Movado Group Inc (MOV) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Movado Group's first quarter 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) 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.

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 Chief Executive Officer, Rick Cote, Chief Operating Officer, and Sally DeMarsilis, Chief Financial Officer.

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 any future results expressed or implied are discussed in our filings with the SEC.

Such forward-looking statements include statements regarding Movado's performance for fiscal 2010 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 the first quarter performance.

Sally will review the financial details, and Rick will then provide you with an update on operating initiatives along with the Company's financial outlook.

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

And now, I'll turn the call over to Efraim.

Thank you, and good morning everyone.

The state of the global economy continues to be extremely difficult.

While financial markets appear to have stabilized, they have by no means returned to normal levels of activity.

Credit remains extremely tight for both consumers and for business.

And we are not expecting, nor are we planning our business for any type of fast recovery in the world economy.

The watch and jewelry industry has been significantly impacted by consumer's severe cutbacks on discretionary purchases.

While there are fewer retail doors, we're encouraged that sales at those remaining doors have stabilized, particularly in the US.

Considering the ongoing difficult economic environment, we are relatively pleased with our first quarter performance.

In our seasonally smallest quarter, we experienced a sales decline but maintained a solid adjusted gross margin.

We also took advantage of opportunities to convert excess discontinued product into cash.

This coupled with cost reduction initiatives and stringent expense management led to better than expected results.

Our team quickly recognized the signs of the weakening economy in 2008, and we took bold and aggressive actions to appropriately position for a challenging sales environment.

During the second half of last year, we began implementing expense reduction initiatives aimed at generating $50 million to $60 million in annualized cost savings.

As you can see from our first quarter performance, these initiatives have already begun to yield results.

We've also taken actions in each of our brands to create strong markets for our products as we move forward.

We are encouraged by some bright spots that we are seeing as we have introduced new products at more accessible price points within each of our brands.

We are beginning to see some very nice sell-through of these products at retail.

A few highlights include the new Series 800 Sub-Sea collection within our Movado brand priced in the brand's sweet spot of $500 to $1,000.

Also, the Bella Moda, a new $700 jewelry watch collection for women.

ESQ by Movado has received a good reception from both our retail partners and consumers.

We can see the benefits of connecting the Movado name with the ESQ, not only in our wholesale business, but also in our boutiques, where we have now introduced ESQ by Movado.

In our licensed brand segment, we continue to be very focused on introducing excellent design at a great value for our consumers.

This strategy has proven to be very successful with products such as Amanda and Coach with opening price points under $200, the Advantage Collection in LACOSTE and the new BFF Collection in our Juicy Couture brand.

We believe the most challenging factor in our business during the first half of this year continues to be the retailer's relentless focus on realigning their inventory to a new consumer, a new financial environment, and a new level of sales.

While we experienced a significant sales decline in the first quarter, our retail partner sales of our products has not declined anywhere near those levels.

In fact, in Movado, we've seen certain retail sales at wholesale ranging from down single digits to slightly up on a per door basis.

We can also see that trend in our own direct retail business.

Movado boutiques and our outlets, which combined recorded a 2.3% comparable store sales decrease.

While we expect our retail partners to continue driving down their existing inventory throughout the first half of fiscal 2010, we expect to see an improvement beginning in the second half of the year, as retailers prepare for the holiday selling season.

Clearly, our operating environment remains extremely challenging.

However, a certain level of confidence appears to be returning to both consumers and retailers.

Nevertheless, we remain extremely cautious for the balance of the year.

During the second half of this year, we will continue to focus on reducing operating expenses and lowering inventories.

We remain committed to maintaining a solid balance sheet, and we are taking the right actions to deal with the global economy's new reality and position Movado Group for future growth.

From the high end of the luxury watch market to the more affordable fashion watch category, our Company's strong portfolio of brands provides a compelling value proposition to our consumer base at all levels.

The strength of our brand, along with a well diversified global business, will enable Movado Group to gain market share and to benefit from improvements in the marketplace.

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

Thank you, Efraim, and good morning, everyone.

On a GAAP basis, we reported a first quarter net loss of $9 million, or $0.37 per diluted share, compared to net income of $1.2 million or $0.05 per diluted share in the prior year.

Sales for the first quarter were $67.6 million, down from last year by $33.8 million or 33.3%.

The current year included $4.3 million of excess discontinued product sales.

On a constant exchange rate basis, and excluding the sales of excess discontinued product, sales decreased by 33.7%.

The balance of my remarks as they relate to sales and gross margins will exclude the excess discontinued product sales recorded in the first quarter of fiscal 2010.

Year-ago sales and gross margin results did not include any such sales.

For the first quarter, sales in our wholesale segment were [$47.5 million], or 44.2% over prior year sales of $85.3 million (company corrected after the call).

Sales were below prior year in all categories.

Most significantly in the luxury and accessible luxury categories.

The US wholesale business was below prior year by $18.7 million, or 50.4%.

The international wholesale business was down 39.4% year-over-year.

The retail business posted a 2.2% sales decrease over last year.

