Movado Group Inc (MOV) 2010 Q3 法說會逐字稿

Good morning, Ladies and Gentlemen.

Welcome to the Movado Groups Third 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) I'd like to introduce Ms.

Lee Parish of FD.

Please go ahead.

Thank you, good morning everyone and thank you for joining us today.

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

Before we begin I'd like to note 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 the companies filings with the SEC.

Such forward-looking statements include statements regarding Movado's performance for fiscal 2010 and beyond.

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 todays Conference Call.

Efraim Grinberg will begin with the highlights of the third quarter, Sallie will review the financial details and Rick will then provide you with an update on the Company's financial outlook.

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

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

Thank you, Lee.

Good morning and welcome to Movado Group's Third Quarter Conference Call.

I'd like to get right to the point this morning.

I am very disappointed in our third quarter and year-to-date results.

Our performance has been below our expectations this year and we recognize that we need to make sure it improves.

Previously, when we had looked out at fiscal 2010 and established our expectations for the year, it is clear that we underestimated the level of destocking that would take place within our wholesale distribution channel as retailers have remained highly conservative in their inventory positions throughout the year.

Like others in our industry, we've also experienced the compounded effect of the liquidation of some of our former wholesale customers who filed for Chapter 11 in the past year such as Fortunoff and more recently Finley.

In addition, the luxury segment was profoundly impacted by the slowdown in consumer spending, especially an important market such as the US, Europe, and the Middle East which has affected our Ebel and Concord brand.

Our gross margin was impacted by the mix of our business, the reduction of volume and the weaker US dollar.

On the positive side, we have taken actions in the last 18 months that are enabling us to navigate the challenging environment and maintain a strong financial position.

Importantly, we have strengthened our Balance Sheet generating approximately $17 million in operating cash flow in the quarter, reducing our inventory by approximately $24 million versus last year on a constant dollar basis, reducing our overall debt to $25 million and increasing our cash position which has continued to improve from the level at the end of the second quarter.

We obviously have a great deal to do to improve our business as we move forward but we have great brands and a solid financial base that are allowing us to take the necessary actions to return to growth and profitability.

We have been through difficult periods before and always emerged stronger.

I'd like to now speak briefly about the initiatives within our various brands.

Looking specifically at our Movado Brand, the landscape has changed significantly over the last 18 months.

The American consumer has been negatively impacted by the economic slowdown in job losses.

Our Movado brand in particular has been affected by the contraction of our wholesale distribution as major retailers have gone out of business and there has been further retail consolidation.

And as you all know, retailers have been focused on major inventory reductions.

Within this environment, Movado has performed well at retail as we have increased its penetration in the $500 to $1500 price range.

As we look towards next year we set the foundation for improvement in the performance of our Movado brand with some very strong product introductions this Fall.

We introduced the Movado Master Collection priced from $2,000 to $5,000, expanding Movado's presence in the luxury category, as well as the successful introduction of several new jewelry families in our Boutiques.

On Black Friday weekend we launched an innovative family of watches called Movado Bold, manufactured from high-tech, composite materials, Bold is now exclusively available in our Boutiques and it's been a hit since its introduction.

The Bold family is priced from $350 to $495 and allows for a more fashion forward youthful customer to enter the world of Movado.

It is important to note that as the wholesale distribution channel has contracted over the last several years, our Boutiques are becoming a more important part of our distribution strategy as we move forward.

In addition to the exclusive product available in our Boutiques, another major growth opportunity for Movado continues to be our expansion into China where we opened our own subsidiary in February.

So far the results have been excellent and we will continue to grow this very important marketplace for Movado.

It has been a very challenging year for luxury watch brands especially in the US, Europe and the Middle East.

Ebel has suffered in these markets as well.

However, we've strengthened our management team in Ebel and are now focused on returning the brand to growth next year.

We will focus our energy in growing our share in watches for women in the $3000 to $10,000 price category.

We'll also support the brand with an exciting new advertising campaign in our most important markets, the US, Germany, Switzerland and the Middle East.

In our license brand category we expect a single digit sales decline this year but expect to return to growth next year.

We have very strong brand names in this arena and have already have very strong product assortment that will be launched early next year.

We're also focused on expanding these brands, Coach, Hugo Boss, Tommy Hilfiger, Juicy Couture, and Lacoste, in China and Asia over the next several years.

Given the macroeconomic environment and value conscience consumers, our outlook division has performed well throughout the year.

