Movado Group Inc (MOV) 2009 Q4 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Movado Group fourth quarter and year end earnings conference call.

At this time all participants are in a listen-only mode.

Later we will conduct a question and answer session, and instructions will follow at that time.

(Operator Instructions).

As a reminder, ladies and gentlemen this call is being recorded, and may not be reproduced in whole or part without permission from the Company.

I would now like to introduce Ms.

Leigh Parrish of FD, please go ahead.

Thank you.

Good morning everyone, and thank you for joining us today.

With me on the call today is Efraim Grinberg, Chairman, President, and CEO, Rick Cote, COO, and Sallie DeMarsilis, CFO.

Before we begin, I would like to note that this conference call contains forward-looking statements which are made 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 future results expressed or implied, are discussed in our filings with the SEC.

Such forward-looking statements include statements regarding Movado performance for fiscal 2009 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.

During the course of today's conference call, management may present certain non-GAAP figures.

For reconciliation of these figures, along with information required under SEC Regulation G, please view our earnings press release which has been posted on our website at MovadoGroup.com.

Let me now outline the order of speakers and topics for today's conference call.

Efraim will begin with the highlights of our fourth quarter and full year performance, Rick will provide you with an update on our operating initiatives, along with our financial outlook, and Sallie will then review the financial details.

They will all then be happy to answer any questions you might have.

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

Thank you, Leigh, and good morning everyone.

As I stated in the release this morning, we are operating in the most challenging economic environment I have seen in my 30 years in the watch industry.

While the crisis is global, the reality is that it's largest impact is being felt in the United States.

The watch and jewelry industry overall has been significantly hampered by severe cutbacks by consumers on discretionary purchases.

Double digit declines were recorded across the fine watch industry in the US during the important holiday season.

Many fine watch and jewelry retailers have closed or are exiting the business.

In fact, independent data shows that approximately 15% of US jewelry doors closed in the last year alone.

As a result, we continue to strictly monitor who we are selling to, and from a credit point of view while adjusting our business accordingly.

Movado Group is obviously not immune to what is taking place across our industry.

Fiscal 2009 was extremely difficult.

We experienced a loss in the fourth quarter, reflecting the dual impact on our business from weak consumer spending, and the amplified effect of customers significantly curtailing replenishment orders as they focused instead on inventory reductions and cash flow.

Fine retailers usually have a years supply of inventory on hand so they can aggressively pull back on new inventory purchases.

Retailers are realigning their inventories to a new level of sales, and we expect this trend to continue throughout the first half of fiscal 2010, with an improvement beginning in the second half of the year, as retailers prepare for the holiday selling season.

In our own retail segment, which is comprised of our Movado boutiques and Movado company stores, we experienced only a slight sales decline.

However, we were very aggressive in our promotions of jewelry in our boutiques, and this along with our overall mix of business and total sales decline, contributed to the deterioration of our consolidated gross margin in the fourth quarter.

That said, we believe we are taking the right actions to deal with this reality, and position Movado group for strong future growth.

We are addressing our cost structure with expense reduction programs, that combined will generate 50 million to $60 million in cost savings, most of which we expect to realize in fiscal 2010.

We are preserving our cash with the discontinuation of our quarterly dividend, and reductions in our capital spending plan.

We are also focused on maintaining a strong balance sheet and lowering our inventory levels, and we are working with our banking partners, on negotiating a new asset based loan agreement, which Rick will discuss later in his comments.

In addition to these actions, let me remind your that our greatest assets are our powerful brands, and when we begin to exit the recessionary environment, strong brands like ours should be the ones to rebound first.

I want to emphasize the importance of strong brands, because as we anticipate the retailers will begin to replenish in the second half of this year, we expect they will do so selectively.

They will look for those brands that drive consumers into their doors, and Movado Group is strongly positioned to benefit.

Our powerful portfolio of nine brands is very important to our customers.

Our brands combined represent a significant portion of the fine watch department in most of our department store and chain jewelery customer's doors.

In addition, while consumers will continue to be careful in their purchasing decisions, they won't be shopping on price alone, they will continue to look for products and brands, that offer tremendous value for the money, and these attributes are what each of the brands possess.

Added to the overall strength of our brands, we are also continuing to develop new product, and new marketing strategies for each.

In each of our brands, we are introducing key drivers this spring that directly speak to consumers demand.

Examples include a new sport collection in the Movado Series 800 segment entitled Sub Sea.

