Movado Group Inc (MOV) 2013 Q3 法說會逐字稿

Good day, and welcome to the Movado Group, Inc., third-quarter fiscal 2013 earning conference call.

Today's conference is being recorded.

I would now like to turn the call over to Ms. Rachel Schacter of ICR.

Please go ahead, ma'am.

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 am sure you are 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 Securities 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 to this non-GAAP financial measure 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, Rachel.

Good morning, and welcome to our conference call.

Before beginning my commentary, I want to take just a moment to express our sympathy and empathy to everyone whose lives were impacted by Hurricane Sandy.

Our thoughts and prayers are with all of the families that have been affected by the storm, with the hope that you return to normalcy as quickly as possible.

Let me now turn to our business performance.

We are pleased with our third-quarter and year-to-date results, which continued our strong performance from the past 11 quarters.

Our consistent strength 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 accessible luxury Licensed Brand divisions, which drove our performance this quarter with a combined 20% increase in constant dollar sales.

The quarter also included the successful relaunch of our Ebel and ESQ brand repositioning this fall.

And while early, we were pleased with the initial response.

We are excited about the strong growth opportunities that lie ahead, 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 fourth quarter of the year, and longer term.

Our financial results were strong acrosst all key metrics.

In total for the third quarter, net sales increased 12.3%, or 14.3% on a constant dollar basis, reflecting broad-based strength acrosst our business, with strong consumer demand and customer sell-through.

Adjusted operating income increased more than 45% to $28 million, from $19.1 million last year.

This improved performance resulted from our strong sales growth and having an established infrastructure that allows us to leverage our expense base as we grow.

For the nine months ended October 31, 2012, our performance was also strong, with net sales increasing 10.5%, or 12.7% on a constant dollar basis, and adjusted operating income increasing 84% to $47.2 million, from $25.7 million in the prior period.

With this improved financial performance, we have increased our adjusted full-year operating income guidance to $57 million from our previous guidance of $49 million.

And this represents growth of 66% from actual adjusted results of $34.3 million in fiscal year '12.

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

In addition, our net cash position was $165 million at the end of the third quarter.

As a reflection of our confidence in the strength and consistency of our business, our ability to invest in growth initiatives, and commitment to building long-term shareholder value, we are also pleased to announce that our Board of Directors has approved a special cash dividend of $0.75 per share of the Company's outstanding stock, as per this morning's press release, in addition to our normal $0.05 quarterly dividend.

Along with our May 2012 $0.50 special dividend, this will result in dividends per share of $1.45 being paid in calendar year 2012 to our shareholders.

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

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

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

And we continue to experience strong sell-through performance acrosst 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, a continued recession in southern Europe, solid growth in South America, and conservative growth in Asia.

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

Globally, Movado's constant dollar sales grew 20% in the third quarter as compared to fiscal 2012, and 19% in the nine-month period.

Our Movado brand in the United States 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.

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.

Indicative of our market share growth in the United States, the $500 to $3,000 price category has grown 5% for the trailing 12 months, while Movado has grown 18%.

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 our strategy to offer compelling products at key price points continues to help drive our growth.

Introductions from spring, such as the steel and ceramic Cerena and the Museum Sport chronograph, have continued to perform exceedingly well.

The new iteration of Circa in both the 3-hand and chronograph, strategically priced at $795 and $995, respectively, is a great new classic addition to our brand portfolio.

Also introduced this fall and selling well is our new Vizio chronograph, priced at $24.95, with a carbon fiber dial, a tungsten carbide bezel, and a distinctive, architecturally designed bracelet.

Movado Bold, part of our Swiss-trend pillar, is still exceeding expectations.

Strategically limited to less than 700 doors worldwide, Bold continues to add a fresh, younger perspective to Movado.

The global Movado-brand advertising campaign was updated for this holiday season.

An exciting new Bold titanium TV spot was introduced this week on Facebook, and is airing on TV nationally.

We continue to utilize digital as a strong messaging vehicle.

As mentioned on previous calls, we have repositioned ESQ to now be closer to, but still distinctive from, Movado.

ESQ Movado, powered by Movado, has now been universally launched with our retail partners.

The product, along with new displays and new packaging, started shipping in September at price points ranging from $250 to $595, and has a much-improved aesthetic, with a true design language throughout the entire collection.