As we look into next year we believe this will be an even more important part of our business as we continue to focus on reducing inventory and use this division as the primary vehicle for sales of discontinued inventory.

This has been a challenging year for the luxury market and our Company as we operated in a difficult retail environment.

We have taken significant steps in the past year to more strongly position our Company, but we also know that we need to continue to take decisive action as we return our business to growth which we fully intend to do next year.

We plan to take the necessary actions to restructure our business to focus on driving sales and market share growth.

We remain confident in our ability to improve our performance as we move forward.

We have some of the strongest brand names in the marketplace, a talented and focused team of associates and a strong Balance Sheet.

We're very focused on making sure that we execute our vision of returning our Company to a healthy level of growth and profitability and we are confident in the strength of our portfolio of nine brands.

I'd now like to turn the call over to Sallie.

Thank you, Efraim, and good morning everyone.

On a GAAP basis, we reported a third quarter net loss of $20.9 million or $0.85 per diluted share compared to net income of $15.7 million or $0.62 per diluted share in the prior year.

The third quarter results included non-cash tax charges of approximately $23 million or $0.92 per diluted share.

I will discuss this in greater detail in a few moments.

Sales for the third quarter were $129 million down from last year by $6.9 million or 5.1%.

Net sales for the third quarter included $8.4 million of excess discontinued inventory.

Excluding the sales of discontinued product, net sales declined by 11.2%.

On a GAAP basis gross margin for the third quarter was 46.8% as compared to 62.9% in the third quarter of last year.

Excluding the loss on the sale of excess discontinued product, the gross margin for the third quarter of this year is 52%.

The balance of my remarks as they relate to sales and gross margin will exclude the excess discontinued product sales reported in the third quarter of fiscal 2010.

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

For the third quarter, sales in our wholesale segment were $102.6 million or 12.7% below prior year sales of $117.5 million.

Sales were below prior year in all categories, most significantly in the luxury category.

The US wholesale business was below prior year by $7.4 million or 12.2%.

The decrease was driven primarily by the luxury and accessible luxury categories as sales in the license brand categories were up 10.4% over last year.

The international wholesale business was down by $7.5 million or 13.2% on a year-over-year basis.

The decrease was driven primarily by the luxury and the licensed brand category.

The retail business posted a 2% sales decrease over last year.

On a comp store basis Company outlet store sales increased 1.9% compared to the prior year and sales in the Movado Boutiques decreased 4% for the same period.

Gross profit in the third quarter was $62.7 million versus $85.4 million last year.

Gross margin for the quarter was 52% as compared to 62.9% last year.

The overall decrease in gross margin was unfavorably impacted by approximately 380 basis points resulting from a shift in channel and product mix as a result of the global economic recession.

In addition, gross margin was negatively impacted by currency and overhead absorption.

As a result of the weaker US dollar compared to the prior year period, fewer net favorable currency benefits were reported year-over-year related to the Company's natural hedge.

This is primarily attributable to reductions of inventory purchases in Switzerland which resulted in a 210 basis point decline in gross margin percentage.

Also, as a result of the weaker US dollar, gross margin deteriorated 150 basis points due to losses on unhedged portions of the Company's Swiss Franc liabilities.

The unfavorable overhead absorption impacted gross margins by 210 basis points and is primarily attributed to the usually low production levels associated with the decline in volume.

Operating expenses for the third quarter of the prior year include a charge of $3.4 million or $0.10 per diluted share related to the severance associated with our previously announced expense reduction program.

The balance of my comments as they relate to the quarter will exclude these items for comparative purposes.

Operating expenses for the quarter were $57.4 million, below prior year by $10 million or 14.9%.

The decrease was primarily the result of initiatives to streamline operations and reduce expenses which included lower marketing expenses of $9.9 million.

The reductions of expenses across all other operating categories were offset by the reversal in the prior year period of previously reported performance based compensation expense of $4.5 million.

The operating income for the quarter was $5.3 million compared to operating income of $18 million last year.

On a GAAP basis, income tax expense of $22.5 million includes two unusual non-cash charges.

In the third quarter of the current year, the Company reported a full valuation allowance against its US net deferred tax assets primarily due to the Company's US loss position in recent years.

Although the Company may ultimately utilize the underlying tax benefits within the statutory limits, the Company recognized a non-cash deferred tax expense of $20.8 million.

Also in the third quarter of Fiscal 2010, a non-cash provision of $2.2 million was reported for the net federal income tax on future remittance of approximately $10 million of current year earnings of a foreign subsidiary.

