Movado Group Inc (MOV) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Movado Group's second-quarter 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 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 expressed or implied are discussed in the Company's filings with the Securities and Exchange Commission.

Such forward-looking statements include statements regarding Movado Group's performance for fiscal 2012.

However, the failure to update this information should not be taken as Movado Group'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.

Now, let me outline the order of speakers for today's conference call.

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

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

So now, I'll turn the call over to Rick.

Thanks, Leigh.

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

Before discussing our business results, we want to pass along our best wishes and prayers to the many families and communities along the East Coast that are still feeling the aftermath of Hurricane Irene.

Let me now turn to our business results.

We are very pleased with the strong financial results we achieved in the second quarter and our progress year to date.

Even more importantly, we have delivered consistently positive sales trends over the last six quarters and significantly improved our adjusted profit trends over the last four quarters.

We are particularly pleased with our performance and the momentum in our business since coming out of the recession and post the implementation of our [variant] strategic initiatives and business restructuring.

Let me discuss the quarter and first-half results.

Our brands continued to experience very strong customer and consumer demand, and as a result, second-quarter sales increased 33% and sales for the six months increased 28% versus the prior-year periods.

We continued to experience pressure on our gross margins due to a devaluing U.S.

dollar versus the Swiss franc, as well as product cost pressures.

However, we have been able to offset these impacts with strong sales growth and our disciplined expense management approach.

Our strong sales performance allowed us to deliver operating income of $5 million and EBITDA of $8 million in the second quarter, and an operating income of $6.6 million and EBITDA of $12.5 million in the first half of this year.

In addition, our balance sheet remains exceptionally strong, as evidenced by our net cash position which continues to grow.

At the end of the quarter, we had a net cash position of $129 million, compared to $103 million at the end of fiscal 2011 and $44 million for the same quarter last year.

Our current business plans do not require any debt financing and our equity position remains strong at over $400 million.

We are also pleased to have announced our quarterly dividend.

As I just mentioned, we are particularly pleased with our consistently positive results in the recent timeframe.

Specifically, our sales increases for the last six quarters had been led by strong performances in our largest businesses, Movado and the licensed brands.

As many of you may recall, in our last fiscal year, 2011, we had positive sales growth each quarter with overall full-year sales growth of 14%.

This was followed by first-quarter sales growth of 23% and now second-quarter sales growth of 33%.

Similarly, we have generated an adjusted operating profit for the last four quarters, delivering positive EBITDA performance and earnings per share.

We believe this demonstrates the successful changes we have made to our business structure and strategies.

Now let me briefly discuss some global trends and provide some specific brand highlights for the second quarter and first half.

From a global economic perspective, the watch category continues to perform well.

We continue to experience strong watch retail sellthrough performance at our retail partners globally, which is being driven by sales growth across every brand and particularly our largest businesses, Movado and our licensed brand division.

In the China market, we are experiencing strong growth, also driven by these two areas of the business.

As a result, we grew this business more than 50% in the first half of the year versus the first half of fiscal 2011, albeit off of a small base.

Our Movado brand continues to hold the leading market-share position in our key price points of $500 to $1,500 and a strong market position in the $1,500 to $3,000 price point segment.

The execution of our Movado strategy continues to deliver very strong results.

Movado sales in the second quarter grew 47%, and for the first half grew 44% as compared to the same periods in fiscal 2011.

Movado sales growth to date this year was primarily fueled by its core product range and the continued rollout of Movado Bold.

Specifically products like Concerto, our collection designed exclusively for women; SE Extreme with a carbon fiber dial; the new Serio classic museum bracelet; Datron Automatic; the Series 800 sports collection; and the continued expansion of Movado Bold product offering, utilizing new materials and executions helped drive Movado's growth.

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

The conversion to ESQ by Movado is greatly enhancing awareness of the brand and its prestige, which is again delivering improved retail sellthrough.

Sales in our luxury category increased by 23% in the second quarter and 20% in the first half, as compared to the same periods of last year.

We remain focused on expanding our positioning for Ebel on the women's category, and specifically in the consumer price segment between $2,000 and $5,000.

We are designing new leadership product this year for introduction next year to further enhance Ebel's product positioning.

Our licensed brand division continues to perform extremely well.

This division grew sales by 39% in the second quarter as compared to fiscal 2011 and 33% in the first half of fiscal 2012 versus the same period last year, and this is on top of 21% sales growth in fiscal-year 2011.

Every licensed brand has delivered double-digit sales increases in the first half of fiscal-year 2012.

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

Some of the leading product performers for licensed brands were the Coach Boyfriend and Classic Signature watches; the Tommy Hilfiger Windsurf and Jacqueline products; the HUGO BOSS Aviator and entry-level classic watches; our Pedigree product offering in Juicy Couture; and the Lacoste Sports Navigator and Goa product offerings.

