Movado Group Inc (MOV) 2011 Q2 法說會逐字稿

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

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

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

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

I would like to turn the call over to 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 CEO, Rick Cote, President and COO 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 expressed 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.

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.

The Management team would then be glad to answer any questions that you might be have -- that you might have.

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

Thank you.

Thanks, Leigh.

Good morning and welcome to Movado Group's second quarter conference call.

As indicated by the results announced earlier this morning, we're continuing to see signs of recovery in our wholesale business in the US with improving sales of our Movado brand as well as our other proprietary and licensed brands for the year-to-date period.

We continue to believe that the US economy will continue to show moderate growth with consumers remaining cautious in their spending.

In addition to improved results in our US wholesale business, our international wholesale business continues to perform well, driven by our licensed brands in the China market.

That said, we continue to maintain a conservative outlook on the European market.

As we focus on executing the strategies that will return to our business to growth, we are planning to formally announce our multi-year strategic plan on September 15.

A critical step in implementing the plan was the closure of our retail boutiques.

We completed the closures on June 30 as planned and we are pleased with the execution of this process.

We are now prepared to move ahead with our strategic plan which is geared towards driving sustainable sales and profit growth.

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

We have plans in place in each of our brands to drive improving sales during the second half of the year and the very important holiday season.

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

Thanks, Efraim.

First let me give a brief update on the boutique closing status.

As planned, all retail boutiques except the Rockefeller Center store, which will serve as our flagship, were closed by June 30.

We are very pleased to have successfully negotiated the lease termination agreements with virtually every landlord and the overall closing costs were well within or better than our expectations.

The overall P&L cost of the closing was approximately $20 million and the cash cost was approximately $15 million.

These costs were paid from existing cash balances.

Now turning to our business performance.

Our performance in the second quarter and first half were in line with our expectations and we believe we are well positioned to achieve our full year expectations.

On a non-GAAP basis our sales growth in the first half grew 14% with the exception of luxury category sales increasing by 14% and licensed brand division sales increasing a strong 27% over the first half in 2009.

Let me give you a few branded business specific highlights.

The Movado brand maintains a leading market share in our key price points of $500 to $1500.

We continue focusing our product differentiation and segmentation and we are particularly delighted that our major US retail partners are experiencing strong sell-through of Movado branded products.

This performance was fueled by SE Extreme, one of our new pinnacle products, and the introduction of Junior Sport which features a new minute track an enhancement for the classic Museum dial.

Additionally, we continue to expand our presence in the sports category with the expansion of Series 800 Sub Sea product offering.

We believe we are well positioned for the fall retail season with our planned new product introductions and the consumer desired price points below $1000 such as Certa, our new rectangular shaped Museum dial, the women's Concerto collection and expansion of our Datron automatic family.

As we have previously stated, we will launch Movado Bold in our wholesale distribution in September.

Movado Bold allows us to introduce Movado to a new innovative segment targeting a younger, more fashionable consumer and introducing the brand in the $300 to $500 fashion price point category.

Our retail partners are very excited and we look forward to updating you on consumer response as we proceed with the rollout.

We will also supplement our fall advertising with television commercials featuring Movado Bold as part of our commitment to enhancing our connection with consumers.

On an international basis, Movado China continues its strong growth driven by product sell-through and existing retail doors and continued retail expansion in both major and secondary markets.

We continue to believe that China will be a solid growth opportunity for Movado.

It is too by Movado, we are focusing on energizing the brand with strong new product and price point introductions as well as door expansion with existing accounts and independent jewelers.

We were very pleased with the May television advertising campaign and believe that it helped drive brand awareness and sell-through at department and chain jewelry stores during the quarter.

We will continue supporting ESQ by Movado with television advertising during the holiday season.

We are focusing on expanding our positioning in the women's category and specifically in the consumer price segment between $1,800 and $5,000.

Our current Brasilia, Classic Wave and Beluga product offerings provide the core of our women's product primarily in the $2,500 and above price range.

We anticipate that the introduction of our new classic store will drive our product offering in the $1,800 to $2500 price range.

We have already begun shipping this product to our retail partners and we expect Classic Sport will drive our fall sell-through performance in our critical US, Europe, and Middle East Markets during the second half of the year.

Turning to our licensed brand division, which continues to perform extremely well.

As I mentioned earlier, this division grew 27% in the first half of this year compared to fiscal 2010.

All of our licensed brands experienced increased sales in all key global markets.