These unusual charges negatively impacted earnings per diluted share by $0.92.

Excluding these items, the tax provision for the quarter would have been nominal.

In the prior year, the tax benefit reported in the quarter was $1.4 million due to the utilization of the Swiss net operating loss carry forward.

On an adjusted basis Third Quarter net income was $3 million or $0.12 per diluted share compared to net income of $13.4 million or $0.53 per diluted share in the prior year.

Looking now at our year-to-date results.

On a GAAP basis for the nine month period we reported a net loss of $31.1 million or $1.27 per diluted share compared to net income of $25.1 million or $0.97 per diluted share in the prior year.

Sales for the nine month period were $286.2 million.

The net sales for this year included $13.6 million of excess discontinued inventory.

Excluding the sales of discontinued product, net sales decreased by 25.7%.

On a GAAP basis gross margin for the nine months was 51.6% for this year as compared to 63.5% last year.

Excluding the loss on the sale of excess discontinued product, gross margin for the nine months of this year was 55.3%.

Once again let me remind you that the balance of my remarks as they relate to sales and gross margin will exclude the excess discontinued product sales recorded this year.

Sales in our wholesale segment were $218.8 million or 29.4% below prior year sales of $309.8 million.

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 $42 million or 28.8%.

The international wholesale business was down by $49 million or 29.9% year-over-year.

Net sales in the retail segment were $53.8 million or below prior year by 5.7%.

Gross profit for the nine months was $150.8 million versus $232.9 million last year.

Gross profit for the nine months was 55.3% as compared to 63.5% last year.

The overall decrease in gross margin was primarily driven by the same factors as mentioned for the third quarter.

The operating expenses for the nine months of the prior year included a charge of $5.6 million or $0.16 per diluted share related to our previously announced expense reduction program.

Additionally, the results of the nine months of the current year include a charge of $1.3 million for one-time costs incurred in connection with the repayment of $25 million that was outstanding under our former note agreements and other costs related to the refinancing of our credit facility.

The balance of my comments for the nine month period will exclude these items for comparative purposes.

Operating expenses for the nine months were $155.1 million, below prior year by $44.9 million or 22.4%.

The decrease was primarily the result of initiatives since streamline operations and reduce expenses as previously discussed in the quarterly comments.

On a GAAP basis, income tax expense of $19.7 million for the nine months of the current year includes the two unusual non-cash charges as discussed earlier related to the recognition of a full valuation allowance against our US , our net US deferred tax assets and a non-cash provision that was reported for the future remittance of a portion of the current year earnings of a foreign subsidiary.

These unusual charges negatively impacted the diluted earnings per share by $0.94.

On an adjusted basis, the nine month period net loss of $5.3 million or $0.22 per diluted share compared to net income of $24.7 million or $0.96 per diluted share in the prior year.

Now taking a quick look at our Balance Sheet.

Overall, our Balance Sheet remains strong.

Cash at the end of October 2009 was $49.5 million and total debt was reduced to $25 million at the end of the third quarter.

The Company's net cash position at the end of the period was $24.6 million up from $21.6 million as of January 31 and up from $15.8 million a year ago.

Additionally for the quarter ended October 31, 2009, our cash flow from operations was approximately $17 million.

Accounts Receivable of $105.5 million is below prior year by $13 million.

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

Inventory of $228.8 million decreased from $236.7 million last year.

On a constant dollar basis, inventory decreased by $24.2 million or 10.2%.

Total debt consisting of both short and long term debt was $25 million versus $69 million last year and total liabilities are down from $180.9 million last year to $113.4 million this year.

Lastly, Capital Expenditures for the nine months were $3.4 million and depreciation expense was $13.1 million which includes the depreciation for our new ERP system.

Now let me turn the call over to

Thank you, Sallie, good morning everyone.

Given our performance for the first nine months, we have revised our outlook for the full year.

So let me jump right into our updated guidance.

First, taking into consideration the industry trends that Efraim mentioned, we now we expect sales to be in the range of $370 million to $380 million excluding the sale of excess discontinued product which represents an approximate 20% sales decline for the year.

This is a comparison to our prior expectations of a high single digit decline in sales versus last year.

In the fourth quarter, we expect sales to range from flat to up 10% versus last year so we are expecting some year-over-year improvement compared to the trends we experienced in the first nine months.

