Movado Group Inc (MOV) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Movado Group's fourth quarter and full year earnings conference call.

(Operator Instructions).

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 and Chief Executive Officer; Rick Cote, President and Chief Operating Officer; and Sallie 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 the Company's filings with the Securities and Exchange Commission.

Such forward-looking statements include statements regarding Movado's performance for fiscal 2011 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.

And let me now outline the order of speakers for today's conference call..

Efraim will begin, then turn the call over to Sallie, and Rick will close.

The Company would then be glad to answer any questions that you might have.

And now I'd like to turn the call over to Efraim.

Good morning, and welcome to Movado Group's fourth quarter and full year conference call.

Given that we just spoke with you a little over two weeks ago, we will keep our remarks brief as nothing has changed dramatically in the business since that time.

As we announced today, our results for the fourth quarter and fiscal 2010 were in line with the revised expectations we provided in mid-March.

As expected, we recorded charges related to challenges within the US jewelry market and the proactive steps we took to manage our business within this environment.

Sallie will discuss financial results with you in greater detail.

Despite these charges, we were able to significantly strengthen our financial position in fiscal 2010 by increasing our net cash position to $61 million from $22 million last year, and delivering close to $35 million in cash flow from operations.

We are continuing to proactively take steps now to address both the challenges and opportunities we see in the marketplace.

While we continue to anticipate this year will be one of investing to build our brand strength in the marketplace, we have renewed our focus on growth moving forward.

I believe that Rick's recent promotion to President, in addition to his responsibilities as Chief Operating Officer, will allow us to better leverage the Company's strong brands and assets.

Let me reiterate that we view fiscal 2011 as a building year.

We are increasing investments in our brand to elevate our connection with consumers and drive the topline growth that will enable us to achieve our long-term profitability objectives.

Specifically, we will focus on driving creativity within Movado, Ebel and ESQ by Movado to take advantage of the improving global environment.

We plan to follow through on the initiatives we discussed with you in mid-March.

Specifically, in Movado we are focused on energizing the brand and invigorating product development with a greater focus on product segmentation.

We are enhancing the resources and aligning the organization to have a more seamless execution around the development and segmentation of our products and distribution.

In addition, as many of you know, we introduced Movado Bold, a new design last year, intended to attract a younger, more fashionable consumer.

We will begin to roll out Movado Bold to select wholesale partners during the second half of the year.

In Ebel, we plan to return to the brand's core value proposition while maintaining its classic look and feel.

Given where our competitive set has risen in terms of pricing, we believe there's a significant opportunity to focus on products at the $1,500 to $5,000 price point.

In ESQ by Movado, we will energize the brand with strong new product introductions and a new television campaign, which we will begin in May.

Additionally, having just returned from Basel, I would like to note that we received a very good reception to our new product introductions in Movado, Ebel and ESQ by Movado, as well as to our new products in our licensed brands.

As a Company, we will continue to leverage the strength of our outlet stores and maintain the proven growth strategy of our licensed brands, as these businesses continue to perform well.

On the international front, we continue to expect that China will also be an opportunity for us, both for Movado and our licensed brands.

We are confident in our ability to leverage our strong assets, including iconic brands, talented people and a solid balance sheet to maximize our performance.

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

Thank you, Efraim, and good morning, everyone.

I will go through the audited financial results for fiscal 2010 with you now.

As Efraim mentioned, these results are in line with our March 15, announcement.

Our fourth quarter and fiscal year results were impacted by a number of items.

I will begin by discussing these special items, but please also refer to our press release for a description of the items, as well as a table reconciling adjusted results to GAAP.

Our GAAP results include $1 million of sales of excess discontinued products for the quarter, and $14.6 million of sales of excess discontinued products for the fiscal year.

Gross margin for the quarter and the fiscal year includes an $8.8 million or $0.28 per diluted share non-cash pretax reserve, primarily for excess non-core component inventory.

Operating expenses for the quarter and the fiscal year included $7.6 million or $0.29 per diluted share pretax non-cash charge primarily related to the writedown of certain assets of our retail boutiques and trade show booths for the Basel fair.

Last year's fourth quarter and full fiscal year results also included a $5.5 million pretax charge resulting from the previously announced expense reduction program, and a $4.5 million pretax non-cash charge related to the impairment of certain retail boutiques.

These two items impacted last year's diluted earnings by $0.27 per diluted share.

