Movado Group Inc (MOV) 2006 Q1 法說會逐字稿

Good morning, and welcome to Movado Group first-quarter earnings conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the floor over to your host, Miss Suzanne Michalek.

You may begin.

Thank you.

Good morning everyone and thank you for joining us today.

With me 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 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 2006 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 provide you with an update on our growth initiatives along with our financial outlook.

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 and good morning, everyone.

We are pleased with our first-quarter results, which were achieved on top of a very strong first quarter delivered in the comparable period last year, and which exceeded our expectations.

Double-digit gains in sales and profits reflect the power of our portfolio brands and businesses, innovative new product offerings and consistent integrated marketing support.

This year in our seasonally smallest quarter, we delivered an 18% sales increase on top of a 23% increase posted last year, reflecting retailer replenishment and the successful expansion of our brands and businesses, as well as the full integration of Ebel.

Our results were fueled by strong year-over-year sales gains in our Ebel, Movado, ESQ, Coach and Tommy Hilfiger watch brands.

Turning to our brand performances during the quarter, Movado remains one of the most powerful brands in its category, defined by strong product offerings and distinct brand image.

Movado continues to perform extremely well at retail, with very strong sell through in the United States.

In the first quarter, Movado achieved high single-digit revenue increases, reflecting both domestic and international sales gains.

We continue to strongly support Movado, and appeal to its target consumer with new products featured in our art of time advertising campaign.

We also remained focused on our strategy to constantly evolve Movado's product assortment, while remaining true to the brand's heritage.

This spring we continue to build upon our presence in the women's fashion category, with products such as Dolce, featuring a bracelet of bold geometric design.

In April, at Basel World, the annual watch and jewelery fair held in Switzerland, we received a tremendous response from customers to new Movado products, such as Fiero and Strato, both of which will ship in the fall season.

We remain focused on our growth strategy for Movado which is to maintain the brand's dominant position in the U.S., while expanding overseas, specifically in China.

Looking ahead to next year, we are very pleased about a number of marketing initiatives at events we are planning to celebrate Movado's 125th anniversary, and we look forward to sharing more details with you as we move forward.

Our Movado boutiques continue to elevate Movado's brand image and we have made a long-term commitment to building this business.

We are devoting all the right resources to our boutique initiative, including exceptional product design and strong advertising and marketing support.

We are also continuing to invest in building a strong infrastructure to support the continued growth of this business.

For the first quarter, our Movado boutiques delivered a 3.2% comparable store sales increase on top of a 18.2% gain last year.

During the first quarter, we opened one new boutique in the Cherry Creek Mall in Denver.

Looking ahead we anticipate opening an additional two locations this year, Beverly Center in Los Angeles, and Walnut Creek in Northern California.

These openings will bring our total to 27 boutiques at year-end.

First quarter marked the one-year anniversary of our acquisition of the global luxury brand, Ebel.

This year at Basel we took a big first step in our journey of returning Ebel back to its rightful position at the top of the luxury watch category.

We introduced completely redesigned iconic collections for which Ebel is known, adding new life to the Ebel Classic, Beluga, and 1911 families.

We also unveiled a new men's collection, Ebelisimo (ph), as well as a new movement, the Calibre 139, emphasizing the watchmaking expertise of Ebel.

The response from our retail partners was fantastic.

And we look forward to building on this momentum throughout the year.

New products, combined with the increased visibility in the marketplaces -- in the marketplace generated by our global advertising campaign, featuring Claudia Schiffer, drove Ebel's top-line growth significantly from a year ago.

Looking ahead, our efforts will only intensify.

As we deliver our new products in the second half of this year and the power of the media will remain a top priority for Ebel.

Our Concord brand experienced a low single-digit decline in the first quarter, reflecting positive increases domestically offset by decline internationally due to a shift in the timing of product shipments to the Middle East.

Concord's U.S. business continues to strengthen as does its business in the Far East and Japan where we are seeing good sell-through.

Our product offering continues to get stronger and at Basel this year, Concord launched the new Mariner collection, which received an excellent reception from our customers.