Our outlet retail division remains a strong and important performer for our business.

The continued renovation of our existing stores with a greater focus on branding has helped fuel increased awareness, sales conversion, and profitability.

In summary, we are excited about all the great plans and initiatives we have in place that we believe will continue the positive momentum in our business this year.

We believe that television advertising, continued strong print marketing, a focused digital strategy to support our customers' brand experience vehicles, and great product offering will all contribute to ongoing consumer demand.

However, considering the uncertainty of the current global macroeconomic environment, and the potential impact it could have on consumer confidence and spending habits going forward, we are maintaining our guidance for the year, which anticipates strong sales growth and profitability.

We remain confident in our portfolio of iconic brands and our position in the watch category.

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

Thank you, Rick, and good morning, everyone.

I'm very pleased to be with you today presenting our financial results for the second quarter and year-to-date period.

I will first cover the operating results, followed by the balance sheet, and I will close with guidance.

To begin, I'd like to remind you that effective February 1, 2011, the Company changed its method of valuing its U.S.

inventories to the average cost method.

In prior years, primarily all U.S.

inventories were valued using the first in, first out, or FIFO, method.

The comparative consolidated financial statements of the prior year have been adjusted to apply the new accounting method retroactively, and a detailed [EA] adjustment can be found in our Form 10-Q.

This change was made to align our inventory valuation using one global method.

My remarks this morning will reflect this change in accounting method used to value our U.S.

inventory.

I would also like to remind you that the financial results of the Movado Boutiques, which were closed in the second quarter of fiscal 2011, are reported as discontinued operations.

Sales for the second quarter were $113.2 million, up from the same period of the prior year by $27.8 million, or 32.6%.

On a constant-dollar basis, sales increased by 25.5% when compared to the prior-year period.

For the six months, sales were $203.1 million, up from fiscal 2011 by $44.9 million, or 28.4%.

On a constant-dollar basis, sales increased by 23.1% when compared to the prior-year period.

For all periods, the higher sales were due to growth in every brand category.

For the second quarter, sales in our wholesale segment were $99.3 million, or 37.9% above sales of $72 million for the same period last year.

For the six months, sales in our wholesale segment were $179.3 million, or 32% above prior-year sales of $135.8 million.

For both the quarter and the six-month period, sales were above prior year in all categories, with the largest growth coming from the accessible luxury and licensed brand categories.

For the quarter, the U.S.

wholesale business was up $16.5 million, or 55.1% year over year.

For the six months, the U.S.

wholesale business was above the comparable period of fiscal 2011 by $21.9 million, or 36.5%.

The increase in sales was driven by higher sales in the accessible luxury and licensed brand category for in the quarter and the six months, as compared to the prior periods of last year.

For the second quarter, international wholesale business was up $10.7 million, or 25.5% year over year.

For the six months, the international wholesale business was up $21.6 million, or 28.5% from fiscal 2011.

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

Sales from the Company's retail business increased $561,000, or 4.2%, as compared to the prior-year second quarter.

For the six months, the Company's retail business was up $1.4 million, or 6.1%, versus the first half of fiscal 2011.

The increases in sales for both periods was the result of additional stores.

At the end of the quarter, the Company operated 33 outlet stores and our Movado brand flagship store.

Gross profit for the quarter was $60.9 million versus $44.4 million in the second quarter of last year.

Gross margin for the quarter was 53.8%, as compared to 52% for the second quarter of last year.

For the six months, gross profit was $109.6 million versus $82.9 million last year.

Gross margin for the six months was 54%, as compared to 52.4% for the prior-year period.

The increase in gross margin for both the quarter and the six-month period was favorably impacted by leverage gained on fixed costs, as well as a shift in channel and product mix.

Included in the second quarter of this year were $809,000 of sales of excess movements sold as part of our initiative to reduce inventory.

Excluding this sale, adjusted gross margin would've been 54.2% for both the quarter and the six-month period.

Operating expenses were $55.9 million, above the prior-year period by $9.3 million, or 20%.

For the six months, operating expenses were $103 million, above prior year by $12.7 million, or 14.1%.

The increases were primarily the result of the following -- a $2.8 million increase in marketing for the quarter and a $4.6 million increase for the six months; a $3 million increase for the quarter and a $4.3 million increase for the six months in compensation and benefits, resulting from salary increases, reinstatement of certain benefits such as the 401(k) match, and performance-based compensation; and a [$3.0] million increase for the quarter and a $3.6 million increase for the six months due to the combination of the translational and transactional impact of foreign exchange.

Operating income for the quarter was $5 million, compared to an operating loss of $2.2 million in the same period of the prior year.

Operating income for the six months was $6.6 million, compared to an operating loss of $7.3 million in fiscal 2011.

