Movado Group Inc (MOV) 2005 Q2 法說會逐字稿

Good morning and welcome to the Movado Group second quarter earnings conference call.

At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation.

It is now my pleasure to turn the floor over to your host, Suzanne Michalek.

Ma'am, you may begin.

Thank you, 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 refer you to our second quarter earnings press release, which is posted on our web site at www.MovadoGroupInc.com.

I would also like to note that this conference call contains forward-looking statements which are made in pursuance 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 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 an overview of our business, Gene will then review the financial details, and Rick will provide you with a progress update on the integration of Ebel along with our financial outlook for the second half.

We would then be glad to answer any questions you might have.

All figures provided in our conference call today have been adjusted to reflect the two-for-one stock split distributed to shareholders on June 25, 2004.

I would now like to turn the call over to Efraim.

Thank you, Suzanne.

Good morning, everyone.

Today we are pleased to report excellent second quarter results reflecting strength across our brands, geographic regions and channels of our business.

We delivered growth in both our sales and profits, which exceeded our expectations, and these results were achieved even as we absorbed the dilutive impact of our Ebel acquisition and positioned the brand for future growth; which I will detail for you later in my remarks.

I would now like to update you on each of our brands, and Gene will then walk you through the financials.

Our Movado brand recorded low single digit percentage growth, led by increases in both our domestic and international business.

The new products that were introduced to our customers in Basel earlier this year, began shipping at the end of the second quarter and already are being met with a great reception.

In addition to our strong classic museum product, we have expanded our assortment of women's fashion to build on the success we experienced in this category last year.

New products include the Trimbrili (ph), Timima (ph) and Baroleto (ph); a beautiful open-ended bangle bracelet with semi-precious stones.

This fall we have added to our arsenal of powerful personalities featured in Movado's advertising campaign, who possess the qualities and timelessness associated with the Movado brand.

Mia Maestro, a highly-regarded Argentinian actress, who held a leading role in the critically acclaimed film "Frida" and who will appear in the upcoming film, "The Motorcycle Diaries".

Also joining our Movado campaign is Ashley Tuttle, the star of the Tony-nominated Broadway show, "Movin' Out."

These champions and their respective crafts will help support Movado and build on its strong brand image throughout the fall and holiday season.

Movado continues to build on its dominant position in the U.S. while expanding in overseas markets.

Specifically we have been focusing on the emerging Chinese marketplace as a growth opportunity for the brand.

We have rolled out our first six Movado shop in shops in China, and we plan to have approximately 20 of these shop in shops rolled out by year-end.

In our Movado boutiques, we continued to show strong growth in the second quarter with comparable store sales increasing 11.8%.

Our sales growth is being driven by the continued strong consumer appeal of our proprietary jewelry assortment.

In fact, during the second quarter, jewelry represented 50% of our product mix, compared to 41% last year.

Our products are true to the Movado philosophy of clean, modern design.

We recently introduced a new generation of our original Radius Collection and we're introducing new extensions of our best-selling Ono Collection launched last fall.

During the second quarter, we opened a new boutique in the Oak Brook Mall, and in August, we opened in Water Tower Place.

These openings bring us to four locations in the Chicago market.

In the second half of this year, we will open stores at Stoney Point in Richmond, Virginia;

Palm Beach Gardens and Tampa, Florida.

With these openings, we will end the year with 24 Movado boutiques, compared with 17 operated at the end of fiscal 2004.

Our Concord brand delivered strong results in the second quarter, with sales showing double-digit gains.

We were pleased with the single-digit increases experienced in our U.S. business, demonstrating the appeal of more accessible luxury price points in the marketplace; and resulting in continued improvement and sell through.

Overseas, Concord experienced an exceptionally strong rebound in sales, particularly in Asia.

These results were driven by the successful launch of the new Delirium Collection, celebrating the 25th anniversary of its launch as the world's thinnest watch.

Looking to the fall season, we are very excited about the introductory phase of a new Concord global advertising campaign.

The campaign will feature well-known model Angela Lindvall.

This dynamic advertising campaign, together with the comprehensive marketing program we rolled out over the course of the past year, truly solidifies Concord's positioning in the marketplace.

Affordable luxury, defined by elegance, classic design and individual style.

