Movado Group Inc (MOV) 2004 Q1 法說會逐字稿

Welcome to the Movado Group Inc. first-quarter earnings conference. During the presentation all participants will be in a listen-only mode. Afterwards you'll be invited to participate in a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded on June 2, 2004. I would now like to turn the program over to Suzanne Michalek, Director of Corporate Communications at Movado Group. Go ahead, please.

Good morning, everyone, and thank you for joining us today. With me today on the call is 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 pursuance of 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 2005 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 highlights of our first-quarter results. Gene will then review the financial details, and Rick will cover the progress we have made on our operating initiatives, as well as provide you with a progress update in the integration of Ebel along with our financial outlook for the second quarter. We would then be glad to answer any questions you may have. I would now like to turn the call over to Efraim.

Thank you, Suzanne, and good morning, everyone. We're very pleased with our top and bottom-line performance during the first quarter, which even with the anticipated dilutive impact from Ebel exceeded our expectations. Our favorable results were fueled by strong year-over-year sales gains in our Movado, Concord, Coach, and Tommy Hilfiger watch brands.

As you recall, last year's first quarter was impacted by a difficult retail environment further exacerbated by the war in Iraq and the outbreak of SARS in the Far East. This year in our seasonally smallest quarter we delivered exceptionally strong sales increases, reflecting retailer replenishment and the successful expansion of our growth businesses.

All of our brands continue to perform very well at retail, and we are extremely encouraged by the rebound in our international business, which saw total sales increase 44 percent. With only two months of Ebel's results included in our first-quarter numbers, we are confident in the future growth potential of Ebel under Movado Group's ownership, and I will touch on the direction of Ebel in a few moments.

First let me turn to the highlights for the first quarter, which include a strong 23 percent increase in sales, net income of $0.7 million, and earnings per share of 6 cents. Our base businesses delivered a stellar performance this quarter. Excluding Ebel, our company delivered an 18 percent sales increase, net income of $2.6 million, which tripled last year's levels, and a more than doubling in earnings per share to 20 cents versus 7 cents achieved in the year-ago period.

Our Movado brand remains one of the most powerful brands in its categories, defined by strong product offerings surrounding the iconic Museum watch. In the first quarter our Movado brand achieved low double-digit revenue increases, reflecting strong domestic sales gains and even stronger increases internationally. This spring we introduced an evolution of our distinctive Movado advertising campaign. The new campaign continues to embody the classic timelessness of the Movado brand and features world-renowned dancer Mikhail Baryshnikov and Darci Kistler, principal dancer with the New York City Ballet. The campaign also continues to feature Pete Sampras and Wynton Marsalis. To support our Movado growth initiatives in the emerging Chinese marketplace, we recently added local celebrity Karen Mok. We continue to focus on evolving the Movado product assortment and maintaining our dominant position in the US while expanding overseas in targeted markets.

We're very pleased with the strong first-quarter results achieved in our Movado boutiques, which demonstrates the strength of the Movado brand and its ability to extend into other related product categories. The strong 18.2 percent comparable store sales increase is on top of a 24.7 increase last year and reflects the success of our merchandising initiatives, specifically the increased assortment of Movado jewelry. As an example, the Movado Diamond, which was introduced last fall, continues to be well received by our customers and continues to gain momentum. During the first quarter jewelry represented more than half of our mix in the Movado boutiques.

Also during the first quarter we introduced the Movado branded credit card, which is managed by a third party, absolving us of any credit risk. We look forward to the benefits that this card will bring, including engendering customer loyalty as well as providing us with another tool for targeted marketing efforts.

We are committed to expanding the successful Movado boutique concept, and during the first quarter we opened two new boutiques, one in Fashion Centre at Pentagon City, just outside of Washington D.C., and another in the Houston Galleria. Additionally in May we opened a new boutique in the Oak Brook Mall, making this our third location in the Chicago market. We now operate a total of 20 boutiques across the U.S., compared to 12 locations operated last year at this time. Looking ahead, we have an additional three leases signed for stores scheduled to open later this year. They include Stony Point Mall in Richmond, Virginia, Tampa International Plaza in Florida, and Water Tower Place in Chicago.

