Movado Group Inc (MOV) 2013 Q2 法說會逐字稿

Good day and welcome to the Movado Group, Inc.

second-quarter fiscal 2013 earnings conference call.

Today's conference is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Allison Malkin of ICR.

Please go ahead.

Thank you.

Good morning everyone.

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 get started I would like to remind you of the Company's Safe Harbor language, which I'm sure you're all familiar with.

The statements contained in this conference call, which are not historical facts may be deemed to constitute forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995.

Actual future results may differ materially from those suggested in such statements due to a number of risks and uncertainties, all of which are described in the Company's filings with the SEC, which includes today's press release.

If any non-GAAP financial measure is used on this call a presentation of the most directly comparable GAAP financial measure and reconciliation of this non-GAAP financial measure to GAAP will be provided as supplemental financial information in our press release.

Now I would like to turn the call over to Rick Cote, President and Chief Operating Officer of Movado Group.

Thanks Allison.

Good morning and welcome to our conference call.

We are pleased with our second-quarter results, which continued our strong performance from the past ten quarters.

This demonstrates the ongoing success of our strategies that focus on capitalizing on the unique aesthetic of our brands with compelling product offering while maximizing our improved operating platform.

This is best evidenced by our Movado and licensed brands which drove our performance this quarter with a combined 20% increase in constant dollar sales.

We also readied our Ebel and ESQ brands for their relaunch this fall.

We are excited about the strong growth opportunities that lie ahead and afforded to us by our strengthened operating platform and by the powerful brands we possess.

We remain confident in our ability to continue our positive momentum in the second half of the year and longer term.

Our financial results were strong across key metrics.

In total for the second quarter constant dollar sales rose 7.6%, reflecting broad-based strength across our business, with strong consumer demand and customer sell-through.

Constant dollar sales would have increased 15.1%, excluding the reduction in anticipation of our Ebel and ESQ fall relaunch.

Gross margin expanded 190 basis points and SG&A reduced by 280 basis points despite product cost pressures.

This improved performance resulted from our strong operating infrastructure combined with our disciplined management of expenses.

Operating income more than doubled to $10.7 million and diluted earnings per share rose 78% to $0.32 from $0.18 in the prior year.

With this improved financial performance we have increased our full-year earnings guidance to $1.40 per diluted share outstanding from $1.15.

Our balance sheet remains exceptionally strong as evidenced by our reduced inventory levels despite higher sales.

In addition, our net cash position was $156 million at the end of the second quarter even after paying a $12.6 million special dividend in May 2012.

As a reflection of our commitment to building long-term shareholder value we are also pleased to announce that our Board of Directors has approved a cash dividend of $0.05 per share of the Company's outstanding stock as per this morning's press release.

Our current business plans do not require any debt financing and our equity position remains strong at $383 million.

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

From a global perspective the watch category continues to perform well, and we continued to experience strong watch sell-through performance across our retail partners.

We remain cognizant that there is the potential for further deterioration of the world economies; however, our plans continue to anticipate moderate growth in North America, modest growth in Northern Europe, declines in Southern Europe, and solid growth in Asia and South America.

From a brand perspective the execution of our Movado brand strategy continues to produce particularly strong results.

Globally Movado's constant dollar sales grew 14% in the second quarter as compared to fiscal 2012 and 18% in the first half.

Our Movado brand in the United States continues to hold the leading marketshare 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.

Additionally, Movado continues to outpace the category and increase its market share in total in the $300 to $3,000 price segment and in virtually every category within this segment.

All distribution channels continue to perform well, with double-digit gains in US department and chain stores, and even greater growth in our broad and specialty channel distribution.

Product segmentation and the design of desirable new products into specific fillers have been important components of our strategy with the Movado brand.

New and adoptions in the category performed exceptionally well during the key Mother's Day, Father's Day and graduation periods.

Specifically, the new ladies Cerena with ceramic bezel and bracelet insert starting at $995 was a key performing family.

For men the new Museum Sport chronograph starting at $750, and the new Series 800 in both the three-hand and chronograph in both blue and orange accents were also key performers in the second quarter.