ESQ continues to build momentum in North America as we strengthen our distribution in the United States, introduce terrific Swiss leadership products and support the brand with the clearly-defined beauty and brains advertising campaign.

These efforts were validated by a strong double-digit sales increase in the second quarter.

Beginning in the third quarter, we'll roll out a new platform for ESQ, including great displays and packaging consistent with the brand image.

These initiatives position ESQ where it should be, as a leader in the entry-level Swiss watch category; and we believe it represents significant growth opportunity for our company.

Our Coach watch brand delivered strong double-digit sales increases for both the quarter and the first half of the year.

The appeal of the Coach brand has never been stronger, and we continue to achieve success in all of our channels of business and in our key markets in the U.S. and with the Japanese consumer.

Second quarter best sellers included Bridal Classic, now in round shapes and seasonal colors; and an innovative Signature C etched bangle bracelet watch.

Our fall advertising campaign will feature the recently-introduced Gallery Interchangeable.

Tommy Hilfiger posted impressive double-digit sales growth in the first half of the year.

In Europe, the Tommy brand is extremely strong and continues to grow very quickly; as does the overall fashion watch category.

We also continue to see very strong retail trends at all U.S. points of distribution.

Our Tommy Hilfiger business continues to establish its leadership in the fashion category.

Strong sellers during the quarter included Four Wheel Drive and Flagstaff.

Color continues to play an important role in fashion watches and we are capitalizing on this trend in the women's category.

Our new fall advertising for Tommy continues to focus exclusively on the product, and this season it will feature the Tommy crest emblazoned Rebel watch.

Now let me discuss our newest brand, Ebel, for a few moments.

As Rick will detail in his remarks, we are very pleased with the progress we have made right-sizing Ebel's infrastructure and integrating its operations into Movado Group Worldwide.

Now with the right operational platform in place, we are strategically poised to return Ebel back to its rightful position at the high end of the luxury market.

Our product development and marketing teams have been working hard, developing the right products and programs to revitalize the Ebel brand and drive sales gains.

Now as we enter the second half of the year, our customers will begin to see the impact of our efforts to date.

On the advertising front, we have launched a beautifully-executed, image-building global campaign featuring internationally-recognized supermodel Claudia Schiffer.

This campaign has a prominent presence in the key fall fashion publications.

By now I hope you're all seeing our beautiful new Ebel ads, such as our Classic Wave advertisement, featured on the back cover of the fashion critical and largest ever September Vogue issue.

We also expect Ebel to benefit from exciting new products such as the Sportwave, an Ebel watch geared to a younger consumer, and our new Beluga Tonneau Collection which will be introduced in the fourth quarter of this year.

These products are a precursor to the broader array of products that we plan to introduce throughout next year.

Combined with refined marketing programs, we are delivering a unified look, feel and meaning of the Ebel brand to our customers.

Together, these initiatives represent a return to the successful roots of the brand, truly conveying the appropriate luxury image.

Programs such as these properly position Ebel in the marketplace and will help drive the brand's growth.

As we enter the second half, our company is well-positioned for an excellent year.

Across all of our brands, we're delivering newness and generating excitement in the marketplace.

Our strong financial position will fuel our brand's continued growth and enable us to continue executing our growth initiatives.

I now would like to turn the call over to Gene.

Thank you, Efraim, and good morning, everyone.

We recorded strong financial results in the second quarter ended July 31, 2004, fueled by strong sales.

In discussing our financial performance today, I will provide you with year-on-year comparisons with and without our Ebel business.

Sales for the second quarter were 97.8 million, or 27.8% above prior year.

Excluding Ebel, sales were 88.4 million, or 15.4% above last year.

Sales in the wholesale segment increased 28.3% to 80.6 million.

Excluding Ebel, wholesale sales increased 33.3%.

All brands were above prior year in double-digits except Movado, which was in line with our plan and low single-digits above last year.

The domestic wholesale business was up 11.5% and, excluding Ebel, up 6.8%.

Tommy Hilfiger led the way with sales up a strong 62.2% over the prior year, due to positive sell through at retail in existing doors and added distribution.

ESQ and Coach were up double-digits, Concord up low single-digits, and Movado was flat year-on-year.

The international wholesale segment was up 128.3%, and excluding Ebel, up 52.3%.

All brands recorded strong double-digit increases with Tommy Hilfiger more than doubling year-over-year, reflecting the strength of the brand name and the appeal of our watch designs in the international marketplace.