Our Concord brand experienced an excellent first quarter, with sales showing strong double-digit increases, confirming our strategy of shifting Concord's product emphasis to the more accessibly priced steel luxury watch category, while supporting it with a comprehensive marketing support program. The strong first-quarter growth was driven by the Saratoga family and the new Carlton collection.

We were also very pleased with Concord international sales performance, which benefited from a rebound in the Far East after struggling with the SARS epidemic last year. At the annual international watch and jewelry fair held in Basel, Switzerland, this year, Concord introduced a brand new Delirium watch to commemorate the 25th anniversary of the launch of Delirium, the world's thinnest watch. This collection is available only in 18-karat gold; and it received an excellent reception from our customers. We believe this collection will help drive Concord's sales for the balance of the year.

ESQ delivered first-quarter sales results which were ahead of our plan and slightly below last year, as we anniversaried some expanded distribution. Sellthrough of ESQ products continues to grow, and our return to iconic Swiss leadership product has proved to be a very successful strategy. Toward the end of the first quarter we introduced the Love Knot, a brand-new design geared toward women, which perfectly complement our new Centurion and Quest collections introduced last year. Love Knot has received excellent reception from both retailers and consumers. With leadership products such as these, we will continue to differentiate ESQ in the marketplace and will help drive ESQ's growth throughout fiscal 2005.

Coach watch sales surged during the first quarter with strong double-digit growth recorded both domestically and internationally. Expansions of the Bridle Classic family performed well during the quarter, particularly those featuring pink, white, and blue cap (ph) straps with matching mother-of-pearl dials. The Japanese market continues to be a key driver for this business, where Coach has established itself as a very strong brand.

Our team continues to generate synergies with Coach leather goods new product offerings; and this strategy has proven to be very successful. Just recently we introduced a very exciting new watch in Coach retail stores called the Gallery. The Gallery features interchangeable bezels that come in five colors, enabling customers to have multiple fashion looks in one timepiece. This watch generated tremendous excitement and sellthrough in Coach stores, and beginning in the second half of this year, we will roll out the Gallery out to our own Coach wholesale distribution.

We're very pleased with the continued global momentum we are achieving in our Tommy Hilfiger watch brand, which showed tremendous growth during the quarter. Total sales grew almost 90 percent from last year to $5.4 million, with international sales more than doubling in the quarter and very strong domestic growth as well. Gracie, a fashionable strap and bracelet collection, and Mollie, a reversible strap where you can change the color, were strong performers during the quarter. Importantly these excellent results illustrate our company's ability to successfully compete and excel in the fashion watch category.

As you know, on March 1 we completed our acquisition of premiere luxury watch brand Ebel, a transaction that we believe is a great value to our company and its shareholders. Clearly Ebel has gone through uncertain times, having been under the ownership of three different entities within a span of 10 years. We are proud to bring Ebel back into the hands of a company whose main focus is the watch business.

Already we have begun to restructure the Ebel business and to begin to return it to profitability during the second half of this year. Rick will walk you through some of these restructuring efforts in greater detail during his comments. At Basel this year, our customers were able to get a first glimpse of some of the positive changes we're making at Ebel, including the restoration of the brand's well-recognized nameplate, the Architects of Time, and to return Ebel to its roots in its marketing materials.

During the second half of this year, we will launch a new Ebel product inspired by the brand's rich archives called the Sportwave collection. We will also launch an exciting new advertising and marketing campaign to begin revitalizing the Ebel brand. The new campaign will predominantly focus on women and will appear in all major fashion publications in the U.S. and key locations throughout the world beginning in September. Our goal over the course of this year is to complete the integration of Ebel into Movado Group and begin to revitalize and increase the visibility of Ebel by setting a proper foundation for a return to growth in fiscal 2006.

We are very pleased with the excellent results the company achieved in the first quarter and that our brand continued to perform well at retail. We are encouraged by the strong reception each of our brands received at the Basel Watch Fair. Importantly we are focused on maintaining the excellent operating disciplines that we have put in place over the past few years, which continue to drive our success. I would now like to turn the call over to Gene, who will review our financial results in greater detail.

Thank you, Efraim, and good morning, everyone. We recorded strong financial results in the first quarter ended April 30, 2004, fueled by exceptionally strong sales. As a reminder, in our cyclical business the first quarter is the smallest quarter and typically represents less than 20 percent of our annual sales. In discussing our financial performance today, I will provide you with year-on-year comparisons with and without our new Ebel business.

