Movado Group Inc (MOV) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Movado Group's second-quarter earnings conference call. (OPERATOR INSTRUCTIONS) And as a reminder, ladies and gentlemen, this conference is being recorded and may not be reproduced in whole or in part without permission from the Company.

Now, I would like to introduce Suzanne Michalek of Movado Group.

Please go ahead.

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 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 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 second-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.

Good morning, everyone.

Before we discuss our earnings announcement, I would like to publicly express our thoughts and sympathies for those who have been affected by the tragic events that have taken place on the Gulf Coast.

As you know, the purpose of today's call is to discuss our financial results.

We are pleased to report a solid second quarter with growth in both our sales and profits which exceeded our expectations.

Our achievements result from remaining true to our vision, building brands with a commitment to long-term success.

We consistently support our brands with compelling marketing and advertising and support, along with market leading products.

Importantly, we're investing strongly behind our brands and businesses as we position our Company for accelerated growth.

Now let me discuss our brand performances for the second quarter and first half of the year.

Our Movado brand recorded mid single digit percentage growth in the second quarter and first six months, led by increases in both our domestic and international businesses.

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 fresh versions of our strong Classic Museum product such as Eliro (ph) and Strato (ph), we continue to build upon the success of our women's fashion category with bold new products such as Dolca.

This fall we have added actress Kerry Washington to our roster of personalities featured in Movado's Art of Time advertising campaign.

Kerry is the highly regarded actress who was most recently seen in her portrayal of Ray Charles' wife in the critically acclaimed film "Ray".

The first Movado advertisements featuring Ms. Washington are already in appearing in high-profile positions in September publications, including the exceptionally impactful back cover of September Vogue.

In our Movado Boutiques we delivered a 2.3% comparable store sales gain on top of a strong 11.8% increase last year.

We continue to develop and strengthen this business as we move towards converting our investment into a profitable operation.

We have strengthened our management team in this division to support our now 27 boutiques nationwide.

Looking to the second half of the year, our plans call for an acceleration of new product offerings to excite consumers during the important holiday season.

You'll notice that we have increased our fashion diamond product offering in yellow gold to better round out our jewelry assortment.

Some new product highlights include our Trembrili collection, as well as new additions to existing families.

These introductions are supported by our fall marketing plans which feature new, elegant catalog design.

During the second quarter we opened two new boutiques, Walnut Creek in Northern California and Beverly Center in Los Angeles.

With these openings we will end the fiscal year with 27 Movado Boutiques compared with 24 operated at the end of fiscal 2005.

Additionally, we're very excited that our boutique in Short Hills will relocate to a larger and more prominent location in the mall later this month.

The Short Hills boutique will be our first store in the New York metropolitan area to feature our most current boutique design.

Ebel experienced a strong quarter with sales more than doubling year over year as we delivered our first major new product introduction for Ebel with the return of a redesigned Ebel Classic.

We are on track with our strategy of rebuilding Ebel into a global luxury brand and we're very encouraged with our progress.

Looking to the second half of this year, the rejuvenation of Ebel's image and product collection will continue.

This summer we have rolled out new luxurious merchandising material at the point of sale and we all already seeing a positive impact, especially in the European marketplace.

Our global advertising campaign featuring Claudia Schiffer introduced in September 2004 and supported by substantial media investment continues to convey the very sophisticated and glamorous image that is Ebel.

Third quarter will be marked by the launch of an exciting new 1911, a well-known Ebel collection, epitomizing the fine watchmaking expertise of the brand including the Ebel proprietary mechanical movements, Caliber 137.

Our Concord brand delivered low single digit sales gains in the quarters.

Overseas Concord delivered a strong performance as we continue to focus on the brand's priority markets in the Middle East and Asia.

The US wholesale environment was challenging in the second quarter.

However, looking to the fall season we're very excited by the worldwide launch of the Mariner collection.

Mariner was first introduced in Basel and received a very strong response.

Throughout the fall and holiday season, we will continue to strongly support Concord with its style defined advertising campaign, as well as a new consumer brochure to be introduced in the third quarter.

ESQ experienced strong double digit increases in the quarter and the first six months as the momentum of this brand continues to build.