Our Movado and Concord sales were particularly strong in Asia, up over 100% from prior year results, which were significantly impacted by the outbreak of SARS.

The retail business posted a 25.1% sales increase over the last year.

The increase was driven by an overall 65% increase in Movado boutique sales.

This was the result of an 11.8% comparable store sales increase, along with the addition of 8 new doors year-over-year.

The Company outlet store sales were above prior year in high single-digits.

Gross margin for the quarter was 58 million, or 10.7 million above last year, driven by our sales increase.

Gross margin as a percent of sales is 59.3% compared to 61.7% last year, primarily due to brand and product mix.

Excluding Ebel, gross margin remains strong at 60%.

Our operating expenses were 49.2 million, or 28.1% above last year.

Excluding Ebel, operating expenses were 42.5 million, or 10.7% above last year.

The principal reasons for the increase in expenses are added spending in support of our Movado boutique expansion, the continued global expansion of Tommy Hilfiger and increased people-related infrastructure costs to support other growth initiatives, including the development of the Movado brand in China.

Interest expense is 783,000, or 5.1% below prior year.

Our average debt for the quarter was 60.8 million, or 9% above last year.

Our average borrowing rate is 4.4% versus 5% last year.

The reduced rate is a result of the mix of our borrowings with a greater portion being short-term bank loans due to the continued pay down of our long-term debt.

As announced in our recent press release during the quarter, we recognized a 1.4 million gain, net of associated fees, resulting from a litigation settlement with Swiss Army brands.

Income taxes were provided at a 25% effective tax rate versus a 28% rate last year.

The decrease in the effective tax rate is a result of our projected profits and earnings mix for the year.

As reported, net income increased 22.7% to 7.1 million versus 5.8 million last year.

Our base business, excluding the litigation settlement, recorded a 30.7% increase in net income over last year to 7.5 million; while the Ebel business recorded a loss of 1.3 million.

On a reported basis, earnings per diluted share rose 21.7% to 28 cents versus 23 cents last year on slightly higher average diluted shares outstanding.

Our base business delivered an impressive 28.3% increase in earnings per share, excluding the settlement gain, and we recorded a 5 cent loss in the Ebel business.

Looking now at the year-to-date results, sales for the six-month period were 172 million, or 25.8% above prior year.

Excluding Ebel, sales were 159.1 million, or 16.4% above last year.

Sales in the wholesale segment increased 26.3% to 141.6 million.

Excluding Ebel, wholesale sales increased 14.8%.

We are pleased to report that all of our brands recorded increases above prior year.

Tommy Hilfiger, Coach and Concord are above prior year in double-digits, ESQ up high single-digits and Movado up mid-single-digits.

The domestic wholesale business was up 12%, and excluding Ebel, up 6.4%.

Tommy Hilfiger led the way with sales up a strong 64.5% over prior year due to sell through at retail and added distribution.

Coach and Concord were up double-digits, ESQ up high single-digits and Movado up mid-single-digits.

The international wholesale segment was up over 100, and excluding Ebel, up 59.8%.

Sales rebounded in Asia, up over 100% from prior year's results, which had been negatively impacted by SARS.

All brands recorded double-digit increases, with Tommy Hilfiger more than doubling year-over-year.

The retail business posted a 23.6% increase over last year.

The increase was driven by an overall 66.8% increase in Movado boutique sales.

This was the result of an 18.4% comparable store sales increase, along with the addition of the new doors year-over-year.

The Company outlet stores were above prior year in mid-single-digits.

Gross margin year-to-date was 101.4 million, or above last year by 17.7 million.

The increase in gross margin is due to the sales increase.

Gross margin as a percent of sales is 58.9%, or below last year of 61.2%, primarily due to brand and product mix.

Excluding Ebel, gross margin remains strong at 59.8%.

Our operating expenses were 90.9 million, or 24.7% above last year.

Excluding Ebel, operating expenses were 80.5 million, or 10.5% above last year.

The principal reasons for the increase are the same as I just outlined in the second quarter.

Interest expense for the six months is 1.5 million, or 6.2% below prior year.

Our average debt is 53.3 million, or 6.2% above last year.

Our average borrowing rate is 4.7% versus 5.4% last year.

Taxes were provided at a 25% effective tax rate versus a 28% rate last year.