Sales for the first quarter were 74.2 million, or 23.3 percent above prior year; excluding Ebel, sales were $70.8 million or 17.6 percent above last year. Sales in the wholesale segment increased 23.6 percent to $61 million; excluding Ebel, wholesale sales increased 16.7 percent. All brands were above prior year in double digits, except ESQ which was in line with our plan, slightly below last year.

The domestic wholesale business was up 13 percent; and excluding Ebel up 11 percent. Tommy Hilfiger led the way with sales up a strong 63.2 percent over prior year, due to positive sellthrough at retail and existing doors and added distribution. Concord and Coach were up double digits; Movado up high single digits; and ESQ was below prior year (technical difficulty) mid single digits.

The international wholesale segment was up 73.7 percent; and excluding Ebel up 43.7 percent. All brands recorded strong double-digit increases, with Tommy more than doubling year-over-year, reflecting the strength of the Tommy brand name and the appeal of our watch designs in the international marketplace. Our sales were particularly strong in Asia, up almost 90 percent from prior year's first quarter, which was significantly impacted by the outbreak of SARS. Currency had only a minor impact on our overall volume and contributed less than 1 percent to the overall sales growth.

The retail business posted a 21.8 percent increase over last year. The increase was driven by an overall 68.9 percent increase in Movado boutique sales. This was the result of an 18.2 percent comparable store sales increase along with the addition of nine new doors year-over-year. Company outlet stores were relatively flat year-over-year.

Gross margin for the quarter was $43.4 million, or above last year by $6.9 million. The increase in gross margin is due to the sales increase. Gross margin as a percent of sales is 58.5 percent, or below last year of 66.6 percent primarily due to brand and product mix, particularly the proportionally higher sales growth of Tommy and the boutiques and the mix of products within the boutiques. As Efraim mentioned, jewelry sales accounted for more than 50 percent of the overall business and had lower gross margin than the sales of our watches. Excluding Ebel, gross margin remained strong at 59.5 percent.

Our operating expenses were $41.7 million, or 20.9 percent above last year. Excluding Ebel, operating expenses were $38 million or 10.3 percent above last year, which is below the sales growth of 17.6 percent. Principal reasons for the increase in expenses excluding Ebel are higher marketing expense due to the increase in sales, added spending in support of the nine new Movado boutiques, higher payroll and commissions, and increased spending in Asia to support the development of the Movado brand in China and the global expansion of Tommy.

Interest expense is $725,000 or 7.4 percent below prior year. Our average debt for the quarter was $45.5 million or 2.5 percent above last year. Our average borrowing rate is 5.2 percent versus 5.8 percent last year. This reduced rate is the result of the mix of our borrowings, with a greater portion being short-term bank loans, and to the continued paydown of our long-term debt.

As expected, income taxes were provided at a 25 percent effective tax rate versus 28 percent rate last year. The decrease in the effective tax rate is the result of our projected profits and earnings mix for the year. This lower tax rate had virtually no effect on our earnings per diluted share for the quarter.

Net income is $736,000 versus $856,000 last year. Our base business recorded net income of $2.5 million, while the Ebel business recorded a loss of $1.8 million. Earnings per diluted share are 6 cents, versus 7 cents last year. This is on a 3.3 percent increase in the average number of shares resulting from the effect of the higher stock price on our outstanding stock options. Overall we earned 20 cents from our base business, and as expected we lost 14 cents in the Ebel business.

Now taking a quick look at our balance sheet, our cash as of April 30 is $35.9 million and above prior year of $34.5 million even after paying for the all-cash acquisition of Ebel. Accounts receivable of $99.5 million increased by $2.2 million from last year even with the acquisition of approximately $16 million worth of accounts receivable from Ebel. Excluding Ebel, our base business accounts receivable are $88.2 million or 9.4 percent below last year. This reflects the favorable mix of our sales growth in Tommy and our Movado boutiques where shorter payment terms are the norm, in addition to strong cash collections from all of our brands including Ebel for the quarter.

