Movado Group Inc (MOV) 2017 Q2 法說會逐字稿

Good day, and welcome to the Movado Group's fiscal second-quarter 2017 earnings conference call. As a reminder, today's call is being recorded and may not be reproduced in whole or in part without permission from the Company.

At this time I would like to turn the conference 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; Ricardo Quintero (technical difficulty).

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 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 is included in 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 Efraim Grinberg, Chairman and Chief Executive Officer of Movado Group.

Thank you, Rachel. Good morning, and welcome to Movado Group's second-quarter conference call. While our sales and earnings for the quarter were behind last year, we delivered against our plan. Navigating in a challenging retail environment and one that is particularly challenging for the watch arena, we felt it was prudent to update our outlook for the year.

Over the last several years, the fashion watch category has had a very strong growth, and over the last number of quarters the market became somewhat saturated and entered a period of correction. During the last several quarters, retailers focused on rightsizing their inventories to the new realities of the marketplace, which accelerated during this past quarter.

Our sell-in during the quarter was lower than our sellthrough. In a highly promotional environment, we chose to protect our brand and not engage in unusual off-price activity. You can see the results of this decision contributed to our 90-basis-point increase in gross margin for the first half. We believe in the long-term prospects of the watch business in the category. While there will be continuing challenges, we see opportunities for growth, both domestically and international.

To succeed in this increasingly volatile environment, you need to provide new and fresh designs, giving consumers a reason to buy. We are excited about our innovation pipeline for the second half, which includes some of our most exciting new products ever like the new Movado Esperanza, as well as new connected timepieces in Movado and, for the first time, in each of our licensed brands. Ricardo will share some of the highlights in our innovation pipeline.

We continue to focus on executing our strategic initiatives across our brands and regions and controlling our expenses. Our balance sheet, with over $200 million in cash, remains extremely strong, which gives us a high level of flexibility for the future as we continue to pursue sustainable profitable growth.

I would now like to turn the call over to Ricardo and Sally, and we will then be available to answer your questions. Ricardo?

Thank you, Efraim, and good morning. Our second-quarter results are in line with our expectations, delivering approximately $128 million in net sales, down 12% versus last year. Gross margin is 54.9%, up 60 basis points versus last year, and operating income at $10.1 million, down $8.1 million versus last year.

Relative to a very difficult retail environment, our brands continue to outpace the competition, gaining market share in major markets around the globe and setting ourselves up for improvement in the second half ending fiscal 2018.

The second quarter has continued to be especially difficult for the US department store channel and for the fashion watch category, particularly in the women's segment. According to NPD, the overall category under $500 was down 14% in the May/June period. Although our overall sellthrough trends for our licensed brands in the US brick-and-mortar department store channel were better than market, retailers pursued an even sharper approach to reducing inventory to reset stock levels and open to buy for the fall season.

We are working closely with our retail partners to focus our resources on the most productive doors to improve overall retail metrics and online. To note, our total US license brand online business grew over 30% in Q2. The combination of all these variables resulted in wholesale shipments in the US, down 20.7%. At this point, we expect to build from here with fresher, more desirable products and restore healthier selling trends in the holiday season.

A cornerstone of our strategy is to put the consumer first in everything we do. We have been conducting qualitative and quantitative research in the US to understand Millennial consumer behavior. And we are encouraged from what we learned. The results confirmed the watch category has growth potential, not only with connected watches, but more importantly in traditional watches. We will continue to invest in innovation, driven by superior design and developing new products that is desirable, relevant and competitive.

We are encouraged by consumer interest in the smart watch and are excited to continue to add SKUs to our Movado brand throughout the year and, for the first time, in our license brand portfolio in the second half of the year. Our new connected watches will allow us to participate in the smart watch category at key price points, offering consumers new and preferred functionalities such as readable notification, step count, world timer, but as part of the traditional-looking watch driven by design.

Although we are excited and confident with our approach to this emerging smart watch category, we will remain focused on traditional watches, which we believe still have great growth potential in the segments in which we compete. Our innovation strategy continues to drive market share gains, and momentum continues to build behind the Movado brand. In the US for the January/June period, the Movado brand achieved 21.9% market share in the $300 to $3,000 segment, where we compete according to NPD, gaining 50 basis points versus last year.