This collection, along with the evolutions of the Delirium and the launch of the redesigned Vanetto collection in 18-karat gold later this year will help drive Concord sales throughout fiscal 2006.

Concord's style-defined advertising campaign is resonating strongly with the consumer and we will continue to support the brand with a comprehensive marketing program, including new executions of this campaign.

ESQ delivered strong double-digit sales gains in the first quarter of this year.

Sell through of products continue to grow and our transition to innovative Swiss leadership designs is proving to be a very successful strategy.

We continue to focus on ESQ as an accelerated growth opportunity for the company.

The effect of the investments made in the product development and marketing can already be seen in the marketplace.

Our new ad campaign, ESQ and U, launched in high circulation spring publications and featured our men's and women's executions.

This response -- the response to ESQ's new product introduced in Basel was terrific and demonstrates that ESQ truly represents what the consumer 's looking for in the entry-level Swiss watch category.

New product highlights include Elan, a lady's fashion bangle, featured in our advertising campaign, Quest Daneaux (ph) and Fillmore, the first product from the new timeless series by ESQ, offered at very compelling price points.

With comprehensive integrated marketing programs and great products, we look forward to momentum continuing to build in ESQ.

Coach continues to be one of the most powerful brands in the marketplace.

With its accessible luxury proposition of product innovation, relevance and exceptional value resonating strongly with consumers across multiple channels and geographies.

During the first quarter, Coach watches recorded strong double-digit sales growth, both domestically and internationally.

The Japanese market continues to be a key driver for this business, where Coach has established itself to be a very strong brand.

The Gallery Interchangeable and Scribble C collections continue to perform very well.

Our team continues to generate synergies with Coach and the strategy has proven to be very successful.

Madison and Carlyle were two very strong product introductions during the first quarter.

We are very pleased with the continued global momentum we are achieving in our Tommy Hilfiger watch brand.

Tommy Hilfiger showed very strong double-digit gains in the first quarter, with impressive growth, particularly -- particularly in our international markets.

Specifically, growth in Europe increased 45% over last year, reflecting strong sell-through of retail, new doors in existing markets, and the opening of some new markets.

In the U.S., the fashion watch category remains very competitive, but we delivered -- we delivered double-digit gains over last year as we continued to aggressively support Tommy Hilfiger with multiple new product introductions featuring fresh and exciting designs along with a compelling point of sale presence.

We are very pleased with the strong results our company achieved in the first quarter and that our brands continue to perform well at retail.

We are encouraged by the strong reception each of our brands received at Basel World.

Importantly, we are focused on maintaining the excellent operating disciplines that we have put in place over the past few years as we continue to grow.

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, 2005, fueled by strong sales.

As a reminder in a cyclical business, the first quarter is the smallest quarter and typically represents less than 20% of our annual sales.

Sales for the first quarter were 87.8 million, or 18.3% above prior year.

Sales in the wholesale segment increased 19% to 72.6 million.

All brands were above prior year except Concord, which is slightly below last year.

The domestic wholesale business was up 15.3% with all brands above last year.

The international wholesale segment was up 30.3%, primarily due to sales growth in Ebel and Tommy Hilfiger.

Tommy Hilfiger continues to record strong demand and sell through in all international markets and was up almost 50% above prior year.

Our sales were strong in Europe, driven by Tommy Hilfiger and Ebel.

As to Ebel, our global wholesale business more than doubled from prior-year sales.

As you will recall, we acquired Ebel in March of last year.

The sales growth reflects having Ebel this year for the full quarter, in addition to increased demand for our new product offering introduced in the fourth quarter of fiscal '05.

The retail business posted a 15% increase over last year.

The increase was driven by an overall 33.7% increase in Movado boutique sales.

This was the result of a 3.2% comparable store sales increase, along with the addition of eight new stores year-over-year.

The company outlet stores were relatively flat year-over-year.

Gross margin for the quarter was 52.8 million, or above last year by 9.5 million.

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

Gross margin as a percent of sales is 60.2%, above last year's 58.5%.