This collection will be priced in the brand sweet spot of $500 to $1,000.

We are leveraging the power of Movado's connection with ESQ, through two key initiatives.

First, we began marketing the brand this spring as ESQ by Movado.

This association, along with great products has received a tremendous reception from our retailers.

In addition, we introduced the ESQ brand in our Movado boutiques in March.

In our Luxury category, we repriced select Ebel collections back in December to provide greater value to consumers.

For example, we are offering a Brazilian with diamonds at $4,990, and we are already seeing improved sell-through.

We are also focused on key price points across our licensed brand portfolio.

We remain focused on maintaining a solid balance sheet, and believe fiscal 2010 is a year to build a base for strong future growth.

We have a diverse and powerful portfolio of brands, an increasingly global business, an extremely talented and committed team around the world, a strong balance sheet, and an unwavering commitment to long-term growth and success.

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

Thank you, Efraim, good morning everyone.

We continue to take decisive actions to improve our cost structure, preserve cash, maintain a strong balance sheet, and appropriately fund our business for future growth.

First let me discuss expense reductions of which there are three components.

We began reducing expenses in August 2008 when we announced a $25 million cost savings plan, which was predominately related to staffing and discretionary expenses.

In December, we announced the second program that identified an additional 25 million to $30 million in cost savings.

This program was implemented in January, was approximately half of the savings related to staffing, and the other half from expense reductions across our organization, including the alignment of our marketing spend with a new level of sales.

In addition, we are generating savings from voluntary reductions in management pay, and changes in employee benefit plans.

Combined, these three expense reduction initiatives should generate approximately 50 million to $60 million in annualized savings, most of which we expect to realize this year.

Second, capital expenditures reductions.

In fiscal 2009 our capital expenditures were $23 million, with approximately $10 million spent on implementation of a new SAP/ERP system.

I will discuss the launch of that system in a few minutes, but clearly the majority of the capital expenditures associated with the project is now behind us.

Additionally as we focused on preserving capital, we have only budgeted spending this year for those projects deemed absolutely necessary.

As a result, we would expect capital expenditures in fiscal 2010 to be no more than $10 million.

Third, our dividend policy.

As you may have seen in the press release issued this morning, we decided to not declare a quarterly cash dividend, which had been $0.05 per share on our common stock.

The suspension of our dividend is based on our desire to preserve cash in this challenging landscape.

We plan to evaluate the reinstitution of a quarterly dividend once the economy has stabilized, and we have returned to an appropriate level of profitability.

Fourth, the reallocation of cash.

As Efraim discussed, we are experiencing a global economic crisis.

However the US has experienced the harshest impact.

To ensure adequate levels of liquidity domestically, we plan to repatriate $30 million in funds from our international operations.

In a few moments, Sallie will discuss the non-cash tax adjustments that resulted from this initiative.

Fifth, inventory reductions.

In Q4, inventory levels grew to the lower than planned sales, particularly at the end of the fiscal year.

Throughout fiscal 2010, we plan to align our inventories with our lower sales base, which we expect will generate improvements in our cash flow.

Clearly cash is king, and we are focused on preserving cash through the cumulative impact of each of these initiatives.

Turning now to our credit agreements.

As noted in our press release, during Q4 we were not in compliance with our debt agreement with our existing bank group, specifically the interest coverage ratio covenant.

This covenant is based on GAAP figures, in so all of the unusual items recorded during the year were included when assessing compliance.

Without any amendments to the credit agreements, we would expect to remain out of compliance for Q1, and for the remainder of the year.

However, we are currently in negotiations with our bank partners to enter into a new asset-based three-year loan agreement for up to $110 million line of credit.

The loan availability is based on the level of secured assets, and would carry higher interest costs given the current market environment.

We are confident that we will come to agreement on the terms of this new facility, maintaining strong liquidity, and positioning Movado Group for future growth.

As an additional degree of security, the Company has secured a $50 million commitment from Bank of America.

The new three-year facility will be used to replace our current domestic outstanding debt.

Also in our financial statements, all amounts owed have been reclassified to current liabilities.

Let me turn now to our new ERP system.

As you know, this project has been taking place over the past 18 months.

It has involved a huge effort of the part of our team of dedicated employees to institute a major process redesign.

We went live with the system in February of this year in all geographical locations, and every business module with the exception of retail point of sale.

The implementation was extremely successful, and there have been no technical hiccups.