Although we continue to see sellthrough growth in key international markets, we have seen a relative slowdown since our last call. Europe remains our strongest region from a sell-in and sellthrough perspective, led by Germany and the UK, while we have seen only a slight decrease on a sellthrough basis post-Brexit, but definitely a more conservative approach regarding sell-in as key retailers manage their inventories with more caution.

We have also seen a slight slowdown in France as the threat of terrorism curtails travel in domestic spending, but see good results in Spain and Italy. Switzerland remains difficult, with a continued decline in Chinese tourism. Our shipment performance in Asia turned slightly positive in Q2 as we anniversaried softer numbers from last year. China continues to be challenging in the wholesale channel, but we are very encouraged with double-digit increases and sellthrough in our directly operating concessions, which we will continue to strategically expand. Hong Kong continues to be challenging.

Our shipments in Q2 for Latin America decreased double digits, as these are US dollar-based and many of the major economies in the region have been impacted by currency devaluations, and economic uncertainty remains. Sellthrough in Brazil, our largest markets in the region, remains positive, with a relative slowdown in Mexico, Argentina and continued challenges in the travel retail channel.

We are ready for the second half of the year and are gearing up for a very strategic marketing plan to support our outstanding innovation pipeline. We continue to make progress in the digital arena, not only on our e-commerce platform, now a full year since we upgraded our website with successful results, growing strong double digits, but also across social media, where we have increased our footprint and presence in a meaningful way. We will continue to invest in digital with a mobile-first approach in all we do as we accelerate awareness and engagement into the second half of the year.

Our digital investments will be across our portfolio and include some exciting collaborations tied into new product introductions for the holiday season. We are also preparing an exciting television advertising campaign for the holiday season in the US behind Movado innovation, with fantastic new creative and media support at unprecedented levels. To achieve all this, we continue to be focused on smart resource allocation, shifting resources behind the biggest opportunities, fastest-growing brands and channels, focusing on productivity and excellence in execution.

Fiscal 2017 was challenging from a growth perspective for the watch business in what we believe is a cyclical transition and where we intend to continue outpacing our competition.

We are currently operating in an unpredictable global environment, and there are many economic and political uncertainties in the short term, particularly before the US elections. Therefore, we believe it is prudent to reduce our full-year fiscal 2017 outlook, projecting for sales to be between $550 million and $560 million and EPS in the range of $1.40 to $1.55. We remain confident in our talented team at MGI, the strength of our brands, our innovation pipeline and the health of our balance sheet to set ourselves up for a future of sustainable, profitable growth.

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 second-quarter financial results and balance sheet and then discuss our outlook. Before I begin, I would like to point out the special items included in our year-to-date results for fiscal 2017 and fiscal 2016. Our press release also describes these items and includes a table of GAAP and non-GAAP measures.

Our GAAP results for the first six months of fiscal 2017 include a $1.8 million pretax charge, which equates to $1.1 million after-tax, or $0.05 per diluted share, in connection with divesting a stock award and certain other compensation in the first quarter related to the announcement of Rick Cote's retirement.

Our GAAP results for the first six months of fiscal 2016 include a $2.7 million pretax charge in the first quarter, which equates to $2.5 million after-tax, or $0.10 per diluted share, in connection with our operating efficiency initiative and other items. The balance of my remarks will exclude the special items just discussed.

Beginning with a review of our income statement, as both Efraim and Ricardo mentioned, sales for the second quarter were in line with our expectations. For the second quarter, sales were $128.1 million, a decline from the same period of the prior year by approximately $17.5 million, or 12%. This decrease was driven by our wholesale business, partially offset by an increase in our retail business. Sales were down 15.2% in the US and, in constant dollars, decreased 6.5% internationally.