Our newly designed product assortment is driving this business and is developing ESQ into a true standout in the entry-level Swiss watch category.

Consistent with our strategy, we're aggressively supporting ESQ with a launch of its new advertising campaign, ESQ and You, which truly embraces a lifestyle focus.

The campaign was launched in spring publications, but the full effect will be felt throughout the important fall and winter selling season.

The campaign will be featured in major fashion magazines and will be reinforced by television advertising.

The back half of this year will bring significant product newness to the ESQ consumer, all featuring exceptional design, quality and value.

The Coach brand's distinctive accessible luxury proposition continues to be embraced by a loyal consumer base in North America and internationally.

For the first six months of this year our Coach watch brand showed high single digit increases.

Sell through of our fashionable Coach products continues to be strong and we look forward to a significant increase in product newness during the second half of the year.

We're very excited about our fall advertising campaign which features our new Signature C Gallery Design.

Also in October we're proud to support Breast Cancer Awareness Month with our introduction of Positively Pink Bridal Classic (ph) watch.

A portion of the proceeds will go directly to the Breast Cancer Research Foundation.

Tommy Hilfiger posted strong double digit sales growth in the first half of the year, and this brand continues to establish its leadership in the fashion watch category.

The US fashion watch market remains consistent -- remains extremely challenging, but Tommy continues to grow its share of market in the segment.

Excellent growth was seen in the balance of North America and Latin America, as well as significant growth overseas.

Our new fall advertising for Tommy continues to focus exclusively on the product, and this season we will feature our new Naples and Riverside families.

In our newest business, Hugo Boss, our team is preparing for the exciting launch of our new Hugo Boss watch collection in Basel 2006.

We continue to sell select styles of the existing Hugo Boss watches as we focus on establishing the proper infrastructure for this business and developing product that is brand right and priced appropriately for the higher end of the fashion watch market.

Hugo Boss is a powerful global brand and we look forward to building this into a significant business for our Company.

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 brands' continued growth and enable us to continue investing behind and executing on our growth initiatives.

I would now 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, 2005 fueled by strong sales.

Sales for the second quarter were 115.3 million, or 17.9% above prior year.

Excluding sales from Ebel, sales were 99.1 million or 10% above last year.

Sales in the wholesale segment increased 18.7% to 95.7 million.

The domestic wholesale business was 69.6 million, or above prior year by 16%.

Movado and ESQ brands increased by 2 million and 1.6 million respectively, primarily the result of increased demand from our chain and department store customers.

Ebel sales increased by 5.2 million, primarily due to the sell in of new product introductions.

Sales in the international wholesale business were 26.1 million or 26.4% above prior year.

Ebel and Tommy Hilfiger had increases of 3.3 million and 1.4 million respectively, driven by sales in Europe.

The retail business posted a 14.4% increase over last year to 19.7 million.

The increase was driven by an overall 21.4% increase in Movado Boutique sales.

This was the result of a 2.3% comparable store sales increase, along with the sales volume from 10 non-comparable stores year-over-year.

The Company outlet stores recorded an overall increase of 10.1% increase above prior year.

At July 31, 2005, the Company operated 27 Movado Boutique and 28 outlet stores.

Gross profit for the quarter was 70 million, or 12 million above last year, driven by our sales increase.

Gross profit as a percent to sales is 60.7% compared to 69.3% last year.

The 140 basis point increase was primarily attributed to supply chain productivity improvements.

Our operating expenses were 57.7 million, or 17.2% above last year.

The principal reasons for the increase in expenses are added spending to invest in the Company's strategic growth initiatives.

This included higher marketing expenditures of 3.2 million, added spending of 1.5 million in support of the retail expansion, and increased people-related infrastructure costs of 1.5 million.

Interest expense was 84,000 or 12.9% above prior year.

Our average debt for the quarter was 72.1 million, or 18.6% above last year.

The higher borrowings are the result of the issuance of 20 million of senior promissory notes in the third quarter last year.

Our average borrowing rate is 5.2% versus 4.4% last year.

This higher rate is the result of the mix of our borrowings with a greater portion related to the higher long-term debt rates.