However, as with any change in systematic processes, it will take some time for everyone to get comfortable with our new business practices.

We look forward to realizing the multitude of benefits this system will bring; global analytics, product life cycle management, global procurement , inventory reductions, enhanced customer collaborations, to name a few.

Particularly as the economy recovers, Movado Group is strongly positioned to leverage it's enhanced capabilities across this global platform.

We remain focused on driving shareholder value over the long term, and believe our Company is strongly positioned to achieve that goal.

Now I would like to turn to our financial outlook for fiscal 2010.

There is no doubt that the economic environment remains extremely challenging and significantly limits our visibility, and accordingly we are not giving detailed guidance.

However considering these factors, we felt it appropriate to provide some macrolevel direction.

We are estimating a slight profit in fiscal 2010 excluding any unusual items.

We would expect the first half of the year to be a continuation of what we experienced in Q4, a continued weak consumer spending environment, and retailers continuing to lower their inventories.

To give you an order of magnitude, could result in a loss approximating $1.00 per diluted share.

As a reminder, the first half of the year is seasonably smaller, and therefore the effects of these macroeconomic and industry trends will be amplified on our business.

We anticipate that this loss will be offset by gains in Q2 of fiscal 2010, driven by two factors; first, a greater portion of the savings expected from our three savings initiatives are scheduled to be realized during the latter half of this year, and second, we believe retailers will begin to purchase inventory in advance of the holiday season.

As a reminder, capital expenditures are not expected to exceed $10 million in fiscal 2010.

With that, I would now like to turn the call over to

Thank you, Rick.

Good morning everyone.

It was a very challenging fourth quarter given the ongoing difficult economic and retail environment, particularly in the United States.

For the fourth quarter, we recorded an adjusted net loss of $10.5 million, or $0.42 per diluted share, versus adjusted net income of $10.8 million, or $0.40 per diluted share in the year ago period.

On a GAAP bases, we reported a fourth quarter net loss of $22.8 million, compared to net income of $19.6 million in the prior year.

This year's results included a $5.5 million pretax charge, resulting from the previously announced expense reduction programs.

A $4.5 million pretax non-cash charge, related to the impairment of five Movado retail boutiques, and a $7.4 million non-cash tax provision, related to future repatriation of approximately $30 million in undistributed foreign retained earnings.

Prior year net income included a $6.6 million after tax non-cash charge for estimated sales returns related to the closing of certain Movado wholesale doors in the United States, and the benefits on our tax expense of $15.4 million, primarily resulting from the settlement with the IRS, as well as the utilization of our international net operating loss carry-forwards.

For the year, adjusted net income of $14.2 million or $0.55 per diluted share versus adjusted net income of $46.6 million or $1.71 per diluted share in the year ago period.

On a GAAP basis we reported net income for the year of $2.3 million, or $0.09 per fully diluted share, while prior year net income was $60.8 million or $2.23 per fully diluted share.

For the full year the pretax charge resulting from the previously announced expense reduction program was $11.1 million.

The pretax non-cash charge related to the impairment of the five Movado retail boutiques was $4.5 million, and the impact of the tax provision related to the future repatriation of approximately $30 million in undistributed foreign retained earnings was $7.4 million.

Last year the benefit of our tax expense of $20.8 million, primarily resulted from the IRS settlement, and the utilization of the NOL for the year.

For the remaining discussion, both the fourth quarter and the full year operating results will exclude the impact of the following; for fiscal 2009.

the results will exclude the charges related to the expense reduction programs, and the non-cash impairment charge recorded, related to the five Movado retail boutiques.

For fiscal 2008, the results will exclude the impact of the sales returns accruals, and the sales of excess discontinued inventory.

Now let me discuss the operating results for the fourth quarter.

Sales for the fourth quarter were $94 million, below prior year by $50.7 million or 35%.

For Q4 sales in our wholesale segment were $61.6 million or 45.5% below prior year sales of $113.1 million.

The US wholesale business was below prior year by $30.6 million or 60.5%.

Sales were below prior year in all categories, most significantly in the Luxury and Accessible Luxury categories.

The International wholesale business was down 33.5% year-over-year.

All categories were below prior year.

The Retail business posted a 2.6 sales increase over last year.

The Company outlet stores were above prior year by 19.7%, offset by a 14.8% decrease in the Movado boutiques.

At January 31, 2009, the Company operated 29 Movado boutiques and 32 outlet stores.

