Movado Group Inc (MOV) 2003 Q3 法說會逐字稿

Good day and welcome to the Movado third-quarter earnings conference call. Now I'd like to turn the conference over to your moderator, Ms. Suzanne Michalek.

Thank you. Good morning, everyone, and thank you for joining us today on Movado Group's third-quarter conference call. With us today on the call are Efraim Grinberg, President and Chief Executive Officer; Rick Cote, Chief Operating Officer; and Gene Karpovich, Chief Financial Officer.

Before we begin I would like to note that this conference call contains forward-looking statements which are made in pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Factors which could cause actual results to be materially different from any future results expressed or implied are discussed in our filings with the Securities and Exchange Commission. Such forward-looking statements include statements regarding Movado's performance for the remainder of fiscal 2004 and beyond.

We currently expect to update estimates; however the failure to update this information should not be taken as Movado's acceptance of these estimates on a continuing basis. Movado Group may also choose to discontinue presenting future estimates at any time.

Let me now outline the order of speakers and topics for today's conference call. Efraim will begin with the highlands of our third quarter; Gene will then review the financial details; and Rick will cover the progress we've made on our operating initiatives as well as provide you with our outlook for the balance of 2004. We would then be glad to answer any questions you might have. I would now like to turn the call over to Efraim.

Thank you, Suzanne. Good morning, everyone. I hope all of you had a great Thanksgiving holiday. Today we're very pleased to announce excellent third-quarter and nine-month results. We successfully executed our operating strategies, resulting in solid increases in sales, profits, and cash flow, exceeding our plan and the analyst consensus. In the third-quarter our sales grew by 10.7 percent to $100.8 million and by 9.1 percent on a constant dollar basis. Net income increased by 14.4 percent to $10.1 million. And our earnings-per-share grew by 9.6 percent to 80 cents from 73 cents last year.

For the nine-month period, our sales were $237.5 million versus last year's 220.5 million. Our net income increased to $16.7 million, a 14.9 percent increase over last year's 14.5 million. This translated into earnings-per-share of $1.33 versus $1.19 last year. These excellent results reflect year-over-year sales increases in each of our brands. In the third quarter, our largest brand, Movado, posted high single-digit percentage growth. Sales in North America increased by low double digits, partially offset by softness oversees, where our sales are being affected by a still challenging economic environment. We are very pleased with Movado's performance and as the economy improves we are seeing better sell through trends.

During the quarter we successfully launched our new Movado automatic museum watch. By now you have likely seen the powerful placements of our fall advertising campaigns in widely distributed publications. We look forward to building on the momentum of this new product with the introduction of national television spots, which have just begun running this past weekend. The response to the Museum automatic and other new Movado watches, including the Esperanza, an update on Movado's best-selling watch, has been terrific from both retailers and consumers alike.

The extension of Movado into a lifestyle brand continues to be met with success in our Movado Boutiques. Our boutique business continued to build on its excellent pace in the third quarter with comparable store sales growing at an impressive 19 percent. During the quarter we introduced our beautiful Movado Diamond, featuring 114 facets into our boutiques. The Diamond assortment is comprised of high-quality solitaires, pendants, and studs in a unique Movado setting. We're already receiving very positive customer feedback to this new addition to our product mix.

This holiday season we are also very excited about several new product introductions such as our Ono (ph) collection. Leading items such as our Ono pendant, which was featured on the cover of our fall boutique catalog, have quickly become a top seller. As the penetration of jewelry continues to increase in our boutiques, so does our average sale. As we enter the holiday season, we are well positioned and ready to execute in our boutiques with a terrific and full assortment of watches, jewelry, tabletop, and other gift giving items.

Turning to Concord, we are very pleased with the high single-digit sales performance in this brand led by low double digit growth in our domestic business. We also saw a stabilizing of our Concord business oversees with international sales showing a low single-digit increase. The overall improvement in our Concord business reflects not only the benefits of an improving economy in North America, but also demonstrates that the new products we have introduced throughout the year combined with the brand's new packaging, brochures, and displays are beginning to drive sell through. Some of these products include extensions of the very successful Saratoga and Bennington families, as well as the new Calpin (ph) family, our rectangular shape stainless-steel watch family starting at $995.

