Movado Group Inc (MOV) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Movado Group conference call.

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

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

(Operator Instructions) As a reminder, 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 F.D.

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 Chief Executive Officer, Rick Cote, President and Chief Operating Officer, and Sallie DeMarsilis, Chief Financial Officer.

Before we begin, I'd 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, express or implied, are discussed in the Company's filings with the SEC.

Such forward-looking statements include statements regarding Movado's performance for fiscal 2011 and beyond, as well as statements regarding the closure of the retail boutique division.

However, the failure to update this information should not be taken as Movado's acceptance of these estimates or forward-looking statements 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 for today's conference call.

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

Then management would be glad to answer any questions you might have.

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

Thank you, Leigh.

Good morning, and welcome to Movado Group's first-quarter conference call.

I'm sure you've seen by now that the Company issued two press releases this morning.

First, an announcement of our results for the first quarter of fiscal 2011, and second, an announcement regarding the closure of our retail boutique division.

Today we would like to share the details of these announcements and answer any questions you might have.

As indicated by the results announced earlier this morning, we are seeing signs of a recovery in our wholesale business in the US, with improved sales of our Movado brand watches as well as our other brands.

We believe that the negative effects on our business, caused by the unprecedented level of US jewelry retailers closing their operations and liquidating inventory last year, are behind us, and we are now focused on executing strategy that will return our business to growth.

As we had planned, our operating expenses were higher year-over-year, as we allocated increased spend towards marketing to more strongly position our brand and enhance our connection with consumers.

In addition to improved results in our US wholesale business, our license brand business continues to perform well, and we also experienced growth in our international wholesale business during the first quarter, although we are mindful of the challenges currently being experienced in Europe.

We are pleased to have reduced our adjusted operating loss by almost 50 percent through quarter.

Overall, we believe we have gotten off to a solid start in fiscal 2011, and are on track to meet our financial and operational objectives for the full fiscal year.

While our focus is on growth, today's announcement regarding our decision to close our retail boutique division directly reflects our commitment to reduce the negative contribution from an underperforming area of our business.

We believe that closing our retail boutiques, all of which are located in the US, is an important step in returning our US operations to profitability.

Going forward, our primary focus will be on increasing our market share in our wholesale watch business.

We see significant opportunities to further expand our relationships with our current wholesale partners, and enhance our brand with independent retailers in ways that replicate the successful attributes of our boutiques with greater cost efficiency.

Specifically, we will continue to build the Movado brand through enhanced and further expanded shop-in-shop executions, test new products with selected customers and geographies, and further development our e-commerce relationships with our national accounts.

We will also continue to develop innovative new products, like our new Movado Bold collection.

We will also continue to sell our watch products directly to consumers through our 31 outlet stores, which are performing very well.

We do plan to maintain our current location in New York's Rockefeller Center, which will serve as a flagship boutique, and which we believe provides us with a strong opportunity to showcase the brand and our watch products in a high-profile area that is a destination for consumers domestically and internationally.

Rick will provide additional detail on the closure of our retail boutiques and our next steps momentarily.

But first, I want to acknowledge the many contributions that our employees in the retail boutique division have made over the years, and to thank them for their dedication and commitment to our Company.

We are very mindful of the personal impact this decision will have on them, and we are work to ensure a smooth transition.

We are confident that this decision is in the best long-term interests of our Company, our investors, and our larger employee base.

As we discussed with you on last quarter's call, we expect fiscal 2011 will be a building year, as we focus on returning our Company to growth and profitability.

We are implementing initiatives to improve our product offering, how we go to market, and how we market our products to consumers.

In short, we are returning to the core values of the business.

We continue to believe in the strength of the Movado brand, and our overall portfolio of iconic brands, and we expect a successful execution of our strategy will solidify our position as a leader in the watch industry.

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

Thanks, Efraim.

I'd like to take a moment to provide some additional color around our decision to close the retail boutique division.