Gross profit in Q4 fiscal 2009 was $52.5 million versus $93 million last year.

Gross margin for the quarter was 55.9%, as compared to 64.3% last year.

The decrease in gross margin was primarily driven by fluctuations in currency, the higher level of promotional activity in our Movado boutiques, and the overall mix of business.

Operating expenses for the quarter were $66.4 million, below prior year by $12.2 million or 15.5%.

The decrease was primarily the result of lower marketing spending of $9.2 million, the savable impact of foreign exchange and translating our financial results of $1.6 million, and decreased spending, due to the cost savings initiatives of $2.7 million.

This was somewhat offset by a reversal of a bonus accrual in the year ago period, and increased costs associated with the Company's joint venture operations in Europe.

The operating loss for the forth quarter of fiscal 2009 was $13.9 million, compared to operating income of $14.2 million in fiscal 2008.

Turning now to the full year fiscal 2009 results.

I would like to remind you all that the operating results have been adjusted for all of the aforementioned items.

Net sales for the year were $460.9 million or 15.2% below prior year.

For the year, sales in our wholesale segment $371.3 million or 17.5% below prior year sales of $450.2 million.

The US wholesale business was below prior year by 29.7%.

Sales were below prior year in the Luxury and Accessible Luxury categories by 37.5%.

While the sales in the licensed brand category were above prior year by 4.4%.

The International wholesale business was below prior year by 4.1%.

Sales were below prior year in the Luxury and Accessible Luxury categories by 16.9%, while sales in the licensed brand category were above prior year by 9.6%.

The Retail segment decreased 3.9% for the year.

Sales decreased in the Movado boutiques by 16.4%, with a comparable store sales decrease of 17.3%.

The Company outlet stores reported a total sales increase of 6.3% year-over-year, with a comparable store sales increase of 6.9%.

Gross profit for the year was $287.6 million, below last year by $60.1 million or 17.3%.

Our Gross margin was 62.4%,as compared to 64% last year.

The decrease in gross margin reflects the higher level of promotional activity in our Movado boutiques, and the overall mix of business.

Operating expenses of $268.6 million were below prior year by $17.3 million or 6.1%.

The decrease was primarily the result of lower marketing spending of $7.8 million, decrease incentive compensation costs of $11.7 million, and decreased spending due to the cost savings initiatives of $5.8 million.

This was somewhat offset by the unfavorable impact of foreign exchange of $5 million, an increase in the provision for bad debt, and an increased cost associated with the Company's joint venture operations in Europe.

Operating profit in fiscal 2009 was $19 million compared to $61.8 million in fiscal 2008.

Now I would like to discuss our balance sheet which is on a GAAP basis.

Our cash at January 31 was $86.6 million, versus $169.6 million last year.

The decrease in cash was a result of the decrease in cash flow from operations, changes in working capital, as well as the repurchase of $37.9 million of treasury stock earlier in the year.

Accounts Receivable of $76.7 million, decreased by $17.6 million.

The lower receivables year-over-year were primarily due to the decline in our sales, somewhat offset by the sales return accrual in the prior year.

Inventories of $228.9 million increased $23.8 million, or 11.6% from last year.

In constant dollars, inventory was above prior year by $33.8 million.

Due to the lead times required when purchasing inventory, orders were placed well in advance of the downturn in the economy, and the decrease in sales volume, caused these receipts to remain in inventory.

Our total debt was $65 million versus $60.9 million last year.

As result of not being in compliance with the interest coverage ratio in our current credit agreements, amounts owed have been reclassified to current liabilities.

Capital expenditures were $22.7 million, and depreciation expense was $17.2 million.

Now I would like to open the call for your questions.

Ladies and gentlemen, at this time we will be opening up the call for a question and answer session.

(Operator Instructions).

Your first question comes from Jeff Blaeser with Morgan Joseph.

Good morning, and thank you for taking my question.

I got on a little late, apologize if I ask something that has already been touched upon.

On the gross margin side, you mentioned mix, the boutiques, and currency, can you give us a feel for how the individual lines fared during the quarter?

And expectations going forward in terms of price points at the retail locations?

I think, our largest component is to the declining gross margin in the quarter was the mix issue where our accessible luxury brand performed at a lower level, basically due to retailers bringing down our inventory.

That has a largest component and our retail business, at the low gross margin, especially our outlet stores, accounted for a larger percentage of our overall sales.

Okay.

Thank you.

