of the Watch and Accessory Brands segment included
$2.8 million and $2.9 million, respectively, of expenses primarily related to the amortization of acquired intangible assets, as a
result of the Company’s acquisition of the Olivia Burton brand. Fiscal 2018 operating income in the International locations of the
Watch and Accessory Brands segment included $6.8 million of expenses primarily related to transaction charges and the
amortization of acquisition accounting adjustments associated with the purchase of the Olivia Burton brand.
85
(3) Fiscal 2020 and 2019 United States and International locations of the Watch and Accessory Brands operating (loss)/income
included income of $0.3 million for both periods due to a change in estimate related to the Company’s fiscal 2018 cost savings
initiatives. The United States and International locations of the Watch and Accessory Brands segment include a pre-tax charge of
$3.9 million and $9.7 million, respectively, for fiscal 2018 as part of the Company’s cost savings initiatives, the Company took
actions to better align its global infrastructure with the current business environment by consolidating certain operations and
streamlining functions to reduce costs and improve profitability. Also, in light of the changing retail landscape and the growing
importance of digital marketing and online sales, the Company decided to cease its participation in the Basel world Watch and
Jewelry Show.
(4) The United States and International net sales are net of intercompany sales of $346.8 million, $319.5 million and $268.1 million
for the fiscal years ended January 31, 2020, 2019 and 2018, respectively.
(5) The United States operating income included $29.0 million, $43.5 million and $25.2 million of unallocated corporate expenses
for the fiscal years ended January 31, 2020, 2019 and 2018, respectively.
(6) The International operating income included $73.3 million, $53.8 million and $41.5 million of certain intercompany profits related
to the Company’s supply chain operations for the fiscal years ended January 31, 2020, 2019 and 2018, respectively.
(7) Total assets at January 31, 2020 include $49.7 million and $39.8 million of operating lease right-of-use assets within Watch and
Accessory Brands and Company Stores, respectively, recorded as a result of the Company’s adoption of ASU 2016-02 on February
1, 2019 (see Note 10 - Leases).
(8) Total assets at January 31, 2020 include $64.6 million and $24.9 million of operating lease right-of-use assets within United States
and International locations, respectively, recorded as a result of the Company’s adoption of ASU 2016-02 on February 1, 2019
(see Note 10 - Leases).
NOTE 19 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents unaudited selected interim operating results of the Company for fiscal 2020 and 2019 (in thousands, except
per share amounts):
1st
2nd
3rd
4th
Quarter
Fiscal 2020
Net sales
Gross profit
Income before income taxes (1)
Net income attributable to Movado Group, Inc. (2)
Basic income per share:
Net income attributable to Movado Group, Inc.
Diluted income per share:
Net income attributable to Movado Group, Inc.
Fiscal 2019
Net sales
Gross profit
Income before income taxes
Net income attributable to Movado Group, Inc.
Basic income per share:
$ 146,549 $ 157,816 $ 205,618 $ 190,983
85,339 $ 110,069 $ 100,608
$
8,114
22,202 $
$
3,504
17,505 $
$
78,873 $
4,771 $
3,925 $
22,416 $
17,765 $
$
$
0.17 $
0.76 $
0.77 $
0.15
0.17 $
0.75 $
0.76 $
0.15
$ 127,149 $ 144,093 $ 208,949 $ 199,376
77,834 $ 113,364 $ 110,636
$
16,899
12,755 $
$
17,447
9,140 $
$
67,524 $
7,974 $
8,115 $
24,105 $
26,922 $
Net income attributable to Movado Group, Inc.
Diluted income per share:
Net income attributable to Movado Group, Inc.
$
$
0.35 $
0.39 $
1.16 $
0.75
0.35 $
0.39 $
1.14 $
0.74
(1) Income before income taxes includes a change in contingent consideration related to updated revenue and EBITDA (as defined
in the acquisition agreement) performance expectations during the earn-out period for MVMT of $13.6 million and $1.7 million
in the second and fourth quarters, respectively.
(2) Net income attributable to Movado Group, Inc. includes an after tax change in contingent consideration related to updated
revenue and EBITDA (as defined in the acquisition agreement) performance expectations during the earn-out period for MVMT
of $10.4 million and $1.3 million in the second and fourth quarters, respectively.
As each quarter is calculated as a discrete period, the sum of the four quarters may not equal the calculated full year amount. This is in
accordance with prescribed reporting requirements.
86
NOTE 20 – SUBSEQUENT EVENTS
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which
continues to spread worldwide. In response to the outbreak, in mid-March 2020, the Company and the majority of the Company’s
wholesale customers temporarily closed all of their retail stores due to health concerns associated with COVID-19. While the disruption
is currently expected to be temporary, there is uncertainty around the duration as well as the recovery timeline. Therefore, while the
Company expects this matter to negatively impact its business, results of operations and financial position, the related financial impact
cannot be reasonably estimated at this time. As a precautionary measure in order to increase its cash position, preserve financial
flexibility and maintain liquidity and flexibility in response to the COVID-19 outbreak, the Company borrowed an additional $30 million
on its revolving credit facility in March of 2020 under terms and conditions that are consistent with the Company’s borrowings which
existed at January 31, 2020 as described in Note 6 – Debt and Lines of Credit.
87
Schedule II
MOVADO GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Year ended January 31, 2020:
Description
Doubtful accounts
Returns
Other sales allowances
Deferred tax asset valuation allowance
Total
Year ended January 31, 2019:
Doubtful accounts
Returns
Other sales allowances
Deferred tax asset valuation allowance
Total
Year ended January 31, 2018:
Doubtful accounts
Returns
Other sales allowances
Deferred tax asset valuation allowance
Total
Balance at
beginning
of year
Net (benefit) /
provision
charged to
operations
Currency
revaluation Net write-offs
Balance at
end of year
$
$
$
$
$
$
5,492 $
13,034
7,380
5,257
31,163 $
734 $
31,232
12,612
516
45,094 $
69 $
71
9
(169 )
(20 ) $
(652 ) $
(31,057 )
(11,200 )
(123 )
(43,032 ) $
4,181 $
12,359
7,344
8,960
32,844 $
2,104 $
32,710 (1)
9,383
(2,199 )
41,998 $
(257 ) $
(691 )
20
(319 )
(1,247 ) $
(536 ) $
(31,344 )
(9,367 )
(1,185 )
(42,432 ) $
5,499 $
11,648
3,959
8,714
29,820 $
(176 ) $
30,477
9,887
628
40,816 $
289 $
288
340
97
1,014 $
(1,431 ) $
(30,054 )
(6,842 )
(479 )
(38,806 ) $
5,643
13,280
8,801
5,481
33,205
5,492
13,034
7,380
5,257
31,163
4,181
12,359
7,344
8,960
32,844
(1) On February 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) using the
modified retrospective method and recognized the cumulative effect of initially applying the new revenue standard as an
adjustment to the opening retained earnings. Under the modified retrospective method, the Company recognized in part an
increase in reserve for returns with a corresponding reduction of approximately $817,000 to opening retained earnings as the
cumulative effect of adopting the new revenue standard.
S-1