The Company outlet stores were [above] prior year by 5.6%, offset by an 11.7% decrease in Movado boutiques (company corrected after the call).

At April 30th, the Company operated 27 Movado boutiques and 31 outlet stores.

Gross profit in the first quarter was $37.8 million versus $65 million last year.

Gross margin for the quarter was 59.7%, as compared to 64.2% last year.

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

Operating expenses for the quarter were $48.1 million, below prior year by $15.3 million or 24.1%.

The decrease was primarily the result of initiatives to streamline operations, reduce expenses, and included lower marketing expenses of $6.2 million, lower payroll and related expenses of $4.8 million, primarily the result of headcount reductions, and lower travel and related expenses of $1.2 million.

Additionally, our results were impacted by favorable foreign exchange of $1.3 million.

The operating loss for the quarter was $11.1 million, compared to operating income of $1.6 million in fiscal 2009.

Income tax benefit of $2.7 million reflects a 23.3% tax rate in the first quarter, compared to income tax expense of $600,000 or 30.4% tax rate recorded last year.

Now turning to our balance sheet.

Our cash as of April 30th was $74.6 million, versus $127.5 million in the prior year.

The decrease in cash was a result of a decrease in cash flow from operations, share repurchases, and changes in working capital.

Accounts receivable of $66.1 million is below prior year by $23.4 million.

The lower receivables year-over-year were primarily due to the decline in our sales.

Inventory of $241.6 million increased from $231.4 million last year.

Due to the lead times required when purchasing inventory, orders were placed well in advance of the downturn in the economy.

The decrease in sales volume during the second half of last year caused these receipts to remain in inventory.

Our total debt was $65 million versus $71.4 million last year.

Lastly, capital expenditures for the quarter were $1.2 million, and depreciation expense was $4.7 million, which includes a depreciation of our new ERP system.

Now I'd like to turn the call over to Rick.

Thank you, Sally.

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.

We are pleased after decisive cost savings initiatives we embarked upon last year are clearly materializing in our results.

First quarter operating expenses declined $15 million, or 24% from the year-ago period.

This was achieved even as we remained committed to supporting our brands with strong advertising and marketing programs.

During the first quarter, we gained significant cost savings by aligning our marketing spend with our expectations for a lower level of sales.

While we reduced the actual dollar amount spent on marketing, as a percentage of sales, marketing remained at a strong 14%.

Excluding advertising, our operating expenses were $40 million, a significant reduction from historical levels.

Moving forward, we will continue to execute our previously announced cost savings initiatives, which are expected to generate annualized savings of between $50 million and $60 million.

Most of which we expect to realize this year.

Second, capital expenditure reductions.

As I mentioned in our year-ago -- in our year-end conference call, clearly the majority of our CapEx associated with our new ERP project is now behind us, and I will update you on our ERP initiative in a moment.

As we continue to focus on preserving capital, we have only budgeted spending this year for those projects deemed absolutely necessary.

As a result, we continue to expect CapEx in fiscal 2010 to be no more than $10 million versus $23 million last year.

Third, as you may have seen in the 8-K we filed, we have secured a new $50 million asset-based loan agreement with Banc of America.

This new three-year facility replaces our current domestic debt outstanding and together with cash from operations is sufficient to finance our business on an ongoing basis.

Fourth, we remain focused on cash flow management and are taking significant actions to lower our inventory.

While our retail partners are able to react faster than us due to our longer lead times, we've taken the appropriate actions to curtail orders and to be very selective and strategic with the new products we are bringing into the marketplace.

We believe that the benefits of these actions ,coupled with retailers replenishing ahead of the holiday season, will begin to be seen in our inventory levels and cash flow during the second half of the year.

Importantly, we expect to return to being free cash flow positive this year.

In the first quarter, cash flow from operations was reduced to a use of $11 million, versus a use of $25 million in the first quarter last year.

Let me now turn to our new ERP system.

As you know, we took advantage of our seasonally slowest time of the year and went live with SAP in February in all geographical locations and across every wholesale business cycle.

The implementation was extremely successful.

And we recently completed our first quarter financial closing on the system.

We are now in what we call a stabilization period, which will allow our employees around the world to get even more comfortable with our new business practices and system changes.

We look forward to realizing the many benefits this system will bring.

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

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

In our fiscal 2009 year-end conference call, we estimated that we would achieve a slight profit in fiscal 2010, excluding any unusual items.

While the economic environment remains extremely challenging and limits our visibility, we have since begun to realize the strong benefits of our cost reduction initiatives.

Additionally, while we do expect a high single digit sales decline for the year, we also expect to maintain current adjusted gross margin levels in the 60% range.

Considering all of these factors, we now estimate fiscal 2010 fully diluted earnings per share to be approximately $0.50, compared to fully diluted earnings per share of $0.09 reported in fiscal 2009.

Our fiscal 2010 guidance continues to be predicated on an improvement in sales trends during the second half of fiscal 2010 as retailers purchase inventory in preparation for the holiday season.

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

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

(Operator Instructions) One moment, please, for the first question.

Your first question comes from the line of Jeff Blaeser with Morgan Joseph.