Our prior-year results included a onetime 1.4 million gain resulting from the litigation settlement with Swiss Army brands.

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

As reported, net income increased 21.2% to 8.6 million versus 7.1 million last year.

Earnings per diluted share rose 17.9% to $0.33 versus $0.28 last year on slightly higher average diluted shares outstanding.

Prior-year results include the onetime settlement gain of $0.03.

Looking now at the year-to-date results, sales for the six-month period were 203.1 million, or 18.1% above prior year.

Excluding sales for the Ebel brand, sales were 180.2 million, or 11.3% above last year.

Sales in the wholesale segment increased 18.8% to 168.3 million.

The domestic wholesale business was 122.5 million, or above prior year by 15.7%.

Ebel sales grew 6.7 million, which reflects the sell in of the new product introductions.

Movado and ESQ brand sales increased by 4.3 million and 2.7 million respectively.

The international wholesale business was 45.8 million, or above prior year by 28%.

Ebel and Tommy Hilfiger recorded increases of 6.1 million and 2.5 million respectively, primarily driven by sales in Europe.

The retail business posted a 14.6% increase over last year.

The increase was driven by an overall 27.2% increase in Movado Boutique sales.

This was the result of a 2.7% comparable store sales increase, along with sales volume from 10 non-comparable stores year over year.

The Company outlet stores recorded an overall increase of 6.2%.

Gross profit year to date was 122.8 million, or above last year by 21.5 million.

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

Gross profit as a percent of sales is 60.5% or 160 basis points above last year's 58.9%.

This increase is primarily attributed to the same factors as discussed for the second quarter.

Operating expenses were 108.4 million, or 19.2% above last year.

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

Interest expense for the six month was 1.7 million or 12.3% above prior year.

Our average debt is 61.9 million versus 53.3 million prior year.

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

Taxes were provided at a 25% effective tax rate in both years.

As reported, net income increased 22.5% to 9.5 million versus 7.8 million last year.

Earnings per diluted share increased 19.4% to $0.37 versus $0.31 last year and slightly higher average diluted shares outstanding.

Again, last year's results included the onetime $0.03 settlement gain.

Now taking a quick look at our balance sheet, our cash as of July 31 is 50.3 million as compared to 27.4 million last year.

Accounts receivable of 105.5 million increased by 9.7 million from last year.

This reflects an increase of 10.1%, which is less than our sales growth of 18.1%.

Inventories of 206.5 million increased by 24.7 million from last year.

The increase is comprised of 6.8 million for retail expansion and increases across virtually all brands due to the seasonal build of new products for delivery for upcoming holiday selling season.

Our short-term debt is 37.5 million versus 25 million prior year in support of our cyclical business needs.

Capital expenditures year to date were 7.9 million and depreciation expense was 7.4 million.

Our capital expenditures were primarily used for the buildout of our new retail businesses, renovations of existing retail stores, and the further automation of our distribution facility.

In summary, we're pleased with the financial performance for the quarter and for the six month 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.

We're very pleased with the results we delivered during the first half of the year which reflects the success of our brand and business investments, new product offerings, and enhanced productivity.

As we have stated in our past two conference calls, fiscal 2006 is a year where we have made a strategic decision to invest significantly behind our brands and businesses without sacrificing growth in sales, profits or other key financial metrics.

Let me take a moment to remind you of the key areas we're investing behind to lay the foundation for accelerated growth.

First, we're aggressively pursuing growth in ESQ with a goal of doubling the size of this business in North America.

We have been and will continue to invest strongly behind ESQ to take advantage of opportunities we have identified in the entry-level Swiss watch category.

As Efraim mentioned, with category leading product, strong marketing, and a $5 million investment in media spending, including television, ESQ will be front and center beginning this fall season.

Second, China is a strategic growth market for our Movado brand.

We're significantly increasing our resources in this country to support our plan of developing Movado into a major accessible luxury brand sought by the Chinese consumer.

Third, the faster paced growth of our Movado Boutiques and Tommy Hilfiger businesses demand continued investment.

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

In Tommy Hilfiger we will continue to pursue significant growth opportunities that exist in Europe, Latin America, and Asia.