Our Movado Bold trend collection continues to enhance the overall Movado brand image.

This Swiss fashion collection from $350 to $895 had several hits this spring, featuring the introduction of our two-hand metals for women, and for men the new innovative titanium three-hand.

The repositioning of ESQ to ESQ Movado has been well-received by our retail partners.

The new designs with the ESQ Movado branding will start shipping in September to our retailers.

Prices will remain consistent with where they are today, ranging from $250 to $595, but with a much more elevated brand aesthetic.

To complement the new brand positioning and product there will be new packaging, new displays and a comprehensive, fully integrated marketing and digital plan.

The new creator behind ESQ Movado will be launched into major publications on newsstands in October.

And, as planned, the sell-through at retail for ESQ exceeded sell-in to our retail partners, which positions us well to sell in the new ESQ product.

Sales in our luxury category declined 25% globally on a constant dollar basis in the first half versus last year, consistent with our plans as we prepare for major new product introductions for the Ebel brand this fall.

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

Our licensed brand division continues to perform extremely well.

Our global license brand team grew sales in this division on a constant dollar basis by 25% in the second quarter, on top of 33% growth in the first quarter, and exceptional sales growth for the full year in fiscal year 2012.

This represents 2.5 years of growth exceeding 20% per period.

We continue to invest in developing product and infrastructure for our Ferrari brand, which we will launch globally in the spring of 2013.

Growth in our license brand division 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 during the second quarter were the Coach Boyfriend and Classic Signature product offerings -- the Tommy Hilfiger Windsurf, Andre and Olivia models; the HUGO BOSS Aviator in slim classic watches; the Juicy Pedigree and new Rich Girl lines; and the Lacoste Advantage, Goa and launched Borneo collections.

Our outlet retail division remains an important contributor to our business from both a sales and profitability perspective.

The greater emphasis we have placed on branding and customer service at our existing stores has helped fuel sales conversion and improved profitability.

In summary, we remain excited that all the initiatives we have diligently been working on have been successful in creating momentum in our business.

And while we recognize that the environment remains challenging, we are pleased that we are able to exceed our initial plans to start the year, and encouraged by the sustained strength we are seeing in our business as our efforts to fine tune the positioning of our brands have firmly taken hold.

Looking to the remainder of fiscal 2013 we plan to build on these initiatives.

We will continue to refine our product lines and introduce more frequent and focused innovation, maintain consumer excitement and further improve our competitive positioning.

We look forward to the exciting plans we have in place for driving sustainable, profitable growth for the balance of fiscal 2013 and beyond.

We believe that the breadth and depth of our more focused product offering, supported by continued television advertising, combined with strong print support and a focused digital strategy, will all contribute to strong continued sell-through and ongoing consumer demand.

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

Thank you, Rick, and good morning everyone.

I am very pleased to speak to you today and present our financial results for the second quarter and first six months of fiscal 2013.

For today's call I will first review our income statement and balance sheet and then discuss our outlook.

For the second quarter our sales -- our reported sales increased 4.2% to $118 million.

In constant dollars sales rose 7.6%.

Sales growth was driven by our Movado and licensed brands and included a 9.1% increase in the US, and in constant dollars a 6.1% increase internationally.

As Rick noted, we strategically reduced shipments of Ebel and ESQ during the quarter as we prepare for a relaunch in the fall.

Excluding the impact of both ESQ and Ebel, our sales increased 15.1% over the prior-year period on a constant dollar basis.

Sales in our wholesale segment were $104.5 million, or 5.2% above sales of $99.3 million for the same period of last year.

In constant currency wholesale segment sales rose 9%.

By geography our US Wholesale business increased 13.1% to $46.3 million compared to $41 million.

Our international wholesale business sales were essentially flat, with the prior year on a reported basis at $58.1 million compared to $58.4 million last year.

In constant dollars international sales rose 6.1%.

Sales were up solidly in South America, the Middle East, Asia and Canada.

Sales from the Company's retail business were relatively flat to last year, as we focused on improving profitability.

At the end of the period we operated 33 outlet stores.