Second, with the negative impact on our margin due to the product and channel mix shift, inventory reductions in greater than expected currency impact due to unusual and unfavorable swings in the US dollar, we now expect full year gross margin to be approximately 52.5% on a GAAP basis.

Gross margin for the fourth quarter is expected to be approximately 55%.

While we are expecting a decline in sales in gross margin, we are pleased to have reduced expenses by 25% for the year-to-date period.

As such, our operating expenses for the year will be down approximately $65 million from last year reflecting the aggressive cost reduction actions we have taken over the last 18 months.

With that in mind, operating expenses should be approximately $220 million for fiscal 2010 versus $285 million last year.

Taking into consideration all of the above factors, we expect to incur a loss on a GAAP basis in the range of $1.40 to $1.50 per diluted share.

This level of loss for fiscal 2010 includes approximately a $23 million or $0.94 non-cash tax charge, an $0.08 charge the sale of excess discontinued product and a $0.03 charge to debt refinancing.

It is important to note that this updated guidance assumes no new unusual charges for the fourth quarter.

Going forward we will have limited visibility into our effective tax rate due to the need to fully reserve our US deferred tax assets.

As an example, we may record a tax expense despite recording a P & L loss.

On the positive side, the cost reduction in debt refinancing initiatives we have implemented over the past year are continuing to help us operate in this challenging macroeconomic environment.

We are pleased that we have increased our cash position to $50 million and reduced our debt to $25 million.

Our Balance Sheet remains strong with net assets of approximately $400 million, and current assets exceeding total liabilities by approximately $300 million or $12 per diluted share.

We continue to expect positive free cash flow from operations for the year as we reduce inventory levels and maintain low levels of capital spending.

We also expect our net cash position to further improve from our favorableposition at the end of October 2009.

While we need to increase our efforts on improving sales and gross margin performance, we will continue to focus on reducing inventory levels and controlling the expenses as well as managing our capital structure.

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

Ladies and Gentlemen, at this time we'll be opening up the call for the question-and-answer session.

(Operator Instructions) Your first question comes from Jeff Blaeser of Morgan Joseph.

Good morning.

A quick question on the inventories you mentioned about expectations to reduce debt.

What did you feel in terms of further liquidations returning some of the channel and I guess how comfortable are you with the overall inventory level, and where do you see it I guess next year?

I'll start off and turn it over to Rick.

We have seen a 10% drop in constant dollars and since a lot of our inventories in Switzerland it gets translated at a higher value with the weaker dollar and I think we're not anticipating doing anymore discontinued product sales.

And that's why I think I emphasized or outlet stores as the primary vehicle for eliminating inventory and reducing inventory on a go forward basis.

Rick?

We're very much managing our cash flow and that's going to be the focus for us this year.

We're pleased with the inventory reductions that have taken place and we expect that to continue.

With the strong standpoint of buying a lot less inventory in Switzerland, in other parts of the world so we're not bringing our inventory level down and we expect that to continue in the fourth quarter this year.

Okay, and then another question on following the last conference call, particularly in the US, you mentioned some stability in orders obviously not a great environment but you were seeing improvement.

What feedback were you getting from your retailers or your customer base that appeared to dramatically change their ordering patterns from that point throughout the third quarter?

Well I think it's a combination of they continue to be very cautious on inventories and sell-through is not as bad as our sales right now but inventory continues to be reduced.

And the positive side as far as puts us in a stronger position next year as inventories will go into next year at a lower level.

And then it's also been compounded in the fact that-- I only mentioned the two large retailers were Fortunoff and Finley that have gone out of business but they've been liquidating inventory in the marketplace and going-out-of-business sales really for the last nine months and that's had a compounded effect on the overall marketplace.

So we've actually seen I think a large reduction in Movado inventory over the last 18 months that's out in the marketplace but some of that currently is feeding through people going out of business so obviously we don't get the replenishment and our customers don't benefit from that.

Thank you.

Your next question comes from Kristine Koerber of JMP Securities.

Yes, hi.

Just a follow-up to the last question.

So the overall competitive environment, are you seeing the liquidation sales lessen?

Is it any worse this year than last year and what do you see going forward?

We actually think less pressure on our continuing customers out there, so they're doing better than they were last year and beginning to this month and over the last few months.

But what you have out there are people again the remainder of the Finley stores which is now in Bailey, Banks & Biddle going out of business, you had earlier in the year Fortunoff going out of business and then probably a number of independents going out of business and that's had pressure on the marketplace.

But you are seeing at this point last year you had a sense of panic out there in retail.