We're also significantly investing in our newest businesses, Hugo Boss and Ebel.

Fiscal 2006 is a transition year for Hugo Boss watches.

We will continue to make investments in people and infrastructure as we position this brand for a major readable launch in Basel 2006.

Turning to Ebel, we're particularly pleased with Ebel's performance in the first half of this year.

During the year-ago period our focus was on restructuring the business and integrating Ebel into our Company.

As a result, sales were somewhat minor and the business was dilutive on the bottom line given the cyclical nature of our business.

This year, with many of our initiatives under way, Ebel showed impressive growth and reduced dilution to the bottom line.

We continue to project that Ebel will be slightly profitable this year.

As we continue to work towards re-establishing Ebel towards premiere luxury status in the global marketplace and bringing this business to an appropriate level of profitability, we are intensifying our advertising, marketing, and product initiatives.

As Efraim discussed earlier, revitalized iconic designs have been met with great enthusiasm in the market and we will continue to introduce new products throughout the second half of the year.

Now let me provide you with some guidance on our financial outlook for the remainder of fiscal-year 2006.

We now expect full-year net sales to grow approximately 14% from last year.

We expect to maintain strong gross margins for the year in the 60.0 to 60.5% range.

In terms of operating expenses we will continue to be aggressive in supporting our brands and businesses, primarily due to the investment I previously discussed.

Operating expenses are expected to grow in line with our sales growth for the year.

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

Based on these assumptions, fully diluted earnings per share for the year are now expected to be at the upper end of our previously stated range of $1.18 to $1.24 per share.

Included in this guidance is an estimated $0.05 per diluted share expense related to the equity compensation of restricted stock.

Beginning in fiscal 2007, we will expense options in accordance with FAS 123R.

Turning to the second half of fiscal 2006, sales growth for the second half of the year is expected to be approximately 12% as we compare against a very strong second half of last year.

We would expect gross margin to remain strong in the 60% plus range.

Operating expenses should grow in line with sales growth in the second half.

Based on these assumptions, profit for the second half of this year are expected to grow between 20% and 22% to between $0.85 and $0.87 per fully diluted share.

We would expect approximately 55% of our second-half results to be realized in the third quarter.

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

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

Additionally, as you know. we are affected by events and circumstances that impact our customers.

This includes the potential impact of rising gas prices, rising interest rates, and general economic uncertainty, which would cause consumers to alter their discretionary spending patterns.

We would now like to open the conference call for your questions.

(OPERATOR INSTRUCTIONS) Melissa Otto, DE Investment Research.

Good morning.

Just a couple of questions.

One on your international wholesale business.

The number that you guys delivered really exceeded my expectations, and I really just wanted to get a little bit more color on what was driving that.

It looks like your brands were doing very well there, but if you could give some more granularity in terms of distribution and some specifics around those sales, that would be very helpful.

As you know, when we bought Ebel, Ebel is a global brand.

So approximately 60 to 70% of its sales are outside the US.

So a lot of our growth in the Ebel was international, although we did have very healthy growth domestically for Ebel as well.

And we also saw continued strength of the Concord brand in the Far East, as well as very strong growth in Tommy Hilfiger predominantly in Europe and Asia.

Were you getting into new doors in Europe, or was there anything in terms of distribution and was fueling that as well?

Or (multiple speakers)

No, it's really the introduction in Ebel -- predominantly for the first time our delivery of a major new product for the Ebel brand.

And in Tommy Hilfiger, there is some door expansion, but it's also predominantly growth in the organic business.

Great.

Then just a question on China.

I remember earlier Movado had mentioned that they're going to the opening some boutiques in China, and I wanted to see where we are with that.

Really, we're not planning on opening any boutiques in China at the present time.

I think what we have talked about is the shop-in-shops, which are Movado corners in department stores and jewelry stores, but where we sell only Movado watches.

We have been successful in doing that over the last several years.

Today I believe we have approximately 50 Movado shop-in-shops.

And China for us is a long-term growth market and investment market for the Movado brand.

And we've seen nice growth, but again off a very small base.

And then just a quick question on ESQ.

I just want to get a little bit more understanding about the positioning of this brand.