The increase of 170 basis points was driven by higher margins in our Movado boutiques due to the sales mix and price increases passed in the fourth quarter of fiscal '05, improvements in our Ebel margins as a result of sales of our new more profitable models, and increased supply chain productivity improvements.

Our operating expenses were 50.7 million for 21.6% above last year.

The principal reasons for the increase in expenses are higher marketing expense to support our growth initiatives, added spending and support of the retail expansion, higher expenses related to Ebel, and particularly the effect of having Ebel for the full quarter, and increased spending in support of our global expansion.

Interest expense for the quarter is 809,000, or 11.6% above prior year.

Our average debt for the quarter was 51.5 million, or 13.2% above last year.

Our average borrowing rate is 5.7% versus 5.2% last year.

Income taxes were provided at a 25% effective tax rate for both years.

Net income is 997,000 versus 736,000 last year.

The earnings per diluted share are $0.04 versus $0.03 last year on a split adjusted basis.

This is with a 2% increase in the average number of diluted shares outstanding.

Now taking a quick look at our balance sheet.

Our cash as of April 30, 2005 is 49.6 million and above prior year's 35.9 million.

Accounts receivable of 99.9 million is flat to last year, even with the 18% growth in sales.

This reflects the favorable mix of our sales growth in Tommy Hilfiger and our Movado boutiques, where shorter payment terms are the norm, in addition to strong cash collections from all our brands.

Inventories of 204.9 million increased by 28.9 million from last year.

The increase is comprised of 7.8 million resulting from the translation of our Swiss inventory, and a 21.1 million primarily due to the seasonal build of new products for introduction at Basel World and the expansion of our Movado boutique business.

Total debt consisting of both short-term and long-term debt was relatively flat compared to last year at 63 million.

Capital expenditures for the quarter were 4.5 million and depreciation expense was 4.2 million.

Our capital expenditures were primarily for the buildout of our Movado boutiques, renovations of existing retail stores, and the acquisition of machinery and equipment to further automate our distribution activities.

We continue to expect capital expenditures of approximately 15 million for the full year.

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.

Our strong first-quarter performance reflects the success of our brand-building initiatives.

New product offerings and enhanced productivity, even as we invest behind growth across our organization.

In addition to our strong sales results, we are pleased with the improvement in our gross margin, due to the full integration of Ebel into our supply chain and improved margins in our Movado boutiques.

We believe this represents a level commensurate with where we expect gross margin to be for the fiscal year.

As we outlined in our last conference call, we have identified incremental growth initiatives that we are pursuing.

As we believe these opportunities will pay large dividends to our company and our shareholders in the future.

We are strategically investing in our organization, and positioning our company to support expansion and to capitalize on these growth opportunities.

These initiatives include: First, accelerated growth for ESQ.

We believe ESQ is strategically poised to take advantage of opportunities we have identified in the entry-level Swiss watch category.

We have dedicated an incremental $5 million in brand spending to ESQ in fiscal 2006, as we aggressively pursue growth with the ultimate goal of doubling ESQ's business in the North American marketplace.

Second, accelerated growth from Movado in China.

China presents a strategic growth market for the Movado brand.

We have already experienced initial success in this fast-growing market, though off of a very small base.

We are significantly increasing our resources in China in support of our plan to develop Movado into a major accessible luxury brand.

Third, we plan to continue investing behind the faster paced growth of our Movado boutiques and Tommy Hilfiger businesses.

In our boutiques we will continue toward our goal of reaching critical mass in converting this image building investment into a profitable operation.

In Tommy Hilfiger, we have significant growth opportunities in the U.S. and abroad through new markets as well as expansion in existing markets.

In our newest businesses, Ebel and Hugo Boss, there is a lot to look forward to.

Throughout the year we will intensify our advertising and marketing initiatives as we reestablish Ebel to its premier luxury status in the global marketplace and begin to bring the business to an appropriate level of profitability.

The Hugo Boss watch license is a great addition to our portfolio.

And we are very excited about the growth opportunities it presents.