While the boutiques offered valuable opportunities to enhance our Movado brands and test new product concepts, they have never been profitable.

The division has averaged P&L losses of approximately $10 million per year.

Our financial model had anticipated losses of approximately $7 million in fiscal 2011.

After a thorough evaluation of the division, we determined that it is not possible to make the boutiques profitable within the current model, which commits Movado to spaces bigger than we need in the current economic environment, as well as the corresponding infrastructure cost.

We can simply no longer allow the boutiques to weigh so heavily on the remainder of our US operations.

In terms of winding down this part of our business, we expect that our boutiques will be closed effective June 30, 2010, leading to a workforce reduction of approximately 225 employees.

We believe we will be able to sell a portion of our non-watch inventory while our boutiques are still open, and do not intend to run any store closing or liquidation sales.

While closing the retail boutiques will lower annual revenues by approximately $30 million, we fully expect that this action will have an immediate positive impact on our profitability in fiscal 2011, excluding our near-term restructuring costs.

As noted in our earnings release today, we recorded a $3.4 million pretax impairment charge related to the closure of the retail boutiques, and we currently anticipate recording additional pretax restructuring charges of approximately $21.6 million in fiscal 2011.

Costs associated with the retail boutique closure include rent settlements, severance, third-party fees, and asset write-offs.

The cash portion of these charges, which is estimated to be approximately $20 million, will be paid with existing funds via intercompany dividends.

We will not increase our debt borrowings for this purpose.

As previously stated, we intend to present our multiyear profitability and cash flow plan later this year.

We expect that closing the boutiques will also have a favorable impact on that plan.

We do not have all the details for you today, but I can share with you that future profitability is expected to improve by approximately $7 million.

As we noted in our first quarter earnings release, if we exclude the negative contribution from the retail boutiques from our results, we would have achieved positive adjusted EBITDA for the quarter.

Turning now to our performance during the first quarter.

We are pleased with the initial successful execution against our strategies to return the business to growth.

We generated slightly more than 50% growth in sales from Movado and ESQ by Movado in the first quarter, off of a very low base in the first quarter last year.

In addition, sales from our license brands increased approximately 36%, versus a solid sale performance in the first quarter last year.

To reiterate some of the key areas on which we are focused.

We are energizing the Movado brand and invigorating product development with greater commitment to 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.

The new management leaders in our Movado Ebel and ESQ by Movado brands are already bringing a more disciplined and customer- and consumer-centric approach to each of the brands' strategies.

In addition, our strong license brand management team is continuing to execute successful growth strategies within our powerful license brand portfolio.

We remain on track to roll out Movado Bowl, which is targeted to a younger, more fashionable consumer, to select wholesale partners during the second half of the year.

In Ebel, we are making progress at returning to the brand's core value proposition while maintaining its classic look and feel.

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

In ESQ by Movado, we are energizing the brand with strong new product introductions, and a new television campaign, which we launched earlier this month.

We are receiving a very good response to our new product introductions in Movado Ebel and ESQ by Movado, as well as our new products in our multiple license brand.

Looking ahead, we are confident that the decision we have made with regard to our retail boutiques will allow to us further streamline our business and improve our overall profitability.

Additionally, we are continuing to focus on the execution of our brand strategies from Movado Ebel and ESQ by Movado within our global wholesale business, and we believe there are significant opportunities to grow our wholesale business.

At the same time, we will leverage the strength of our outlet stores and our license brand businesses.

As Efraim noted at the start of the call, we are returning to the Company's core values, with the goal of maximizing our competitive advantage and gaining share in the watch market category.

In summary, to our focus on growth strategies, combined with the step we have taken with our retail boutique division, we have begun to establish traction in the first quarter toward achieving our goals of sustainable top-line growth and long-term profitability.

Now I'd like to turn the call over to Sallie, to discuss our results for the first quarter in more detail, as well as an updated outlook for the full year.

Thank you, Rick, and good morning, everyone.

I will begin by discussing special items reported in either the first quarter of this fiscal year or the first quarter of the comparable period of last year.