As reported, net income increased 18% to 7.8 million versus 6.6 million last year.

Our base business, excluding the litigation settlement, recorded a significant 53% increase in net income to 10.1 million; while the Ebel business recorded a loss of 3.2 million.

On a reported basis, earnings per diluted share increased 14.8% to 31 cents versus 27 cents last year on slightly higher average diluted shares outstanding.

Our base businesses delivered a 47% increase in earnings per share, excluding the settlement gain, and we recorded a loss of 12 cents in the Ebel business.

Now taking a quick look at our balance sheet.

Our cash as of July 31 is 27.4 million as compared to 47.7 million last year.

This reflects the payment for the all-cash acquisition of Ebel and the funding of the Ebel business year-to-date.

Accounts receivable of 95.8 million decreased by 3.4 million from last year, even with the acquisition of the accounts receivable from Ebel.

Excluding Ebel, our base business accounts receivable are 89.3 million, or 10% below last year.

This reflects the favorable mix of our sales growth in Tommy Hilfiger and our Movado boutiques, in addition to strong cash collections from our brands.

Inventories of 181.8 million increased by 56.5 million from last year.

Excluding Ebel, inventories were 143 million, an increase in our base business of 17.7 million.

The increase is comprised of 6.7 million from our new Movado boutiques, 4 million resulting from the negative impact of currency and 7 million due to the seasonal build of new products for delivery for our upcoming holiday selling season.

Our short-term debt is 25 million versus 14 million prior year, in support of our cyclical business needs.

Capital expenditures year-to-date were 6.9 million and depreciation expense was 5.7 million.

Our capital expenditures were primarily for the build-out of our Movado boutiques and the expansion of our headquarters in Paramus, New Jersey.

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.

Thank you, Gene.

Good morning, everyone.

As you have already heard, we are very pleased with the strong results our organization has delivered in both the second quarter and the first half of this fiscal year.

Throughout the first half, top line initiatives, including product development, marketing and advertising drove consumer interest; and translated into strong sales gains across all of our brands and businesses.

These efforts were supported and enhanced by our efficient operating structure and continued focus on cash flow management, allowing to us generate strong bottom line results despite Ebel's planned dilutive impact.

As we continue to successfully implement our overall operating initiatives, we're also very pleased with the progress we have made in our integration of Ebel.

On July 30, we completed the final piece of our acquisition with the closing of Ebel, Germany.

Looking at the first five months of our ownership, Ebel was dilutive to earnings by 12 cents as we took the necessary actions and absorbed the cost to properly integrate the brand into our portfolio.

We're very pleased with the progress we have made on several fronts, including right-sizing the infrastructure, integrating the business and applying Movado Group's operational disciplines to Ebel.

Now let me provide you with an update on each of these fronts.

First, we have completed our right-sizing of Ebel's infrastructure and created a variable expense structure with strong supply chain management capabilities.

As you know, in March we announced a 40% reduction in Ebel's workforce in La Chaux de Fonds, Switzerland.

We are pleased to announce that as of June 30, this process has been completed and all of its associated costs are now behind us.

We are also very glad that virtually all of the affected workers were able to secure other employment opportunities in La Chaux de Fonds.

Second, we have fully integrated Ebel's operations into Movado Group's existing operating systems.

As you may recall, over the past few months we have been utilizing transitional services provided to us by LVMH in those countries where we did not have a significant on-the-ground presence; namely Germany, the U.K. and Japan.

As of September 1st, these services are no longer necessary.

We have developed an appropriate support structure for these markets and we have completely transitioned and integrated Ebel into our existing operating systems on a worldwide basis.

Third, and on an ongoing basis, we are applying Movado Group's operating disciplines to the Ebel business; including gross margin initiatives, operating expense control and working capital management.

Now I'd like to turn to our financial outlook for the balance of fiscal 2005.

Our first half sales performance in our base businesses was extremely strong.

And while we are very pleased with our strong first half international sales gain, we recognize that this compares against depressed levels last year, particularly in the Asian markets.

For the full year, we are increasing our consolidated net sales projections to approximately $410 million, versus our initial guidance which called for sales to be slightly in excess of $400 million.

This represents top line growth of approximately 11% from our base businesses.