Our team is focused on the total revitalization of the Hugo Boss watch business and we are in the process of developing a great new collection, with the proper brand positioning and price points to successfully grow this brand as we move forward.

We have made and will continue to make investments in people and infrastructure to support this new business.

We remain focused on generating strong growth for our company, while delivering increased levels of profitability and maintaining a steady focus on our other key financial metrics.

Fiscal 2006 will be a year where our investments will grow in line with sales, primarily due to increased infrastructure and marketing spend.

Nevertheless, we continue to expect earnings growth to outpace sales growth.

By taking the opportunity to invest in our businesses now, we are laying the foundation for accelerated growth in the future.

Now I'd like to turn to our financial outlook.

For the full year fiscal 2006, due to the delay in the adoption of FASB 123 R, which is accounting for stock options, we are increasing our fiscal year 2006 guidance for diluted earnings per share to now range between $1.18 and $1.24.

Included in this guidance is an expected $0.04 per diluted share expense related to the equity compensation of restricted stock.

We project fiscal year 2006 net sales to grow in the 12% range from last year.

Sales growth in the second half of this year is expected to be lower than the first half due to the higher comparable base in fiscal 2005 as a result of the Ebel acquisition.

Turning to our guidance for the second quarter of fiscal 2006.

We would expect Movado Group to deliver diluted earnings per share in the range of $0.26 to $0.30, compared to last year's $0.28.

As a reminder, last year's second-quarter results included a one-time pre-tax gain of $1.4 million, or an after-tax gain of $0.03 per diluted share, associated with the legal settlement the company reached with Swiss Army brands.

Our second-quarter earnings guidance is based on projected sales growth of between 15% to 18% from last year's second quarter.

Additionally, operating expenses in the second quarter are expected to grow slightly greater than sales as we make significant investments to support our organization for future growth and to fund the specific growth initiatives I've outlined earlier.

All of the guidance I have just provided excludes any potential impact associated with the American Jobs Creation Act, which we continue to evaluate.

We plan to make a decision on any repatriation later this year.

Of course, to the extent that we repatriate any international earnings, we would incur a one-time income tax charge.

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

Thank you.

The floor is now open for questions. [OPERATOR INSTRUCTIONS] Please hold for a moment while we poll for questions.

Once again, ladies and gentlemen, we do ask that you press star one on your touch-tone phones at this time.

Our first question is coming from Melissa Otto from DE Research.

Please pose your question.

Hi, good morning.

Congratulations on a good quarter.

Just a question about the U.S. versus international split.

Would you give me the wholesale sales breakdown for U.S. versus international?

I think Gene gave that in his comments but he can repeat it.

Sorry about that.

No problem.

Yeah.

The -- the wholesale segment increased 19% to 72.6 million.

The domestic portion was up 15.3% and the international segment was up 30.3%.

And would you be able to tell me what percentage of that came from Asia?

We don't break it out in -- in that manner.

We haven't broken it out in that manner in the past.

From a standpoint, the Asia was strong and certainly in line with the overall international growth.

You had mentioned that it was coming off of a low base, do you have any like percentages that sort of indicate where -- how much of a low base that was or how much traction is being gained in that market.

There you're talking specifically about China, because we only talked about Movado in the China market specifically coming off of a low base and when we're done, that is one of our investment focuses for the next number of years and we're looking at good performance there but again not anything that is driving those numbers disproportionately.

Okay.

And then just a question about the SG&A.

It looks like it was about 58% of sales this quarter and I was wondering if the SG&A will stay at these levels for the rest of the year?

As a percentage of sales, again the first quarter is our smallest quarter as a sales percentage and a lot of the SG&A is pretty much on a -- on a quarterly basis, so almost 25% of the full year but not quite because the advertising is as a percentage of sales.

As a percentage we would expect it certainly to be lower than that which is slightly above 50% but as I did say that we are expecting that SG&A for the full year will grow in line with our sales growth, which we talked about being in the 12% range.

Okay.

And then just a final question on -- on the cash position.

It looks like you guys have got a nice pile of cash there, any comments maybe on some uses for it.