Some of our key new products are Origin, a collection of over-sized ladies' watches priced from $295 to $395; a Bangle family Corbel; and for men, Capital, a classic watch on a strap, and Synthesis, a rectangular case on a bracelet.

We have also launched a new comprehensive advertising campaign, which is in market now.

Our currently running national advertising campaign features our Fusion product for both men and ladies.

We relaunched our luxury brand Ebel with two entirely new and distinctive collections, Onde and X-1, which bring a new, bold approach to luxury.

The new collections target the modern chic woman or man, a consumer who is active, stylish, and fashion-driven but not a fashion victim.

Ebel's comprehensive brand refresh is being supported by a 360-degree marketing program, including a new brand identity and logo, beautiful new merchandising displays and packaging, a dynamic global print and digital advertising campaign, strong public relations, and a new Ebel.com website.

Delivery of the new collections began mid-October, as did the marketing programs.

We look forward to a strong Ebel holiday season.

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 17% in the third quarter and 23% year to date, on top of exceptional sales growth for the full year and fiscal year 2012.

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

Growth in our Licensed Brand Division is being driven by innovative product designs at key price points that are resonating well with consumers.

Sales growth continues to be strong in the United States, Germany, China, and South America.

Some of the leading product performers for licensed brands during the third quarter were the Coach Boyfriend and classic signature product offerings; the Tommy Hilfiger Windsurf, Blake, and Kelsey models; the Hugo Boss Aviator and Slim Classic watches; the Juicy Pedigree and new Rich Girl lines; and the Lacoste Goa, Borneo, and Biarritz 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 enhanced profitability.

In summary, we remain excited that all of 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 were able to exceed our plans, and are excited 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.

During this important holiday season and into next year, 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 foreseeable future.

We believe that the breadth and depth of our more-focused product offering, supported by high-impact marketing on television, in print and digitally, 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 third quarter and first nine months of fiscal 2013.

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

Lastly, I would like to point out the special items reported in the third quarter and nine-month period of fiscal 2013.

Please refer to our press release for a description of these items, as well as a table of GAAP and non-GAAP measures.

During the third quarter, Movado reported a $3 million pretax contribution to the Movado Group Foundation.

This contribution is reflected in our operating expenses for the third quarter and nine-month period of fiscal 2013.

On a GAAP basis, the tax provision for the third quarter and nine-month period of fiscal 2013 include a $19.4 million, or $0.75 per diluted share, non-cash tax benefit related to the reversal of the valuation allowance on certain domestic net-deferred tax assets.

This valuation allowance was initially recorded in the third quarter of fiscal 2010 in an amount of $20.8 million.

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

For the third quarter, our reported sales increased 12.3% to $160.2 million.

In constant dollars, sales rose 14.3%.

Sales growth was driven by our accessible luxury and licensed brand categories, and included a 17.7% increase in the US, and in constant dollars, a 10.7% increase internationally.

Sales in our Wholesale segment were $147.3 million, or 13.6% above sales of $129.6 million for the same period of last year.

In constant currency, Wholesale sales rose 15.9%.

By geography, our US wholesale business increased 21.7% to $74.3 million, compared to $61.1 million.

Our international wholesale business increased 6.5% to $73 million, compared to $68.5 million in the prior year.

In constant dollars, international sales rose 10.7%.

Sales were up in Germany, France, the Middle East, South America, and Canada.

Sales from the Company's Retail business were relatively flat to last year, as we continued to enhance our level of profitability.

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

Gross profit was $90.4 million or 56.4%, compared to $81 million or 56.8% in the third quarter of last year.

The 40-basis-point decrease in gross margin was driven by unfavorable channel and product mix, partially offset by the favorable impact of changes in foreign currency exchange rates, and leverage gained on fixed costs.

Operating expenses were $62.4 million, an increase of 0.8% year over year.

The increase was primarily the result of the following -- a $2.3 million increase in performance-based compensation, headcount, and salaries; and a $1.3 million increase in marketing expense, partially offset by a $2 million decrease due to the translational and transactional impact of foreign currency exchange rates, and a $1.1 million decrease in various operating expenses, such as bad debt and trade show-related costs.

Operating income increased 46.3% to $28 million or 17.5% of sales, compared to $19.1 million or 13.4% of sales in the year-ago period.