Our gross margin continues to be affected by the shift in the overall mix of our business, particularly the higher sales growth of Tommy Hilfiger, the increased mix of jewelry in our Movado boutiques, and the impact of Ebel.

Nevertheless, we expect to maintain strong gross margins for the year in the 59.0 to 59.5% range, consistent with our second quarter performance.

In terms of operating expenses, we will continue to be aggressive in supporting our brands and businesses.

Specifically, we will continue to invest behind our Movado boutique expansion with four new locations opening in the second half, as well as the geographic expansion of Tommy Hilfiger.

Operating expenses will also increase as we invest in our people-related infrastructure to ensure continuity and drive future growth.

As a result, we anticipate full-year operating expenses, excluding Ebel, to grow between 10 and 11%.

Turning to Ebel, our initial plans call for Ebel to reach a break-even level during the second half of the year, and this was based on right-sizing the business and generating full-year sales of approximately $50 million.

We now have the appropriate cost structure in place.

However, we believe a full year sales target of approximately 40 million to 45 million is a more realistic and healthy goal for Ebel as we roll out our new marketing and product initiatives.

This translates into a full-year loss for Ebel of approximately 15 cents to 20 cents per share.

We continue to expect Ebel to be accretive to earnings next year.

Even as we absorb Ebel's dilutive impact on our results, we project consolidated diluted earnings per share to range between 95 cents and $1 for the full year.

This represents a gain of between 3% and 9% above the 92 cents per diluted share achieved in fiscal 2004.

Excluding Ebel and the legal settlement gain, we project earnings per share from our base business to increase between 20 and 25% in fiscal 2005, significantly outpacing our 11% sales growth.

Turning to our guidance for the second half of fiscal 2005, our plans call for top line growth of approximately 9%, excluding Ebel.

This growth compares to the 16% top line increase recorded in the first half of the year, and reflects more normalized sales comparisons as we anniversary a strong second half performance last year.

Based on our revised expectations for Ebel, along with the gross margin and operating expense assumptions just provided, we project consolidated second half diluted earnings per share to be slightly above prior year; which in the third and fourth quarters were 40 cents and 24 cents, respectively.

With that, we would now like to open the call up for your questions.

Thank you, the floor is now open for questions. (Caller Instructions) Our first question is coming from Richard Friary with Delphi Management.

Yes, first question, I know I always ask it, but how's the duty-free business doing, both in the vacation spots and in the airports?

Our duty free business has been very strong.

Our business in -- in the Far East, where we deal with the Japanese consumers and mostly the Coach brand, has been extremely strong.

And then our Caribbean business in the first half of the year was also excellent, obviously the current period -- the current few weeks will be affected by the storms that are down there, but this is not peak season down in that market, as well.

And there doesn't seem to be appear to be any permanent damage, as well.

Also, I -- I caught the bit about a couple of new introductions or reintroductions of products with Ebel.

But I'm wondering, are there other -- other launches planned with some of your other brands?

Well, in each of our brands we have launched a number of new products, and I think I highlighted some of those, especially in -- in Movado and -- and Coach and -- and Tommy Hilfiger, as well.

And we're launching the new Delirium in Concord.

So, we have new products coming in each of our brands for the second half of the year, and we're continuously focused on -- on developing new products for each of our brands.

I believe that that's one of our company's key strengths, really giving the consumer a compelling reason to buy one of our brands, products.

Thank you very much.

Thank you. (Caller Instructions) Our next question is coming from Jennifer Graff with Trustco Capital.

Good morning.

Good morning.

I'm just curious, are you guys looking to do any new JVs or licensing agreements like you did with Coach and Tommy in the future?

Well, we're very selective about what we do in that category and, obviously, within the two brands that we are doing a license with, we believe are the best within those two categories.

So, it is possible that in the future we would look at certain licenses; but, again, we're very selective and we're not -- we're very picky about the type of relationships that we're looking for in -- in terms of -- of the brand and the global nature of the brand, as well.

Would you prefer to do an acquisition rather than a licensing?

Or are you more concentrated just on Ebel for right now?

Right now we're concentrated on integrating-- on completing the integration of Ebel and then really building the solid foundation this year for the Ebel brand as we position it for growth next year and into the future.

So, that is our -- our focus right now.

Okay, great, thanks.

Thank you.

Your next question comes from Carole Cranmer with Morgan Joseph.

Thanks, good morning.