ESQ recorded a low double-digit increase for the quarter. We are particularly pleased that new iconic products led by our Centurion and Ion families were well-received by both retailers and consumers, thereby driving improved performance. Toward the end of the quarter we introduced the ESQ Quest collection featuring a big day chronograph model which we believe will be an excellent seller this holiday season. We continue to refocus and evolve ESQ by centering the brand's products on core leading families of watches, thereby differentiating the ESQ brand from others in the marketplace.

Our Coach watch brand delivered significant increases in the third quarter, achieving double-digit increases both domestically and internationally. Sell through is strong and we continue to capitalizable on the global momentum of the Coach brand. Fashion newness is what drives our Coach business, and during the third quarter we introduced our new signature C watch. The Bridal Classics family also continues to be a leader collection highlighted by the initial success of the Bridal Classic charm watch and our Bridal Classic watches with diamonds and fashion colored suede straps that are featured in our holiday advertising campaign. We continue to closely partner with Coach to align and maximize our product offering with the Coach customer.

We also generated significant growth this quarter from our Tommy Hilfiger watch brand. Total sales in the quarter increased 70 percent to $6 million compared with $3.5 million last year. Much of this growth was driven by strong product assortments and new product introductions. During the quarter we experienced strong sell through of our Flagstaff model, an updated classic watch and our number one bestseller. The Pasadena is also a leading collection inspired by a car instrument panel, and for women the Bridgehampton family continues to perform well and features a signature H shaped case.

We continue to see strong sell through of classic leader collections including the Grand Prix and Westport families. We remain enthusiastic about the evolution of the Tommy Hilfiger brand and we look forward to the future potential of this brand as it continues to penetrate the fashion watch category. As we approach the important holiday season, we have strong marketing and advertising plans in place to support all of our brands, creating customer demand for our products and driving sales.

With an improving economy in place we're optimistic about this holiday season. We are committed to executing our plans to support our brands and to deliver top and bottom line growth. Our strong financial position enables us to fully support and develop our strongest assets, our brands, as well as to continue to execute our growth initiatives. I would now like to turn the call over to Gene.

Thank you, Efraim, and good morning, everyone. We are pleased with our financial performance in the third quarter and for the nine months ended October 31, 2003. We recorded third-quarter net income of 10.1 million compared to 8.8 million prior year. This resulted in fully diluted earnings-per-share of 80 cents, an increase of 9.6 percent over prior year's results. For the nine-month period, net income increased by 14.9 percent to 16.7 million. This translated into fully diluted earnings-per-share of $1.33, an increase of 11.8 percent over prior year's earnings of $1.19 per diluted share.

Increases in earnings-per-share through the third quarter and the nine months were achieved on top of an increase in our diluted shares of 4.1 percent and 2.8 percent respectively, primarily resulting from a higher average stock price, which increased the number of diluted shares outstanding.

Turning to our results for the third quarter. Sales were 100.8 million versus last year's sales of 91 million. In constant dollars, sales increased by 9.1 percent. We are pleased to report that year-over-year sales increases were recorded in all segments of our business. Sales in our wholesale segment were 85.7 million versus last year's sales of 76.2 million. The domestic wholesale business was up 12 percent, with all of our brands recording increases over prior year results. Our Tommy Hilfiger and Coach brands were up double digits, Movado and Concord up high single-digits, and ESQ showed modest growth. Our international wholesale business was above prior year by 14.9 percent; approximately one-half of the increase is due to favorable currency translation.

In constant dollars our international sales were 7 percent above prior year. Increases were recorded in our Tommy Hilfiger brand due to good retail growth in existing markets as well as new market expansions in Europe and Asia. In Coach, strong sales in Japan and in the duty-free business contributed to a 40 percent year-over-year improvement. Our Concord brand was above prior year low single-digits and Movado was down double-digits year-over-year, as it has been through the first half, reflecting the ongoing economic difficulties in Europe and Latin America.

Our Movado boutiques posted a 36.7 percent sales increase over last year, with a 19.2 percent increase in comparable store sales. Our company stores showed a 5.6 percent sales decline in the third quarter, with a 3 percent decline in comparable store sales. While the outlet business remains challenging, we continue to protect and maintain our gross margins.

Gross margin for the quarter increased by 5.6 million or 10 percent from the prior year to 60.9 percent. The increase is due to higher sales volume. Our gross margin continues to reflect strong margins for the business, in line with our expectations. Operating expenses for the quarter increased by 4.1 million or 9.6 percent from last year to 46.6 million. The increase reflects planned investments in sales support and advertising to drive our customer and marketing initiatives, the rollout of our new boutiques, planned increases in payroll, and the unfavorable impact of currency. These investment initiatives are in line with our expectations for the year and help fuel our top line growth.