We continue to be focused on generating positive cash flow commensurate with our earnings and we believe that that allows the company flexibility, it also allows the company to continue to pay dividends and that's the way we look at returning money to our shareholders.

Great.

Okay.

Thanks so much and congratulations once again.

Thank you.

Thank you.

Your next question comes from Miss Carole Cranmer from Morgan Joseph.

Ma'am, please pose your question.

Thank you.

Good morning.

I'll add my congratulations.

Thank you.

With respect to Ebel, it's certainly been gratifying to see the progress since your year-ago acquisition.

Where do you feel you are in the integration process?

Are you saying it's completed at this point?

You did make mention about its contribution to the quarter in terms of sales and that its inclusion helped gross margins.

Am I right to still assume that it will be slightly accretive this year?

We're focused on Ebel being slightly accretive by the end of the year to the company overall.

We are probably about 80% of the way there in terms of our integration, of where we want to be.

By the end of the year, we will be at 100%.

But we are also focused on bringing back the product from a marketing perspective and we're very excited about the reaction that we've gotten to our new products in Ebel.

And we continue to also develop new and exciting products for next year as well.

So we think that Ebel will be fully up and running the way it should be by fiscal 2007 and we are very gratified and pleased with the progress that we've made in the time frame that we've owned the brand.

Is it still right to think about that slight contribution to profits being a situation where it was slightly dilutive in this quarter and should be in next?

And then more than offset by some profitability in your larger volume quarters?

That's a good assumption.

Okay.

To ask the same sort of larger question about the boutiques.

Again, your progress -- you seem to be very much on track with 27 stores at the end of the year.

Are your assumptions the same about when -- you know, the number of stores and when you might reach profitability there?

We have said that we would -- our goal is to reach profitability and we have approximately 30 stores open for a full year.

And so we're probably still about two years away from that, but we are very much focused on -- on execution and our operating infrastructure to be able to support 30 stores.

And we have made very good progress so far and we look forward to the stores that we're opening also will make good contributions as well.

Thanks very much.

That's all good to see.

Okay.

Thank you, Carol.

Thank you.

Once again, ladies and gentlemen, if you do wish to pose a question at this time, we do ask that you press star one on your touch tone phones.

Again, that is star one on your touch tone phones if you do wish to pose a question at this time.

Our next question comes from Steven Weiss from Mindflow Capital.

Please pose your question.

Thanks very much, good job, guys, great quarter.

I have a couple questions.

Over the last quarter a lot of your competitors have recently been implementing some new strategic initiatives to reduce their sourcing costs for their raw materials and commodities into their overall processes and I'm curious as to what you guys are doing; if you could provide some color to how you guys are putting in some initiatives in planning to reduce your raw material costs by establishing a better line of communication with the suppliers, and opening up a better line of communication as well.

Well, our raw materials are really gold and diamonds that have a general market price and then stainless steel.

So that's really it.

I don't know what -- what examples our competitors are doing in terms of those areas.

We're not vertically -- you know, we're not going to be vertically integrated in the diamond area or the gold area.

But we do continue to have strong working relationships with our vendors, obviously we are continuing looking at productivity improvements, and as we have -- we have been talking about that for certainly the last five years and that's been one of the key -- primary reasons our margins have been able to remain strong.

So we continue to do the -- you know, the day in and day out type of activities and we've been doing that for a long time.

What's been your supplier feedback?

Are they pretty pleased with your efforts?

When we do it, we have very strong partnerships with our -- with our suppliers and again the key word is being a partnership there.

We work hand in hand with them to improve processes, not just ours but also theirs and how the two work together.

Okay.

So regarding stainless steel, are you guys seeing a lot of pricing pressure right now?

No, no major price changes there.

Okay.

Thank you very much.

Thank you.

Thank you.

Your next question comes from Mr. Arnold Brief from Goldsmith & Harris.

Sir, please pose your question.

Based on what you said about seasonality and the Ebel numbers that you gave in the release, Ebel would seem to be running below 35 million in sales at this point.

