10-Q: Movado Group Reports Q1 Decline Amidst Financial Restatement and SEC Inquiry

Movado Group, Inc. reported a decrease in net sales and profitability for the first quarter of fiscal 2026, alongside a significant financial restatement due to misconduct in its Dubai branch and an ongoing SEC inquiry.

Summary

• Movado Group's net sales for the three months ended April 30, 2025, decreased by 1.9% to $131.8 million, down from $134.4 million in the prior year period.
• Gross profit declined to $71.4 million (54.1% of net sales) from $72.9 million (54.3% of net sales) in the same period last year.
• Operating income significantly dropped to $0.3 million for Q1 FY2026, compared to $2.1 million in Q1 FY2025.
• Net income attributable to Movado Group, Inc. decreased to $1.4 million, or $0.06 per diluted share, from $2.0 million, or $0.09 per diluted share, in the prior year.
• The company announced a restatement of previously issued financial statements for fiscal years ended January 31, 2024 and 2023, and interim periods within fiscal years 2025 and 2024, due to misconduct in its Dubai branch involving overstatement of sales, premature revenue recognition, and underreporting of credit notes over approximately five years.
• A cost-savings initiative was implemented, resulting in $0.6 million in accruals for severance and employee-related charges in Q1 FY2026, with expected go-forward annual savings of approximately $10.0 million.
• Cash and cash equivalents stood at $203.1 million as of April 30, 2025, a decrease from $225.4 million at April 30, 2024.
• Cash used in operating activities improved to $7.2 million for the three months ended April 30, 2025, compared to $18.1 million used in the prior year period.
• Inventories increased to $189.3 million at April 30, 2025, from $165.2 million at April 30, 2024.

Sentiment

Score: 3

Explanation: The sentiment is negative due to declining financial performance across key metrics (sales, gross profit, operating income, net income), coupled with the highly significant and concerning financial restatement caused by internal misconduct and the subsequent SEC inquiry. While there are positive steps like cost-savings initiatives and a share repurchase program, these are overshadowed by the severe corporate governance and financial reporting issues.

Positives

• Cash used in operating activities significantly improved, decreasing to $7.2 million in Q1 FY2026 from $18.1 million in Q1 FY2025.
• The company is implementing a cost-savings initiative, with $0.6 million in accruals recorded in Q1 FY2026 and an expected annual savings of approximately $10.0 million.
• A new $50.0 million share repurchase program was approved, extending through December 5, 2027, with the full amount remaining available.
• The company declared a cash dividend of $0.35 per share, maintaining its commitment to shareholder returns.

Negatives

• Net sales decreased by 1.9% to $131.8 million, primarily due to unfavorable sales mix and negative foreign currency exchange rate fluctuations.
• Gross profit decreased by $1.5 million, with the gross margin percentage declining by 20 basis points.
• Operating income saw a substantial decline from $2.1 million to $0.3 million.
• Net income attributable to Movado Group, Inc. decreased by 29.4% to $1.4 million.
• Sales in the owned brands category decreased by $6.8 million, or 17.0%, indicating a decline in performance for key proprietary brands.
• The company restated prior financial statements due to misconduct in its Dubai branch, involving overstatement of sales and premature revenue recognition over five years.
• A material weakness in internal control over financial reporting was identified, specifically regarding the risk assessment process and lack of functional segregation of duties in the Dubai branch.
• Cash and cash equivalents decreased by $22.3 million year-over-year.

Risks

• General economic and business conditions, including inflation and elevated interest rates, may impact consumer disposable income in key markets.
• Uncertainty related to geopolitical concerns and international hostilities (e.g., Russian invasion of Ukraine, Middle East war) could affect global markets, consumer spending, and supply chains.
• Increased tariffs and other trade barriers, including new U.S. tariffs on Chinese, Swiss, and Japanese goods, are expected to increase cost of sales and potentially reduce sales volumes.
• Supply disruptions, delivery delays, and increased shipping costs pose ongoing challenges.
• The company faces risks related to changes in consumer preferences, new product development, and the impact of smart watches on the traditional watch market.
• Dependence on significant suppliers and customers, as well as the continuation of licensing arrangements, presents business risks.
• Information systems failure or breaches of network security, along with complex and evolving privacy and data protection regulations, are ongoing concerns.
• The identified material weakness in internal control over financial reporting, if not effectively remediated, could adversely affect the company's ability to record, process, summarize, and report financial information reliably.
• The ongoing voluntary request for documents and information from the SEC Division of Enforcement regarding the restatement could lead to further regulatory actions or penalties.