Operating income for the quarter was 14.8 million or 11.2 percent above prior year of 13.3 million. For the nine-month period, operating income rose to 25.5 million from 23.2 million in the prior year, an increase of 10.1 percent. Interest expense declined by 25.9 percent to 0.8 million. This is due to significantly reduced average borrowings. Our average debt for the quarter was 48.7 million, 35 percent below prior year. Taxes were recorded at a 28 percent tax rate, consistent with prior year.

Now I would like to discuss our balance sheet that continues to reflect a very strong financial position. Accounts Receivable of 120.7 million decreased by 2.9 percent. In constant dollars, our receivables are below prior year by 4.2 percent while our constant dollar sales increased 5.9 percent above last year. Inventories of 123.1 million increased by 9.9 million from last year, primarily due to the effect of the weaker US dollar. In constant dollars, inventory was 117.9 million or 4.1 percent above prior year. Our wholesale inventory increased by 2 million, while our boutique inventory increased by 2.7 million, reflecting our new store openings and an expanded jewelry product assortment.

Our debt as of October 31st was 57 million, a decrease of 19.7 percent from the prior year. As of October 31st, we were in a net cash position of 4 million versus a prior year net debt position of 34.1 million. Our capital expenditures for the nine months were 7.3 million, reflecting the investments in our new boutiques, some maintenance and enhancements to the existing retail stores in addition to normal ongoing systems hardware and software spending. Finally, we ended the period with cash and cash equivalents 61 million, tangible net worth of 228.4 million and our book value per share is $21.18. Now let me turn this over to Rick.

Thank you, Gene, good morning, everyone. We are pleased to have delivered strong increases in sales and profits in the third quarter, even as we appropriately invested behind our brands, infrastructure, and inventory. These results demonstrate our efficient operating structure and strong balance sheet. We remain focused on our three main goals -- driving our accelerated growth businesses, appropriately managing operating expenses, and continuing to improve the financial strength of the company by focusing on cash flow and working capital.

First let me discuss our accelerated growth businesses, Tommy Hilfiger and our Movado Boutiques. During the quarter sales of our Tommy Hilfiger product increased an impressive 70 percent over last year to $6 million. Year-to-date Tommy has achieved sales of 12.3 million compared with 8.3 million last year, a strong 49 percent increase. In addition to strong sell through, Tommy's performance was also driven by continued global door expansion. In North America and Latin America we've expanded Tommy Hilfiger's presence by approximately 150 doors and we ended the quarter with over 1300 doors. We also continue to expand Tommy's presence in Europe, where we now operate in over 930 doors in eight markets. In the Asian marketplace we continue to build on our early stage presence in Taiwan and Hong Kong, and we also began shipping to Korea during the third quarter. Looking ahead, our strategy for Tommy Hilfiger remains consistent, to continue strengthening our presence in existing markets while expanding geographically.

Now let's discuss our Movado Boutiques. This business delivered an excellent performance in the third quarter with a strong 19.2 percent comparable store sales increase. Our boutiques are successfully extending the Movado brand into a lifestyle. As we recently announced, we have opened two new boutiques in the Boston and Chicago markets. In addition we recently opened a boutique in the Valley Fair Mall and we will be opening a boutique in the Bellevue Mall in Seattle and in the Northbrook Mall just outside of Chicago during the month of December. Looking ahead to the early part of 2004, we plan to open an additional three boutiques in the Houston Galleria, the Pentagon in Washington and Oakbrook in the Chicago market.

Next let me discuss our operating expense management initiative. We remain focused on enhancing our operating efficiencies and our supply chain productivity. In the third quarter of this year, gross margins remained strong at 60.9 percent despite the continuing deterioration of the US dollar. As we discussed with you on our last conference call, we are focused on driving topline growth through appropriate investments in our brands, inventory and infrastructure. As anticipated, operating expenses increased 9.6 percent to $46.6 million. In turn these investments have supported a 10.7 percent increase in our topline while still delivering an 11 percent increase in operating profit.