We believe this growth is driven by innovative product designs in key price points that are resonating with consumers.

Some of the strong product performers for the (inaudible) Tommy Hilfiger Windsurf and Avalon products, sharp price points in sports and watches in Hugo Boss, (inaudible) product offerings in Juicy Couture, and Lacoste logo design products.

Lacoste is also introducing a new fashion watch under $100 which we expect will help fuel the fall season as well.

We are also pleased with the consistently strong performance of our outlet store division.

Our focus on the fall season is to reduce the level of promotions which were so critical last year and as a result improve the outlet division operating margins.

Before I turn the call over to Sallie, I would first like to mention that we will present our multi-year strategic plan via webcast on Wednesday, September 15.

A separate press release will be issued early next week announcing webcast details.

As mentioned earlier the retail boutique closure was a major initiative impacting our multi-year strategic plan.

As we move ahead, the focus of our plan will be driving sales growth and profitability with our existing brand portfolio.

We continue to believe in the strength of our iconic brands and look forward to discussing our plan with you in greater detail.

Now, I'd like to turn the call over to Sallie to discuss our financial results.

Thank you, Rick and good morning, everyone.

I would like to first speak to the financial presentation of the retail boutiques.

As mentioned, the boutiques were closed in the second quarter of this year.

For all periods, presented the financial results for the boutiques are reported as discontinued operations.

As a result of the boutique closure, the Company reported $20 million of expense primarily for occupancy charges, asset impairments, inventory reserves and severance and this expense is reported within the discontinued operations.

Next I'd like to point out the special items supported in either the second quarter of this fiscal year or the second quarter of the comparable period of last year.

Please refer to our press release for a description of the item as we as table reconciling adjusted results to GAAP.

Our GAAP results for the second quarter of last year include $1 million of sales of excess discontinued product and $1.3 million of interest expense related to the refinancing and repayment of the Company's former credit and note agreements.

The tax provision for the second quarter of this year on a GAAP basis includes non-cash deferred tax expenses related to changes in valuation allowances from certain net deferred tax assets, taxes on repatriated foreign dividends, and the application of interim tax reporting guidelines.

The impact of these items on the tax provision was $900,000 or $0.04 per diluted share.

The balance of my remarks will exclude these items as discussed.

Sales for the second quarter were $85.4 million, up from last year by $3.4 million or 4.1%.

Sales were higher than prior year primarily driven by growth in licensed brand categories.

For the second quarter sales in our wholesale segment were $72 million or 5% above prior year sales of $68.6 million.

Sales were above prior year due to growth in the international segment partially offset by lower sales in the US wholesale business.

The US wholesale business was below prior year by $2.2 million or 6.7%.

Sales were below prior year in the luxury and accessible luxury categories and relatively flat in the licensed brand category.

International wholesale business was up 15.3% over year-over-year.

Sales were above prior year primarily driven by the licensed brand categories.

The Company outlet store sales were relatively flat to the prior year.

At July 31, the Company operated 31 outlet stores.

Gross profit in the second quarter was $45.6 million versus $47.4 million last year.

Gross margin for the quarter was 53.4% as compared to 57.7% last year.

The decrease in gross margin was primarily driven by fluctuations in currency and the shift in channel and product mix.

Operating expenses for the quarter were $46.6 million above prior year by $3.7 million or 8.5%.

The increase was primarily the result of a $2.3 million increase in marketing and a $2.2 million increase due to the unfavorable transactional effect of foreign denominated assets held in weakening currencies.

These were offset by decreases in several other areas.

The operating loss for the quarter was $1 million compared to an operating income of $4.4 million in fiscal 2010.

Income tax benefit of $600,000 reflects a 33.8% effective tax rate in the second quarter of this year compared to an income tax expense of $1.4 million or 37.9% effective tax rate reported in the second quarter of last year.

On an adjusted basis, the loss in the second quarter was $1.1 million or $0.04 per diluted share versus an adjusted income of $2.3 million or $0.09 per diluted share in the year ago period.

Adjusted EBITDA for the second quarter was reduced to $2.7 million compared to adjusted EBITDA of $8.6 million in the second quarter of fiscal 2010.

Now to discuss the results for the year-to-date period.

Our GAAP results for the six-month period of last year exclude $5.2 million of sales of excess discontinued product and $1.3 million of interest expense related to the refinancing and repayment of the Company's former credit and note agreements.