I don't think that that is out there right now.

But people don't have very high expectations either.

Right, and then with that said, as we look at the retail chain inventories, it sounds like you're a little more optimistic as we look into 2010 that we'll see destocking come to an end.

It sounds like retailers are going to maintain pretty tight inventories for a while.

Would you agree with that and given the seasonality of your business we're really looking at the third quarter of 2010?

Well we believe two things.

We believe retailers will continue to be very focused on maintaining lower inventory levels and we also believe that that puts the ownness on us as a Company next year and that's what we're working on to drive growth strategies into the marketplace that will drive consumers into their stores and that's really what we're focused on as a Company for next year.

And then just lastly, international markets, any trends internationally improved at all from last quarter?

The third quarter in Europe continues to be challenging.

Our license brands we believe are outperforming the marketplace in a number of Markets but it still is lower than last year.

We do expect some growth in our license brands in the fourth quarter, last years fourth quarter and our license brands was challenging.

China and unfortunately the Company does not have a major presence in China, it is a market that's been very strong.

Our Movado brand that is a small brand is doing very well in there and we have growth plans in place for China for next year as well for Movado and our license brands which we launched at the end of the third quarter and into the Fourth Quarter this year, we also believe will have a significant growth there next year.

Great.

Thank you.

Thank you, Christine.

(Operator Instructions) Your next question comes from Bill [Weichter] of Weichter Associates.

Hi, good morning.

Good morning.

It's an unfortunate quarter.

Maybe it's a good time for some reflection here.

Just curious, Fossil reported today and Fossil's results beat estimates for the third quarter and stock has tripled this year.

Could you perhaps look at Fossil and tell us what might have gone right there and what might not have gone right with your operations or are they just so totally different?

I think we're in two very different businesses to a great extent.

We obviously look and I think they reported a month ago because they're at a different calendar than us.

Well it hit this morning apparently.

Oh,, they're actually on a year-end calendar so their numbers are through the end of September and their model is much more now in retail, much more in accessories and non-watch products and they are also really not into the luxury category to the extent that we are and they have a much more global business as well.

So the US in this economic environment, the US consumer has pulled in much more than any other consumer base around the world.

And we are, especially with our largest brand Movado, we are very heavily skewed toward that US consumer and a large portion of our distribution also did this appear.

We also recognize that that distribution is not coming back so that we now need to develop growth strategies that exclude and really deal with the new environment and that's what we're focused on.

As I said earlier we are very disappointed with the results of the quarter but we're not going to sit still and do nothing about it.

Well, but the wholesale business disappearing can't be a surprise to you because you discussed that at the Annual Meeting about Finley.

There was a specific question and I think you said you would have done things financially to make sure they would not impact your receivables, so what was the difference here?

Fortunoff going out of business was also fairly well known.

What was the difference here that might have affected the your operations?

I think we said several things and we were fully reserved for Finley going out of business so we did not take a financial impact this year on their bankruptcy.

But that doesn't mean that the liquidations that they put into the marketplace and going out of business sales, in the case of Bailey, Banks & Biddle, and then a number of Finley Department Stores didn't affect the overall market and we underestimated that in combination with the retailers destocking and the combined effect of the two had a greater effect on the Company.

And just one final thing if I might.

You have both outlets and regular stores and I don't think the regular stores have yet made a profit and we're talking about now over 20 years.

Isn't there a time when you look at those regular stores and say that this is never going to make it and this store is going to make it because it's profitable today and really tack a hard look at them and a hard sharp pencil to them and eliminate that loss out of the Company at least?

Okay, and we obviously do look at each of our businesses in great detail and as I said earlier in my comments, one of the issues is that with the closing of a number of points of sale in this country, retail may become a more significant part of the overall business down the line.

That being said we are very focused on looking at each point-of-sale and seeing which ones are profitable and which ones are not, as well as developing new strategies for our Boutiques, which we began implementing earlier this year, have proven to be somewhat successful and we're optimistic about this holiday season in our Boutiques.

So when we talked earlier, a 4% decline in this type of an environment was not bad in the third quarter and again our gross margins in that venue were stronger and we introduced new jewelry really in November and we're seeing that begin to perform.

We've also introduced a number of specific watch products geared towards the Boutiques like the Movado Master at the high end, Movado Bold at the accessible end and we believe that those two products have shown a very promising launch.

So there are opportunities there but obviously in this environment, we're taking a look at the financial ramifications.