Approximately half of the expense increase in the third quarter relates to increased support behind our core brands including sales support, training, and increased advertising support. The balance of the operating expense increase reflects investments behind our Tommy Hilfiger geographical expansion and our boutique expansion. We continue to focus on working capital management and driving increased cash flow from operations. We are extremely pleased that for the nine-month period we generated record cash flow from operations of 8.1 million and our balance sheet also remains strong.

Now let me provide you with some guidance on our financial outlook for the remainder of fiscal year 2004. We are seeing improvements in the economic environment and current selling trends are encouraging. For the full year, we continue to expect sales growth in the 6 to 8 percent range, while earnings per share now growing in the 8 to 10 percent range. This translates into fully diluted earnings per share in the $1.78 to $1.81 range, an increase from our previous EPS guidance of $1.75 to $1.78. For the fourth quarter will expect sales growth of 6 to 8 percent with profits flat to slightly up from the year ago period. These estimates reflect our growth initiative investments focused in on the key holiday selling season.

We expect gross margins for the fourth quarter and full year to remain at the 60 to 61 percent level, despite the continued pressure from the weak US dollar. Operating expenses are expected to grow approximately 11 percent, including the addition of new boutiques. Our plans also anticipate continued strong cash flow generation from operations, commensurate with profits. We would now like to open the conference call for your questions.

(CALLER INSTRUCTIONS) Carol Cranmer from Morgan Joseph.

It's nice to see such a strong quarter. Could you remind us how to look at the fourth quarter a year ago in terms of your expectations for profits to be flat to up slightly in the context of a very difficult retailing environment? And a second question, could you tell us in a little more detail about the experience of opening the new boutique stores in new markets and how those stores are performing?

Sure, basically we had a pretty good quarter last year in the fourth quarter and we expect that although we will see sales up in the fourth quarter this year, we will see profits basically flat to slightly ahead of last year -- based on the fact that we're continuing to invest in both the marketing behind our brands as well as new store openings. So far we've been very encouraged with our new store openings and we believe that they continue to further enhance the Movado image, especially on the domestic basis where we've been opening up our boutiques, and strengthen the Movado brand overall.

Was the difficulty of the year ago comparison in some part due to delayed ordering and reorders on the part of retailers, thereby setting up a more difficult comparison?

I think that last year people did wait longer to order, but, as I said earlier, we continue also to invest in the business in this quarter and we are looking for profits to be slightly ahead of last year or flat with last year for the quarter. But overall we expect them for the year, which is really what we look at, to be ahead of last year and better than our original plan at the beginning of the year.

Understood, thanks.

Paula Kalandiak from Wells Fargo Securities.

Congratulations, great quarter. I was wondering if you could give us any either quantitative information or some kind of more color on the museum automatic watch in terms of how it's doing versus your expectations.

Thank you. Basically it is exceeding our expectations. It's the first time that we've introduced a self winding mechanical watch in the Movado brand and we're doing it with quite a bit of excitement, and we think it also enhances and continues to build on the Movado image. It's doing well both within our stores and within our wholesale customers as well. And we also see it as a big opportunity in the future internationally.

Okay. And then also the Carlton line that you mentioned for Concord, is that now the opening price point for Concord?

That's the opening price point on a bracelet watch for Concord. We do have several steel watches within the Bennington family that start about $800. But on a bracelet model, that is the opening price point for Concord.

Have you seen a shift in consumer preferences towards the more opening price point Concord watches? Is there a pickup in the sales of those types of watches?

What it does is it expands our consumer base for the Concord brand, and we began that strategy about two years ago with the introduction of the new Saratoga at more affordable price points, and now we've continued that with the introduction of Carlton and Bennington. It solidifies our position at about $1000 to $4000.

Do you think that these introductory, the lower introductory price points are helping to increase sales of the Concord brand versus if you had more of an emphasis on some of the higher end --?

I think during especially what has been over the last 18 months a more difficult economic environment, it is -- and also as luxury has become more accessible to consumers, it's basically positioned us in an accessible luxury category, which has been beneficial for the Concord brand. And we're finally this quarter, in the third quarter we were beginning to reap the rewards for that.

Okay, thank you.

David Taylor of Taylor P. Taylor & Co.

I guess I've got a new name. It looked like a really good quarter and you sound really upbeat, but yet you're talking about a flat fourth quarter? Is this just your inherent conservatism, Efraim?

