Movado Group Inc (MOV) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Movado Group, Inc.

fiscal second-quarter 2016 earnings 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 Miss Rachel Schacter of ICR.

Please go ahead.

Thank you, good morning, everyone.

With me on the call is Efraim Grinberg, Chairman and Chief Executive Officer; Ricardo Quintero, President; and Sallie DeMarsilis, Chief Financial Officer.

Also in the room is Rick Cote, Vice Chairman and Chief Operating Officer, who will join us for questions and answers.

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 fact 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, our 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 Ricardo Quintero, President of Movado Group.

Thank you, Rachel.

Good morning, and welcome to our Q2 conference call for Movado Group.

We are pleased with our Q2 results, as it reflects strong execution of our strategic approach to growing our business and capturing the full potential of our brand portfolio.

Sales were up 6.1% on a constant currency basis, and 1.4% on a reported basis.

With international sales increasing 12.4% on a constant currency basis, and 2% on a reported basis.

Operating income was also up 23.9% on a constant currency basis, or 6.2% on a reported basis.

During the second quarter, the global market has given us many variables we do not control.

But the theme of constant change remains.

And it is within our ability to successfully manage through these changing times so that our Company and our brands can win.

As discussed on our previous calls, foreign exchange and currency volatility is one of the big central themes affecting our industry and our business.

And rather than have a wait-and-see attitude, we implemented a number of proactive measures that have yielded positive results.

One of these key initiatives was our selective price increases, which we executed successfully.

To note, our gross margin expanded to 54.3% of net sales, despite a 200 basis point overall unfavorable currency impact on gross margin.

Our price increases were done thoughtfully and strategically, resulting in an improvement in gross margin, offsetting currency headwinds without a significant impact to volume.

In the US, where we are able to effectively track market share through NPD, in the $300 to $3,000 price category where we compete, our Movado brand market share rose to over 21% for the period of January through June, up 250 basis points versus prior year.

In the same January through June period, Movado sales at retail grew 12% on a flat market.

In June, in a market that was down 6%, largely driven by promotional events in the department store channel which were not anniversaried this year, Movado retail sales were up 6%.

For Latin America, in Q2, we continue to experience strong double-digit growth in Mexico and Brazil which was offset by double-digit declines in our travel retail business, impacted in part by fewer Brazilian travelers, which also affected our business in key US destination locations such as Florida and New York.

This past August 7, we held a beautiful launch event for Movado in Sao Paolo to formally launch the brand in Brazil, and continue building on the positive retail momentum the brand is experiencing there as consumers have shifted their spending domestically.

We are particularly pleased with our performance in Europe in Q2, where the weakness in the euro has attracted traveling consumers from China and the US, and where we saw double-digit increases in sell-through and sell-in across the portfolio in constant currency.

Noteworthy results were achieved in the UK and Germany across most of our brands.

Although our business in the Middle East was impacted by the price of oil and regional issues, we experienced double-digit growth during Q2.

Ebel and Concord continue to focus on this market, and we continue to see positive results.

Our business in Asia has also been impacted by a number of external factors in Q2, including the slowdown of the Chinese economy, and the ongoing decline in spending in Hong Kong and Macau, the MERS outbreak in Korea, and the aforementioned shift in tourists to Europe.

In Asia, we experienced double-digit declines, both at sell-through and sell-in.

In China, we are focusing our resources on productive doors, including those we operate directly, and planning for the future for when the economy recovers.

Our retail outlet business is up slightly for Q2 with an additional door.

This environment is challenging.

And we have continued to focus on delivering strong operating profits in the segment, and have chosen not to play in the ultra-promotional game to drive sales.

Innovation is the lifeline of our business.

We create beautiful products that consumers desire.

Giving them a reason to accessorize their look, support their personal taste, or celebrate a key life milestone while offering superior quality at a strong value proposition.

This is certainly true again in Q2 of this year, as we drove newness across the portfolio.

In Movado, we supported our core collections, including a new gold-tone classic Museum, acceleration of our 1881 automatic collection, which is enjoying phenomenal sell-through across the globe and our new thin profiled edition of Sapphire, which was a key winner for Father's Day.

Our Bold collection continues to resonate with consumers, and represents the shining star in the US watch business.

Our metals collection and our new Colorado straps demonstrate that the consumer is excited to buy new watches if the design aesthetics and value proposition are right.

On the licensed brand side, global sell-through was in the mid-double digits, which is a remarkable achievement.