Gross profit was $65.8 million or 55.7% of sales compared to $60.9 million or 53.8% in the second quarter of last year.

The 190 basis point improvement in gross margin was driven by a reduction in and leverage gained on fixed costs, as well as the favorable impact of changes in foreign currency exchange rates and the sales of excess watch movements in the prior-year period.

Operating expenses were $55 million, a decrease of 1.6% year-over-year.

The decrease was primarily the result of the following -- a $2.4 million decrease due to the translational and transactional impact of foreign currency exchange rates, partially offset by a $2 million increase in performance-based compensation, headcount and salaries.

Operating income was $10.7 million or 9.1% of sales compared to $5 million or 4.4% of sales in the year-ago period.

And as a reminder, during the second quarter of last year a building was sold for a gain of $747,000 or $0.02 per diluted share.

Income tax expense was $2.5 million, and our effective tax rate was 23.6% in the second quarter of fiscal 2013, compared to an income tax expense of $900,000 or a 16% effective tax rate last year.

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

The fluctuation in the effective tax rate is primarily due to a shift in the mix of the global pretax financial results.

Net income in the second quarter was $8.1 million or $0.32 per diluted share versus net income of $4.4 million or $0.18 per diluted share in the year-ago period.

EBITDA increased to $13.4 million compared to EBITDA of $8 million in the second quarter of fiscal 2012.

Looking at the six-month period ended July 31, 2012, sales were $221.7 million or an increase of 9.2% from fiscal 2012.

On a constant dollar basis sales increased 11.6%.

And excluding the impact of both ESQ and Ebel, our sales increased 19.2% over the prior-year period on a constant dollar basis.

The higher sales were driven by both the US and international businesses.

Gross profit was $124.8 million or 56.3% of sales as compared to $109.6 million or 54% of sales last year.

Operating income was $19.2 million compared to $6.6 million in fiscal 2012.

Net income was $14.7 million or $0.58 per diluted share, approximately triple the net income of $4.9 million or $0.19 per diluted share in the year-ago period.

EBITDA for the six months of fiscal 2013 increased to $24.9 million from EBITDA of $12.5 million last year.

Now turning to our balance sheet, we continue to have a strong balance sheet.

Cash at the quarter end was $156.3 million, up from $128.8 million last year.

We continue to have no debt outstanding.

Accounts Receivable decreased $10 million or 14.3% to $59.7 million.

Our focus on inventory continued to be successful as evidenced by the 13.3% decline in inventory at quarter end, even as our sales increased more than 9% year-over-year.

On a constant dollar basis inventory decreased by 1.5%.

Capital expenditures for the six-month period were $2.4 million and depreciation and amortization expense was $5.7 million combined.

I would also like to remind you that we are projecting capital expenditures of approximately $20 million for fiscal 2013, which is higher than our fiscal 2012 level, primarily because of the production of new Basel Fair booths, and the relocation of our Swiss office and warehouse in the second half of the year.

Now I would like to discuss our increased guidance for the current fiscal year.

And let me note, we are still taking a cautious view of the global economy and we are assuming no significant fluctuations in foreign currency exchange rates.

For fiscal 2013 we anticipate our sales will increase approximately 10% to $510 million.

Gross margin rate for the remaining quarter is expected to approximate the rate experienced in the second quarter.

Operating income is projected to increase close to 45% to a range of $49 million to $50 million.

EBITDA is expected to increase over 30% to a range of $60 million to $61 million.

The estimated tax rate for the current fiscal year is now expected to be 25%.

And net income is planned to increase approximately 45% to a range of $35.5 million to $36 million.

This guidance is based upon adjusted fiscal 2012 net income, applying a 25% effective tax rate, the same updated effective tax rate for fiscal 2013.

We expect diluted earnings per share in fiscal 2013 to increase to approximately $1.40.

This increase is $0.25 per diluted share from -- I'm sorry -- this is an increase of $0.25 per diluted share from previous guidance of $1.15.

Approximately $0.15 of this increase is due to improvements in operating results, and the remainder is due to a change in the estimated effective tax rate.

Note that this guidance includes an investment in infrastructure for our newest licensed brand, Ferrari, but does not include any corresponding revenues, as this new collection will not be introduced until early fiscal 2014.