Inventories of $175.3 million increased by $55.9 million from last year. Excluding Ebel, inventories were $136.7 million. Increase in our base business of $17.3 million. The increase is comprised of $7.6 million for our nine new Movado boutiques; $2.6 million resulting from the translation of our Swiss inventory; and $7.1 million due to the seasonal build of new products for introduction at the Basel trade show.

Our short-term debt increased due to an acquired mortgage from Ebel of $5.1 million which we plan to pay off shortly, and higher bank borrowings to meet our cyclical business needs.

Capital expenditures for the quarter were $5.9 million and depreciation expense was $2.7 million. Our capital expenditures were primarily for the build out of our Movado boutiques, renovations of existing retail stores, and the acquisition of furniture and fixtures for our expanded office space in Paramus. In summary we are pleased with our financial performance for the quarter in all respects, delivering a very solid P&L performance and maintaining a sound balance sheet. Now let me turn the call over to Rick.

Thanks, Gene. Good morning, everyone. Our strong first-quarter performance reflects the success of our brand investments, new product offerings, and enhanced productivity, further demonstrating our ability to execute our multiyear initiatives on many fronts. Even as we remain focused on integrating Ebel, we continue to leverage our improved cost structure and maximize our flexible global supply chain.

During the first quarter we remain focused on our fiscal 2005 operating initiatives, which I outlined in our last conference call. They are, first, a continued focus on our growth initiatives, Tommy Hilfiger and our Movado boutiques. As Efraim and Gene touched on, these businesses showed substantial growth during the first quarter; and combined they contributed approximately 8.1 percent of our 17.6 percent sales growth, while our base businesses contributed 9.5 percent.

Second, a continued focus on our company's financial strength by managing working capital and generating positive cash flow from operations. As you can see, our balance sheet remains strong with a cash position equal to a year ago level, despite the recent all-cash acquisition of Ebel.

Our third operating initiative is the integration of Ebel into our worldwide operations. Now let me discuss Ebel for a few minutes. As you know, we completed our acquisition of Ebel on March 1, with the exception of Germany, which we would expect to close in mid-June. We also filed our 8-K on May 17, which discloses three years of audited financial statements for Ebel and showed GAAP losses averaging $15(ph) million during this period.

Now let me remind you of some of the specifics of the transaction. Under the terms of our contract with LVMH we received net assets of $45.6 million in exchange for a total payment of $39.8 million. In essence we are receiving assets in excess of the purchase price by 15 percent. These assets along with a valuation to the Ebel trade name translate to an opening balance sheet for Ebel consisting of the following. Inventories net of reserves of 38.6 million; Accounts Receivable net of reserves of $15.9 million; property plant and equipment up $3.9 million; and liabilities of $24.8 million, which include $4.4 million for severance associated with the restructuring of Ebel. All of this results in good growth for the Ebel trade name of $7.4 million which is still subject to minor changes but in line with our guidance.

As you may recall, Ebel was purchased by our wholly-owned Swiss subsidiary. In addition to the assets I just outlined, the Swiss company will also receive net operating tax loss carryforwards generated by losses incurred by Ebel prior to our ownership. These NOLs, while not yet finalized, are estimated to be in excess of $60 million. Of course this is not reflected as an asset on our balance sheet but clearly presents us with an opportunity to offset taxes from future years' income. To the extent we could realize any value from these NOLs, it would provide us with an incremental cash flow benefit and be reflected, first, as a reduction of goodwill, with any further excess realized in the P&L.

Now let me discuss Ebel from an operations standpoint. As expected, Ebel was dilutive to earnings in the first quarter as we integrate the brand into our portfolio. Already we're demonstrating through our efforts that we are committed and prepared to take the necessary actions to turn this brand around and return it to profitability. The integration is proceeding as planned and we are pleased with the progress made thus far.

Immediately following the closing of the acquisition we obtained Ebel's sales and marketing personnel around the world, and we are utilizing our existing infrastructure to operate the business, particularly in North America and Asia. In those countries where we do not have a significant on-the-ground presence, particularly Germany, the UK, and Japan, we are utilizing transitional services provided to us by LVMH. In the meantime we are in the process of developing an appropriate support structure for these countries, which will utilize our existing operating systems and a centralized facility for distribution.