Could you talk more about your outlook for opportunities in the Chinese market?

You mentioned what you're doing with respect to Movado, but perhaps for other brands, as well?

And there's been much talk about the Japanese consumer, perhaps you can talk a little bit about how you see business in that market, as well.

Sure, first let me talk about China.

China's obviously one of the great growth markets in the -- in the world today and we're specifically focused with our Movado brand there.

We have opened a sales office in the Chinese market and we also have a specific Movado advertising campaign that ties in with the rest of our advertising campaign, but features a -- a Chinese film star and singer, Karen Mok.

And as well as that, we're also looking at opportunities with our other brands.

We've launched the Concord Delirium in -- in China this fall and we believe that there are opportunities for all of our brands down the road in -- in China.

In Japan, we have found that both our Ebel business has been good in Japan in the first half of the year; as has our -- as has our Coach business, has been very strong in -- in Japan during the first half of the year and we look at it as being strong in the second half, as well.

What are the shops in shops like?

Where would we find them?

Really they're inspired by our Movado boutiques, but just feature Movado watches; and they're basically about six feet of case space with a Movado wall behind them, as well.

Thanks very much.

Thank you.

Your next question is coming from Elizabeth Montgomery with SG Cowen.

Hi, guys, congratulations on a good quarter.

Thank you.

I have a couple of questions and I apologize because I'm not in my office and I don't have access to the press release at the moment, but I was wondering if first you could tell me the combined -- the first half revenue contribution from Ebel?

Rick?

The revenue contribution for Ebel in the first half was about approximately $13 million.

Okay.

And from a earnings per share, it was a dilutive impact of 12 cents.

So, the seasonality of the business is really weighted towards the second half of the year?

Well, you know, our business by its nature is weighted toward -- is a little stronger in the second half but, clearly, we only have five months of Ebel in the first half of the year versus the six months, because we closed on March 1.

And also, as with any acquisition and integration of a business, you always have a little bit of a slow period of time in the beginning as everyone kind of gets comfortable and understands what's taking place.

That includes employees as well as retailers.

Okay.

The second question was the benefit from the settlement with the Swiss Army brands, does that go through the SG&A line in the P&L?

No, that's a separate line item that we have in our P&L which shows just above interest expense, which is basically a separate line item as a one-time gain.

Okay.

And my last question is, can you talk a little bit more about the boutiques in terms of how many are in the comp base for this quarter?

And the comps that you saw, are those being driven by, you know, traffic increases?

Or is there some change going on in the average transaction value as you move more toward jewelry?

Or is there like better conversion?

Or is it all three?

It's really a combination of all three, but the main part of it has been the number of transactions as well as the average sales price going up, and I can get you the specifics, but Gene can talk to you about comp stores in the base.

This is Rick, basically we have 12 stores that we're comping year-on-year, so that's the comp store comparisons, there's another incremental 12 stores -- 12 stores -- another incremental 8 stores that have taken place that we're not comping yet.

When we look at our average transaction price, our average transaction price is going up and, again, primarily because of the mix of jewelry.

As we said, jewelry had grown to approximately 50% of our sales in the boutiques, up from 41% a year ago, and they generally have a little higher ticket price.

Okay.

And you're seeing traffic in the stores?

Well, traffic continues to be strong, and obviously as a lot of the new stores, with the local advertising that we're putting in and getting people familiar with them, overall traffic is increasing.

Clearly when we look at our stores that are more mature, they're at a more standard level.

Okay.

Thanks a lot.

Okay.

Thank you.

Your next question is coming from Mario Montagnani with Bank Julius Bear.

Yes, good morning, gentlemen.

My first questions were about -- about Ebel.

Could you -- could you -- is it right when you're targeting currently some $50 million U.S. sales for this brand in the near-term?

Could you just give a split of these figures in value terms between the quartz and mechanical technology for this brand?

I think we just updated -- the number would be between 40 and $45 million for the year and about 80% of the sales are in the quartz category, 20% in the mechanical category.

Right.

For this -- for this 20%, is -- is actually Ebel self-sufficient in terms of faction of mechanical movements or do you depend strongly from a supplier, third party?

Both, a combination of we do manufacture our own movement, our own chronograph movement, and we do purchase movements, as well, from suppliers.