Well when do you, I mean what criteria are you going to use to make a decision to say this program is working or not working because I don't know what program this is but it's well into the four or fifth reincarnation of these stores.

So what criteria will you use to say that this is working or not working and we need to cut the losses now and forget about it?

Just walk away from it.

Well I don't think we can just walk away.

We have commitments in place.

Well I understand.

So I think that we have shrunk the operations over the last several years and as leases come up, we obviously look at them very carefully, whether it's someplace that we would like to continue in or not.

And so we are taking a very diligent look at this overall business.

So that being said, I think it is something that we're looking at very carefully and looking at each way to make the operation more efficient.

I have faith in you guys pulling out of this but it is a tough quarter.

Okay, thank you very much, Bill.

Thanks.

Your next question comes from Josh Pechter of Cacti Partners.

Good morning.

I was just listening to the last question and I understand the feelings but maybe you could just spend two seconds.

Tell us now the entire retail world has been shaken whether it's more operators, whether it's the number of jewelers in the mall, what is your three year outlook of how the watch business will look?

Can we think in 2013 that we'll look back and say well this was a blip in the road and we're back to normalized earnings of $1.50 or so in this Company?

Or do you look forward and say look, the world has changed and the number of doors in a mall that we're going to be present in is no longer going to be 14, it's going to be three and one of them is our Boutique which is why it's critical that we keep these properties.

Give me some thought that you and Rick have sat there and envisioned what does 2013, 2014 look like in the watch world from your perspective?

Let's talk a little bit about that.

We're not going to give forecasts that far out obviously but I will talk in broad strokes.

We have great brand names in this Company.

We have great brands.

Obviously this economic environment has brought a great amount of stress especially in the US marketplace in the luxury category and the retail environment, so a number of the retailers have consolidated and disappeared.

That being said we do believe that the only way for this Company to be successful and for any Company to be successful in the future is to grow so that is our focus right now.

It is really on developing and strengthening our growth strategies for the future.

I do believe that retail will play a position within that growth strategy but there are obviously some steps that we need to take to improve that and make it a contributing factor to the Company, but down the road there will be less jewelry retailers.

There is now one major department store chain in this country whereas several years ago, there were two and one that operated under many different brand names, so the world has changed and we have to deal with that new distribution channel.

As I tell our people, I don't believe that we're going to see a new department store chain or a new jewelry store chain emerge to replace the old one, so we have to work with the landscape that we're dealt and I believe that retail will play a role in that.

Obviously our focus is on returning to growth and returning to profitability and we expect to do both things.

Okay, but do you look at the mall and say to yourself, we used to have $100 of sales in the mall and now it's $50, and we see $100 coming back so our Boutiques are going to have a much larger revenue, using the $100 as just a round number, is that what you're thinking about?

Or are you thinking the new world is we'll have $50 of sales in the world and it's just spread out across less players?

I think one of the things that we believe is that our sales of watches on to consumers wrists did not shrink by the level of our sales to retailers.

And we know that because over the last year we believe there's been about $100 million of inventory come out of the marketplace and we have not benefited from that.

We obviously benefited from it in prior years and that will return to a more normalized level so consumers are still buying a greater level of Movado, and now I'm only talking about Movado-- Movado wrist watches than we're getting the benefit for currently.

And we will get the benefit for that in the future as long as we continue to market strongly and support our brands and introduce products that they want to buy.

That makes me believe that from keeping the Boutiques in place you may garner the share that Bailey Banks and all of the other outlets that have dropped out of those A malls they have to go somewhere because you're believing that a more normalized level of sales will return so why shouldn't we think that the Boutiques are on the edge of having a huge step up in sales as more normalized environments return?

Well we believe that the Boutiques play a future role in our Movado brand and because we believe that they will get a larger share of the market as will our major customers.

Different segments of the populations.

Our Boutiques appeal to a higher end Movado customer.

Our department store and chain store jewelers to a different segment of the population and so we'll each get a significant part of that share of watches that have been quite frankly sold by people who were no longer in business and will no longer be in business next year.

Some of those are still in malls today operating going out of business sales.

One more question, because four, maybe five quarters ago, Rick made a comment that we're not exactly sure how many watches are out there.

Once we sell them we don't get a report from Macy's or any of these stores.

You made a comment in today's earnings about you still think destocking will occur.

Give us an idea, when will they be out of inventory?

When is the world dry of Movados because you've now had almost a year in which you've sold but not as aggressively even when guys went bankrupt the stuff hit the internet overnight, when are these channels dry?