Income tax expense was $10.4 million compared to income tax expense of $2.1 million last year.

And our effective tax rate was 37.1% in the third quarter of fiscal 2013, compared to an 11% effective tax rate last year.

The tax provision for both periods includes the effects of the application of guidelines related to accounting for income taxes in interim periods.

And only the tax provision for the third quarter of fiscal 2012 includes the effects of accounting for valuation allowances.

The fluctuation in the effective tax rate is primarily due to the effects of accounting for valuation allowances in fiscal 2012, as well as a shift in the mix of global pretax financial results.

Net income in the third quarter was $17.2 million, or $0.67 per diluted share, after reflecting the 37.1% effective tax rate, versus net income of $16.4 million, or $0.65 per diluted share, using the 11% effective tax rate in the year-ago period.

EBITDA increased 37.8% to $30.3 million, compared to EBITDA of $22 million in the third quarter of fiscal 2012.

Looking at the nine-month period ended October 31, 2012, sales were $381.9 million, an increase of 10.5% from fiscal 2012.

On a constant dollar basis, sales increased 12.7%.

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

Gross profit was $215.2 million or 56.4% of sales, as compared to $190.6 million or 55.1% of sales last year.

Operating income increased 83.6% to $47.2 million, compared to $25.7 million in fiscal 2012.

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 $14.5 million, compared to income tax expense of $3.7 million for the nine months of last year.

And our effective tax rate was 30.9% for the nine months of fiscal 2013, compared to a 14.3% effective tax rate last year.

The fluctuation in the tax rate is primarily due to the same reasons previously noted for the third quarter.

Net income increased 49.8% to $31.9 million, or $1.25 per share, compared to net income of $21.3 million, or $0.85 per diluted share, in the year-ago period, despite the year-over-year increase in the effective tax rate.

EBITDA increased 60.1% for the nine months of fiscal 2013 to $55.3 million, for an EBITDA of $34.5 million last year.

Now turning to our balance sheet.

Cash at quarter-end was $164.8 million, up from $138 million last year.

We continue to have no debt outstanding.

A portion of our cash on-hand will be used to fund the payment of our quarterly dividends, which is $0.05 per share, as well as a special cash dividend of $0.75 per share announced this morning.

Accounts receivable increased $11.7 million or 12.3% to $107.1 million.

Our focus on inventory continues to be successful as evidenced by the 3.6% decline in inventory at quarter-end, even as our sales increased more than 10% year over year.

Capital expenditures for the nine months were $6.5 million, and depreciation and amortization expense was $8 million combined.

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

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

Also, this guidance is based upon current year results, adjusted for the reversal of the domestic valuation allowance and the charitable contributions.

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

The gross margin rate for the fourth quarter is expected to be slightly stronger than last year.

Operating income is projected to increase approximately 66% to $57 million.

This is an increase of approximately 15% from prior guidance of $49 million to $50 million.

EBITDA is expected to increase over 47% to $67 million, an approximate 10% increase from prior guidance of $60 million to $61 million.

Due to the release of the valuation -- of the domestic valuation allowance, the estimated effective tax rate for the current year is now expected to be 30%, versus the previous forecast of 25%.

And net income is planned to increase approximately 66% to $38.5 million.

This guidance is based upon adjusted fiscal 2012 net income, applying a 30% effective tax rate, the same updated effective tax rate for fiscal 2013.

When adjusting our fiscal 2012 results for a 30% effective tax rate, adjusted net income would have been $23.1 million, and diluted earnings per share would have been $0.92.

We expect diluted earnings per share in fiscal 2013 will increase to approximately $1.50.

This is an increase of $0.10 per diluted share from previous guidance of $1.40.

Approximately $0.20 of this increase is due to improvements in operating results, offset by the change in the estimated effective tax rate.

And I'd like to also point out that our annual sales forecast continues to reflect the impact of the 53rd week for certain of our customers who are on the retail calendar.

This shift delays certain year-end shipments into next fiscal year.

As previously stated, this guidance includes an investment in infrastructure for our newest licensed brand, Ferrari, but does not include any corresponding revenues as this 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.

Thank you, Sallie.

We are pleased with our third-quarter performance.

And, as our guidance suggests, we are expecting a strong year.