I'll give you a little bit of view on that and then I'll let Rick take over from there. Basically we're looking at a topline growth in the 6 to 8 percent growth, but we are opening up -- we have opened up several stores in the third quarter. We're opening up several in the fourth quarter, and so that's why we're looking at a bottom line increase of a slight increase rather than any more of a substantial increase right now. Rick, would you want to enhance on that?

Sure. The top line we're very comfortable with and see continued momentum. The margins continue under pressure. As you know, the dollar has deteriorated quite significantly from a year ago. We've been fortunate to have our margins hovering around 61 percent, but there continues to be pressure on it and I feel that we're going to be lower than 61 percent, still north of 60 percent, but we're not going to be at the 61 percent level. We're probably going to be in the 60.5 and slightly North of that arena. Operating expenses are going to be up approximately 11 percent, and again, as Efraim mentioned, we basically will have opened up seven stores this year from a year ago, two in February and basically five at the end of the third quarter and beginning of the fourth quarter. So -- and obviously there is an investment both from an inventory standpoint and clearly from an operating expense standpoint with opening up each boutique.

Also we have a third factor influencing us, which is the increase in the number of shares outstanding. That increase will be approximately in the 4 to 6 percent range, and obviously the number of shares increase as the stock price increases because of the dilutive nature of options outstanding. So with that that will allow us to basically have a P&L that we believe will be flattish to slightly up from where we were in the fourth quarter, and we had pretty good fourth quarter of last year, part of which was influenced on some of the delays and purchases that were taking place from the third quarter to fourth quarter of last year, and obviously we're not see nothing shift taking place this year with people being more optimistic in the marketplace. So I understand the concern with the numbers, but I think if you go through and look at those dynamics, that's where we and up versus what again was a strong fourth quarter for us last year from a profit standpoint.

Okay, how about looking into the next fiscal year? I mean, we are now in the fourth fiscal quarter. How about gross margins looking forward? Do you see them under pressure?

Yes, we continue to see, again I'd have to sit there and say I'm a little bit surprised at the weakness of the dollar and how much that has declined over the last 12 month time frame. There isn't a lot of news out there that says it's going to rebound significantly at all, so we are anticipating that the dollar will remain weak and therefore putting pressure on our margins. But again, we are confident, as we've said in the past, that we are well positioned to be North of 60 percent in our margins, but we're not going to be in the 61 to 61.5 percent range where we've been fortunate for the last 18 months or so of being in that range.

So we see margins, yes, being under pressure. Clearly a 30 percent drop in the dollar does impact us. And as we mentioned before, our hedging program basically gives us a window of 9 to 18 months to be able to react to that from the standpoint of price increases and/or cost efficiencies that we're able to bring into the marketplace to try to maintain our margins.

Are you having more difficult than usual in increasing prices to match costs?

This has not been an industry where there's been significant price increases over the last five years. Over the last year there have been price increases taking place, but those are constantly under pressure in the economic environment that we're in. From a standpoint of inflation it's still relatively minor and the ability of getting those price increases in is not that easy. One of the things that's fortunate for us is the amount of newness that we bring in in being able to make sure that the margins are appropriate on the new products that we bring in. So it's that blend that you have to work through to be able to maintain it. But again, we're confident that our margins will be North of 60 percent on an ongoing basis.

Now, expansion in the boutique operation. Washington and Houston, these are new announcements, aren't they?

Yes, they are. We're in Washington today with Tyson's Corner. This will be our second store, which has always been our strategy to try to have a critical mass in a market where it's appropriate, and Pentagon is a very good shopping center. And the Houston Galleria is the best shopping mall, we believe, in the Houston market.

Which fiscal year will these last two expansions be in?

They will be in in this fourth quarter right now. So they are in our fiscal year 2004. We will end the year January 31, 2004 with 17 stores open.

Okay. And you're still saying about five stores a year now?

Yes, again our focus is to get to that critical mass level which we talked around 30 stores or so. And so we do see ourselves in the 5, 6 arena of store openings for the next couple of years, and three are already on the table for the first half of -- our fiscal year 2005, calendar year 2004.

Those being which?

Houston and Chicago?

No, no, Chicago is this year.

But we have another opening --.

I thought there was a third opening in Chicago.