Tax provisions for the six-month period of this year include non-tax deferred tax expenses related to changes in valuation allowances on certain net deferred tax assets, taxes on repatriated foreign dividends and the application of interim reporting guidelines.

The impact of these items on the tax provision was $2.3 million or $0.09 per diluted share.

The balance of my remarks will exclude the special items as discussed.

Sales for the six months were $158.2 million, up from last year by $19.3 million or 13.9%.

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

For the six months, sales in our wholesale segment were $135.8 million or 16.9% above prior year sales of $116.2 million.

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

The US wholesale business was above prior year by $9.4 million or 18.6%.

Sales were above prior year in all wholesale categories, most significantly in the luxury and licensed brand categories.

The international wholesale business was up 15.6% per year-over-year.

Sales were above prior year primarily driven by the accessible luxury and licensed brand categories.

.

The Company outlet stores were slightly down from the prior year.

Gross profit in the six months was $85.8 million versus $79.9 million last year.

Gross margin for the quarter was 54.2% as compared to 57.5% last year.

The decrease in gross margin was primarily driven by fluctuations in currency and the shift in channel and product mix.

Operating expenses for the six months were $90.2 million, above prior year by -- I'm sorry, let me start again.

Operating expenses for the six months were $90.2 million above prior year by $6.7 million or 8%.

The increase was primarily the result of a $5.5 million increase in marketing and a $4.6 million increase due to the unfavorable transactional effect of foreign denominated assets held in weakening currencies.

These are offset by decreases in several other areas.

Operating loss at the six months was $4.5 million compared to an operating loss of $3.6 million in fiscal 2010.

Income tax benefit of $1.5 million reflects a 27% effective tax rate for the first half of this year compared to an income tax benefit of $800,000 or 15% effective tax rate reported in the same period last year.

On an adjusted basis, the loss in the first half of this year was $4.5 million or $0.18 per diluted share versus an adjusted loss of $4.2 million or $0.17 per diluted share in the year ago period.

Adjusted EBITDA for the six months was reduced to $2.7 million compared to adjusted EBITDA of $4.3 million in the same period of fiscal 2010.

Now turning to our balance sheet.

Our cash as of July 31 is $54.3 million versus $47.5 million in the prior year period.

Total debt has been reduced to $10 million versus total debt of $40 million at the end of the same period last year.

The Company's net cash division at the end of the quarter was $44.3 million up from $7.5 million a year ago.

Accounts receivable of $60.4 million is below the prior year by $16.3 million.

Inventory of $204.6 million decreased from $245.9 million last year.

On a constant dollar basis, inventory decreased by $46.3 million or 19%.

Lastly, capital expenditures for the six months were [$3.2] million and depreciation expense was $6.2 million.

As will be further disclosed in our 10-Q that will be issued this afternoon, there are two items we expect to record in the third quarter that relate to the former Chairman.

Movado expects to receive a cash payment of $4.8 million due to the reimbursement of premiums previously paid on a life insurance policy.

These premiums were classified as a receivable at July 31, 2010.

In addition, Movado will reverse a $4.3 million liability that was related to a retirement annuity which will no longer be paid.

The $4.3 million will be recorded as a reduction of operating expenses.

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

We are maintaining our previous guidance as it relates to continuing operations excluding the $4.3 million reduction of operating expenses due to the reversal of the retirement liabilities.

We 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 an adjusted basis, excluding the $4.3 million reduction of operating expenses, we anticipate our fiscal 2011 results from continuing operations will range from a net loss of $3 million or $0.12 per diluted share to 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 excluding fiscal 2010 discontinued product sales.

With respect to gross margin, we anticipate a full year gross margin of approximately 56%.

We expect an increase in operating expenses including an increase in marketing support related to investments in brand building and the remainder is due to SG&A.

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

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

With the need for a tax valuation allowance on our deferred tax assets, we continue to anticipate recording a tax provision in fiscal 2011.

As Rick mentioned, we look forward to sharing the details of our multi-year plan with you on September 15.

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

With that I'd now like to open the call for your

Thank you.

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

Good morning.

A question on the sales, particularly Q1 and Q2, granted it's a seasonally slower half for you.

Any color you can give us in terms of stronger growth Q1, Q1 stronger in US, Q2 stronger in international?

Was it just timing or was there anything specific industry-wide that split the two quarters up?

I think it's important in looking at last year which is a bit of an anomaly, the first quarter of last year was a very low quarter from a standpoint of retailers particularly in the US.