The initiatives we have implemented over the past 2.5 years have led to more powerful assortments and are driving strong sales increases across our Movado and licensed brands.

We are pleased by the initial response to our new ESQ-powered-by-Movado and Ebel assortments, which we expect to provide us with incremental growth opportunities.

Our balance sheet remains healthy, affording us the flexibility to invest in our business and return value to our shareholders.

As Rick discussed earlier, we are pleased to have announced a second special cash dividend this year, which reflects our Board's continued confidence in both our financial position and our brand strategies.

Our special cash dividend is consistent with our commitment to increased shareholder returns when both our performance and outlook create the appropriate opportunities.

We are optimistic as we begin the holiday season, and expect a compelling innovation in our offerings, combined with our memorable advertising campaigns, to drive increased growth across our portfolio.

We remain equally focused on continuing to deliver sustainable profitable growth for the future.

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

Thank you.

(Operator Instructions)

Oliver Chen with Citi.

Hi, everybody.

This is actually Nancy Hilliker filling in for Oliver Chen at Citi.

Our question is actually -- how would you like us to prioritize the biggest new growth opportunities in the medium term and into next year?

Should we think that Ferrari will become one of your biggest brands, and how do you see ESQ and Ebel going forward in 2013?

I think, you know, we are not counting yet on significant growth from Ebel and ESQ in the near term.

And Ferrari, we believe, will ramp-up fairly quickly, but it will not be one of our biggest brands for quite a while, in terms of our licensed-brand category.

But we think it has huge potential and we are excited about its launch next year.

Okay.

And I think as the year ends this year and we -- next year we begin to give guidance for the following year, we will give a little more color on where we think Ferrari is going.

Okay, thanks.

(Operator Instructions)

Mike Richardson with Sidoti.

Yes, good morning, guys.

Congratulations on a nice quarter.

I'm just wondering if you could comment on any -- if you saw any change in sales trends throughout the quarter.

Did things sort of -- consistent throughout the quarter, strengthen towards the end, weak?

Anything you can share with us would be helpful.

I think from a standpoint -- you know, nothing major from anything unusual in trends.

Obviously, you know, for us, the third quarter is a build-up to the holiday season.

And the holiday season is starting off a little bit early with Thanksgiving a week earlier than normal.

So really, the trends we are looking for are going to be in January when we see what has taken place in the holiday season.

So, no change in buying patterns from your distribution partners?

No.

Again, we will see that -- the 53-week will impact us at the end of January, our fiscal year being the end of January 31, and the retail calendar being a few days later.

So, that will have an impact.

But we've built that into our guidance.

Okay.

And with regard to inventory, how should we be thinking about that going forward?

Once again, you know, inventory is down a little bit, year over year.

I'm just trying to, for modeling purposes going forward -- how should we be thinking about that?

I think from a standpoint, we're pleased with our inventory levels where they are.

We do see that, over the next couple of years, they will probably need to start growing a little bit.

But we believe that we are able to grow them at a lower level than our sales growth.

So, we see that trend continuing.

But we don't see the trend that we've had over the last two years, which is, bringing inventory down during a period of significant sales increase.

So we think we have inventory at a pretty good level.

But, again, I think we can do a good job of managing it and not letting it grow -- having it grow less than our sales growth.

Okay, thanks.

Just one more and then I'll let others jump in.

Just back to the sales, specifically in Europe.

No changes there?

And I know you sort of got -- guided, I believe, modest growth in northern Europe, and sort of more of a recession in southern Europe.

That's a little bit of a change, right, for southern Europe from the second to third quarter?

Well, what I put down is, in the second -- at the last conference call, the end of the second quarter, I said, continued deterioration in the southern part of Europe.

I've just changed that to say it's in a formal recession.

So, yes, southern Europe is important for us, but not overly significant.

And, therefore, we have been impacted, but I think that trend has kind of continued.

Northern Europe, I know, has been a little bit tighter.

But, again, our performance has continued to do quite well there.

So, we are pleased.

But we do expect that northern Europe, you know, may grow slightly above, you know, a 0% level.

So we don't think it's quite in a recession.

Certainly the whole Euro zone is, when you put in the southern part.

But our business is stronger in the northern part than the southern.

And just to reiterate what Rick said, southern Europe has been tough for quite a while.

So that is nothing new.

