Impact of Tariffs and Mitigation Strategies on Margins
Management highlighted ongoing tariff impacts, estimating a 250 basis point gross margin pressure due to tariffs in the Brand Portfolio segment.
Mitigation efforts include sourcing country mix adjustments, factory concessions, and selective price increases, but lag effects mean pressure persists into the second half of 2025.
The company expects gross margin pressure from tariffs to continue into the third quarter, with some normalization anticipated in the fourth quarter as mitigation strategies take effect.
Approximately $10 million of sales in Q2 were negatively impacted by tariffs, split evenly between cancellations and delayed receipts, with recovery expected in Q3.
Management emphasized the lag between tariff enactment and mitigation effectiveness, which complicates short-term margin recovery efforts.
The company is actively exploring additional cost savings and efficiency measures to offset tariff-related margin pressures.
Adjusted earnings per share were $0.35, down from $0.85 last year, including a $0.07 discrete tax benefit.
Brand Portfolio gross margin declined 240 basis points to 40.3%, impacted by tariffs and markdown reserves.
Famous Footwear gross margin decreased 130 basis points to 43.7%, due to deeper promotions and channel mix.
Gross margin contracted by 210 basis points to 43.4%, driven by tariff-related costs, inventory reserves, and promotional activity.
Inventory increased 4.9% year over year to $693 million, with 8.6% growth in Brand Portfolio and 2% in Famous Footwear.
Operating earnings were $16 million, with operating margin at 2.4%.
Second quarter sales declined 3.6% year over year to $658.5 million, with both Brand Portfolio and Famous Footwear segments down but showing sequential improvement.
SG&A expenses increased by $1.4 million to $269.7 million, deleveraging 170 basis points as a percentage of sales.
Impact of U.S.-Switzerland Tariffs on Inventory and Supply Chain
Movado built a strong inventory position of Swiss-made watches in the U.S. in anticipation of a 39% tariff rate on Swiss imports implemented after the quarter.
Management expects a substantial portion of the year's inventory needs are already covered by the current stock, mitigating immediate supply disruptions.
Approximately $28 million of inventory was accumulated, with $16 million in the U.S., to offset tariff impacts and manage supply chain risks.
The company has taken proactive measures such as pricing adjustments and supplier negotiations to mitigate tariff effects, though some impacts will only be seen in future periods.
Movado plans to reduce inventory levels by the end of the year to more reasonable levels, aiming to offset the increased costs caused by tariffs.
Management remains optimistic that the U.S. and Switzerland will negotiate to lower tariff rates in the coming months, which could further ease supply chain pressures.
Cash and short-term investments ended at $33.5 million, down from $63.2 million a year ago, with no debt and $70.1 million available on the revolving credit facility.
Comparable store sales declined 7.1%, while direct sales fell 14.4%, with sequential monthly improvement from May (-10.4%) to July (-7%).
EBITDA fell to $4.6 million from $6.5 million last year, impacted by lower sales but partially offset by expense reductions.
Gross margin rate decreased 300 basis points to 45.2%, mainly due to a 240 basis point increase in occupancy costs and higher markdown rates.
Inventory was $78.9 million, flat year-over-year, with clearance penetration steady at 10.2%. Inventory down 28.5% compared to 2019.
Merchandise margins declined by 60 basis points, partially offset by a favorable shift from national to private brands.
Net sales for Q2 2025 were $115.5 million, down from $124.8 million in Q2 2024, driven by a 9.2% decline in comparable sales.
SG&A expenses decreased by $6.1 million year-over-year, reducing SG&A as a percentage of sales to 41.2%.
Dafinchi