Interest expense for this fiscal year includes a pretax charge of $1.3 million or $0.03 per diluted share for costs incurred in connection with the repayment and refinancing of our debt earlier this year.

And lastly, this year's tax provision includes a non-cash deferred tax expense related to a valuation allowance on net deferred tax assets.

This is partially offset by an $8 million income tax benefit recorded in the fourth quarter due to a recent US tax law change which increases the net operating loss carry back period to five years.

The valuation allowance for the fourth quarter and full fiscal year was $11.1 million and $34.5 million, respectively.

The net impact of these tax items is $0.13 per diluted share for this quarter and $1.08 per diluted share for the year.

The balance of my remarks will exclude these special items that were just discussed.

Sales for the fourth quarter were $91.2 million, a decrease of $2.8 million or 3% from the fourth quarter last year.

Sales were lower than prior year due to the challenging economy as well as our proactive sales management in light of industry liquidation and potential credit exposure.

Sales in our wholesale segment for the fourth quarter were $61.6 million, or flat to the prior year.

Sales were below prior year most significantly in the luxury category, offset by an increase in sales of our licensed brands.

The US wholesale business increased by $1 million or 5.2% from last year, driven primarily by strength in the licensed brand category.

This was offset by decreases in the luxury and accessible luxury categories.

The international wholesale business decreased by $1.1 million or 2.5% on a year-over-year basis, driven primarily by the luxury category.

This was offset by increases in the accessible luxury and licensed brand categories.

The retail business posted sales of $29.6 million for the quarter, an 8.6% sales decrease over last year.

Gross profit in the fourth quarter was $44.9 million versus $52 million last year.

Gross margin for the quarter was 49.3% as compared to 55.3% last year.

Gross margin was negatively impacted by currencies and lower production levels, which will be discussed in greater detail with the full year results.

Operating expenses for the quarter were $58.3 million, below prior year by $7.6 million or 11.6%.

The decrease was primarily the result of initiatives to streamline operations and reduce expenses, which included lower marketing expenses of $1.2 million.

The remainder of the reduction of expenses is across all other operating expense categories, such as payroll and related costs, and reduced spending in our retail segment.

On an adjusted basis, the net loss in the fourth quarter was $7 million or $0.28 per diluted share versus an adjusted net loss of $8.8 million or $0.36 per diluted share in the year ago period.

Adjusted EBITDA for the fourth quarter was a loss of $9 million compared to adjusted EBITDA loss of $9.1 million in fiscal 2009.

Now looking at our fiscal year results -- and once again let me remind you that the fiscal year results will be adjusted to exclude the special items discussed earlier, and please refer to our release for details on those items.

Sales for the year were $363.8 million, a decrease of $97.1 million or 21.1% compared to last year.

Sales were lower than anticipated for the reasons previously mentioned, as well as inventory destocking by retailers which took place throughout the year.

Sales in our wholesale segment decreased by 24.5%, to $280.3 million compared to $371.3 million last year.

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

The US wholesale business decreased by $41 million or 24.7% compared to last year.

Sales were below prior year most significantly in the luxury and accessible luxury category.

This was offset by an increase in the sale of our licensed brands.

The international wholesale business decreased by $50 million or 24.4% year-over-year.

Sales were below prior year in all categories.

Net sales in the retail segment were $83.5 million, which is a decrease of 6.8% compared to last year.

On a comp store basis, Company outlet stores increased 1.9% compared to the prior year, and sales in the Movado boutiques decreased 15% for the same period.

Gross profit for the fiscal year was $195.7 million versus $284.9 million last year.

Gross margin percent for the year was 53.8%, as compared to 61.8% last year.

The overall decrease in gross margin was unfavorably impacted by approximately 285 basis points resulting from a shift in channel and product mix.

In addition, gross margin was negatively impacted by currency and lower production levels.

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

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

The lower production levels impacted gross margin by 180 basis points.

Operating expenses for the year were $213.4 million, below prior year by $52.5 million or 19.7%.

The decrease is primarily the result of initiatives to streamline operations and to reduce expenses, which included lower marketing expense of $24.7 million.

The remainder of the reduction of expenses is across all other operating expense categories, such as payroll and related costs, and reduced spending in our retail segment.

On an adjusted basis, for the full year, net loss was $11.9 million or $0.48 per diluted share versus adjusted net income of $16.4 million or $0.64 per diluted share in the year ago period.

Adjusted EBITDA for fiscal 2010 was $1 million compared to adjusted EBITDA of $37.5 million in fiscal 2009.