Unemployment in Spain and places like Portugal have been tough for quite a while.

So it's nothing new.

Okay, thank you very much.

Raghav Nayar with Capstone Capital.

Hi, thanks for taking my questions.

Nice quarter.

I had a question about the Ebel brand.

Was hoping you could share your thoughts with us about its potential, especially in North America.

I get the sense that -- in the brand that's still top-of-mind in North America for -- with independent retailers, you know, could you talk about what is the potential for North America and how is this business different from the Movado brands, please?

Well, it operates at a higher segment -- price point segment than the Movado brand.

It is specifically, really geared towards women.

And we believe it has a strong opportunity in North America, but it will take some time to really communicate the new brand strategy and image to the consumer.

So it has, as you said -- still has strong top-of-mind with retailers, as well as consumers.

So it is a valuable franchise and now we have to really invest behind it and continue to build that.

But we are doing that in a planned, methodical approach, and not trying to do it all overnight.

Okay.

And I was wondering if you could share your initial reads on ESQ Movado at retail?

I think it is still early days from a consumer sell-through standpoint, since we're just getting into the holiday season.

But early response has been -- we are very pleased with the response from our retailers from a product standpoint, product-positioning standpoint, packaging, display material, also.

So we're very pleased with the positioning that we have.

And now it's all about getting the message across to consumers and having consumers have the same level of excitement.

Okay, great.

And, I'm sorry, I just have a couple more.

The total Movado brand -- growth of the Movado brands, you had said that was 20% in Q3?

Let me just go back and confirm that.

But -- yes, from a constant dollar standpoint, it was 20% in the third quarter, and 19% in the nine-month period.

Okay, great.

I had just one question on the -- I guess, what's in your plan now for Asia.

You had gone now to, I guess, conservative growth.

What is the change between conservative and solid?

Yes, I think, you know, with all the news over the last number of months about China bidding a little bit tougher, I think from an overall economy standpoint, there's been a lot of questions and concerns with that.

From a Swiss watch export standpoint, the numbers have not been anywhere close to where they have been in the past.

We think from a standpoint of the high-end luxury side, there's lots of inventory out in the market place.

From our standpoint and our Movado product, the licensed brands, we believe we're well positioned.

But obviously, as the retailers have a lot of inventory, perhaps of other brands at a higher price point, their open-to-buy may be a little more limited.

So I think it's just highlighting that the China numbers seem to indicate that there's a little bit of a slowing taking place.

So that is really the change from the consistent to the more conservative.

Okay.

And my last question, could you share with us your philosophy about, you know -- and I guess, using your cash strategically versus returning to shareholders?

I think from a standpoint -- we look at that full balance.

Obviously, we're always interested in looking at additional growth opportunities.

Certainly we are using part of the cash to invest in Scuderia Ferrari and the launching of that brand.

We thought it was a good opportunity this year to be able to return some of our US cash to shareholders.

But, again, you know, we look at that as an ongoing basis.

And looking at our cash position globally, and looking at the opportunities out there, and make assessments each year as to the best utilization of our cash.

And sometimes it's holding onto it for potential future opportunities.

Okay, great.

Thank you, and best of luck.

(Operator Instructions)

Mike Richardson with Sidoti.

Yes, hi.

Just one follow-up on gross margin.

I believe Sallie made the comment that you were expecting a slight gross margin improvement in the fourth quarter year over year.

What is driving that?

Are you raising prices?

Or is it just -- what is going on there?

I'll take that, Mike.

I did say that.

We expect gross margin in the fourth quarter to be somewhere in the range between 54% and 55%, predominantly due to the mix in currency.

Yes, from a standpoint, you know -- the increase in our sales is driven by unit growth, not by price increases.

And that's been pretty consistent for quite a few years now coming out of the recession.

We really have not made any changes to much degree at all in pricing.

Okay, thank you for the clarification.

And we have no further questions in the queue.

Okay.

I would like to thank all of you for joining us today.

We wish all of you a happy and a healthy holiday season and a New Year.

We would like you to visit our stores and take a look at our product.

They make very good holiday gifts.

And we look forward to speaking to you again for our fourth-quarter results in March.

So, thank you very much, and again, a happy and a healthy New Year to everybody, as well as a great holiday season.

And this does conclude today's conference call.

Thank you all for your participation.