You have mentioned that it's sort of an entry-level Swiss watch brand.

Could you give a little bit more --?

We believe that in the 200 to $500 price range, there is a gap for an entry-level Swiss brand with very strong marketing support, product quality, and design.

And we are giving that and filling, we believe, a very -- a void like Movado fills in the 500 to $1500 price range.

And that represents a major growth opportunity for ESQ.

We are emphasizing a tremendous amount of marketing support behind the brand to penetrate that arena this year.

And it looks like so far the initial results are very encouraging.

Thank you very much, and congratulations on a great quarter.

Pamela Brown, Gabelli.

Good morning.

I just wanted to ask a question specifically to Gene about the gross profit margin.

Just looking at the expectations for the second half and thinking about a 60 to 65% range, it seems to me that really is going to take the second-half margins down from incremental like 170 basis point you would be getting in the first half, so I just wanted to get some better feeling on why those expectations are in my mind coming down year over year.

As I indicated in my remarks, a good chunk of the improvement was a result of the productivity improvements in the supply chain.

The base business we do expect to still have strong margins on, but as we look at the overall mix we don't expect the same level of contribution.

Just because the sales is going to be 12% versus 18%?

Pardon me?

Just because your sales growth is going to be 12% versus 18%?

And that is part of the reason.

It's also the mix of the business to get to the sales.

Okay.

So maybe could you explain to me how much better the margins are kind of year-over-year in the first half than your expectations, because in my mind I thought that your first-half gross margin expectations were more modest.

They were a little bit stronger than we expected.

But again, from a standpoint of Ebel had very strong performance in the first half and part of that is certainly with timing because of the launch of new product introductions and getting that into the marketplace.

Also from the standpoint of a lot of the productivity savings that were generated, a lot of those were last year.

And obviously as our inventory is selling through we realize those benefits.

And as you know, internationally costs are continuing to increase.

So those levels of productivity are not continuing at the same level as they have in the past.

To further emphasize what Rick said about Ebel, in the second half of last year we began our new model introductions where we already started to generate some of the higher gross margin on what we were producing, so therefore we're not anniversarying the same increase based on the original product we're selling.

Okay, thanks a lot.

Eric Dains (ph), SG Cowen.

Congratulations on a good quarter.

Just quickly, if you could -- sorry, I missed some of those numbers for the overall domestic wholesale, international wholesale and retail, just the growth numbers for 2Q.

And then secondly, when exactly do you expect the jewelry boutiques to become profitable?

It sounded like you're finishing opening -- or finished opening new boutiques this year.

So when exactly do you intend on hitting that critical mass of 30 stores, and is that sort of the magic number for profitability?

Why don't we answer the second half of a question first.

I'll try it, and then Rick can chime in as well.

Our boutiques, well we believe the critical mass is anywhere around the 27 to 30 boutiques.

We have -- we still have several on the agenda for next year.

But -- and what we've said is that those stores need to be opened a full year.

But we are making incremental progress.

We believe we will make incremental progress this year towards that target.

And we're very excited about the things that we have in place for the second half of the year to continue to drive growth in that business.

Basically in the timeframe that's going to be probably over the next two or three-year timeframe where we will convert into a profitable business operation.

And as you know, we've opened seven to eight boutiques in each of the last two years.

This year is going to the three boutiques.

And obviously as we get to the large number of stores that we have, and the selectiveness of only being in A malls and A locations within those malls, the properties become more and more selective.

So we certainly do expect to open a handful more over the next couple of years, but again being very selective in the locals that we go into.

You asked about the wholesale business.

The domestic wholesale business for the quarter was 69.6 million and it was above last year by 16%.

And the international wholesale business was 26.1 million or 26.4% above last year.

Great, thanks a lot.

And just lastly, that retail number or growth?

For the quarter the retail business was 14.4% above last year.

Thanks very much.

David Leibowitz, Burnham.

A few questions.

Number one, how much cash do you have overseas that you would be permitted to repatriate under the tax forgiveness?

We've disclosed that I believe in our 10-Q filing (multiple speakers)

(multiple speakers) the American Jobs Creation Act we feel there is an opportunity and we're evaluating of anywhere between 0 and up to $150 million.

