Movado Group Inc (MOV) 2011 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to Movado Group's 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 CEO, Rick Cote, President and COO and Sallie DeMarsilis CFO.

Before we began, 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 call.

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

Thanks Leigh.

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

As indicated by the results announced earlier this morning we are pleased with our financial performance in the quarter and year-to-date period.

And, we believe we are well positioned to achieve our full year sales and EBITDA expectations.

We are seeing strong watch retail sell through performance at our retail partners particularly here in the United States.

And, we are helping drive this strong retail sell through performance with sales growth across all of our accessible luxury and licensed brands.

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

We believe we are well positioned for the holiday season with strong product offerings, exceptional advertising, including television and digital media campaigns, and a well-positioned retail product presence.

From a global economic perspective, we see signs of recovery in the US and particularly in the watch category.

We continue to believe that the United States economy will show moderate growth moving forward with consumers remaining cautious in their spending.

We continue to hold a conservative outlook on the European market and the Asia market remains robust yet represents less than 5% of our business.

Now let me provide some specifics to our year-to-date business performance.

On an adjusted basis our year-to-date sales growth was 11% with the luxury category increasing 4%, accessible luxury category increasing 8%, and the licensed brand division sales increasing a strong 21% over the nine-month period in 2009.

Our focus on cash generation and a strong balance sheet continues to drive positive results.

Lower inventory levels, zero outstanding debt, and over $60 million in cash on hand.

Even after paying approximately $15 million in closing the Boutique Division earlier this year .

Let me give you a few brand highlights.

As previously stated in our multiyear plan presented earlier this fall the Movado brand maintains a leading market share in our key price points of $500 to $1500 and a strong market position in the $1500 to $3,000 price point segment .

We continue focusing on product differentiation and segmentation and we are particularly delighted that our major US retail partners are continuing to experience strong sell through of Movado branded products Movado's performance was fueled by product Concerto, our collection designed exclusively for women and one of our featured products in our print advertising campaign.

Luno Sport which is price sharply starting at $795, the new Serio collections priced from $995 to $1500 and the new Verto collection are helping drive our strong performance in our feature products this holiday season.

In the higher price product offerings our growth is driven by products like our tungsten carbide Fiero, our new Dura collection SE Extreme and Vizio products.

Movado Bold, which is all about enhancing the Museum dial image, was launched in our wholesale distribution in September and is off to a great start.

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

Our retail partners are very excited with Bold's strong sell through performance to date and the level of consumer excitement it is generating around the entire Movado brand.

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

China will continue to be a strong growth initiator for Movado.

Besides our exceptional product offering we have some very exciting advertising initiatives in place for the Movado brand that will drive consumer awareness and traffic.

We recently launched a new upgraded Movado website that provides the consumer with state-of-the-art search engines, brand information regarding our history and ambassadors, and featuring product highlights .

Please visit our new website at movado.com.

We think you'll be impressed.

Digital is going to play an extremely important role for Movado.

We'll be featuring the new Bold ad in video in a dynamic newyorktimes.com campaign and creating a one-day media takeover on December 8 and December 16.

The new Bold collection will appear in image enhancing print as well as dynamic video content in the iPad, December issues of GQ, Wired and the New Yorker.

In addition Movado is excited to be on television for a three-week period from November 29 through December 19 th.

On seven cable networks ESPN, CNN, MSNBC, Comedy Central, E, Bravo, and Style, plus the morning shows on the major network stations NBC, CBS and ABC.

You will see Movado front and center this holiday season and hopefully you have already seen one of our new ads.

With ESQ by Movado we are focusing on energizing the brand with strong new products and price point introductions, as well as door expansion with the existing accounts and independent jewelers.

The conversion to ESQ by Movado is greatly enhancing the brands awareness and prestige delivering strong retail sell through in fall season to date.

Following the success of our May television advertising campaign we will again support ESQ by Movado with television advertising during the holiday season featuring our Bracer and Torrent product offerings.

For our Ebel brand we continue to focus on expanding our position in the women's category and specifically in the consumer price point segment between $1800 and $5000.