During the second quarter of fiscal 2012, a building owned by the Company in Switzerland, which is no longer being utilized, was sold for a gain of $747,000, or $0.02 per diluted share.

Income tax expense of $875,000 in the second quarter of fiscal 2012 compared to an income tax expense of $375,000 reported in the second quarter of the prior year.

For the first six months of fiscal 2012, income tax expense of $1.6 million compared to an income tax expense of $792,000 in fiscal 2011.

The tax provision for all periods includes the effects of the application of guidelines related to accounting for income taxes in interim periods, as well as accounting for valuation allowances.

Income from continuing operations in the second quarter was $4.4 million, or $0.18 per diluted share, versus a loss from continuing operations of $3.2 million, or $0.13 per diluted share in the year-ago period.

Income from continuing operations for the six months was $4.9 million, or $0.19 per diluted share, versus a loss of $9.6 million, or $0.39 per diluted share, in the comparable period of fiscal 2011.

EBITDA for the second quarter increased to $8 million, compared to EBITDA of $1.5 million in the second quarter of fiscal 2011.

EBITDA for the six months of fiscal 2012 increased to $12.5 million, compared to an EBITDA loss of $118,000 for the first six months of fiscal 2011.

Now turning to our balance sheet, our cash at the end of the second quarter of fiscal 2012 was $129 million versus $54 million in the same period of fiscal 2011.

Additionally, we had no debt outstanding at the end of the second quarter of this fiscal year, as compared to total debt of $10 million at the end of the prior-year period.

As a result, the Company's net cash position at the end of the second quarter was $129 million, up from $44 million a year ago.

Accounts Receivable of $70 million at the end of the second quarter of this year is above the prior-year period of $61 million.

Inventory of $197 million at the end of the second quarter of this year decreased from $206 million for the prior-year period.

On a constant-dollar basis, inventory decreased by 20.2%.

Now let me spend a moment discussing the status of our initiative to reduce inventory.

As you know, we are in the process of recovering gold from our excess non-core merchandise.

To date, we've recovered more than $6 million from this process.

We expect the gold melt to be nearly complete by the end of our fiscal year.

In addition, we sold $809,000 of excess movements that were not needed for our forecasted productions.

Moving forward, we will continue to look opportunistically at ways to further reduce our non-core excess inventory.

Capital expenditures for the six months were $3.2 million.

Now I'd like to discuss our outlook for the current fiscal year.

As Rick mentioned, we are maintaining our guidance for this year.

For fiscal 2012, we continue to anticipate our EBITDA will range between $31.5 million and $33.5 million.

Net income will range from $15 million to $16.5 million, and diluted earnings per share will range from $0.60 to $0.65 per diluted share.

We expect that our strong trend in sales and expense management will offset the pressures we are experiencing on our gross margin caused by currency fluctuations and cost increases.

While we are very pleased with our sales and marketing trends to date this year, as Rick noted we are also mindful of what may be a more uncertain macro environment in the back half of this year.

We also continue to anticipate an effective tax rate of between 10% to 15% on a GAAP basis, which is based upon expected full-year 2012 earnings and the continued requirement for accounting for valuation allowances.

For purposes of a longer-term strategic plan, we continue to forecast a 30% effective tax rate.

The guidance we have provided does not assume any additional unusual charges for fiscal 2012.

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

Thank you, Sallie.

We are very pleased with our second-quarter and year-to-date performance.

Strong execution of our strategic initiatives has continued to benefit our results, as we recorded another period of double-digit sales growth while also increasing our profitability.

As Rick and Sallie mentioned, we are experiencing broad-based sales growth across all of our brand categories.

However, we are particularly pleased with the strong performances we are seeing in our Movado and licensed brands, which is in line with the emphasis we have placed on these areas of the business as part of our strategic initiatives.

We have continued to drive the growth potential of the Movado brand by introducing compelling new products that generate increased demand, such as Movado Bold.

We also continue to capture the strong growth opportunities of our licensed brands globally.

Additionally, we remain committed to returning Ebel to growth by focusing on its women's watches and developing an exciting new collection to be launched next year.

Lastly, our performance in China demonstrates the success we have had in placing greater importance on capturing Movado Group's growth opportunities in this market.

Both domestically and internationally, we are achieving positive results and receiving encouraging response from our retail partners and consumers.

While we recognize that there is an intensified level of uncertainty within the global environment, we believe that the global recognition and acceptance of our brands reinforces that we have the right strategy, product, and team in place.

We are confident in our brand strength, as well as our position in the watch category.

We have a solid infrastructure that we believe provides the global platform to grow sales while limiting our expenses, coupled with a very strong balance sheet.

We continue to focus on executing against the strategy that we laid out to you last year.

I appreciate our team's hard work and dedication in further positioning Movado Group for long-term success.