Next question comes from Kristine Koerber with JMP Securities.

Hi, this is Jennifer [Bennett] filling in for Kristine at JMP Securities.

Can you talk about the various markets overseas, were there any bright spots, or markets that were below expectations, relative to trends that you have seen recently?

Sure.

Well, the Middle East was probably one of the bright spots, was stronger, was one of the stronger markets around the world.

Obviously the United States got hit hardest first, early on into this cycle.

And then markets like Brazil were very challenging as well.

And that really I think gives you a feeling, China, for us, is a small market, but is a growing market, and we launched actually in this subsidiary in February 1st, and we believe that will be a bright spot for the company in the future.

We will now be selling directly into China, versus through a third party distributor.

Okay.

One more quick question, I know that star power is kind of cornerstone of your advertising campaign, will we see any changes there with regard to the celebrities that you, that support your brands?

I think we are still very focused on maintaining strong images for our brands, and maintaining strong brands.

Currently we don't anticipate any changes in the people within specifically our Movado brand.

We have replaced one woman, with Amanda Seyfried, who is really geared towards reaching a younger market, she is an up and coming actress who was one of the stars in the movie 'Mamma Mia!', and that campaign is beginning now.

Thank you.

Your next question comes from David Taylor with David P.

Taylor & Company.

Thank you.

You reclassified the loan from Prudential to currently due from long term debt, has the Pru asked for repayment?

From our standpoint, we have got excellent working relationships with all of our banking partners, including Pru.

They all have the same covenants.

So when we are all done, they all have the same level of parity and the same covenants, so missing the interest coverage ratio, applies to all of our banking arrangements, including the Pru.

Because of that we have classified them as current, but I think the good thing is, we have got great working relationship with our partners, and they are all working with us from a standpoint of entering into a new longer term debt arrangement.

We are comfortable that that will be completed over the next couple of months.

You expect that the loan from the Pru will remain outstanding?

I didn't say that.

I said that what we have is entered into discussions with new banking arrangements, and we are comfortable that with the partners that they have, they understand that and will be working with us.

However, when we are done, I won't reiterate that all of the bank partners that we have, including Pru, will be the same ones afterwards.

We don't know that as of yet.

Great.

Thank you.

(Operator Instructions).

You do have a follow-up question from Jeff Blaeser with Morgan Joseph.

Mr.

Blaeser, your line is open.

On the inventory levels, do you foresee potential liquidities down the road like you have done in the past, or do expect to put be able to put those through the outlets as you have also, and will that change the product line up for 2009, in terms of the newness that you would expect out there?

Why don't I address the newness first, and then Rick will address the liquidations.

On the newness, we have actually just came off of Basel, which is where we introduced a lot of our newness for the year.

We are introducing newness, but in a much more focused way, and really focusing on 100% the introduction of winners, and we have done that in each of our brands, we have actually gotten an excellent reception to the level of newness that we introduced in Basel, and believe that we are one of the leaders in that area.

Now I will turn it over to Rick to talk about the mix of our sales going forward.

I would say that the level of newness is an important factor in our inventory plans as we go forward.

From a standpoint of inventory management, clearly that is a major focus for us, has always been, but obviously with the major changes taking place in Q4, we couldn't react as quickly.

We have taken actions to bring inventory down, and believe we will be successful in that.

The outlets have always been a very important vehicle for us, from a standpoint of making sure that we have enough product available for them, let me remind you that with the outlets we do not actively produce for our outlets, we really use that as part of our management of our inventory, and the management of new product introductions.

Liquidations that we have disclosed in the past that were significant, we felt appropriate to disclose that.

To the extent that those may be available, and if we believe that we have inventory that could fit into that criteria, and not take away from our outlets, we certainly would look at those in this point in time.

If we do any of those, we will disclose those as we have in the past, it is important to realize that outlets are our primary vehicle for selling our discontinued products in a very controlled organized, and profitable manner, and we will continue doing that.

Thank you.

(Operator Instructions).

If there are no more questions, I would like to thank all of you for participating with us today.

Our Company has faced challenging times before, and we have always risen to the occasion.

I want to reiterate that our Company is strongly positioned as we navigate through these challenging times.

We have a diverse and powerful portfolio of brands, an increasingly global business, an extremely talented team around the world, a strong balance sheet, and unwavering commitment to long-term growth and success.

Thank you very much for participating with us today.

Thank you for participating in this morning's conference, you may now disconnect