Our current Brasilia, Classic Wave and Beluga product offerings provide the core of our women's product primarily in the $2500 and above price range.

Introduction of our new recently launched Ebel Classic Sport sharply priced starting at $1800 is off to a strong start in key markets and will drive our planned holiday season sell through performance.

Our licensed brand division continues to perform extremely well .

As I mentioned earlier this division grew 21% year-to-date compared to fiscal 2010.

All of our licensed brands experienced double-digit sales increases in all key global markets.

This growth is driven by innovative product designs and key price points that are resonating with consumers.

Some of the strong product performers for licensed brands where the Coach Boyfriend watch, the Tommy Hilfiger Windsurf and Riley products, sharp price points in sports inspired watches in HUGO BOSS.

Ceramic product offerings in Juicy Couture and Lacoste logo design products.

Lacoste introduction of Goa, a new fashion watch under $100, has had exceptionally strong performance in retail sell through.

The licensed brands are well positioned to continue the strong growth performance during the holiday season.

Our outlet retail division continues to be a strong and important performer for our business.

The continued renovation of our existing stores with that greater focus on branding has helped fuel increased traffic and sales conversion.

Hopefully you sense our excitement with all the great plans and initiatives we have in place to support this holiday season.

Television advertising, continued strong print present, major new initiatives in digital to support our consumers' brand experience vehicles and our newly released Movado website.

Our focus continues on driving sales growth and profitability with our exceptional portfolio of brands.

Now I'd like to turn the call over to Sallie to discuss

Thank you Rick and good morning everyone.

I'm very pleased to be with you today presenting the financial results of our third quarter.

First I would like to point out the special items reported in either the third quarter of this fiscal year or the third 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 third quarter of this year include the reversal of a $4.3 million liability which is related to in retirement annuity which will no longer be paid.

The $4.3 million was reported as a reduction of operating expenses.

Our GAAP results for the third quarter of last year include $8.4 million of sales of excess discontinued product.

There were no such sales in this fiscal year.

And on a GAAP basis the tax provision for the third quarter of last year includes non-cash deferred tax expenses related to evaluation allowance on 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 provisions was an adjustment of $22.4 million or $0.91 per diluted share in the third quarter of fiscal 2010.

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

Sales for the third quarter were $123 million up from last year by $7.9 million or 6.9%.

Sales were higher than the prior year primarily driven by growth in the licensed brand and luxury brand category.

For the third quarter, sales in our wholesale segment were $110.2 million or 7.4% of our prior year sales of $102.6 million.

Sales were above prior year in all categories primarily in the international segment.

Our US wholesale business was flat compared to last year.

Sales were above the prior year in the licensed brand category with offset reductions in the luxury and accessible luxury category.

The international wholesale business was up 15.3% year-over-year.

Sales were above prior year in all categories.

The Company retail business was relatively flat the prior year.

At the end of the third quarter the Company operated 32 outlet stores.

Gross profit in the third quarter was $68.6 million versus $59 million last year Gross margin for the quarter was 55.8% as compared to 51.3% last year.

The increase in gross margin was primarily driven by the shift in channel and product mix.

Additionally, the year-over-year increase resulted from the unfavorable impact of currency and overhead absorption in the prior year period, as a result of the economic environment.

Operating expenses for the quarter were $54.7 million above prior year by $4.3 million or 8.6%.

The increase is primarily the result of a $2.5 million increase in marketing and a $3.4 million year-over-year increase in performance-based compensation resulting from the expected achievement of performance sold for the current year as well is the reversal of previously reported expense in the prior year period.

These increases were partially off set by reduced expenses in other areas.

Operating income for the quarter was $13.9 million compared to operating income of $8.7 million in fiscal 2010.

Income tax expense of $800,000 reflects a 5.7% effective tax rate in the third quarter of this year compared to an income tax expense of $2.9 million or 38% effective tax rate reported in the third quarter of last year.

On an adjusted basis income from continuing operations in the third quarter was $12.5 million or $0.50 per diluted share, versus adjusted income from continuing operations of $4.5 million or $0.18 per diluted share in the year ago period.