Clearly that would entail if we get into some larger numbers some increased borrowing over on the international front as well.

As you know, it's not only cash, it's basically unrepatriated earnings that have accumulated over the lifetime of our businesses there.

So that's the reason for that range, and clearly we continue to evaluate that.

Second question, how many Company-owned Movado stores are there outside of the United States right now?

There are none.

Are there any plans to introduce any?

There are no plans to currently introduce any.

And what percentage of your total Movado brand sales in this country are derived from your own stores?

It is a small number right now.

It is -- I would say of our Movado brand sales it's less than 15%.

What is your target with the new openings going forward?

We are really looking at building a total lifestyle business and brand business.

We're not targeting an increase of that share into our Movado Boutiques.

What about boutiques under your other brands, any thoughts in that regard?

No, not at the current time.

What will be your total advertising budget for this year, fiscal year?

Our advertising budget is in the range of 15 to 18% of sales.

Would that be the case for next year as well given the major spending you had on a couple brands this year?

Yes.

One of the things with the portfolio that we have is if you look at our advertising it's basically been in that 16% type of range for the last couple of years.

We would expect that on an ongoing basis that's around the right range -- 15.5, 16.5% of sales.

Obviously with the portfolio we have, at certain points in times there's an increased level of focus and priority on some brands versus other brands.

So that's the beauty of the portfolio we have.

What percentage of your sales do you believe are gifts rather than purchased by the ultimate user?

We don't have that information.

What about male versus female?

It's about -- our penetration in most of our brands is about 50-50.

In Ebel it is higher towards women.

And in the balance it's pretty evenly split.

Again, Coach also is heavily weighted towards women.

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

In sharp contrast to your excellent quarterly statement, one of your customers -- at least the company I believe is one of your customers had (multiple speakers)

Something is breaking up.

We can't hear you.

I said one of your customers had rather dismal results this morning.

I am referring to Whitehall.

Do you have much exposure either in terms of sales or balance sheet exposure to them?

Whitehall -- and they did not report dismal results I think this morning because what we saw was that they reported management issues and possibly financial issues.

We have a -- they are a customer that does below 2% of our overall sales.

And we do have some receivable exposure, but again under 1% of our total receivables.

Thank you.

Barbara Wyckoff, Buckingham Research.

What percentage of sales in the boutiques during the first half came from watches versus jewelry versus gifts?

And if you could give me sort of the same information for last year.

It was about 40% watches in the first half of this year and last year I think it was about 35% watches.

So we saw an increase of penetration of watches this year.

And part of that is that we're introducing a lot of our newness in jewelry in the second half of the year, and also as I said in my comments with the return to emphasis on yellow gold as well which we found as a gap in our assortment.

Gifts are probably the smallest part?

It's very small.

It's under 5%.

Okay.

Thank you.

Carole Cranmer, Morgan Joseph.

Good morning.

I will add my congratulations and ask one final question with respect to Hugo Boss.

You mentioned that this represents a transitional year for that brand, but that it could be important going forward for what you might share in terms of more specific plans and what it could mean next year or in the future would be helpful.

We look at -- Hugo Boss we believe is a major opportunity for the Company.

It is a major global fashion brand doing about €1.5 billion in business worldwide and also doing very well and has actually very well balanced distribution with a strong presence in Europe, the growing presence in the Far East, as well as a significant presence in the US.

And we believe it represents a major opportunity at the high-end of the fashion watch market.

And what we are really focusing on in this year of transition, which is where all of our effort is on, is product development and developing exciting, great new products for the Hugo Boss brand.

And we will begin really launching that product in Basel next year in April 2006.

In terms of numbers, I think it's a little too early to project numbers for the Hugo Boss brand.

But today, we do have a philosophy that each of our license brands has to be major brands with a significant potential for the Company, and we do certainly see that here.

Thank you.

Arnold Brief (ph), Goldsmith & Harris.

Just to clarify, because I'm not sure quite what you said here, if -- you have indicated on a number of occasions when you get to 30 boutiques on an annualized basis that that should be critical mass.

Then somewhere along the conversation you said it would take and other two to three years.