Good morning.

Thanks for taking my question.

Quick, on the second half strength and the retail inventory level, do you expect the improvement to come from retailers just building up inventories again or from replenishment sales that may develop throughout the course of the year?

Well, what we've seen so far in the first half, and began in the fourth quarter of last year is in the fourth quarter of last year, there were sales declines that were significant at retail.

But beginning this year, sales declines have stabilized and are significantly lower than we saw in the fourth quarter of last year, and retailers have basically been living off of their existing inventory to a great extent.

We don't believe that that can continue through the third and fourth quarter for the holiday season.

Okay.

So it sounds like you're seeing improved POS sales.

And I think I mentioned that in my comments, that we have seen stability in our retail sales, particularly in the US.

Okay.

And then if I may just have a quick second one.

You put a release out yesterday for the Coach line.

What kind of change does that have for the line?

That was a modification with some advertising.

It wasn't -- it was not a material change, I think.

But I think the rules are that you have to -- if an agreement is filed and you make an amendment to it, you have to file an 8-K on it.

Okay.

Great.

Thank you.

Okay.

Your next question comes from the line of Kristine Koerber with JMP Securities.

Hi.

This is Jennifer Bennett filling in for Kristine.

I have a couple of questions.

With regards to your more optimistic guidance, could you be a little bit more specific about what trends you're seeing now that give you more confidence in the back half?

Well, I think the first thing is that when we gave guidance at the end of the year, the visibility was quite limited and, therefore, we were kind of looking at a much more deteriorated level of performance in the overall economy.

Clearly, with four months into the year, we have a little bit more visibility and, therefore, rather than just having guidance of saying that we certainly expect to be profitable, we're able to give a lot more clarity to that.

And therefore, we're really looking at guidance that pretty much is in line with last year's performance before unusual charges.

And that's where we see ourselves being at the 50% level.

It's not so much we see the second half dramatically improving as opposed to we're getting better visibility, and as you can see the first quarter results were much better than had been originally anticipated.

I would also like to add that in the first half of last year, we were also comping against very strong performance whereas in the second half you already began to see the deterioration in the economy last year.

Okay.

Thank you.

That's helpful.

With regard to the competitive environment, do you continue to see a lot of discounting by your peers, and do you expect that to continue?

Well, our peers don't really -- we're predominantly in the wholesale business, so we don't see that.

I don't think there's as much -- at retail, there's not nearly as much promotional activity as there was in the fourth quarter because people have a greater alignment of inventory this spring than they did in the fourth quarter of last year.

So I think you saw that at retail, but not specifically affecting our category.

Again, because our products and our category are longer lasting in terms of design and style.

Got it.

Okay.

With regard to inventory, so inventory was up 4%, sales were down 33%.

How much of inventory was made up of discontinued product versus new product?

I know you said in your prepared remarks that you're being more selective in offering new product, but you've offered several more accessible price points.

Could you talk about what's in that inventory mix?

Yes, one of the things is our inventory has a long life cycle.

So just because the inventory has gone up with sales going down doesn't mean that it's discontinued product.

It is core product.

However, as we said, our lead times with putting orders out and when we receive the finished goods is six months or longer.

And obviously, retailers can react very quickly and cancel purchase orders as we were seeing at the fourth quarter in lower purchases that they were taking.

So we're getting that inventory in.

We have delayed some of that.

We have made some cancellations, but that is very good inventory.

And that's inventory -- the predominant of what we will be selling this year is inventory models that have been in existence.

New products are really sprinkled in there from a standpoint of newness and activity.

But again, the vast majority of our inventory is sold for many years and does not have a short life cycle.

Okay.

So it's majority is core products, six months lead time.

So part of that build is for the back-to-school?

The lead time -- .

Six months or longer.

Six months or longer.

So we're getting product in that we were ordering last year.

Obviously, the levels of ordering were greater than what the needs were indicating.

And obviously, we're able to adjust that to some degree.

But that's what we're seeing in the first half, and we're very comfortable that that's what we'll be selling throughout this year and early next year.

Okay.

And then lastly, you talked about sales trends stabilizing -- where you're starting to see signs of stabilization, particularly in the US.

Could you talk a little bit more about your markets abroad?

Well, we've seen actually in our Movado brand, which we launched a subsidiary in China at the beginning of this year, we've seen fairly good sell-through.

And that market seems to be performing well.

The Middle East also has been performing well, but the people in that area are also focusing on bringing down their inventory so we have actually seen acceptable business levels there.

The more challenging markets right now are in the European markets where economies have begun to slow and retail sales have begun to slow.

But again, our sales trends are better than the market overall in those markets.

They've continued to decline from Q4?

Europe -- the European markets did not perform that badly in Q4 as the domestic markets.

So we're seeing some deterioration there in the first half of this year as the US markets begin to stabilize.

Okay.

Great.

Okay?

Thank you.

(Operator Instructions)

Okay.

If there are no more questions, I'd like to thank all of you for participating today and wishing you a good summer.

Thank you very much.

This concludes today's conference call.

Thank you for your participation.

You may now disconnect your line.