A large part of the stock has moved through the channel and it's moving through the channel.

We do know and I think we do know our inventories at retail and our customers that are still in business.

So we do know that there are inventories, we monitor them and-- but quite frankly what happened last year if you start going back to last year when after Lehman Brothers went bankrupt, retailers saw their sales in our products and everybody else's products drop 20-30%.

And they had stocked up as if they were going to be flat or slightly up, so that creates an inventory glut in the market, then that's compounded by the fact of customers who are now going out of business and liquidating goods into the marketplace.

So they have to struggle against that as well, and our inventory which is long lasting isn't liquidated by our retailers fortunately but they will sell it through in a slower manner against that kind of competition and we see it now returning to a more normalized level.

I don't believe the destocking will continue.

I believe that people will just manage their inventories more efficiently and tighter going forward.

Your next question comes from Jennifer Milan of Sterne Agee.

Thank you.

I know you talked about the luxury categories and accessible luxury categories being relatively more impacted but you had also talked about introducing more accessible price points across the brand.

So I'm just wondering if you could talk about the change in mix relative to the more sensible price points, the relative performance of that category and then maybe your strategy for the mix in terms of a balance of the price points going forward?

Sure.

We have introduced within our accessible luxury category more accessible price points and one recent one I talked about is Movado Bold which is just in our Boutiques right now and has been extremely well received.

In fact in one weekend, the first weekend we put it on sale with no advertising, it's the most we've ever sold of a single model in one weekend through our Boutiques, so we are very focused on continuing to deliver very good value to the consumer.

And on the other side we also realize that we may have sacrificed a little bit too much gross margin and we need to get that in balance because gross margin for us is a very important metric and one that we're not pleased with right now.

So is there an opportunity to adjust further going forward?

I think as we look at new product introductions and as we deliver new products we've also delivered very good value in our license brands and that has seemed to work as well.

And we're looking now at what we do in our luxury category as well, delivering good value but at the same time generating gross margins.

Okay, thank you.

Your next question comes from Gary [Merwitz] of ICM.

Good morning.

I also wanted to follow-up on inventory a little bit.

Just if you think about the sales down 30% and inventory only down about 10%, I just was wondering if you could comment more on how you perceive the quality of what you have on your Balance Sheet now.

And can we think about is it potential reduction to current, I guess that 30% type of reduction when you achieve a better level or how do you think about it?

A couple things.

Number one is having a 10% reduction in inventory when sales are down that level is a strong compliment because as you can recall last year our earnings really hadn't grown as a result of the drop in the sales that had taken place so we're very pleased to have sales, have our inventory down as much as it is considering the decline in sales, so that's a positive.

Second is we do expect to continue to look at that coming down.

As I mentioned earlier on we're very much managing to cash flow.

We would expect in the fourth quarter we'll have a further decline in inventories taking place.

We are pleased with the level of inventory, as Efraim mentioned, we do have long lasting products so complete watches we have the ability of selling.

When we look at some of the excess discontinued sales that we had that is truly a product and in fact some of that was a little bit from the remaining product from the Ebel acquisition, which was four or five years ago.

So those we consider very unusual but the rest we do and we sell and again we're going to focus on our outlook being the primary seller of that product and our outlets have been doing well and they deliver good margin.

Not quite at the level of the Company average but very good gross margins for us.

So we are pleased with our inventory and inventory declines and expect that to continue.

Then you just mentioned a discussion about gross margins you're not happy with where they are but are gross margins permanently impaired to a great degree from what you've achieved in the past?

Is there a target level that you could talk about as you look at new product or even existing product as to where that should be going forward?

Obviously, we had a sizeable impact with a very significant drop in the US dollar this year and changes in our natural hedge primarily because of the reduction of purchases that we've made to obviously bring inventory down.

As I mentioned we expect the fourth quarter is going to be in that 55% range, clearly we do not believe that as our go forward level.

It needs to be better than that.

Obviously levels we've had in the last couple of years have been very nice levels but with the change in dollar that's not going to be maintainable.

As we did talk about this year we felt we would be closer to that 60% range and clearly I'd sit there and say that's a goal and the likelihood that's going to be fully achieved next year I certainly doubt it, but certainly will higher than our 55% level we're looking at in the fourth quarter.

And then you've done a good job cutting cost but just wondering if we're getting close to the bone now and really the opportunity to continue to cut costs, has that been exhausted to a great degree?