Future Outlook

Movado Group expects go-forward annual savings of approximately $10.0 million from its cost-savings initiatives. The company is developing plans to lessen the impact of new U.S. tariffs, including select price increases at wholesale and retail levels, and possible operational changes to alter the country of origin for certain products. The company continues to evaluate the impact of the Inflation Reduction Act of 2022 and the OECD's Pillar Two global minimum tax rules, though no material impact is currently expected.

Management Comments

• Management believes the accompanying unaudited Consolidated Financial Statements reflect all necessary adjustments for a fair statement of the financial position and results of operations.
• The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures are not effective at a reasonable assurance level due to a material weakness in internal control over financial reporting.
• Management is in the process of implementing a remediation plan to address the material weakness, including enhancing risk assessment and oversight processes, making personnel changes, and increasing policy awareness and compliance training.
• The company expects the remaining severance and employee-related expenses and early lease termination expenses from the cost-savings initiative to be paid during the remainder of fiscal year 2026.
• The company currently expects to continue to declare cash dividends in the future, with the decision determined quarterly by the Board of Directors in its sole discretion.

Industry Context

The company operates within a challenging consumer-spending environment, characterized by ongoing inflation and elevated interest rates, which impacts disposable income. The watch and accessory market is also influenced by evolving consumer preferences, the rise of e-commerce, and the impact of smartwatches. New U.S. tariffs on imported goods, particularly from Switzerland, Japan, and China, are adding cost pressures to the industry, requiring companies like Movado to consider price adjustments and supply chain reconfigurations.

Management Changes

Corporate Governance

Legal Proceedings

• The company received a voluntary request for documents and information from the Division of Enforcement of the Securities and Exchange Commission (SEC) on April 28, 2025, relating to the financial restatement. The company is cooperating with the SEC.
• A U.S. Customs and Border Protection audit concerning watch component tariff allocation (from August 1, 2011, through July 15, 2016) concluded with the statute of limitations lapsing on May 1, 2023, leading to the release of previously established reserves. This matter is now resolved.

Stakeholder Impact

• **Shareholders:** Negative impact due to decreased profitability, diluted earnings per share, and the significant financial restatement and SEC inquiry which could affect stock price and investor confidence. Positively impacted by continued cash dividends and a new share repurchase program.
• **Employees:** Impacted by headcount reductions as part of the cost-savings initiative, leading to severance costs. Personnel changes, including the termination of the former managing director in Dubai, affect the organizational structure and reporting lines.
• **Customers:** Potential for price increases on products due to new U.S. tariffs, which could affect affordability and demand.
• **Suppliers:** Potential for operational changes to alter the country of origin for certain products due to tariffs, which could shift sourcing relationships.
• **Regulatory Authorities:** Increased scrutiny from the SEC due to the financial restatement and internal control weaknesses, requiring cooperation and remediation efforts.

Next Steps

• Continue implementing the remediation plan to address the material weakness in internal control over financial reporting, including testing the operating effectiveness of controls.
• Evaluate the impact of new accounting pronouncements (ASU 2023-09 and ASU 2024-03) on future consolidated financial statements and disclosures.
• Develop and implement plans to lessen the impact of new U.S. tariffs, including potential price increases and operational changes to product country of origin.
• Cooperate with the SEC in responding to their requests for documents and information related to the financial restatement.
• Continue to evaluate the Inflation Reduction Act of 2022 and the OECD's Pillar Two global minimum tax rules for potential future impacts.

Key Dates

Recommendation

Keywords

Movado Group, SEC filing, 10-Q, Quarterly Report, Financial Restatement, Internal Controls, Watch Industry, Luxury Goods, Consumer Spending, Tariffs, Corporate Governance, SEC Inquiry, Earnings, Sales, Profitability, Cash Flow, Share Repurchase, Dividends