Because as I say, you're trying to position Ebel in the top hand of the watch market. (indiscernible) So, if I will understand logic behind the industry, the more you go upwards with your price, the more you will be selling mechanical watches.

So, you're not self-sufficient right now, and I think this percent, 80 -- 80 versus 20%, will slowly increase in favor of the mechanical technology.

We don't agree with that because our belief is that -- and our positioning for the Ebel brand leans towards the feminine side and women's watches, and we're more positioned within the jewelry category as well as making beautiful women's watches that are predominantly based in quartz.

Okay.

So you mentioned women's watches.

Could you give us an idea of the split women/male -- female/male models, value terms with Ebel?

It's about 80% women's watches as well.

Okay.

And a split, or just a percentage of the sales you generate with Ebel, in terms of after-sale service of these 40, 45 million; 10%, is a right guess?

It should be roughly that number.

Okay.

Thanks a lot.

Okay.

You're welcome.

Thank you. [Caller Instructions] Our next question is coming from Cora Hughes with Susquehanna International.

Hello.

Can you discuss how the ASPs are going for Concord this year?

And also where you intend to take the ASPs for Ebel next year with your new products?

The average selling price, for those that don't know what ASPs are, for Concord are slightly up over last year with the introduction of Delirium; which is only available in 18 karat gold, and not in stainless steel.

And we expect that the average selling price, also for Ebel, will rise over the next 18 months as we place a greater emphasis on 18 karat gold watches versus solely steel and steel and gold watches in the recent past.

And can you give us some guidance in terms of percentage?

No, it's a little too early for that.

Thank you.

Thank you.

Your next question is coming from Arnold Brief with Goldsmith and Harris.

Ebel sales have been in a pretty sharp decline over the last few years, I guess due to, you know, prior ownership.

Do you see any signs at all of that trend leveling out?

Or is it too soon, depending on the new products, it won't happen until next year?

Is there any indication at all that you've got that under control in terms of the sales?

I think it's leveled off and it's establishing a base to be able to grow from as we introduce new products, which we are introducing several new families this fall.

As well as a sustained and consistent advertising support behind the brand, which it hasn't seen in a number of years.

So, with those two efforts in place, we believe that the sales will begin to grow next year and really will build a solid base this year, and that's one of the reasons that we have put in place our current forecast is that we do not want to build inventory in the stores, the idea is to continue to build sell through and grow from a very strong base.

How about shelf space and doors and things like that for Ebel?

Has that started to turn up yet?

Have you got orders for next year that indicate that you're going to expand doors or shelf space?

It's too early to -- to have orders for next year.

But we believe that with the emphasis on advertising and marketing that we're putting behind the brand, we will continue to build the strong distribution, although a very limited distribution, because it is a luxury brand in the future.

Ebel, even during its period of difficulties, has lost only a very limited number of doors, has maintained a very strong distribution in this market and other major markets and key markets around the world.

So, you know, that is one of the very positive things is that retailers are partnering with us and want the brand to succeed and be successful.

So you don't think you'll have any trouble placing the product?

Not at all.

Just one other question, it wasn't quite clear, I think I understood, but Ebel lost 12 cents in first half and is going to lose a few cents in the second half.

It's quite a shift.

And yet your earnings per share that you forecasted are up in the very minor.

I know things for the jewelry business picked up and the watch business picked up around November last year, but still in all, I'm just wondering; with a shift in Ebel, are you taking advantage of that to -- to do some more spending or something, to build some products?

Or is it just a conservative forecast based on your economic outlook?

I think first of all is, yes, you are correct that we're looking at having a slight loss for the loss of Ebel in the second half because of the sales pace that we're looking at, and that in continuing with our strong advertising support and the launch of the new global advertising campaign that we have.

So obviously we want to give that the proper level of support, which we're doing.

Number one.

Number two, our base businesses are performing quite strong.

They were very strong in the first half and, again, we're looking--we're comping against some tough economic situations last year in the first half, particularly in the Asian marketplace.

The mix of our business has changed so the margins are a little bit lower because of the strong growth of Tommy Hilfiger, above the levels that we had anticipated; so that is a bigger percentage of our mix.

As well as the boutiques.

So, when we're done, sales growth, we believe, is continuing very strong for us.

When we're looking at the second half, our base business, we're looking at a strong 9% sales growth.