Please refer to our press release for a description of the items, as well as a table reconciling adjusted results to GAAP.

Our GAAP results for the first quarter of last year includes $4.3 million of sales of excess discontinued product.

Operating expenses for the first quarter this year include a $3.4 million pretax non-cash charge, or a charge of $0.14 per diluted share, for the impairment of the remainder of the fixed assets of our retail boutiques, due to the decision to close these retail locations.

And lastly, the tax provision for the first quarter of this year includes a non-tax deferred tax expense related to an increase in the valuation allowance on certain net deferred tax assets.

The impact of the valuation allowance for the first quarter was $2.4 million, or $0.10 per diluted share.

The balance of my remarks will be the special items just discussed.

Sales for the first quarter were $78.9 million, up from last year by $15.6 million, or 24.6%.

Sales were higher than prior year, primarily driven by growth in both the US and international wholesale categories.

For the first quarter, sales in our wholesale segment were $63.8 million, or 34.1% above prior year sales of $47.6 million.

Sales were above prior year in the acceptable luxury and license brand categories.

The US wholesale business was above prior year by $11.6 million, or 62.7%.

Sales were above prior year in all categories -- luxury, accessible luxury, and license brands.

The international wholesale business was up 16% year-over-year.

Sales were above prior year in the accessible luxury and license brand categories.

The retail business posted a 4% decrease in sales versus last year.

The Company outlet store sales were below prior year by approximately 3%, and the Movado boutiques were below prior year by approximately 5%.

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

As Rick and Efraim discussed, we are closing our Movado boutiques, effective June 30 of this year.

Gross profit in the first quarter was $44.2 million, versus $36.5 million last year.

Gross margins for the quarter were 56%, as compared to 57.6% last year -- the decrease in gross margins primarily driven by fluctuations in currency and the overall mix of business.

Operating expenses for the quarter were $50.2 million, above prior year by $2.1 million, or 4.3%.

The increase was primarily the result of a $3.4 million increase in marketing, offset by a decrease in all other areas.

Additionally, our results were impacted by unfavorable foreign exchange of $2.3 million.

The operating loss for the quarter was $6 million, compared to an operating loss of $11.7 million in fiscal 2010.

Income tax benefit of $2.1 million reflects a 31% effective tax rate in the first quarter of this year, compared to an income tax benefit of $2.7 million, or a 22.5% effective tax rate, recorded in the first quarter of last year.

On an adjusted basis, the net loss in the first quarter improved to a $4.8 million loss, or a $0.19 per diluted share, versus an adjusted net loss of $9.5 million, or $0.39 per diluted share, in the year ago period.

Adjusted EBITDA for the first quarter was reduced to a loss of $2.1 million, compared to an adjusted EBITDA loss of $6.8 million last year.

Now turning to our balance sheet, our cash at April 30 was $62 million, versus $74.6 million in the period last year.

And total debt had been reduced to $10 million, versus total debt of $65 million at the end of the same period last year.

The Company's net cash position at the end of the quarter was $52 million, up from $9.6 million a year ago.

Accounts receivable of $58.7 million is below prior year by $7.4 million.

Inventory of $204.6 million decreased from $240.3 million last year.

On a constant dollar basis, inventory decreased by $41.9 million, or 17.4%.

Lastly, capital expenditures for the quarter were $1.5 million, and depreciation expense was $3.4 million.

Now I'd like to comment on our outlook for the full fiscal year.

As I'm sure you have seen in our earnings release, we updated our fiscal 2011 guidance based on today's boutique closure announcement.

Please note that beginning in the second quarter of fiscal 2011, we anticipate that the financial results for the retail boutiques will be recorded as discontinued operations.

As Rick mentioned earlier, the Company anticipates reporting additional pretax restructuring charges of approximately $21.6 million related to the boutique -- retail boutique closures.

With the need for a valuation allowance on the majority of tax assets, we continue to anticipate recording a tax expense in fiscal 2011.