Adjusted EBITDA for the third quarter increased to $17.1 million compared to adjusted EBITDA of a $12.6 million in the third quarter of fiscal 2010.

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

As previously stated our GAAP results for this year include the reversal of these aforementioned $4.3 million retirement liabilities.

Our GAAP results in the nine month period of last year included $13.6 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.

On a GAAP basis the tax provisions for the nine-month period of last year includes non-cash deferred cash expenses related to a valuation allowance on certain net deferred tax assets, taxes on repatriated foreign dividends and the application of internal tax reporting guidelines.

The impact of these items on the tax provision was $23 million or $0.94 per diluted share in fiscal 2010.

Once again I'd like to remind you that the financial results of the Movado Boutiques which were closed in the second quarter of this year are reported as discontinued operations.

As a result of the Boutique closure the Company reported $20 million of expense.

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

Sales for the nine-month were $281.2 million up from last year by $27.2 million or 10.7%.

For the nine-month sales in our wholesale segment were $246 million or 12.4% above prior year sales of $218.8 million.

Sales were above prior year in all categories.

The US wholesale business was above prior year by $9.4 million or 9.1%.

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

The international wholesale business was up 15.5% year-over-year.

Sales were above prior year in all categories, primarily driven by the licensed brand category.

The Company's retail business was flat to last year.

Gross profit in the nine-month were $154.3 million versus $139 million last year.

Gross margin for this year was 54.9% as compared to 54.7% last year.

The increase in gross margin was primarily driven by fluctuations in currency and overhead absorption, offset by a shift in channel and product mix.

Operating expense for the nine months was $145 million above prior year by $11.1 million or 8.3%.

The increase is primarily the result of an $8.1 million increase in marketing, $4 million increase due to the unfavorable transactional effect for foreign denominated assets held in weakening currencies and a $3 million increase in performance based compensation over last year.

Of these increases are partially offset by a decrease in expenses in other areas.

The operating income of for the nine months was $9.4 million compared to $5.1 million in fiscal 2010.

Income tax expense of of $1.6 million reflects a 20% effective tax rate for the first nine months of this year compared to an income tax expense of $1.5 million or a 57% effective tax rate reported in the same period last year.

On an adjusted basis, income in the first nine months of this year was $5.8 million or $0.23 per diluted share versus an adjusted income of a $900,000 or $0.04 per diluted share in the year ago period.

Adjusted EBITDA for the nine months increased to $19.8 million compared to adjusted EBITDA of $16.9 million for the same period of fiscal 2010.

Now turning to our balance sheet.

Our cash at the end of the third quarter is $63.2 million versus $49.5 million in the prior year period.

Additionally, there is no debt outstanding this year as compared to total debt of a $25 million at the end of the same period last year, resulting in the Company's net cash position at the end of the quarter being $63.2 million up from $24.6 million a year ago.

Accounts receivable of $91.6 million is below the prior year by $13.9 million.

Inventory of $206.5 million decreased from $228.8 million in last year on a constant dollar basis inventory decreased by $26.2 million or 11.5%.

Capital expenditures in the nine months were $4.9 million and depreciation expense was $9 million.

Lastly, we're very please with our cash flow from continuing operations which was over $17 million for the first nine months of this year.

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

Based on our performance in the first nine months of this year, we are maintaining our guidance for fiscal 2011 for adjusted net sales and adjusted EBITDA.

The guidance continues to be predicated on a 12% to 15% sales increase for the year which excludes fiscal 2010 discontinued product sales and an increase in operating expenses due to the Company's investments in brand building.

Adjusted EBITDA from continuing operations is anticipated to range between $20 million and $25 million or fiscal 2011.

All guidance refers to continuing operations only.

On a GAAP basis the Company anticipates a fiscal 2011 results on continuing operations will range from a net income of $10 million or $0.39 per diluted share to net income of $11.5 million or $0.45 per diluted share with a tax rate of approximately 25% and including the $4.3 million or $0.17 diluted earnings per share benefit from the reversal of the retirement liabilities previously mentioned.