In the early part of 2004 will be the Houston Galleria, the Pentagon and Oakbrook. This year we are opening up Valley Fair in California, the Bellevue Mall in Seattle, and the Northbrook Mall in Chicago, which will be our second store in Chicago. In the first quarter of next year we'll be opening our third store in the Chicago market. So this year our 17 will include Valley Fair, which just opened up, Bellevue in Northbrook Mall, and then the three in the early part of next year are the Houston Galleria, the Pentagon, and the Oakbrook.

Which will bring you to 20 at that point.

Which would bring us to 20 at that point, correct.

Thanks a lot, keep up the good work.

Bob Pool from Bricolor (ph) Capital.

Thanks and congratulations. D&A in the quarter with how much?

Depreciation and amortization? In the quarter, I think it's in the -- close to the 2.5 million range.

And how about CAPEX, Rick?

CAPEX year-to-date is 7.3 million, and again our plans are that we will be around that 10 million range this year and for the next couple of years.

Okay. Rick, you said, in your comments about cash flow for the fourth quarter, that it would be in -- I think the words you used were "in line with earnings". Normally you would have a substantial reduction in accounts receivable from the October quarter end to the January quarter end.

I think he meant in line, Bob, with earnings for the year.

Yes, commensurate with profits for the full year, and yes, usually the fourth quarter is obviously our strongest for cash generation. One comment I do want to remind everyone of is that we have been very focused on receivables and inventory, and one of the things we're very pleased with, and again the fruit of our efforts around the world, is that receivables in the third quarter were down despite a strong increase in sales. So we have been focusing on receivables on an ongoing basis, so rather than seeing such a big jump in the fourth quarter, we're seeing it much more through the year. Again that's part of the reasons for our record position of cash flow through the nine-month period just ended.

So to put some numbers on that, last year you had a $30 million inflow from receivables, but what I think we you're telling me is that the growth in receivables year-on-year should be more in line with sales growth year-on-year this year around. And if that were the case, you'd probably only pick up 20 million or so from receivables in the fourth quarter versus the 30 million or so last year?

Because we picked up a lot more in the third quarter and previous quarters, yes.

And then -- it looks like your inventories now are growing about in line with sales. And is that about what we should expect going forward?

Yes, going forward. And the primary reason for that is as we expand boutiques there's about -- rounding a $1 million investment in inventory in each boutique. So as we open up the boutiques, the inventory level increases for those boutiques, and that will be the primary driver, it has been this year and will be for the next couple of years in the inventory growth. Wholesale we hope to be able to have inventory grow slightly less than wholesale sales growth.

Great. You've done a great job on that side -- on the balance sheet management and I'm sure all your shoulders appreciate that. The boutiques in the fourth quarter, should the boutiques be able to achieve something close to profitability in the fourth quarter by itself?

In the fourth quarter by itself, obviously that's the significant part of the sales growth. When I look at that, again we do advertising from a standpoint of commensurate with sales, so from an accounting standpoint the way we look at it, it would be probably close to that, probably still a little bit of an investment from an overall standpoint.

Do you recall how much of an investment it was last year?

On an overall basis?

In the fourth quarter.

In the fourth quarter, I don't have that readily available. I would expect it was probably in the order of magnitude of $1 million.

Okay, thank you. And then have you -- you talked about the difficulty of getting price increases, but have you been trying? Obviously everybody has the same issues, everybody in the high-end watch business has the same issues with the weaker -- or in the Swiss movement business has the problem with the weaker dollar and higher gold prices. So the pressure is on everybody. Have you guys been -- have you guys actually been working the price increases and to what extent? Can you quantify the extent to which you've been successful?

We did increase prices on a select basis in the first quarter of this year, because the dollar had already deteriorated significantly over the prior six months, and obviously we'll review again our pricing structure as we begin next year.

Do you normally do it sort of on an annual basis?

If possible that's what we like to do if we're able to and we've been in the position that we have been able to do it that way. So we are in the process of looking at options for next fiscal year.

Okay, and then my last question is -- it looks like you probably should end fiscal 2003 with something on the order of net cash -- I haven't completed all my numbers yet, but let's call it $20 million of net cash. Can you make some comments about historically you've been a company that has had some leverage and I think that's actually worked pretty well for you because you do have pretty consistent profitability and that leverage helps your return on equity. Where do you go with this cash because it only looks like it's going to build over the coming years?

I think right now we're looking at that the cash gives us flexibility. We did increase our dividend this year and that is an ultimate objective of the company, but also gives us the flexibility and, we've stated in the past, to look at acquisitions if opportunities should arise in the future. So that is also something that for the present moment the cash on our balance sheet begins to give us flexibility.