All of our guidance refers to continuing operations only.

We now anticipate adjusted EBITDA will improve, from a slight gain in fiscal 2010 to a range between $20 million and $25 million in fiscal 2011.

On a GAAP basis, we anticipate a net loss in the range of $3 million, or a loss of $0.12 per diluted share, a net income of $2 million, or $0.08 per diluted share.

These bottom-line expectations are predicated on a 12% to 15% sales increase for the year, including the sales of excess discontinued products in fiscal 2010.

With respect to both margins, we anticipate a full-year gross margin of approximately 56%, with a lower percent in the first half.

We expect an approximate 12% increase in operating expenses, with an increase in marketing investment in support of our brand-building initiatives, and the remainder due to SG&A.

Advertising as a percent of sales will be approximately 16%.

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

We are working -- we are continuing to work on our long-range plans, and look forward to sharing details with you after our second-quarter earnings call.

Overall, we believe there are many growth opportunities ahead for our business, and that we can achieve long-term profitability.

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

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

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

Good morning.

Oh, good morning, sorry about that.

Quick question on the industry as a whole and what you're seeing there.

It seems like the comps have been improving, particularly in the first quarter.

Can you kind of correlate that into fewer stores, increased demand, and how quickly did that typically translate to retail inventories restocking their shelves?

Because obviously it's a slower moving SKU product.

I think we are seeing improved demand, I think in the high, mid- to high-single digits, in terms of the Movado, higher in the ESQ by Movado brand.

But what you're actually really seeing in our numbers, where you saw a 50% increase in Movado, is, again, replenishment -- as we actually talked to everybody about over the last year, there was a huge de-stocking of inventory at retail, and you're now beginning to see patterns of normalized replenishment by retailers.

And I know you don't give quarterly guidance, but can you give any -- give us a feel of where Q1 came in based on your expectations, and do you have a depreciation and amortization expectation for the year?

I think from a standpoint the quarter was a little bit stronger than our initial plans were, primarily from the standpoint of the sales growth.

All the other items were very much in line with that.

When we look at our depreciation from the year, from a continuing operations standpoint, it is greatly reduced and it will be more in that $14 million to $15 million range, versus our historical $19 million, again taking out the boutique operations.

So that would increase your guidance even further on an EBITDA basis, if I'm understanding?

No, what we've done is, we've increased the EBITDA guidance from where it was last time, as a result of taking out the boutique operations.

So we have the loss, and then obviously part of the loss is depreciation, and all of that will -- that has a net impact on the EBITDA.

So we did increase our EBITDA from last call to here, reflecting the change in the boutiques.

Okay.

Thank you.

Your next question come from the line of Jennifer Milan with Sterne Agee.

Hi, thank you, good morning.

I know you talked about the replenishment with the retailers.

I was wondering if you have a sense of the rate of sell-through.

Also, if you could comment on the performance of jewelry, and if you could talk a little bit more about your marketing plans for the balance of the year, how the response to TV has been, and how long that will continue.

Sure.

Well, I think I mentioned earlier that we saw sell-through improve in the mid- to high-single digits.

It varies by retailer and by brand.

And the retailers have returned to a more normalized pattern of replenishment.

Our ESQ by Movado TV commercials began running at the end of May -- at the beginning of May, and will end this week.

And we believe that it's been quite impactful.

I think we will see the results of that in our June sales and then also our sales for the second half.

In terms of the jewelry business, I think it's clear that with the exiting of the boutiques, we will also exit the fine jewelry business with the Movado brand.

So we have seen -- jewelry sales have actually been slightly up based on our new design, but we did not see enough volume being generated to be able to in any way make the boutiques a profitable business venture for us.

(Operator Instructions)

Carol, if there are no more questions, I would like to thank all of you for participating today, and we look forward to speaking to you again at the end of our second-quarter conference call.

Thank you very much.

Thank you.

This concludes today's conference call.

You may now disconnect.