Sales in our wholesale segment were $111.2 million, as compared to sales of $129.8 million for the same period of last year. In constant dollars, wholesale sales decreased 13.4%, driven by a sales decline in both our luxury and licensed brand categories. By geography, our US wholesale business decreased 20.7% to $49.9 million, compared to $63 million last year. Our international wholesale business decreased 8.3% to $61.3 million, compared to $66.8 million in the prior year. In constant dollars, international sales decreased 6.5%. Although overall international sales declined, we have positive sales growth in portions of Asia as well as Europe.

Sales from the Company retail business increased $1.1 million, or 6.7%, compared to last year, primarily due to an increase in our comp store sales as well as an increase in the number of door -- number of stores. At the end of the quarter, we operated 40 outlet locations as compared to 38 locations last year.

Gross profit was $70.3 million, or 54.9% of sales, compared to $79 million, or 54.3% of sales, in the second quarter of last year. The increase in gross margin percent was primarily driven by the favorable impact of channel and product mix and certain sourcing improvements, as well as the favorable change in foreign currency exchange rates partially offset by levered loss on certain fixed costs as a result of lower net sales.

Operating expenses were $60.2 million, declining 1% from last year's second quarter. As mentioned on previous calls, we continue to closely manage our expenses yet, at the same time, continue to invest appropriately to support our business initiatives and brand awareness.

As a result of our lower sales, partially offset by slightly decreased operating expenses, operating income decreased $8.1 million to $10.1 million, compared to $18.2 million in the year-ago period. Income tax expense of $3.4 million, or 35.1% effective tax rate in the second quarter of fiscal 2017, compared to an income tax expense of $6.1 million, or 33.8% effective tax rate, recorded in the second quarter of the prior year. The effective tax rate for the second quarter of fiscal 2017 is higher than the expectation for the full fiscal year due to the unfavorable timing of discrete items. This is similar to the second quarter of fiscal 2016.

Net income in the second quarter was $6.3 million, or $0.27 per diluted share, versus net income of $12.1 million, or $0.50 per diluted share, in the year-ago period.

Now looking at our year-to-date results, as we mentioned on our first-quarter earnings call, we expected the first-half sales performance to be below last year's levels in the high single-digit range. Sales for the six-month period ended July 31, 2016 were $242.1 million, or a decrease of 9% from fiscal 2016. On a constant dollar basis, sales decreased 8.4%. Gross profit was $131.6 million, or 54.3% of sales, as compared to $142.2 million, or 53.4% of sales last year. The increase in the current-year gross margin percent for the first six months was a result of reasons similar to the second quarter just discussed.

Once again, as mentioned on our first-quarter earnings call, we expected operating income for the first half to be below the prior year. For the first six months ended July 31, 2016, operating income was $17.3 million, compared to $27.8 million in fiscal 2016. Net income was $10.7 million, or $0.46 per diluted share, as compared to net income of $18.2 million, or $0.75 per diluted share in the year-ago period.

Now turning to our balance sheet, our cash at the end of the second quarter of fiscal 2017 was $205.8 million versus $188 million in the same period of fiscal 2016. Accounts receivable were down $8.1 million as compared to the same period of last year.

As our sales for the second quarter were in line with our expectations, inventory was down approximately $2.4 million as compared to the same period of last year.

At the end of the quarter, we had $38 million outstanding on our revolver, down $2 million from year-end. And year to date, we utilized approximately $2.9 million of the $50 million share repurchase program.

Capital expenditures for the first six months were approximately $1.8 million, and depreciation and amortization expense was $5.7 million.

I would now like to discuss our updated outlook for the current fiscal year. Please keep in mind that our results may be materially affected by many factors such as changes in global economic conditions, customer spending, fluctuations in foreign currency exchange rates and various other causes.

Predicated on the headwinds we are facing in the marketplace, our updated outlook for fiscal 2017 is as follows. We anticipate our sales to be in the range of $550 million to $560 million. Although we are excited about our product pipeline for the holiday season, we anticipate the headwinds to persist for the near-term, with progressive improvements during the final two quarters of this fiscal year. As previously noted, we will be closely managing our expenses for the current year, especially in light with our updated outlook.