In addition to the initiatives Efraim touched on earlier aimed at revitalizing and increasing the visibility of Ebel, we are also bringing Movado Group's operating disciplines to bear on the Ebel's infrastructure. These include gross margin initiatives, operating expense control, and working capital management.

Now let me discuss some of the specific actions involved with the integration of Ebel and how we will restore the brand to its rightful position at the high end of the luxury watch market. First, our intention is to right size the business, including the infrastructure, which I will talk about more in a few moments. We are focused on Ebel for the long term and on generating healthy, profitable sales. As a result, sales for Ebel are expected to be approximately $50 million, a reduction from prior-year sales.

As Efraim discussed, beginning in the second half of this year we will launch new products such the Sportwave collection and a global advertising campaign aimed at increasing Ebel's visibility in the marketplace. Having been without consistent marketing and visible advertising support for some time now, we expect that initiatives such as these along with the revitalized product assortment will help drive Ebel's sales growth in the future.

Second, we expect to increase Ebel's gross margin from its current 30 percent level to the 50 percent range by year-end. This improvement will come as a result of the actions we are taking including the closure of manufacturing facilities and the incorporation of Ebel into our very efficient global supply chain organization. Initially Ebel's gross margins will be negatively impacted as we cycle through product that had been produced within Ebel's own manufacturing facility. Later this year as we begin selling products produced through our supply chain, we will start to enjoy a much improved gross margin.

Third, when we acquired Ebel it had an infrastructure in place to support a much larger business. We have already taken a major action to right size the business and create a variable expense structure with strong supply chain management capabilities. In March we announced a 40 percent reduction in Ebel's workforce in La Chaux-de-Fonds, Switzerland. European labor laws are very specific; and in accordance with those laws, we have provided the affected workers with the proper notice, and this whole process should be completed at the end of June. As such, certain onetime costs were incurred for the severance notice period, which will run through the P&L.

We are committed to returning the Ebel brand to profitability. Building and growing watch brands are the core focus of our worldwide operations. We have a strong track record of successful product development, marketing, and supply chain management. Therefore we are confident that we will position Ebel for future profitable growth.

Now I would like to turn to our financial outlook. We initially anticipated the Ebel would be dilutive to fiscal 2005 earnings per share by 10 to 20 cents. We expect that the dilutive impact of Ebel will now be closer to the 20-cent range for the full year with that amount or a slightly greater loss recorded in the first half, given the cyclical nature of our business.

That being said, given the exceptionally strong sales results we experienced in our Movado businesses during the first quarter, we now expect these businesses will generate sales at the higher end of our previously stated 6 to 8 percent range. For the full year fiscal 2005, we continue to project diluted earnings per share between $1.84 and $1.92 including the impact of Ebel. We expect Ebel to reach a breakeven or profitable level during the second half of the year as our restructuring initiatives begin to gain traction and as we inject (technical difficulty) into Ebel's product assortment and support the brand with the launch of a global advertising campaign. As previously stated, Ebel is expected to be accretive to earnings starting in fiscal 2006.

For the consolidated company we maintain our estimate for the full-year net sales be slightly in excess of $400 million. This represents an estimated contribution of $50 million from Ebel and projected sales growth in the 8 percent range from all other brands.

Turning to our guidance for the second quarter of fiscal 2005, we would expect Movado Group excluding Ebel to deliver diluted earnings per share slightly in excess of last year's 46 cents. This is based on projected mid-single-digit sales growth coming from our existing businesses. As Gene mentioned earlier, first-quarter sales were exceptionally strong, particularly in our international business, where we saw a rebound in (inaudible) following last year's SARS epidemic.

Looking to the second quarter our year-over-year sales comparisons become more difficult. As a result we would expect to see our second-quarter sales growth return to more normalized levels. Additionally operating expenses in the second quarter are expected to grow in line with our sales due to the investments we continue to make behind our Movado boutique expansion and the increased cost associated with operating Ebel's global marketing and support infrastructure.

As we continue to integrate the Ebel business, we anticipate Ebel will incur a second-quarter bottom-line loss of between 5 cents and 15 cents. Therefore on a consolidated basis second-quarter diluted earnings per share are expected to be in the 33-cent to 43-cent range, compared to 46 cents last year. With that, I would now like to open up the call to your questions.