We saw continued momentum building behind key product families such as Lacoste 1212, where we are now introducing a beautiful [Prano] version of this new icon.

On Tommy Hilfiger, we continue to build upon the success of the [Trent] family, adding line extensions with blue dials and brown straps.

On Coach, our Tristan and Delancey collections drove significant growth, and we are now introducing our highly anticipated Coach men's line.

On Scuderia Ferrari, we're seeing continued strength in the Pit Crew and Race Day collections, as we prepare to test the brand in alternative channels of distribution, which we will discuss later this year.

HUGO BOSS continues to be a major success.

Particularly in Europe, where Aeroliner, Ambassador, and Icon collections grow double-digit increases.

We are seeing double-digit growth both in our BOSS Black and BOSS Orange collections, which demonstrates the brand has the ability to attract multiple consumer segments.

Design and innovation are our core competencies.

And we will continue to drive beautiful introductions as we look towards our Q3 and Q4 fall introductions.

We will also continue to focus on our bestsellers by region, and build upon successful product families where we know consumers find our product and brand offerings desirable, relevant, and competitive.

We are particularly excited about our innovation pipeline for our flagship Movado brand where we will have two major new product introductions in the fall season.

The first is a fresh compelling interpretation of our Museum Dial, raising it to the pinnacle of modern design aesthetics.

Designed in collaboration with one of today's most inspiring and respected industrial designers.

Our second big innovation story relates to connected technology, where we are planning to deliver our introductory collection of Movado watches in the fourth quarter in time for holiday shopping.

Finally, I am also happy to report that we have launched our new Movado.com website in the US to be rolled out to other key markets around the globe within the next year.

We are very pleased with the design and improved navigation, particularly for mobile use.

This is how consumers are shopping.

And mobile devices become their first point of engagement in their consumer journey.

I invite you to visit the site and experience it yourselves.

We are seeing significant double-digit growth versus prior year in all e-commerce platforms where we participate, and expect this trend to continue to accelerate.

Winning in digital and embracing omni-channel is one of our key growth strategies, and we will continue to strategically invest in digital capabilities to further capture this fast-growing opportunity.

During this quarter, we also implemented a new organizational structure that will effectively allow us to improve our ability to execute with excellence and capture the full potential of our brands.

The new organizational structure was officially rolled out July 1. Our new organization will leverage a matrix structure.

Within which now have clear roles and responsibilities for brands, regions and functions.

I am convinced that our new organization will enhance our ability to accelerate our growth, particularly on an international basis.

In closing, you can see that we have made some important moves to strengthen our business model, and lay new foundations for sustainable profitable growth.

We have taken a proactive strategic approach, making thoughtful decisions that are starting to yield positive results.

We have invested, and we will continue to invest in innovation to deliver beautiful compelling products as this is the lifeline of our business.

We have put the consumer first in everything that we do.

And have some key touch points in the consumer journey, and positioned our organization for success to win in the global marketplace.

For FY16, we are maintaining our guidance, with net sales in the range of $590 million to $600 million, and operating income to increase to approximately $72 million to $75 million assuming no further potential worsening in the global economic environment, significant fluctuations in exchange rates, or other unusual events.

I will now turn the call over to Sallie.

Thank you, Ricardo, and good morning, everyone.

For today's call, I will begin with a review of our financial results for the second quarter and first six months of FY16, and close with our outlook.

Before I begin, I would like to point out the special item included in our year-to-date results for FY16.

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

Our GAAP results for the first six months of FY16 include a $2.7 million pre-tax charge which equates to $2.5 million after-tax, or $0.10 per diluted share in connection with our operating efficiency initiatives and other items.

The balance of my remarks will exclude this special item.

Beginning with a review of our income statement, sales for the second quarter were $145.6 million, an increase from the same period of the prior year of approximately $2 million or 1.4%.

In constant dollars, sales increased 6.1%, as currency unfavorably impacted our sales by $6.8 million.

This growth was primarily driven by our licensed brand and luxury businesses.

Sales were up 0.8% in the US, and in constant dollars increased 12.4% internationally.

Sales in our wholesale segment were $129.8 million, an increase of 1.5% from $127.8 million for the same period of last year.

In constant dollars, wholesale sales increased 6.8%.

By geography, our US wholesale business increased 0.9% to $63 million compared to $62.4 million last year.

Our international wholesale business increased 2% to $66.8 million, compared to $65.5 million in the prior year.