The guidance we have provided assumes no additional unusual items for fiscal 2013.

Now I would like to turn the call over to Efraim.

Thanks, Sallie.

Over the past 2.5 years we have demonstrated consistent growth driven by the success of our brand, product, marketing and expansion strategies.

We are very pleased to continue our positive performance in the second quarter and report an increase in net sales, expansion in gross margin, and a more than doubling of operating income compared to last year.

As we enter the second half of the year, we will continue to refine our product lines and introduce focused yet frequent innovation, which is the hallmark of our Company.

This keeps our brand fresh and relevant with consumers and further drives our growth.

While we remain cautious on the economy overall, we believe we have strong marketing and product plans in place to help drive our holiday performance.

This fall our retail partners are eagerly anticipating the relaunch of Ebel and ESQ and we expect to continue to drive the positive momentum for our Movado and licensed brands.

Our healthy balance sheet allows us to reinvest in the business and to drive sustained profitable growth and at the same time return value to our shareholders.

We are focused on delivering our fiscal 2013 objectives and executing on our initiatives to drive our long-term performance.

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

(Operator Instructions).

Oliver Chen, Citigroup.

Congratulations on really impressive results, great news.

We did have a question related to gross margin.

Could you just speak to us a little bit on the upside that you experienced this quarter?

And it looks like you're also guiding to encouraging upside going forward.

In addition, the inventory control looks pretty outstanding.

Do you expect the year-over-year declines to continue throughout the year?

Good morning.

I will speak to gross margin.

The upside we had experienced for this year as compared to last year has been predominantly due to mix and leverage on our fixed costs.

These are things that we have been focusing our efforts on and we will continue to focus on those for the remaining periods of this year.

From an inventory standpoint, as you know, in the second half of last year we had a program of melting a lot of our gold product and converting that into cash.

So, obviously, we will start anniversarying those declines at the end of the year.

So, therefore, the types of declines we are seeing from this year to last year we expect to be consistent with our level of inventory, as we have been the last couple of quarters, you know, in that $160 million to $170 million range.

And we would expect to kind of continue at that level as our sales grow.

So we won't see that same level of continuing declines as we look into next year.

Thank you.

And regarding the second-quarter strategic reduction of shipments, in the back-half will that also occur or is that kind of over?

Are there any implications to Movado in terms of the current product in a marketplace that is not yet updated from ESQ and Ebel?

Well, we will have somewhat of a running change on the ESQ line, and so what we have done is the inventory is now fairly clean out there.

And we will begin shipping our new ESQ product in September and October.

So we are very excited about that.

And then we will also in the third quarter begin shipping our new Ebel product, so both of those somewhat in a very organized and managed effort.

But, no, we don't see any issue coming back with inventory from retail at all.

Thank you.

The new product looks awesome, so that is exciting.

Regarding Ferrari, could you share with us some preliminary thoughts on the strategies and the terms with respect to the kinds of accounts and/or geographies that you'll be targeting in the beginning?

And also when will that start shipping approximately?

Ferrari, obviously, we are working very diligently on building the infrastructure and product design and development and working with our licensor in Italy.

So we're very pleased with what we see.

It will start shipping in the spring of next year, so our fiscal year 2014, calendar year 2013, probably shipping in the April/May type timeframe.

From a distribution standpoint, obviously, Ferrari is a globally recognized name.

We see the opportunity of very much piggybacking off of our existing distribution that we have in our major global brands such as Tommy, HUGO BOSS and Lacoste.

So we see very similar distribution with that.

We also see further distribution down the road with some specialty stores that deal much more with sport, novelties and things of that nature, but that will be the second tranche that will take place.

Okay.

And within the consumer arena Europe continues to be an interesting hot topic.

Are there any call outs or you could offer us?

I know you have had a good history of conservative guidance in the context of Europe in terms of call outs of better or worse performing countries and your thoughts about what the landscape looks like in watch spending in those markets.

Well, as I outlined in my comments, our guidance -- the assumptions we make in our guidance are that Northern Europe will continue with modest growth.