The change in income from continuing operations and an EPS from previous guidance is primarily due to the impact of the reversal of the retirement liability as well as more favorable tax provisions.

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

I would now like to turn the call over to

Thank you Sallie.

As Rick said we are very pleased with the results for the third quarter.

We have began executing our multiyear strategic plan that we shared with you earlier this Fall and we gain traction in our initiatives during the third quarter.

As we look forward, we have very strong plans in place to support our brands for the very important holiday season.

We are very excited by the consumers initial reaction to the introduction of Movado Bold and the Halo effect which it should have on the Movado brand.

The fashion watch category is performing very well and we are seeing momentum behind our licensed brand as we continue to introduce trend right product.

We are focused on continuing to invest in our brand building efforts and then executing on our multiyear strategic plan.

As we discussed with you earlier this Fall our plan calls for delivering sales growth in our overall business that we believe will outpace the market.

One of our strongest assets is the great brand names the Movado Group owns and licenses and we believe that we will grow our existing brand substantially over the next few years.

As we turn Movado Group to growth we have a number of the great opportunities.

We continue to be committed to driving solid consistent growth by leveraging the full potential of the Movado brand, building on our licensed brands success globally, capturing international opportunities, and generating further improvement across our business.

We would now like to open the call up to questions.

Thank you.

(Operator Instructions) Our first question will come from Jeff Blaeser with Morgan Joseph.

Good morning.

Thanks for taking my question.

Can you talk a little bit on the luxury side is that primarily from the Ebel line?

That looks like pretty good growth in the third quarter.

And, any driver's-- obviously looks like your fourth quarter growth expectations are larger .

What kind of feedback are you getting from the retailers and what lines do you think do you expect to drive that topline growth in the next

From the standpoint of the luxury category yes it's predominantly on Ebel, but also I think it's important to remind you that when we look at comparisons to last year, last year's quarterly mix it was really not a typical type of quarterly mix.

If you recall, in the first quarter our sales growth was up very strong and I said we need to look at the first half in the second half.

So the first half we were up if I recall something like 13% or 14%.

We will have a similar type of growth in the second half .

We had a very, very large sell in the third quarter of last year and a very, very low fourth quarter last year.

So again I think it's important to look at the second half to the second half of last year so therefore you will see stronger growth as a percentage of sales in the fourth quarter.

Smaller growth as a percentage of sales in the third quarter but the two, I think, will have the right level of the consistent growth that we would expect to

Okay.

And then obviously your long-term plans factor in minimal economic growth if I remember correctly.

The recent data points on the jewelry and the luxury side of retail is that in line with your expect patients?

More encouraging?

Any near-term color that you're seeing going into the holiday season?

We are seeing the consumer return to purchasing.

I think they're still being cautious and very value-oriented.

I think some of the return to luxury that you do see is predominantly in Asia and even as some of it returns to Europe it is fueled by Asian consumers.

So I think what you're seeing still a very cautious consumer but they are buying and returning to consuming and as long as you're giving them a reason to buy and value and we think were doing that in each of our brands.

We're seeing a good beginning to the holiday season and I think as most retailers are probably also beginning to point out.

Thank you very much.

(Operator Instructions) Will go next to Jennifer Milan with Stern Agee.

Hi.

Thank you I was wondered if you could talk about what you're seeing in terms of the inventory level at retail and you talked on a last call about the fact that you weren't paying normalized replenishment pattern yet and that you were possibly anticipating a shift in the business to Q4 so I was wondering if you could talk a little bit about what you're seeing currently.

I think from our product standpoint we're pleased with the inventory levels at retail.

As particularly with Movado and I focused on that as we have the door reductions over the last number of years and consumers are coming back from the economic pressures that was taking place and going into those fewer doors that we have to be purchasing.

We're seeing strong performance there and I think as time goes on over the next year or so those retailers will build their inventories up to appropriate levels to support what their seeing as their sell through.

So I think we're seeing that on an ongoing basis but it's not going to happen in any one particular quarter and will be over a period of time and we think over the next year or so.