In constant dollars, international sales increased 12.4%.

Sales growth was led by increases in Europe, and to a lesser extent, Latin America.

Sales from the Company's retail business were about flat at approximately $15.8 million compared to $15.7 million last year.

At the end of the quarter, the Company operated 38 outlet stores.

Gross profit was $79 million or 54.3% of sales, compared to $77.6 million or 54% in the second quarter of last year.

The increase in gross margin was primarily driven by a 230 basis point favorable impact of channel and product mix, which includes pricing increases and sourcing improvement opportunities.

Offset by a 200 basis point unfavorable change in foreign currency exchange rates.

Operating expenses were $60.8 million, above the prior year period by 0.6%.

The increase, as compared to the prior year, was primarily the result of the following.

A $1.4 million increase in compensation and benefits, including higher performance-based compensation and headcount.

And a $600,000 increase in marketing expenses.

These were partially offset by a decrease of $1.7 million, resulting from the impact of foreign currency exchange rates.

Operating income increased 6.2% to $18.2 million or 12.5% of sales, compared to $17.2 million or 12% of sales in the year-ago period.

Due to the global nature of our business, fluctuations in currency impact all aspects of our P&L.

On a constant dollar basis, our operating profits would have increased approximately 23.9% as compared to last year's second-quarter results.

Income tax expense in the second quarter of 2016 was $6.1 million, or a 33.8% effective tax rate, which was higher than planned, due to the tax impact of fluctuations and losses incurred by certain foreign operations.

This compares to an income tax expense of $4.9 million, or a 28.7% effective tax rate recorded in the second quarter of the prior year.

Net income in the second quarter was $12.1 million or $0.50 per diluted share versus net income of $12.2 million or $0.47 per diluted share in the year-ago period.

Currency headwinds negatively impacted our earnings-per-share for the second quarter by approximately $0.10.

The favorable impact of our share repurchase program offset the impact of our higher-than-expected effective tax rate.

Looking at the six-month period ended July 31, 2015, sales were $266 million, an increase of 0.6% from FY15.

And on a constant dollar basis sales increased 5.6%.

Gross profit was $142.2 million or 53.4% of sales, as compared to $142.8 million or 54% of sales last year.

The current year gross margin percent was impacted by a 200 basis point unfavorable change in foreign currency exchange rates.

Operating income was $27.8 million, compared to $28.1 million in FY15.

Net income was $18.2 million or $0.75 per diluted share, as compared to net income of $19.5 million or $0.76 per diluted share in the year-ago period.

Now turning to our balance sheet.

Our cash at the end of the second quarter of FY16 was $188 million, versus $169.6 million in the same period of FY15.

At the end of the second quarter of FY16, we had $40 million outstanding on our revolver.

While sales were up 1.4% in the quarter, accounts receivable were down $10.4 million.

And inventory was down approximately $6.8 million, as compared to the same period of last year.

Capital expenditures for the six-month period were $3.7 million, and depreciation and amortization expense was $6.1 million combined.

We project capital expenditures of approximately $13 million for FY16, slightly down from our previous estimates.

While we are maintaining our guidance at this time, we do believe there is uncertainty in the global economic environment as we enter the second half of the year.

Therefore, our guidance for the current fiscal year does not take into account a potential worsening in the global economies in which we operate, and assumes no further significant fluctuations in foreign currency exchange rates.

As a reminder, in the first quarter, we've utilized $2.7 million of the planned $3 million to $4 million charge related to operating efficiency initiatives and other items in FY16.

There were no additional charges in the second quarter.

These initiatives will result in approximately $5 million of annualized savings, with $4 million of savings being realized this year.

We will continue to closely manage our expenses as we have successfully done in the past.

For FY16, we continue to anticipate our sales will increase to a range of $590 million to $600 million.

Gross margin rate is expected to be approximately 53.5% as compared to 52.8% in FY15, primarily due to the selective price increases and sourcing improvement opportunities, offset by the negative impact of currency.

As mentioned, we will be closely managing our expenses for the current year, and expect to see savings of our operating efficiency initiatives.

However, we will continue to invest appropriately in our brands.

Operating income is projected to be in the range of $72 million to $75 million.

Due to the mix of our global pre-tax results, the estimated effective tax rate for the full year is expected to be 30%.

And net income is planned to be in the range of approximately $48.5 million to $51 million.