We continue to see that.

However, as you know, it is a fragile set of economies and things can change quite quickly, just as they can in the US with all the uncertainty taking place with fiscal policy and all.

Southern Europe is a much tougher environment, certainly in a heavy recession -- in a recession and with large unemployment.

Fortunately for us the southern part of Europe is a smaller part of our business.

What we are seeing, though, is that retailers are starting to be more cautious in their buying -- they're open to buy and the timeframe in which they are buying.

So they are trying to buy closer to the holiday season, which impacts a little bit of the shifting of timing and sales.

But that is really what we are seeing now.

And as we all hope that people get the fiscal house in order, both in Europe as well as the US, and the economies start driving forward.

We believe we are well-positioned to continue strong positioning with the consumers and our retailers out there.

Thank you.

Regarding your portfolio, were there any major call outs in terms of strengths or weaknesses with respect to the different pricing -- prices of your watch portfolio?

You do have a comprehensive portfolio all the way from Lacoste to your super premium.

Were there any major trends in terms of what you are seeing with consumer reception to different prices within the portfolio?

We continue to offer excellent value across all of our brands.

And so we have seen very strong performance, especially in our licensed brand portfolio, as well as in Movado's sweet spots between $500 and $1,500.

And we are also seeing growth in the $1,500 to $3,000.

Oliver, I would just -- and you are asking some really great questions, but I would like to let some other people also ask some questions, and then please feel free to come back on.

Okay?

Thanks, guys, for your time.

(Operator Instructions).

Raghav Nayar, Capstone Investments.

Great quarter.

Thanks for taking my questions.

My first question is about the licensed brands.

What is the opportunity here if you take Europe out of the picture and -- within your existing licenses?

And if you could address existing doors, new doors and by region, please.

Okay, and I think from a standpoint of our licensed brand business for the brands that we have are reasonably mature from a standpoint of we are in the doors that we need to be in.

There is small refinement of doors that take place.

Obviously, in China, in places like Korea where our business is relatively small but growing, we have kind of expanded doors, but it really doesn't have a major impact on the overall sales performance.

So the sales performance from our brands is very much on sell-through performance, and it is all unit driven as opposed to price driven.

When we are done, we are extremely global from a licensed brand standpoint.

Obviously, each of the brands are a little bit different.

Coach is much stronger in the US and Asia.

HUGO BOSS is much stronger in a Europe type thing.

But we have pretty good balance throughout the geographies.

And we have been, again, fortunate that because we are global some markets are doing well, as Sallie outlined in her comments, some markets are doing a little bit tougher because of economic situations, but we continue to perform well because of the global nature.

So I don't think there is any major shift or adjustment taking place.

As the economies get better that is good for everyone.

But, obviously, having great product and great price value helps you to be one of the better performers in tougher times as well, and we believe we are there.

And my next question, did you give Movado brand growth in constant currency for the quarter?

I did in my comments.

I believe -- let me just -- bear for a second -- they were 14% in constant dollars for the second quarter and 18% for the first half.

Again, US -- Movado is very strong in the US marketplace.

That is the most dominant, but we do have a nice business outside of the US, so therefore a little bit improvement from a constant dollar standpoint.

Okay.

And just about the Tommy fashion jewelry line.

I believe it was in your German and UK stores.

Can you give us any early reads on that part of the business?

It is a small business for us.

It is predominantly European business, and for us is doing well.

But, again, it is very early days, so the benefit is as you are able to launch that in more doors and expand it you really get that door expansion.

But, again, as an overall percent of our business it is quite minor.

Okay.

And just about the cash balance.

About how much is with the overseas subsidiaries and are there any plans to repatriate near-term?

Well, I certainly can talk to the cash hoard, as we have cash all over the globe, obviously, where our main offices are concentrated primarily in Switzerland, Asia and then the US, with Switzerland having about one-half of it and Asia and the US having the other one-half combined.

Okay.

That is definitely all -- it is all in the Q if you need further information on that.

And from a standpoint of repatriation, our policy there is obviously we repatriate it as we need it.