Operating income is projected to be in a range of $50 million to $55 million. The estimated effective tax rate for the year continues to be approximately 32%. And net income is planned to be in a range of $33 million to $36.5 million. We expect diluted earnings per share in fiscal 2017 to be in a range of $1.40 to $1.55. And capital expenditures for fiscal 2017 are estimated to be approximately $8 million. The outlook we have provided assumes no other unusual items for fiscal 2017 and excludes the $1.8 million pretax charge from the first quarter of fiscal 2017 related to the announcement of Rick Cote's retirement.

I would now like to open the call up for questions.

(Operator Instructions) Ed Yruma, KeyBanc Capital Markets.

I guess first, you articulated some of the weakness in the fashion watch market, obviously some of the market trends and promotions by competitors. Can you talk a little bit more about the conditions in that over-$500 price point? I know that is obviously where a lot of the Movado product kind of sits. And whether you think competitors have been promotional there as well.

Certainly the market has been somewhat more promotional, but that market has not had the negative effect that has been occurring in the fashion watch market over the last several quarters. And obviously if you look at the Swiss data, the Swiss watch market is more challenging. But in that market, Movado has continued to gain market share.

Got it. Obviously very promotional environment. I know you did take a pricing, I think, late last -- early this year. How do you feel about the overall pricing architecture of what you offer? Do you think you're priced competitively? And how should we think about pricing for some of the new products you are bringing in for holiday?

Thank you, Ed. I think our pricing architecture is right. All of the new innovations we're bringing in, we're seeing whether it's an entry price point or not. We think we are competitive at the (inaudible) price points. And we offer a lot of value in many of our collections. One of the other components here, especially when you think about Movado, Movado is a very desirable brand. And consumers are voting with their pocketbook, and therefore you see our market share gains. So we feel good about the decision we made. That has also contributed to our expansion and gross margin. And obviously, you know, we didn't get 100% of all the increases right, so we have been adjusting. But we think we're in a good place.

Got it. One follow-up if I may. What has the reception been on some of the watches that have the tech functionality? And are you selling to existing retailers? Are they different ones? And kind of has the order pattern for that -- is that materially different than it would be for a traditional fashion watch? Thank you.

We are in the process of launching these products against -- in our licensed brands and the more sophisticated connected watches in Movado as well in the third and fourth quarter this year. And we're doing it in limited quantities and limited ways, predominantly with existing distribution.

So, we believe in the opportunity. We feel very strongly and positive about our watches. But we also believe in the traditional watch space, and it's not as much technology affecting the category as it is a cyclicality in the overall watch market. And you see that from the high end now really down into the fashion watch category, which we believe got saturated over the last number of years and is now rightsizing itself. And there will be a new base, and from that new base we will see growth.

Great. Thanks so much.

Oliver Chen, Cowen and Company.

We had a question regarding how we should think about the gross margin and drivers for the back half. And Efraim, as this market evolves, what are your thoughts on hybrid versus trackers versus a smart watch that is more fully functioned? Is that one way to think about how the market may segment? I'm just curious about your strategy in that context. Also, just lastly in inventory, what are your thoughts on managing the inventories relative to sales in the back half? Thanks a lot.

I will let Sallie answer the first one on gross margin.

And then I'll pass it off. If you remember, Oliver, around the timing of our pricing, we have now anniversaried that. So, the increases that we have seen resulted from great decisions we have made, though also that pricing strategy which is now anniversaried. So, our gross margin will remain strong in that we're not going to be promotional, but the increase year over year is something that is probably well behind us.

Right. Then on the technology front, I think it will have a role in the category. And we're not playing right now in the segment of bands or fitness bands and in that area, and are strictly right now in the watch face and, for the time being, in analog watches that have additional functionality. Our license brand watches actually have a hidden screen, so when you receive notifications, you can actually read the notification. The screen pops up and then disappears. And it's a very, very cool feature. We are very excited about it. We are in the process now of testing these watches, and we will begin delivering them in the third quarter.

And the last thing was inventory levels.

Inventory levels at retail, I think -- one of the things that you have seen is retailers have right-sized their fashion watch area, and so they have really focused on bringing down their inventory in the first half of the year. There will be a holiday season that comes in the third and fourth quarter, and I think you'll see people now preparing for that.