We expect diluted earnings-per-share in FY16 to be in a range of approximately $2 to $2.10.

The guidance we have provided assumes no unusual items for FY16.

And as mentioned a moment ago, we expect to report a total of $3 million to $4 million in pre-tax charges related to operating efficiency initiatives in FY16.

This charge is excluded from the guidance just provided.

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

Thank you, Sally.

We are very pleased with our overall results for the second quarter.

Results which included increased sales, a stronger gross margin percentage, and operating income above last year despite operating in a challenging retail environment and facing significant currency headwinds.

During the quarter and the first half of the year, we were able to execute our strategy which included selective price increases, continued delivery of strong product innovation in our brands, and gaining market share in our targeted markets.

As we enter the second half of the year, we continue to see a global economic environment with increased risk and volatility and a continued challenging retail environment.

We believe we have strong plans in place for each of our brands to help drive consumers to our retail Partner's stores and websites.

As Ricardo mentioned, we are particularly excited about our new product family in Movado, designed by a world-famous industrial designer that will be introduced in the fourth quarter and our first entree into the evolving wearable category in our Movado brand.

Product innovation is what has helped Movado continue to garner market share gains in the US.

And we remain focused on introducing and marketing truly exciting products for our consumers.

We are also excited about the launch of our Coach men's watches, and the introduction of our HUGO BOSS Swiss collection.

As a Company, we continue to execute in a disciplined manner, and continue to outperform the category for our retail partners.

We remain focused on continuing to grow our Company for the long-term.

And believe our new organizational structure, which Ricardo described, will position us appropriately to capture the full potential of our brands on a global basis.

I would like to thank our teams around the world for their continued focus and execution.

Now, I would like to open up the call to questions.

(Operator Instructions)

Oliver Chen, Cowen and Company.

Thanks.

Nice, solid results in a tough, volatile environment.

We had a question.

Your inventories look really good under pacing sales growth.

Will that continue to be a trend for your inventories?

And could you give us an update on how you're feeling about how the wholesalers are managing inventories?

I know there's been a trend of tightening.

And do you expect that to continue, and if so, for how long?

Oliver, thank you.

And, on the first part, we have continued to basically see inventory management at retail being consistent with the trends that it's been over the past several quarters.

So there's been a fairly tight management, and in most cases our sales are outpacing inventory growth in the current retail environment.

But, overall, we're very pleased with our results.

I'll give it to Sallie to answer the second question about our expectations for our own inventory levels for year end.

Oliver, I think right now, we are very pleased with our inventory positions and we would expect it to be in line with our sales growth.

Okay.

And your comments on digital were helpful, and sounded like a newness relative to how long I've covered you.

Where do you think about that in terms of percentage of sales over time?

The website looks like it has a lot more product than I've ever seen before on your site.

And so where -- and also how do you marry omni-channel in the context of your business model being some multi-channel between direct-to-consumer and wholesale?

I was also curious about if certain brands or price points are more suited for success and penetration online.

So thank you, Oliver.

I am happy you were already able to get on the website.

Your questions are very important questions, and really this is a new space.

It's going to be hard for us to make a prediction on what the impact will be.

The reality is, there will be an impact and we're starting to participate.

But the market will evolve, and consumer's pace evolve in different ways.

So I wouldn't like to give you a prediction, because it's hard to give you one.

I think as far as the omni-channel question, we're seeing that consumers, as I mentioned in my prepared remarks, are moving to digital to buying online or even searching for product and learning about product online.

And in many cases, this is actually happening while they are in the store.

So this is something that we believe is very important, and we will continue to support all these digital elements for storytelling and product information, to support not only purchases that are made online, but also support those purchases for those consumers that want information at the point of sale.

And they're going to have it through our digital platforms.

Okay, thanks.

And just our final question.

You mentioned selective price increases, which sounds pretty great in the context of a mixed international and macro environment.

What's the nature of how you were able to achieve that?

Was it across the globe and across your brand portfolio?

We've been very careful over the past several years about continuing to offer consumers tremendous value.

And so I think we were able to do that and execute and deliver a price increase and continue to do that.

And really by being very strategic, very selective, and being very pointed at what we've done.

So we're very pleased with the overall execution by our teams of the global price increase that we implemented.

And you can see that by actually an increased gross margin in a time where currency had a negative impact of 200 basis points.

Best regards for holiday.

Thanks a lot.

Ed Yruma, KeyBanc Capital Markets.