I think that we're pleased with the cuts that we've taken, they were very aggressive.

We do not see ourselves going with another round of I'll call it cost cutting per se, clearly there are opportunities of restructuring particularly focusing on how do we accelerate our levels of growth and how do we accelerate our level of gross margin improvement.

So I could see restructuring is taking place which are really roles and responsibility adjustment and getting people more focused on the things we really want them to focus in on.

Last couple issues, one is receivables.

You can look at similarly to inventory they just aren't down nearly as much as sales.

Just wondering again in terms of if you could discuss the quality of receivables and maybe the opportunity to get that down to lower levels?

I think our receivables have been in good shape for a long long time, we're very pleased with them.

When we look at the change in receivables it really does tie into the change in sales that are taking place.

We're pleased with the health of our receivables as we've mentioned in the past we've taken probably aggressive postures of curtailing sales to people that we think are credit risks, so we think we've done a good job of that and we're pleased with our receivable position.

Great and then lastly just more on the Balance Sheet.

I think you said the fourth quarter will be a positive cash generator and then in terms of your credit agreement that is purely security based, it's based on your level of receivables in inventories is that accurate so there's no financial covenants?

Correct.

We have an asset based loan agreement.

So cash flow, as long as you're in a period where inventories are coming down, cash flow should continue to be positive even at current sales levels, would you agree?

As I said earlier on we were about managing cash flow, we knew the first half and historically our first half is a cash utilization, but we focus very much on bringing inventory down, we have done that this year and focus on very low levels of capital expenditure, we've done that this year.

Third quarter was a positive cash flow, the fourth quarter will be as well, so we expect as I said in my comments to be positive cash flow, positive for the full year.

Great.

Thanks very much.

Good luck.

Our next question comes from Steve (inaudible)

Good morning.

Thanks for taking the question.

Just to jump off the last question about cash flow, I'm having a little bit of trouble understanding how guys generated the $17 million in cash in the quarter.

I didn't see a cash flow statement in the Press Release.

Can you just maybe sketch out the major items of cash flow?

It looked to me like maybe $8 million of EBITDA?

Well it's a couple things.

Number one is obviously when you look at the P & L loss, it is a very significant tax non-cash charge, so that comes out of it so there for, the level of losses is a much lower level and then we have very positive impact on inventory.

And again you have to look at the inventory excluding-- on a constant dollar basis you have to look at it.

So when you look at the inventory levels they look like they're down $10 million year on year on a GAAP basis but a lot of that is currency so you have a sizeable reduction in inventory levels.

We have depreciation and amortization that through nine months is $14 million and for the year will be $20 million.

So despite the loss take out the non-cash charge for taxes, positive cash flow generation for depreciation and amortization, positive cash flow from working capital despite receivables being up because inventories are down further and then very low levels of capital expenditures.

Yes, I think it's probably the constant currency that makes it difficult to look at the Balance Sheet.

The Q will be filed today or tomorrow and you'll have a lot more detail in that as well.

Great.

So there wasn't any unusual tax refunds or anything in the quarter?

No, the unusual is taking that $23 million of tax non-cash charge out of your P & L and that's the benefit there.

And it was disclosed.

Got you, and the only other question I had was on I guess the smaller of the two charges on the tax basis, I think you said you're bringing back $10 million of cash to the US subsidiary.

Is that right?

Actually we're reserved for taking that back we have not taken it back yet so it's the reserve for the federal taxes related to that deemed dividend, yes.

So it's a potential repatriation.

Does that mean that most of the cash is currently in Switzerland or in foreign ops and you essentially need cash in the US operation?

Well our cash is generally scattered throughout the world, which is generally the way things are, a big piece obviously Asia, Switzerland and the US.

But in the past however our foreign operations do generate excess cash flow over and above what they need for a local need.

But it doesn't necessarily mean we'll bring it back.

Right.

It just means we've reserved for it.

I guess I'm not sure why you'd reserve for it if you don't intend to bring it back if it was deemed to be permanently invested obviously you wouldn't need to pay a tax on it so-- okay, thanks very much for answering the questions.

Okay, thank you.

Okay, if we don't have anymore questions, I would like to thank all of you for participating today and asking some very good questions.

We obviously have a lot of work to do.

We're very focused on making sure that we return, we make very sure that we execute our vision to returning this Company to a healthy level of growth and profitability.

With that I'd like to wish everybody a Happy Holiday season and thank you very much for participating.

Thank you.

This concludes today's Conference Call.

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