Now taking a quick look at our balance sheet, cash at the end of the year was $71 million, and total debt had been reduced to $10 million versus total debt of $65 million last year.

The Company's net cash position at the end of the year was $61 million, up from $21.6 million a year ago.

Additionally, for the year ended January 2010, our cash flow from operations was $34.7 million, and our free cash flow was close to $30 million.

Accounts receivable of $67.2 million is below prior year by $9.5 million.

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

Inventory of $204.1 million decreased from $228.9 million last year.

On a constant dollar basis, inventory decreased by $37.1 million or 16.2%.

Lastly, capital expenditures for the year were $4.9 million, and depreciation expense was $18.7 million.

Now let me turn the call over to Rick to discuss our outlook.

Thank you, Sallie.

Good morning, everyone.

As we look forward, we are focused on executing strategies to return to topline sustainable growth that will be the driver for us to improve our profitability long-term.

In the coming year, we will strengthen the business for our core portfolio brands, including Movado, Ebel and ESQ by Movado, with a focus on product innovation, improved execution of product segmentation and pricing, and an increased level of marketing investment.

We expect that our new management leaders in each of these brands will bring a more disciplined approach to executing the brand strategies, as well as a greater focus on customers and end consumers.

In addition, our capable licensed brand management team will continue to execute our successful growth strategies within our strong licensed brand portfolio.

And finally, we will develop strategies to reduce the negative contribution in the areas of our business that are underperforming.

Our management team is also in the process of revising our long-term business plans to better address the changed consumer and market environments.

We expect to share a multi-year plan with you during our second quarter conference call this year.

Turning now to our guidance, as I am sure you have seen in today's release, we reaffirmed the outlook for fiscal 2011 that we provided on March 15.

We continue to anticipate adjusted EBITDA will improve from a slight gain in fiscal 2010 to range between $15 million to $20 million in fiscal 2011.

With the need for a tax valuation allowance, we anticipate recording a tax expense in fiscal 2011.

This will result in us recognizing a net loss for the year.

On a GAAP basis, we continue to anticipate a net loss in the range of $5 million to $10 million, or $0.20 to $0.40 per diluted share.

Based on how we expect business to trend throughout the year, we anticipate recording net losses in the first half of the year to be partially offset by a net profit in the third quarter of fiscal 2011.

These bottom line expectations continue to be predicated on a 10% to 15% sales increase for the year, excluding fiscal 2010 discontinued product sales.

With respect to gross margin, we anticipate a full year gross margin of approximately 57%, and approximately 55.5% in the first half.

As we noted in our release, we expect an approximate 10% increase in operating expenses, with half of that due to increased marketing in support of our investments and brand building and the other half due to increases in SG&A.

Advertising as a percentage of sales will be slightly above 15%.

The guidance we have provided does not assume any unusual charges for fiscal 2011.

As Efraim mentioned, fiscal 2011 will be a year of rebuilding our brands as we focus on returning to growth.

We are enhancing our marketing, improving our product offering and how we go to market through stronger execution around segmentation.

In short, we are returning to the core values of our business with the goal of maximizing our competitive advantage and gaining share in the market.

Through the strength of our great portfolio of brands, we are confident that there are many promising opportunities ahead for our business.

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

(Operator Instructions).

Your first question comes from Jeff Blaeser with Morgan Joseph.

Morning.

Morning.

A couple of questions on the SG&A side.

It looks like it was fairly lower versus your 3Q guidance.

Was there any particular area there that you trimmed during the quarter?

And on the 15% on the advertising marketing side, any kind of timing for the investments quarter by quarter?

How should we look at that in the modeling stage?

First let me deal with the last part of the question, which is the advertising.

From a standpoint of how we will record that, we basically take the full year percentage and apply that percentage on a quarterly basis, and usually our actual spending and more skewed to the second half of the year.

So we spend less in the first, but from the P&L you will see that same plus 15% pretty much throughout each of the quarters.

The first part of the question certainly had to do with the SG&A, and from a standpoint of the full year perhaps being a little bit lower than the original guidance we had, I would sit there and say I think it was kind of in line with where we expected.

Certainly we continue to focus on critiquing our expenses to make sure that we were only spending what we needed to do; so obviously dealing with the profitability picture, so I think we continue to be focused on our spending levels throughout the year, and we will continue to do so as we go forward.

It looks like, just like -- maybe not product mix, but price point change going forward, at least a little bit more focus.