We're very cautious in buying and replenishing inventory, however, in the second quarter they started picking up so we had very low results in the first quarter, stronger results in the second quarter.

So I think it's important when you look at our results, look at the first six months.

That's a more logical comparison and when we look at our six-month performance this year versus last year we have strong performance in the accessible luxury category particularly in the US marketplace, we are seeing strong retail sell-through in licensed brands globally both domestic and internationally with a very strong 27% increase in sales.

So the better comparison is looking at the six-month to six-month time frame.

We actually -- I'll add to Rick, we actually sell-through begins to strengthen during the second quarter but obviously there wasn't replenishment that they needed in the first quarter.

So you think that the function of the increased advertising or is just improving -- possibly improving industry economic trends?

A combination of three things, I think.

The first is the economy is having some improvement in some growth, although slow.

The second is our attention to really delivering excellent product at very good values to the consumer across-the-board and the third thing is increased advertising and marketing as well, which we believe will pay increased dividends in the second half of the year.

Thank you very much.

(Operator Instructions) We'll move next to Jennifer Milan of Stern Agee.

Hi, yes.

Can you comment at all or clarify at all about the product mix shift that you saw during the quarter and then I was also hoping you could clarify in terms of your guidance of 12% to 15% sales growth, I'm assuming is that excluding the contribution from the retail boutiques last year or including?

I think the first thing is the 12% to 15% is on the continuing operations so it takes out the retail boutiques and it also takes out the last year of the excess discontinued products liquidations sales that we had, so that's putting out an apples-to-apples basis.

And the first half of this year, we were certainly within that range.

The second question was more along the lines from a standpoint of the product mix.

That was taking place was very much from a standpoint of our mix globally of our product offering and really in two areas jumped out a bit.

First is in Ebel where we had an opportunity of selling some high range, high price product at the -- to the normal channels that we sell-through and that normally sells at a little lower margin than normal brand average but then also in our outlet business with the strength of that and the mix of the product offering in there.

So from a standpoint, understand that we still believe we're well on target for our overall gross margin guidance for the year.

We'll move next to Steve Baughman of Divisar Capital.

Good morning.

Thanks for taking the question.

Just two quick questions.

I wonder if you can give the apples-to-apples comparison that you're using for your growth projections of 12% to 15%?

I guess I'm lost --

So what's the sales number that you're using for FY 2010 given the revised presentation of continuing and discontinued ops?

Okay, the number from a pro forma fiscal year 2010 is around $335 million in sales.

$335 million?

Right.

Because last year was $360 million and change and taking up the boutique sales of about $30 million.

Okay, and then excludes as well the excess in discontinued watch sales?

Yes.

Last year was close to $15 million of excess discontinued product sales so, yes, it takes that out.

Great.

That's helpful, thank you and the only other question I had was I just wondered if you can give a little bit of background on this transaction with the former Chairman.

Is that a life insurance policy that he essentially gave up and signed over to you guys or was there a contractual kick out that gave you guys the rights to collect that?

No, no.

What happened is we had a life insurance policy on the Chairman and his spouse that we were paying the premiums and had a receivable for that.

Therefore, upon their passing, which has happened, the proceeds of the life insurance first come to us to repay the premiums that we had, therefore, the receivable and obviously the excess then goes to the family and the estate.

So that was the first transaction which is the repayment we'll have in the third quarter of the remaining receivable and the second piece is from a standpoint of there was an annuity chargement that we had that obviously is no longer payable so that will reverse in the third period and that annuity was based on his retirements.

That's helpful and the final question or clarification on that.

It sounds like that's a non-cash event.

It sounds like there's a liability that offsets the receivable and so the cash effect is going to be zero?

No, no.

The liability going away so there for that's a P&L pick up and then the receivable payment is actually a cash transaction so when we're done, there will be a net cash pick up of approximately $5 million which is in short-term receivables and our balance sheet at the end of July.

That's helpful.

Thanks very much and I look forward to hearing more in two weeks.

Thank you.

(Operator Instructions) With no further questions, that will conclude our question and answer session.

I'd like to turn the conference back to management for any closing comments.

I would like to thank everyone for participating today.

We're very focused on executing our strategic plan and vision for the Company to return ourselves to sales growth and profitability.

And we also look forward to sharing with you our strategic plan on September 15.

Thank you very much for participating today.

This concludes today's conference call.

Thank you all for your participation.