(OPERATOR INSTRUCTIONS) Lance James, David L. Babson & Co.

Congratulations on a great quarter. My one question is with regard to the projections on losses from the Ebel in the second quarter in the range of 5 to 15 cents. Is that more -- is the range there because it is unclear as to the progressions on cutting costs there? Or is it more associated with uncertainty as to what top-line sales might be there?

Basically it's a combination of top-line sales and gross margins, because as we said gross margin will improve as we start producing new products and selling those. So that will improve partially in the second quarter but more in the second half.

But then also incurring some costs as a onetime basis for severance, that is the notice period that we had originally anticipated would be part of our purchase accounting. That will be going through the P&L. Some of it went through in the first quarter, some will go through in the second quarter. It's really the period after June where we make a lump sum payment to employees that is included in the purchase accounting and will not go through P&L.

Okay, and if I can fire a second question in, in terms of your boutiques, are you finding -- I'm not sure how you can measure it -- but value added just to your brand image as you grow the number of boutiques in different areas? Do you find that helping to support the sales of your product even outside of the boutiques?

What we have found is that as we enter a market with our Movado boutiques we actually strengthen our presence within the market both in our retail distribution obviously, but also in our wholesale distribution, and really in several ways.

One, we strengthen the overall image of the Movado brand because the stores do that, and they reinforce the luxury image of the brand. But we also increase the advertising within that marketplace to support our retail business, and that really creates additional awareness and image within the marketplace. So, we've been in the New York metropolitan area the longest and that is by far our strongest market, and I think as we expand into other markets we are strengthening the brand in those markets as well.

Well, congratulations on not only an outstanding quarter but really an outstanding number of years you've put together here.

Bob Poole, Bricoleur Capital.

I too couldn't say enough about your financial performance and I think what will prove to be the wisdom of your Ebel acquisition. You guys are doing a great job. My only question is this. In your guidance, can you tell me what the aggregate losses would be in that guidance that you expect from the Ebel business, the retail business, and the Tommy business? In the aggregate.

I will let Rick answer that. I do believe that the Tommy business will actually be profitable this year.

Okay, so I can take that off the list.

Remove that from the question. (multiple speakers)

Basically from the Ebel standpoint we're going to look at approximately 20 cents for the full year. In the first half of the year it could be between 20 and 30 cents, for the first half of the year. And obviously with the improvement in margins and those onetime costs not recurring after June, improving in the second half. Also the second half is when we will have a lot of our newness and expect a good part of the sales to take place.

From the standpoint of the boutiques, the boutique investment will be in the range of $4 million and probably a little bit higher than that, 4 to 4.5 million, which is down from a year ago. Obviously as we expand the boutiques our game plan is to get to a breakeven over the next number of years. That is all pretax.

Great, so $4 to 4.5 million pretax, so that is almost another 20 cents there. Is that right?

Right, but that has been an investment, an ongoing investment that the company has been making for a number of years now and we believe that within two years should turn the corner as we get to critical mass in boutiques.

That is on a fully absorbed and allocated basis. So obviously we're getting a lot of value from those boutiques in the Movado wholesale business.

They are incurring all their own advertising expense, which traditionally supports the overall brand as well.

Completely understood. You are talking about the boutiques reaching some level of breakeven or profitability over the next couple of years. You will have 23 stores by the end of this year. I suspect you will have more than 25 by the end of the following year. Twenty-five in my recollection has always been the magic number to get to, for breakeven. Is there a change to that, which would surprise me given the incredible strength of your sales there.

We said 25 or so was the breakeven. We're probably looking at getting around 30 stores; and 25 once they are up and running. So the year a half (ph) 25 stores, you are going to have quite a few that are only open a partial year. So it is really the time when we have those open for a full year.

Understood.

Very comfortable that basically in three years we're going to see dramatic changes in those investments; and three years from now when we probably have 30 stores, but 25 stores opened for at least a full year, we will be in that breakeven range.

Great, thanks again. You're doing a great job.

Elizabeth Montgomery, SG Cowen.

Congratulations. I have a couple questions. The first, I was wondering if you can maybe talk about the door count within the core business; and how that has changed; and if that is maybe driving some of the really strong sales in the core business?