But, obviously, with our strong cash position, no debt position, and cash well-positioned globally we are in good shape and don't have to do that for any particular reason.

So that is certainly an opportunity.

Again, what I would suggest is thank you for your questions.

You do have the opportunity of getting back in the queue for questions.

So if you don't mind, I think it is limited to a couple of questions and feel free to requeue.

Thank you.

Mike Richardson, Sidoti.

Just a couple of quick questions here.

A bunch of them have already been asked, but I wonder if you could just comment on any sales trends sort of as throughout the quarter, especially in Europe, did things stay the same, get better, get worse?

And if you could talk a little bit maybe about how you are planning inventories for fall and holiday given the uncertain macro environment?

Thank you.

And, again, I think the global economies are all in different states.

Again, we tried to highlight that in our assumptions from a standpoint of North America being moderate growth.

North America being modest, Southern Europe being very tough, but strong performance in the Asian and South America.

So in all the countries we have been kind of reacted a little bit differently.

I think the good thing for us is that we have very strong brands, exceptional price points.

We provide very compelling product to consumers out there, and as a result consumers are quite attracted to our product and continue to purchase.

So consumers are out there purchasing.

Obviously not all consumers, but consumers are out there purchasing.

And in our price value proposition, our excellent brand positioning, and our excellent brand names I think help us to be a stronger performer in the marketplace.

So it is really a mixed bag out there.

But the things we are doing, I think, are the right things that give us the best possible positioning.

And from an inventory on the second-half of the year, we usually build inventory during the first-half of the year because of lead times and all for holiday season.

We continue to invest selectively in various brands and building perhaps a little higher levels of inventory to give us more upside potential.

But we are very pleased with our inventory levels and about where they are.

I would see that they would remain constant, perhaps decline a little bit for the rest of the year.

Okay, thanks.

Just two more here.

I may have missed it.

I know Sallie touched on it.

Gross margin guidance for the back-half, did she say that was going to be about in-line with the second quarter?

That is correct.

Each of the quarters will be in-line here.

Each of the quarters, right.

Each quarter, okay.

And then --.

A little volatility last year.

And I just want to make sure that we are aware of the fact that this year should be more in-line with each other.

Okay.

And I am wondering if you can comment a little bit on SG&A.

It looked like SG&A is basically flat, down actually a little bit a little bit year-over-year, which was a little surprising to me given the building of infrastructure that you guys are going to have going on for Ferrari and launching.

I'm just wondering how we should be thinking about that maybe for the back-half?

I will also comment on that.

So SG&A, we will be investing in the organization, but we will get leverage as a percentage of sales.

And most of the drop in the second quarter was currency related.

Right.

So we did have a slight -- we did have an increase in constant dollars on SG&A.

Again, that is the beauty of our global structure.

We have infrastructure in Switzerland, infrastructure in Asia, infrastructure in the US sales globally that we have a pretty good natural hedge.

So if the dollar gets stronger it impacts us on sales negatively.

It gives us a little bit of benefit when it comes to expenses, and obviously we saw that in the second quarter.

Okay, thanks.

And just actually the last one.

The tax rate, I know you haven't given any guidance obviously for fiscal 2014, I guess that would be.

How should we be thinking about the tax rate going forward?

And originally it was 30% for this year, and that is the way we are going to be looking at things going for it, obviously it is a little bit lower now for this year.

Just for modeling purposes, I am wondering if there is any -- if you have any thoughts there.

Right, so, Mike, for right now I would suggest you remain at the 30% for the out years, which is the guidance that we still have existing for our long-range plans.

Okay.

And then we will be speaking on our longer -- updated longer-range plan probably in the next six, nine months or so, which will include updated information related to everything including the tax rate for the go forward years.

But 30% is the thinking right now.

Okay, thank you very much.

I will jump out and let somebody else ask a question.

(Operator Instructions).

At this time we have no further questions in the queue.

I would like to turn the call back over to management for any additional or closing comments.

As we all stated earlier, we are very pleased with our quarter.

I would like to thank all of you for participating today and asking some very good questions.

And thank you very much, and enjoy the rest of the summer.

That does conclude today's conference.

We thank you for your participation.