I guess first, just housekeeping.

Sallie, I think you decided that, on the tax rate, it was a little higher because you are unable to recognize some tax benefits from I think some of your foreign subs.

Was that anticipated when you introduced annual guidance?

And I guess how should we be thinking about modeling that tax rate longer term given all the volatility abroad?

Yes.

You are correct.

It was higher because of some of our foreign entities, and, yes, that was built into our model.

But, unfortunately, we only give annual guidance, and those losses in some of those foreign subs create some volatility quarter to quarter.

So is that a one-shot deal?

Or is this really -- should we think about so long as we have this international volatility, this tax rate to be elevated because of an inability to recognize the most tax benefits?

We're still aiming for 30% for the year, Ed, so that may help you little bit with what the back half may be.

Got it.

And again, congrats on the pricing increase.

I guess did you get any pushback at all at retail, and was that a one time or should we expect you to more selectively take up pricing through the balance of the year?

Thanks.

I think our price increase, we're not planning on having another price increase this year.

I think gross margin is a continued focus of the Company.

So you're going to continue to see that.

And beyond just our price increase execution, our teams did a fabulous job on the supply-chain side and improving some of our costs.

And that was really helpful during the quarter, and should continue (multiple speakers) benefits for the balance of the year.

Great.

And one final follow-up.

I think it was HUGO BOSS, you mentioned you were rolling out a Swiss program, I might have missed that.

But how should we think about interest in doing more Swiss product within your licensed portfolio?

Thank you.

Well, I would think that this is probably a fairly exclusive offering that we introduced to our customers in Basel, and got a great response.

And then we will see how it rolls out through the balance of the year.

I would think that probably HUGO BOSS is the brand that we will focus Swiss-made product in.

Great.

Thanks so much.

Rick Patel, Stephens.

This is Shreya Jawalkar filling in for Rick.

Thank you for taking our question.

I wanted to ask about your connected technology.

Any update on which month it will launch in 4Q?

And should be expect an uptick in marketing spend to support this?

And also from a pricing perspective, do you expect this to be comparable with the core Movado brand at luxury price points, or will it be for more aspirational consumers?

Thank you.

So we expect to introduce this, as we mentioned, in the fourth quarter.

And it will be supported appropriately, to make sure the consumers know that we now have this with the Movado brand.

And it will be within not only the design aesthetics of the brand, but also within the price points that our consumers expect for the Movado brand.

Thank you.

Kristine Koerber, Barrington Research Associates.

Good morning.

First a follow-up on the smart watch.

Can you talk about the technology around the device, and will it be synched -- will you be able to sync it with iPhone or Android devices?

So we really have not given out any information yet about the product that we will launch.

And we would anticipate giving out that information during the third quarter as we prepare for deliveries and introduction in the fourth quarter.

But it's a product that we are very excited about, and hits the sweet spot of the Movado brand, both from a design and price point.

So when you talk about the fourth-quarter launch, I am assuming it's December -- is in the launch in December?

Be for holiday.

(Technical difficulty) store for holiday.

And it will have limited availability as well.

How many doors, do you know at this point?

We haven't finalized that yet.

Okay.

And then, can you quantify -- is there any way to quantify the price increase -- how much the price increase -- the benefit it had on gross margin during the quarter?

Because wasn't the increase taken late in the quarter?

No.

The increases -- some of the increases began late in the first quarter.

And then by the beginning of the second quarter, early in the second quarter, most of the price increases did take place.

I think it would be very difficult to quantify exactly the impact to gross margin, but it did offset, more than offset, a negative currency headwind of 200 basis points.

That and our cost reductions.

It was mixed pricing and our sourcing improvements, correct.

Okay.

And then, Sallie, I believe you had indicated a quarter or two ago that expecting a $26-million impact -- FX impact, on sales for the full year.

Is that guidance unchanged at this point?

Obviously, that was when -- a year -- at last year end when we were looking forward into this year.

That was our estimate of what the impact would be, and because of that, we did things like the price increases and took other actions.

So our guidance does reflect all the actions that we're taking to react to what is now the new reality of currency.

Okay.

Thank you.

I would now like to turn the conference back over to Management for any additional or closing remarks.

Okay.

I would like to thank all of you for participating on today's call.

And we'll obviously update you again in our third quarter call, and wish everybody a very happy end to the summer.

Okay, thank you very much.

This does conclude today's conference call.

Thank you all for your participation.

You may now disconnect.