Then I also had a question about China. I think you mentioned a couple times expanding Movado there, and I wondered if you could give more specifics on the plans for doing that.

The door count in the first quarter I think with the exception of Tommy Hilfiger remained flat; and Tommy Hilfiger had slight growth in the U.S. and then an international expansion. In the U.S. I would think that we added probably about 50 doors over last year.

And then China and Movado, we are very excited about our launch of Movado in China, which we began about 18 months ago. We are getting traction in that market. It is obviously still a small and developing market but we think one that has major opportunities for the long term for the Movado brand as an emerging market.

And just to remind you, we have an operating enterprise in Hong Kong. We have (indiscernible) subsidiary in Hong Kong. Movado has been a business force in Hong Kong for a long period of time and this is just a logical expansion into China. Clearly there's advertising synergies between Hong Kong and China that we're maximizing. We're focusing on the major cities; and as we are expanding our doors and our presence with displays and with small shop-in-shops and the displays that we use, it gives us good presence. So it is a logical sequential type of expansion as opposed to a major cash infusion type of investment.

Sure, my final question is just could you remind me one more time, maybe by ranking the brands in terms of which brands have greater customer base among women versus men?

Okay, you want to go by brand? Concord is probably about 60/40 women. Movado is 50-50. Coach is about 75 percent women. ESQ is 50-50. And Tommy is actually about 60 percent women, 40 percent men.

Okay, great. Thanks a lot.

(OPERATOR INSTRUCTIONS) Richard Friary (ph), Delphi Management.

You have mentioned the gross margin and even answered a question about it. I am wondering if you are going to be able to, or at least it is your goal, to get that gross margin back up over 60 percent?

The game plan clearly is to keep our margins north of 60 percent. But in the near term it will be a little bit lower than that because of the integration of Ebel. And again (multiple speakers) from a margin that has fully absorbed in a high level of cost into the product, and to put it in our supply chain, and get it north of 50 and probably even 55 range. That will take 12 to 18 months to get it to that level.

Also the other thing is with the mix of our business, Tommy Hilfiger as we said before is in a margins that is below our company average because of the nature of the business. As we start growing that business and getting critical mass the margins will also be improving. So again over the next 12 to 24 months we will be seeing margin improvement taking place for Tommy Hilfiger.

Also with the boutiques when we look at the mix of our product offering there, as we get to a more stable level, which is probably jewelry in the 60 percent range of our sales, that margin will be stabilizing as well. We have ongoing initiatives to improve margins.

So I think over the next 12 to 24 months we're going to see continual improvement taking place in the margin; and clearly we're hoping that currency remains reasonably stable versus some of the very dramatic weakening that has taken place in the U.S. dollar over the last 18 months or so. So our plans are constantly to be north of that; but with the events taking place we're going to see a short-term drop back, and then growing it back in.

You mentioned currency. Has that had a significant impact on the gross margin as well?

We're fortunate that currency has from a standpoint of looking at couple of years ago -- as you know we have a currency hedging program in place which basically gives us the ability of having some time to react to significant changes in currency. We have put in some price increases to be able to offset that; and those price increases are not fully effective, or we haven't seen a full effect of that in the first quarter.

What is the price point for the Sportwave watch?

The Sportwave watch will start at about $1300 and go up to about $4000. It is the entree price in Ebel and actually comes from their own archives. They had a Sportwave in the '80s, early '90s, and this is the redesign of a similar model. And we got a very good reaction to it from retailers around the world at Basel.

Also how is your product doing at duty-free both in the Caribbean and then at the airports?

In Caribbean it has been exceptionally strong, and that's over the last really 18 months, and that continues to perform well. Then our Coach brand, which is really the one we have at the airport duty-free stores, in the Far East predominantly, has been exceptionally strong as well. And our growth there during the last 18 months, really during the last 12 months as the SARS tide ebbed has been very strong.

Thank you very much.

Carole Cranmer, Morgan Joseph.

Good morning and I'll add my congratulations. A general question on Ebel. You have clearly articulated your plans to turn around the brand; and the financial impact seems to be quite close to what you originally thought it would be. I know you've had experience in turning around brands before. But as you have taken a closer look since the acquisition and the integration process began, are there any particular areas of challenge or opportunity that you've identified that might not have been what you expected?