But in fact, if you open 3 stores next year you'll have 30.

And I would think on the seasonal basis with 30 stores you would be profitable in the last half of next year, and then going into the following year with 30 stores you'd be at critical mass for the profitability in that year.

Am I missing something here?

I think what Rick was alluding to -- and I think what we have said in the past -- was 30 stores open for a full year because not -- even though a store opens in the second half of the year, because of the investment in building that store and all the other expenses associated with that store, meaning we hire the people two or three months in advance, all of those things, you don't make money in that store the first part of the year, even though a bulk of the sales come through.

As well, building a jewelry business, you need to build customer relationships and all of that.

So we believe that 30 stores open for a full year will be profitable either that year or possibly a year after.

But it's -- I think we're talking about small numbers one way or the other (multiple speakers) side of the line.

Would it be fair to say that given the --?

That's why I think the two to three-year range came in.

Is it fair to say that the Hugo Boss is expected to incur some kind of loss next year given the launch and everything?

No, we expect it to be profitable next year.

Could you give me capital expenditure and depreciation for full year this year and what your expectations are for next year?

Basically capital expenditures will be in the 13 to 15 million range.

Depreciation is about 90% of that.

And next year I would expect that would be in a similar range, probably in more of a 13 million range.

So slightly lower than this year.

Again, depreciation would represent about 90 to 95% of that capital expenditure number.

Thank you.

That's it.

Pamela Brown, Gabelli.

Just looking at your sales mix for the second half of the year, and seeing how well Ebel has done in the first half, if I just -- these are rough numbers, but if I basically look at doubling Ebel's sales in the second half of the year, and 12% growth overall I get to a negative sales growth for the base business excluding Ebel.

I was wondering if you could talk to either the doubling of Ebel sales or the 12 --?

I think that's where your issue occurs as you look at it.

We don't plan on doubling Ebel sales in the second half of the year.

We are in the first half -- first of all, we only owned the company for five months last year, so we are comping six months against five months.

Second of all, last year we had virtually -- we had no new product in the first half of the year.

So we had a major sell in now of the new product in the second quarter.

We're looking overall for substantial growth for the Ebel brand for the year, but the growth in the second half will not be anywhere near the first half growth.

I thought we made that clear.

I'm sorry if we didn't.

I guess I am just specifically talking about fill in from the second quarter of the new products for Ebel.

I would assume that that fill is comped in the third quarter and fourth quarter (multiple speakers)

No because in the third and fourth quarter last year we already began to deliver some new Ebel product into the marketplace such as Sport Wave, Beluga Tonneau, and this year we will have more new product in the second half of the year.

But again, it's comping against stronger results in the second half of last year for Ebel.

Okay, thank you.

First half was a very weak first half last year.

Okay, thanks.

(OPERATOR INSTRUCTIONS) David Leibowitz, Burnham.

Are you profit margins the same on all your brands, or are they targeted to be the same on all your brands?

No, they're not the same on all our brands and they're not targeted to be the same on all our brands.

Different brands have different profit margins, and also different cost structures as well.

So by far our most profitable brand is Movado, both from a gross margin and an operating basis as well.

And the middle market is where the Company makes the highest gross margins; a little less on the upper end.

And in the fashion watch market, margins are not as strong but marketing expenses are not as high either.

What about licensing fees?

They're included in the cost of goods sold, so they go against the gross margin in the license brands.

What percentage of the line is mechanical versus electronic?

A very small percentage of our offering is mechanical.

Lastly, what about the sports market?

Is this an important feature for you, or are you staying away from that?

We do have some sports watches in each of our different brands, whether it be a diver watch in Ebel or a certain watch in Movado.

But it's not a market that we have a prominent presence in today.

ESQ does have a stronger presence in that market.

But it's not a major market for the Company today.

Thank you.

We appear to have no further questions at this time.

At this point I would like to turn the call back over to Mr. Grinberg for any closing remarks.

Thank you.

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

We're very pleased with our second-quarter results which reflect a very strong sales performance.

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

Again, thank you all for your participation and have a very nice day.

Thank you.

This does conclude today's conference call.

At this time you may disconnect your lines and have a wonderful day.