Do you expect that to have any impact on gross margin in term of mix?

Well, it has during the year.

That's certainly part of the reason for our gross margin where it is.

And yes, it will have a continued impact in the current year.

One of the things we have certainly done and we have talked about it many times is having what we believe is a proper price value proposition, and certainly taking into consideration the current consumer and marketing trends out there.

So from a standpoint of -- our objectives remain firm from the standpoint of having strong gross margins.

We will continue to as we launch new products going forward, but that certainly has had an impact as to the mix of our product offering, because the declines that took place were in our higher margin categories, particularly the accessible luxury category.

Thank you.

Your next question comes from William [Wister] with [Wister] Associates.

Good morning, how are you today?

I just have a question about your -- the loss that you are projecting for the year.

I mean, what we are really talking about is, the climate next year is a company that's going to be looked on as losing money versus your competitors and some of your companies that you deal with like Coach making money.

So you are going to -- your loss is going to be magnified in relation to -- in the eyes of the investor.

Now, can't you possibly find savings of $5 million to $10 million in a $460 million, $480 million sales base, which is 1% to 2%, to at least breakeven next fiscal year?

I think a couple of things on that.

Number one is again, we are looking at sales being 10% to 15% above last year's $363 million, so that's different than what you just outlined there.

But I understand your point.

Clearly, one of the things that is impacting us that a lot of our competitors do not have is the valuation allowance that we had to book this year, and will have to for the next number of years until the US becomes an ongoing profitable business.

And clearly, we always look at our expenses in trying to focus in on that.

I understand your point; again, we will look at EBITDA -- we are looking at growing that from a slight positive to a $15 million to $20 million positive during the year.

But clearly, our focus is on -- the markets are stabilizing, particularly in the US, much more of our businesses in the US versus the watch competitors that we have around the world.

And we want to make sure we will do the right things, because it is about the long-term liability, and we believe we are well-poised to get back to appropriate levels of profitability for the Company, and we will do the right things in the various years to get there.

But I understand your point, and we constantly always focus in on that.

Yes, okay.

I just have one more small question, and -- have you made any progress on some of the leases in the boutique operation that may be onerous?

I think we said that we did in Rick's comments and in our press release, and also outlined that we are looking at ways to reduce our losses in the segments that we were losing money now, and clearly the boutiques is one, so we are reviewing all of our opportunities to reduce those losses.

Thanks very much.

Good luck with that.

Thank you.

Your next question comes from Jennifer Malone with Sterne Agee.

Hi.

Good morning.

Not to harp on the last question, but I was wondering -- and I know you expect to provide more detail when you introduce your new long-term growth plan -- but with respect to your thinking about the boutiques longer term, is that an area of the business that you expect to remain in, or something that you would be looking to exit, or can you tell us how to think about that?

And then also, just maybe some more feedback on your reception at Basel; anything that you could comment on with respect to the products and the introductions that we can expect to see later this year?

Well, let me --on the first part of your question on the boutique side, obviously we are now developing our -- or updating our long-term strategy, and I think that's really fair that we wait and communicate with you on that strategy and where the boutiques fit into that strategy as well.

On the second, the second part was about the products at Basel.

We really got an excellent reception to the new price point collection, Ebel, which is called the Ebel Classic Sport, and retails from $1,500 to $3,000, and it is an area that we will continue to do development.

And then we also got very good feedback on our products in Movado, the expansion of the Datron family, as well as the new hard metal watch, and Movado really is one of the leaders in the production of hard metal watches in the world, as well as excellent reception across all of our licensed brand product development efforts.

I guess where -- I mean, collectively, how do you see your price points trending this year and into next year with the new introductions of lower price points?

I don't think it is a material change, I think it is a fine tuning of the change, other than the introduction of the new price point in Ebel.

But Movado really remains within its core strength.

Bold is a new price point for Movado, priced at $350 and $495.

But that really, we believe, gives us the opportunity to expand into a new market -- a younger market.

Our test in our boutiques for that product was excellent, and in the second half of the year, we will begin rolling that out to wholesale.

Okay.

Thank you.

(Operator Instructions).

Thank you, that concludes our question-and-answer session today.

I will now turn the call over to management for any closing comments they may have.

Okay.

Thank you very much for participating on today's conference call.

We look forward to sharing our multi-year business plan with you during our second quarter earnings release.

Thank you very much again, and have a nice holiday.

This concludes today's conference call.

Thank you for your participation.

You may now disconnect.