I think it is pretty much what we expected, that we were buying a great asset that needed tender loving care and needed to be restructured from both an operational point of view and certainly from a marketing point of view. And as you correctly pointed out, something that we've done in the past.

The more that we take a look at the brand and the asset that we've acquired, we're really feel comfortable that this is an unbelievable brand and a great value to its shareholders. Again as we have reiterated it is obviously a long-term process to turn around a luxury brand; and we want to maintain the luxury image and treat it with tender loving care. So we didn't buy it to own it for six months or a quarter. We bought it to own it for the long term.

Good enough, thanks.

Arnold Ries, (ph) Goldsmith & Harris.

I hate to try to pin you down this way, but just give us feel. You're doing a lot to turn Ebel and obviously that should produce results. But there's also a seasonal factor in the second half of the year. Will the profitability Ebel gets in the second half, or breakeven, continue into the first quarter of next year? Or is that a seasonal low to the extent that Ebel will drop back into a loss in the first quarter?

Secondly, an easy one, just to make sure. I have got the numbers already but I just want to make sure there's no change. Capital expenditures and depreciation for the year?

Let me take the first part, on Ebel. Clearly as we have said we would expect that we are going to have losses of anywhere from 20 to 30 cents in the first half. And with that we are going to have a 20 cent loss for this second half for the full year. Basically that's going to be a breakeven or a small profit (inaudible) in the second half.

That is going to result from an increased growth in sales, because the predominant amount of our sales will take place in the second half of the year, which is normal in our business but a little bit more skewed for Ebel because of all the activity that we're going to have in the second half, with new product, with major advertising, and relaunches, and things of that nature.

For next year we would expect it to be accretive. It is early days to sit there and say how accretive it will be. I would suspect even though we haven't gone through the pieces by quarter yet for next year that, again in the first quarter, it may well be a small loss for Ebel just because of the cyclical nature of the business. That is entirely driven by sales.

Gross margin as I said will be improving over the next 12 to 18 months. Clearly I would expect us to be fully where we want to be with Ebel probably by the second half of a year from now. So the first half will be probably a little bit -- first quarter will probably be a little bit dilutive to us, but we are confident will be accretive for the full year; but again not sure to the extent of how accretive.

I would like to just add to that. Obviously the business that we are in, product development cycles are quite lengthy. So we will be introducing a lot of new and exciting products within the Ebel brand next year. That I think will also further solidify the Ebel brand next year.

You asked about depreciation.

(multiple speakers) just make sure the numbers haven't changed for the year.

Our expectation for CAPEX is somewhere between $14 and $16 million for the year; and depreciation will be in the $11 million range.

And one final question on working capital. As you work down the Ebel inventory, which is obviously going to hurt your gross margins, there should be a benefit -- I would think a benefit on working capital as you go into the second half of the year. Are you going to have some positive cash flow for the year from working capital?

A couple of things. One is the inventory is net at a $39 million level there. Clearly we will be working through some of the inventory that we have there. But clearly we're going to be investing particularly in new products for Ebel; and clearly that will be adding to itself.

Inventories, I'm not so sure we're going to see any major change this year in their inventory position. A lot will go out. Lots of new stuff will come in. From a receivables standpoint we've made excellent strides in the first quarter already. As I mentioned before our opening balance sheet for receivables was around $16 million; and we have had a major focus on collection and were able to bring that down quite a bit in the first quarter. I don't expect we are going to have a lot more change in that, but that was good news, and we do expect that to continue for the year.

So Ebel we will again interject all of our disciplines that we have with all of our business around the world and do expect some positive results from that. So working capital should probably be a little bit beneficial from Ebel this your.

Thank you.

(OPERATOR INSTRUCTIONS) David Taylor, (ph) David P. Taylor & Co.

My questions have been answered, thank you.

It appears we have no further questions at this time. I would like to turn the program back over to management for any closing comments or remarks.

I would like to thank all of you for participating today. Clearly we are very pleased with our first-quarter results, which reflected exceptionally strong sales performance. Our brands continue to perform well at retail and we remain focused on ensuring that they remain strong in the marketplace. Thank you again for your very good questions, and thank you for your participation. Have a nice day.

Thank you. This does conclude today's program. You may disconnect at any time and have a great day.