That was built into our growth projections for the next couple years in our multiyear plan.

So replenishment has not yet, caught up to sell through.

I would sit there and say I think it will take a period of time for that, yes.

Okay.

And can you also just comment on terms of the TV and overall marketing and advertising for the holidays or Q4 this year relative to last year.

Maybe highlight the differences in terms of the number of days or whatever information you can provide.

I think-- we're being much more aggressive this year in terms of our marketing.

TV is new for Movado.

We have not been on television in the last several years so that's a return to television and then I think our digital initiatives are also a lot more aggressive than last year.

We did highlight earlier in the year that we would be investing more this year and it's really during the third and fourth quarter that were making that investment for the holiday season.

Okay.

And then one last question that's probably three questions combined.

At one point you had talked about operating expenses growing about 12% for the year.

I was wondering if your outlook on that has changed in terms of your guidance for the full year.

And also if you're still thinking about gross margins in the 56% range and then also the net income I believe the guidance you're providing was on an adjusted basis previously and now you're providing it on a GAAP basis.

I was wondering if you could help us to reconcile that.

Couple things.

First, let me take the expenses.

Yes there is growth and take place in expenses.

Obviously currency has an impact that we're not able to fully control.

But the things that we do control we did say we're going to have a heightened level of investment in advertising which you have been seeing and I think were up 8% or 9% in the nine months and you're going to see strong advertising in the fourth quarter.

So expenses will be up.

And they will be probably less than what we had originally talked about at the beginning of the year and that will be partially offset from gross margins not quite being as high as we anticipated in the early part of the year.

So pretty much a wash between the two of those.

And again we're comfortable with the gross margins and where they're moving up as a result of our mix change particularly in our future plans.

And operating expenses will have an investment for the marketing as well as trying to get our compensation levels back to normal over a couple of year period of time .

I think that answer the first couple but the third had to do with guidance.

I'll pass it over to Sallie for

Yes, and Jennifer as we did point out our previous guidance was more from the bottom-line perspective was more on an adjusted basis which would've excluded things like that $4.3 million that we benefited from by the reversal of the liability.

We are now including that in our guidance so that $0.17 extra for the reversal of that liability is that something new this quarter but it's just a one-time item that you can reconcile in or out depending on how you want to.

The other item that we noted was the change in the tax rate.

We are now seeing more beneficial tax rate and that is dropping to our bottom-line.

We anticipate a full year tax rate for the 12 months to be 25%.

So we would expect the fourth quarter to have a heavier tax provision in order to get the full year to that 25%.

But you will see that -- we did talk about the -- again the sales and the EBITDA from an adjusted standpoint and our guidance is in line with where it has been in the past.

Can you reconcile your bottom-line guidance on an adjusted basis excluding the reversal in 3Q and the adjusted tax rate ?

I think what that does is you got a $0.17 benefit that comes from the accrual reversal and then everything else is-- we're basically going with the actual tax rate because on a quarterly basis that will be adjusting up and down because we have to record taxes on a quarterly basis.

So the big adjustment, I think, is the $0.17 from a standpoint of the accrual benefit that we had and then the difference is if you want to take an artificial rate like for instance our multiyear plan talks about a 30% tax rate going forward.

That's why when we give guidance at the end of the fourth quarter for next year it will most likely have that 30% built-in and Sallie mentioned she would expect 25% this year which means our fourth quarter will have a pretty high tax rate expense.

Okay.

Thank you.

Currently with no other questions in the queue.

(Operator Instructions)

Okay.

We'll pause for just another moment.

And with no further questions that does conclude our question and answer session today.

I'll now turn the call over to management for any closing comments they might have.

Okay I'd like to thank all of you for participating today as we said earlier were very pleased with the performance during the third quarter and the first nine months.

We'd like to wish all of you a great holiday season.

I'd encourage you all to visit our point-of-sale and see our great new products and hopefully purchase one for the holiday season.

Again thank you very much and have a great holiday season.

And this concludes today's conference call.

Thank you for your participation.