Okay. And just on that, you've been looking at the acquisition thing for some time. The handwriting has been on the wall as it relates to your balance sheet improvement here for some time, and I think you've recognized your financial flexibility for some time. What has prevented to this point, can you make some general comments about what has prevented deals from happening? Is it absence of opportunities or mispricing in your mind of the opportunities that are out there? Or what sort of --?

I think that's something really that we just continue to explore, so I don't think it's really something that we would want to get into any details about, what type of things have prevented things from happening in the past or could make them happen in the future.

Okay, thank you, guys, as always.

(CALLER INSTRUCTIONS) Mike Teburndonis (ph) from Systematic Financial.

Just two questions. First, on the boutiques, what's your time frame for reaching profitability on a full year basis?

Basically we'd be looking at that over the next two to three-year time frame. Again, basically getting to a critical mass which we view around 30 stores. And again, with that is the full absorption of the advertising that we assign to that as well as the overhead that we have for the overall boutique management.

Okay. And what's the total store count now for boutiques?

The total store count today is 15. Two more will open up over the next couple of weeks to bring us to 17 at the end of this fiscal year, which is January 31. We have three on the horizon for early part of next year, which will take us to 20, and then, even though there's nothing on the table today, we could see perhaps another couple in the second half of next year.

Okay. And then just to clarify, for the fourth quarter you said operating expenses are expected to be up 11 percent. Is that correct?

Correct.

I'm having trouble getting to that guidance number that you've given. What are you assuming for a tax rate in the fourth-quarter?

Same, 28 percent, and again, I think you need to look at the few other factors, the gross margins again with the continued pressure and coming a little bit lower than the 60.9 percent that we have year-to-date, and also the increase in the number of shares outstanding.

Okay, thanks.

Arnold Griese (ph) from Goldsmith & Harris.

You guys have been very consistent over the years about when the retail boutiques would reach profitability, that critical mass number, on the one hand. On the other hand, the comparable store sales have, I think, generally exceeded your expectation for a number of years in a row. Seemingly there's a -- why isn't the strong comp store sales sort of moving that target date up I guess is the question?

The first thing is, again, this here we're extremely pleased with the performance of the boutiques, with very, very strong comp door comparisons. Last year we were strong in a relatively weak market, and our comps last year I believe were in the 4 percent arena, which was very good considering the marketplace was flattish to slightly down. So this is the first year where I would consider the comp doors to be extremely high. And this is one where we wouldn't expect to be able to continue at that level. We do expect strong comps, but not at that level on an ongoing basis. This year has been benefited by the increased jewelry assortment line, that's one of things we have been focusing on the last couple of years is getting to that right level of jewelry mix, and we believe this year we're at that level.

Is gold a factor in your product mix at all?

Gold is a factor but we obviously price gold into our equation. But it's a factor that we do sell a lot of gold product.

Have you seen sales respond at all to the rising gold prices?

Not materially, no.

Could you give us some idea what percentage of your mix gold is?

Gold and gold and diamond jewelry from -- is probably about 70 percent on a value basis of the jewelry mix, and there is some platinum in there and then the balance would be silver, and silver and gold.

On the acquisition front, maybe just without going into detail could you give us some feel of whether you're sort of responding to anything that comes in or whether you're aggressively looking for acquisitions? Are you out there pounding doors, or you're just sort of --?

Again, I think one of the things we've talked about in the past is focusing on the financial strength of our company and we've been able to do that. We want to continue doing that. I think it's the right type of -- and it's helped us the last couple of year of having a strong balance sheet and a strong cash position. We've said that if opportunities materialize in the marketplace we're willing to listen to them, but when you're done, it's opportunities that arise in the marketplace and there's really nothing else to say on that other than we continue to focus in on the strength of what we control and we control the company and the business and the cash flows, and that's what we focus in on.

Let me just belabor one more time, are you responding to opportunities or are you looking for acquisitions?

We've said in the past that we are looking for and that we are one that has the financial wherewithal to be able to seize opportunities that may materialize. Whether they materialize or not is not within our control.

Okay. And lastly, could you give us a little better feel on the retail stores, the new stores, understanding that they have opening expenses, do they still make a contribution in the fourth quarter?