I don't know that the European seasonality is the same as the American -- U.S., but is that a reasonable assumption?

Have those sales --

Well --

Bottomed at this point and.

I think we -- you know, generally this quarter represents less than 20% of our sales and in Ebel even less so because most of the new product that we introduced, we introduced at Basel which took place really at the beginning of the second quarter and we will be delivered predominantly in the second, third, and fourth quarters.

So we see a substantial increase in sales for Ebel in the balance of the three quarters.

We're very pleased with -- in fact, very pleased with the sales results in the first quarter with Ebel, which had a substantial sales increase over the prior year.

A sales increase on a pro forma basis?

Yes.

Yes.

Absolutely.

I mean I think we reported that in our -- in our press release.

Sales were -- in the press release we outlined that sales of Ebel were 6.6 million versus 3.3 million in the year-ago period and even if you do it on a pro forma basis you're looking at still pretty much a doubling of sales.

Is -- is there a -- could you give us some idea of what the critical mass for Ebel would be in terms of revenues to reach a breakeven on an ongoing basis?

We will -- and I think I said earlier in the call and we've said in the past that we expect Ebel to be profitable this year, so it will surpass the critical mass and the breakeven of the Ebel brand is -- today is probably somewhere around $50 million.

That's what I was looking for.

Thank you.

Okay.

Thank you.

Once again, ladies and gentlemen, as a reminder, we do ask that you press star one on your touch tone phones at this time if you do wish to pose a question.

Again, that is star one on your touch tone phones if you do wish to pose a question at this time.

We have a follow-up from Mr. Arnold Brief from Goldsmith & Harris.

Sir, please pose your question.

Could you -- just -- one of your growth initiatives and I understand it's a -- just started and it's a low level, percentage gains don't mean too much at this point although it would be nice to get.

But China -- I don't know that we have an idea how -- how many doors you're adding, how many -- what your goal is, three, four, five years down the road, how significant China could be if everything goes right on a longer term basis?

I'm not looking for quarter to quarter kind of things, but could you flesh out China and your strategic?

Sure I'll talk a little bit and then I'll turn it over to Rick and talk to you a little bit about the doors.

We look at China as being a promising market down the road in terms of -- we believe the accessible luxury category, which Movado is the power in the U.S. in that category will play a similar role in the Chinese marketplace.

But obviously affluence has to gain in the marketplace.

We've had very good initial results and albeit a small business and with that I'll turn it over to Rick and he can highlight a little bit of -- of the door structure as well.

And again just to give you a sense.

We're currently in about 130 doors and that's versus about 80 doors last year.

We would expect at the end of the year to be at about 160 doors, so obviously still looking at some growth there.

From a standpoint of -- when we look at these doors, very importantly we have what we call shop and shops or corners which is the Movado look, in those stores and a lot of the -- the stores are structured so that each brand has its own look and that puts us on an equal playing field with all the other competitors in the marketplace.

We have approximately a third of our doors that we have opened in the shop and shop format, which is a very strong looking presence.

So the focus for us is to continue that expansion, to get that presence, to be on at least an equal playing field with a lot of the other very large competitors that have been there for a longer period of time, and position Movado for that accessible luxury position, which we believe is going to be strong for China in the -- in the long term.

Can you give us some idea, is China losing -- a lot of your growth initiatives, the boutiques, Ebel, probably Hugo are losing money at this point, would the -- you know, the potential for making good money as we go down the road.

I would assume China is losing money at this point, is it significant?

First of all, let me make a couple things clear.

Clearly we look at our investments and we do that in a structured manner so that, yes, we have investments today that are improving to a profitability.

We have other ones that are increasing in profitability.

China clearly is an investment from a standpoint of the marketing presence, the imaging that we have in there, and some of it is -- is the spending that we have on these shop and shops, which again is all image building, focus and advertising.

So, yes, there are losses there, albeit relatively minor.

From a standpoint of Hugo Boss I did mention before that we would expect that to be immaterial to us this year, both on a sales and a profitability standpoint, but certainly we would expect that that would be profitable as we move forward as opposed to years of investment and then turn it to profitability.