Margins are going to be lower than they were a year ago because of the mix of the business;

Tommy Hilfiger, boutiques, the jewelry side as well as Ebel.

Operating expenses, as I did say, we are continuing and focusing on aggressively investing behind our businesses as well as our people, to ensure continuity and position ourselves for continued future growth.

When we're done, we are looking for very strong 20 to 25% growth off of our base business, on the bottom line, versus 11% top line growth.

So, we think our forecast and estimates are appropriate and accurate, taking into consideration the strong second half performance this year, and again expecting strong continued performance for the rest of this year.

Have you made an economic forecast that's less bullish or more bullish or what?

In terms of the environment --

From the standpoint--I mean, obviously, we're not anticipating, nor can anyone anticipate, unforseen circumstances out there, but clearly the U.S. is our strongest market.

The U.S. economy continues to perform reasonably well and we see that continuing just as the economists are saying out there.

The other parts of the world, Japan is performing well.

It's improving better versus where it has been.

Europe continues to be sluggish, but again, when you look at our mix of business, we're very strong in the North American marketplace; and a smaller percent of our business internationally.

Alright and one last question, I think in the past you've indicated that when you have 25 jewelry stores in for a full year, maybe requiring to get you to 30 stores on a run basis.

So, jewelry stores could be profitable.

You're going into next year with 24, would it be fair to assume -- even one more store in the beginning of the year you'll be open for the seasonally strong last half of the year.

Is it reasonable to assume that the losses in the jewelry store -- the boutique business will drop substantially next year?

First of all, I wouldn't expect that we would be profitable next year.

We would expect to still have an investment.

What we did say when we're at the 25 to 30 range and more in the 30 range, with the infrastructure support that we have in the build that we're comfortable, then we'll start getting to a profitability standpoint.

But, clearly, over the next couple of years and in this year we would expect our profitability -- the amount of investment to decline.

Okay.

Thank you.

Thank you.

Thank you.

Your next question is coming from Barbara Wyckoff with Buckingham Research.

Can you hear me?

Yes.

Yes.

Okay.

Could you talk about the projected annual volume for Coach and Tommy Hilfiger, and then remind me of what the revenues were last year?

And then the second question I have is, can you talk a little bit about the reasons behind the weakness in the Movado brand in watches?

The rest of the watch business seems to be so strong.

Why not Movado, too?

Okay.

Let me hit the first one first.

Movado has performed extremely well.

One, it's our largest business so it's building off of a mature base, but it still had -- has had single-digit growth-- mid-single-digit growth in the first half of the year; and it is also comping against last year when we did add some chain store distribution.

So, it's actually comping substantially better than that and doing better than that at retail, as well.

So, it actually has had a very good first half.

In our -- we don't publish our -- our brand businesses by business unit but we do -- we have given the outlook or the performance of the first half in terms of percentage gains.

Okay.

Thank you.

Once again, if you do have a question, you may press star 1 on your touch-tone phone at this time.

Our next question is coming from Mario Montagnani with Bank Julius Bear.

Yes, good morning, gentlemen.

Just had a follow-up question on your Ebel acquisition.

Could you just elaborate a little bit on the percentage of sales that you're targeting to -- to generate with new products, and on the current 40 to 45 million, what is the current percentage of sales of that this generates with products less than 24 months old?

And the second follow-up question is, your operating profit projection for that brand, could just remind us what you have in your planning?

Thanks a lot.

One, we expect that new products this year will -- will have sales of less than 15%, as we bought the brand in March and we had very little ability this year to introduce new products, although we believe there are strong new products that will come later in the year.

Next year I would believe that that percentage would go up to at least double, meaning about 30 to 40%.

And as we talked about earlier, the brand will lose money this year but substantially less than it had lost in previous years.

And next year the brand should be accretive to the Company, meaning that it will be profitable.

Okay.

Thank you.

At this time, we are showing no further questions.

I would like to turn the floor back over to management for any closing remarks.

Okay.

I would like to thank all of you for participating today and your interest and support in our company.

Our first half performance is a testament to the power of our brands in the marketplace, the efficient operating organization of the company and our talented team of people around the world.

We look forward to maximizing these assets and capitalizing on our momentum in the second half of the year.

Again, thank you very much for participating.

Thank you.

This does conclude today's teleconference.

Please disconnect your lines at this time and have a wonderful day.