Okay, thanks. And Efraim, on the wholesale side, with your key wholesale partners, what about the two- to five-year plan in terms of how they will present fashion watches and how this may evolve, if it will change a lot in terms of how customers are changing and what you are seeing at your key wholesale partners and what they want for a presentation and category and shop-in-shops and any other changes that might be happening? Because there's a lot of changes happening at major department stores, so I want your longer-term view on how this may manifest with your category.

Sure. One, you're obviously seeing a larger proportion of sales moved online, and our brands are performing extremely well online. We are also moving a number of our marketing initiatives onto online. And I think over the next -- you don't have to wait two to five years -- over the next 18 months, you will see a greater shift of our resources going to online marketing. And there is a large interest of Millennials, and that's what we found in our studies and our research in the watch category and in the watch category as fashion accessories. So I think that will continue.

I think you are seeing a shift in retail overall. So I don't believe today that retailers could tell you what their three- to five-year strategy is. I think they are planning much shorter-term. You are seeing orders closer to the time period of sales. You are getting -- we have to be faster today, and that's one of the areas that we have focused on and have made big improvements on for the future. Speed is going to be very important in anything that you do, whether it's apparel or watches, and that will play a role also in our business as well.

Thank you. Best regards.

Jeremy Hamblin, Dougherty and Company.

This is David Burdick on for Jeremy. Thanks for taking my question. Just hoping you'd be able to provide some color on department store trends. And specifically Macy's, as an example, who will close 100 stores, or 15% of their locations, this year. Just seems like this may be a trend that can continue. Was just wondering what kind of implications you see in both the short-term and long-term for Movado. Thanks.

Okay. We won't talk specifically about any retailer. But usually the doors that retailers close are the least productive doors. Some of those -- we have already been working with retailers on shrinking back in those doors. Generally Movado, which is our brand that is in the most selective of the doors, is not in a large proportion of those doors.

So if we speak about the Movado brand, I think what you are seeing right now is a rightsizing of retail overall, and especially as some retail begins to shift to online. And eventually you will see a balance between brick-and-mortar and online. Brick-and-mortar will be here forever. Online now, I believe, will also be here forever, but you'll see a shifting of -- and it will come to a balance. Then that balance -- both will have opportunities for growth.

Okay. Thanks. And just one more. Regarding the market share increase you guys saw this quarter, the 50 basis points, was that in the first-half increase or was that just in Q2?

That is for the January/June period.

Okay. So in Q1, you gained 120 basis points. Is that correct?

I think so, yes. We don't have that handy. But if that's what was said in the last quarter, yes.

Okay, okay. Great. All right. Thanks, guys.

Frank Camma, Sidoti.

Could you just -- quick question on your own retail stores. What learnings are you having there? Is it anything different than the overall market that you are seeing in those stores particularly?

We are seeing traffic down slightly in those stores, but we are seeing a much higher conversion rate. Our comps obviously -- we had good comps in our outlet stores and -- so we obviously still see a very good demand for watches in that area.

Okay. And the two-store growth, was that just opportunistic opening of a couple stores?

We are very selective of where we open up stores because we generally try to keep them out of our retail trading area with our wholesale partners. So, when we have the opportunity to open up in good centers that are not in center cities, we do that.

Okay. And just a clarification question on the new product launches. You said shipping in September. When exactly will they be showing up on retailers' shelves?

We ship -- we have new products that are being shipped now all through the second half of the year. I think -- I was talking specifically about connected watches that will ship in October and December.

Right. Thank you.

This concludes our question-and-answer session for today. I would like to turn our call back over to management for closing remarks.

Okay. Obviously we are disappointed in the results and also where we are for the balance -- where we are heading for the balance of the year. But we believe the Company is well-positioned to continue to expand and grow as the market begins to grow. And we're doing all of the right things to make sure that we are well-positioned for that.

I would like to thank you all for participating today, and look forward to talking to you in our third-quarter conference call. Thank you.

This concludes today's conference. We thank you for your participation. You may now disconnect.