When we look at stores, and what we've said in the past is generally in the first year of operation, if particularly we open the store in the second part of the half where the majority of sales take place, on a four wall basis, they're generally around breakeven, slight investment, perhaps a very slight profitability, but generally around the breakeven -- before allocation of advertising and overhead.

So that's what we see taking place. That continues to prove out, and clearly on the first full year of operations, we see it as a slight profitability on a four wall basis in growing over the next couple years, and generally in year four is when we see it getting to the level of profitability we'd expect, which is somewhere around that 15 percent of sales level before allocations.

I don't know if I'm interpreting what you said properly. It sounds to me like the new stores should actually help your net income in the fourth quarter?

Generally no. I said flattish before allocation of advertising, and obviously, as we open up each new market, we do increase advertising in support of that marketplace, so if I take it on a fully absorbed basis with full incremental cash outlay, if you want to look at it that way, it would be a slight investment with the increased advertising that will support in that new marketplace.

Thank you.

Elizabeth Montgomery from S.G. Cowen.

I have some questions about Accounts Receivable turnover and inventory turnover. I was wondering if you can give us an update on how we should be thinking about the long-term goal for improving those? Like what can they be over the next three years?

Again, we look at inventory -- with the boutiques coming in there's much more of an investment in the inventory -- on the inventory side because the boutiques are basically on a cash basis from a collection standpoint. So inventory we see growing because of the boutique expansion, the wholesale side we basically see it slightly less than the sales growth in the wholesale side. So inventory we see growing over the next number of years, but in a structured, controlled manner.

Accounts Receivable, we see the opportunity of continued improvement on that from a Day Sales Outstanding because of the mix that takes place in our business. As the boutiques expand and become a bigger percent of our overall business, they're obviously on a very quick cash turnaround basis; and when we look at Tommy Hilfiger as a percent of our business increasing, those terms are, because they're dealing with chain and department stores, are usually more accelerated than with independent jewelers, which would be in the Movado and Concord side.

So we see receivables continuing to improve as they have. On a Day Sales Outstanding they will grow, but probably much less than the sales growth taking place. Inventories will probably be more in line with our sales growth overall when we include the boutiques in there.

Okay. And what's been the most significant driver of the improvement in the receivable turnover? Is it the -- among the wholesale business? Is it the reduction of some of the lower volume doors?

I think two things. One is very strong focus on the company and all of our employees around the world on focusing on cash collection, and we've seen that over the last three years, so that is an important part of what takes place in that continued focus, but also very importantly is the mix of the business. As Tommy Hilfiger and the boutiques are becoming a larger percent of our overall business, those payment terms are much faster than the company average excluding those two businesses. So it's a combination of the two. Mix is important, but again I think it's important highlight the performance of our employees around the world and their dedication in focusing on this.

And two more questions. Did you at the beginning of the call give the penetration of jewelry as part of the boutiques? I think I may have missed that.

We did not give that percent. It continues to improve and I think it's close to the 50 percent level when we look at the jewelry side of the business.

Okay. And then could you give the cash flow from any financing activities in the quarter?

Yes, if you bear with us for a second, I think that would have been --.

Cash flow from financing was a -- it was a cash provided of 21.3 million, that was primarily because of the debt. We ended the year with zero short-term debt.

We build our debt during the year, and our low point is at the end of the year because of, obviously, the cyclical nature of the business.

Okay, and that was for the nine months?

That is correct.

Great, thank you.

Richard Fryerie (ph) from Delphi Management.

Can you tell me how your sales in airport duty-free shops have been trending lately?

They've been picking up. Obviously in the first half of the year they were very difficult, and basically the only brand that we do sell there is Coach, and it's mostly in the Far East to Japanese tourists. And with SARS -- with the outbreak of SARS and the war in the first half of the year, they were very difficult. In the third quarter they did begin to pick up.

Do you see that continuing?

We do see that continuing.

All right. And your duty-free business -- I think it's in the Caribbean?

Most of our duty-free business is in the Caribbean.

That's not so much airport based and that continues to do well?

That continues to be strong.

All right. Thank you.

It appears we have no further questions and I'll turn it over to management.

Thank you very much. I would like to thank all of you for participating today and asking some excellent questions. We're looking forward to the holiday season and we remain very focused on assuring that our brands remain strong in the marketplace. I would like to wish all of you a happy and healthy holiday season and thank all of you again for participating today. Thank you.

This concludes today's conference. You may now disconnect your lines.