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

(Operator Instructions).

Jeff Blaeser, Morgan Joseph.

Just quickly on the uncertain macro environment, are you hearing that from some of your customers or just kind of what we're all seeing out there and concerned about with the global macro trends?

I think it's obviously what we are all hearing out there from the standpoint of the month of August with consumer confidence going down quite significantly, the concerns with the European marketplace, with the U.S.

marketplace, and really the confusion that's out there.

So, from a standpoint we're seeing it from there, we're seeing it in the global stock markets and what's been taking place with the high level of instability or changes taking place there.

Month of August is obviously a small month for watch retail sales.

And some of the numbers this morning seem to be on the good side with retail, but I think it's more from the back to school and things of that nature.

So, we are concerned with all the noise level and the uncertainty taking place, and that obviously can have a very quick impact, as we saw a few years ago.

So, we're certainly continuing on the strong things that we have in place that we can certainly control, but we are concerned about the European and U.S.

marketplaces.

Okay.

And obviously, the operating cost increases seem to be working on the marketing side, as well as the positive from the comp side, to the positive results.

How variable is that line, and if you did get a slowdown, how quickly can you respond and maybe slow that growth down, if you did see a macro impact?

Our marketing costs are obviously quite variable, but obviously through the end of the year they are basically committed.

So any change would have to be in the future.

Jennifer Milan, Sterne, Agee.

I know you talked about the significant new product launch slated for Ebel.

Are you still thinking in terms of timing the 2H of calendar-year 2012?

Which quarter?

The second half of calendar-year 2012?

Second half.

We're looking at the second half of calendar 2012 for that launch, probably a launch in Basel to our retail customers, and then delivery in the second half of the year.

Okay, great, and then, I know we talked about the environment being uncertain, and on prior calls you had talked about the fact that retailer replenishment had finally normalized.

Have you seen anything that gives you any reason for concern in terms of the replenishment patterns at retail at this point?

We haven't seen any change in any patterns right now.

And I think our reaction, as Rick stated earlier, or our comments are based on the highly volatile markets that we have seen over the last month, as well as the European debt crisis which nobody has really quantified or identified the risk that it presents.

But it's been a volatile market for quite a while now.

Yes, okay, and then, can you help us think about the impact or help quantify the impact that you are seeing from higher input costs and from FX headwinds, and how we should think about that for the balance of this year?

And I was also wondering if -- you commented on the fact that you're maintaining your guidance, but you did not mention the sales guidance, so I was wondering what your thoughts were there.

Okay, from the standpoint of cost, the cost pressures kind of continue when we're done, whether it's from China, whether it's from China labor costs, whether it's from energy costs, whether it's from commodity costs.

We're obviously not putting price increases in to offset those because we think that would have a sizable disruption in the market, and therefore we believe the prudent approach is to absorb some of those costs.

Obviously, as we launch new products, we try to anticipate that.

The currency is hard to sit there and manage that and control that because we are quite global, and obviously we've got a lot of sales in a lot of different currencies with cost of different currencies, but it doesn't help that we have a sizable infrastructure in Switzerland and the U.S.

dollar is taking such a decline versus the Swiss franc.

So, we think those are changes that are taking place.

We're aware of them.

We had planned on some of those.

Some of them perhaps are a little bit greater than we thought, particularly the currency fluctuations.

So we are seeing our gross margin not be quite at the level that we would like.

The good news is we are seeing sales at a higher level than we had anticipated, and also the good news is we continue to be as diligent as possible in our expense line.

So, that's kind of what's taking place and what we've built into our numbers.

From a standpoint of build-forward fluctuations, we really can't predict what's going to happen on the currency levels.

I think we do have a benefit of being quite global, and therefore as the dollar gets hurt and it hurts product that we're selling in the U.S.

that's supplied from Switzerland, we do get a little bit of benefit from product that we're selling in euros that are produced in Asian dollars, even though the China costs are going up a bit.

Great, thank you.

And in terms of the topline guidance for the full year?

I think the topline will be a little better than what our previous guidance had been.

But when we're done, we see that positive being offset by, again, some of the gross margin negatives, and then some of the costs and operating expenses being able to help there.

So, that's why we still see the bottom line in the range that we had given previous guidance on.

Even though the sales will be at the upper echelon and a little bit better, the gross margins will not be where we originally had anticipated.

Okay, great.

Congratulations.

Thank you.

(Operator Instructions).

There are no further questions.

That concludes our question-and-answer session today.

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

Again, I'd like to reiterate that we're very pleased with our performance for the first half of the year, and just want to wish everybody who's been affected by this storm a speedy recovery, as well as thank you for participating on today's call and wish you a happy holiday weekend.

Okay?

Thank you.

This concludes today's conference call.

Thank you for your participation.