So each of our positions is in a -- in a different stage and that's obviously what we manage and we feel that we are in a position of being able to step up some investments, which we have been doing over the last number of years as well.

And yet continued -- I'll add to Rick's point, continue to increase the overall profitability of the Company as well.

Thank you.

Our next question comes from Mr. David Taylor from David Taylor & Company.

Sir, please pose your question.

Thank you.

I have two questions.

One, a few years back, the company made a goal public of reducing SG&A as a percent of sales 5% a year for five years and then the Ebel acquisition came along and of course that required enhanced SG&A, I understand that.

Is that goal that was enunciated a couple years ago, maybe three years ago now, still operative, or is it sort of permanently pushed aside?

From a standpoint, is we launched it about four years ago, clearly a lot has happened with the strong success of Tommy Hilfiger in Europe, obviously the Ebel acquisition and the opportunity positioned ourselves stronger globally and obviously also with the accelerated growth of the boutiques.

When we talked about that, we were still in the boutique mode of -- of opening a couple of the stores a year and as you know for the last two years we opened up around eight stores per year.

So the focus is still on SG&A and obviously one of our financial metrics is continuing to improve that as a percentage of sales.

Clearly, the objective of over a five-year period bringing that down one point per year has, obviously, been delayed from a standpoint of all the activities that have taken place.

That is still a focus, will it get to 45% over the next three or four years, that's probably too aggressive at this point in time because we still want to invest.

We believe we've got the strong brand positions and profitability position to be able to continue to invest behind new businesses like Hugo Boss, further expansion of Tommy, obviously major expansion with Ebel, and also the ESQ and China type of initiatives.

So that -- that specific target is changed from a standpoint of we will continue to drive that as a percentage of sales down, but not get to that 45% in the time frame we talked about.

And I think from a short-term perspective, David, we're looking at increasing sales on a 10% to 12% growth rate and increasing profitability at a greater growth rate than sales.

So we are making progress in that area and also focus not only on reducing costs but also increasing gross margin, which is in effect a reduction of costs as well.

You -- but you don't expect SG&A to decline as a percent of sales this year, is that correct?

This year we're continuing -- we're -- and I think we highlighted in our previous conference call as well as this one, that we have -- that we have decided to invest in certain opportunities as we look at being solid growth opportunities for the long-term success of the company.

ESQ, China, the continued growth of Tommy Hilfiger internationally, all of those as well as the Movado boutiques, all of those taking investment from the company.

But still growing profitability this year at a faster growth level than sales.

Okay.

Did I understand Rick correctly in the -- in the previous question to say that Tommy -- not Tommy, that Hugo Boss would be profitable this coming year?

What I said is this year it will be immaterial from a standpoint of both sales and --

I was talking fiscal '07.

Profitability because this is basically the year of transition.

Yes, we are investing behind product development and sales organizations around the world, basically positioning for a major reproduct -- product relaunch in Basel of 2006.

So this year will be an immaterial small loss, small profit but immaterial this year.

Going forward, we would expect it to be profitable and then growing as a percentage of profitability.

So you -- you expect Hugo to be in the black in fiscal '07, is that correct?

Correct, absolutely.

Okay.

Yes.

Thank you.

Once again, ladies and gentlemen, as a final reminder, we do ask that you press star one on your touch-tone phones if you do wish to pose a question at this time.

Again, that is star one at this time if you do wish to pose a question.

Gentlemen, I am showing no further questions at this time.

I'd like to turn the floor back over to Mr. Efraim Grinberg for any closing statements or comments.

Sir, the floor is yours.

Okay.

Thank you.

I would like to thank all of you for participating today.

Clearly, we are very pleased with our first-quarter results, which reflect a very strong sales performance and profitability performance.

Our brands continue to perform well at retail and we remain focused on ensuring that they remain strong in the marketplace.

Thank you for your participation today and I wish everybody a very good day.

Thank you, ladies and gentlemen.

This does conclude today's teleconference.

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