Movado Group Inc (MOV) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to the Movado Group, Inc. fiscal third-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.

Thank you. Good morning, everyone. With me on the call is Efraim Grinberg, German and Chief Executive Officer; Ricardo Quintero, President; 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 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 include 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 third-quarter conference call. We are pleased with our third-quarter results. Despite a challenging retail environment and continued weakness in the watch category, we delivered sales and profits at the high end of our internal expectations.

Our sales on a constant currency basis decreased 1.4%. We delivered gross margin expansion of 90 basis points over the prior year to 54.8% for the quarter, and our adjusted earnings per share were $0.91 per share versus $0.92 per share last year.

Our teams around the world continued to execute well on our strategies while continuing to manage disciplined operating expenses. While the watch category has continued to remain difficult at retail, we see signs of stabilization for the holiday season.

We believe we are well positioned for the holiday with our powerful portfolio of brands and are excited about our impactful marketing plans in place behind our flagship Movado brand. This includes the introduction of our new Esperanza family in both print and television and also supported in our out-of-home and digital marketing programs. We are pleased with our early read on our smartwatch introductions across our licensed brand portfolio and a new, exciting version in our Movado Bold collection that is delivering now.

Today we're also very excited to announce a new partnership with Rebecca Minkoff. Rebecca Minkoff is one of the fastest-growing fashion designers geared toward the Millennial consumer. Looking ahead, we continue to remain focused on driving product innovation that resonates with our consumers and executing and delivering on our plans.

I would now like to turn the call over to Ricardo, who will share with you some details on our performance.

Thank you, Ephraim, and good morning. Our third-quarter results are in line with the high end of our internal expectations, delivering approximately $179.8 million in net sales, down 3.1% versus last year on a reported basis and down 1.4% on a constant currency basis; gross margin at 54.8%, up 90 basis points versus last year; and operating income at $31.1 million, down 7.1% versus last year.

In a challenging retail environment, we are pleased to see our brands continue to outpace the competition in key markets around the globe. Although the distraction and uncertainty of the US election is behind us, there are still many unknowns as we head into the holidays, the most important selling season in terms of sellthrough.

Turning to our review of the third quarter, as expected, our business at US department stores and for the fashion watch category continue to be difficult. Sellthrough trends for our licensed brands in the US were slightly better than market. In the $300 to $3,000 price range, the Movado brand continues to be a leading player, holding at over a 21% market share year-to-date, according to NPD.

Nevertheless, retailers continue to focus on improving productivity metrics and resetting stock levels as they prepare for the holiday season. Our outlet business in the US was down 2.8% due to the decline in traffic, particularly in high tourist stores, coupled with the impact of bad weather in the Southeast. We also continue to protect our margins in this channel by not offering steeper discounts and, in fact, delivered an increase in gross margin during Q3 over last year.

As we head into the holiday season, we are confident our marketing plans will drive consumer demand behind our outstanding innovation pipeline, especially in our Movado brand. Esperanza for Men and Women is one of our largest relaunches ever, and as the marketing starts to kick in, we are encouraged by the early sellthrough results. This marketing program builds into the holidays with a strong TV campaign.

Movado Bold will also receive strong marketing support, including television, which will help offset the effect of our plans to take Movado Bold out of certain promotional events in Q4 to ensure the long-term health of the brand. We are also very encouraged with the results of Movado Heritage, which is appealing to the Millennial consumer and where we have recently launched a customization module for consumers to build their own Movado Heritage watch on movado.com.

We are pleased by the very early sellthrough results of our new smartwatches as we introduce these new collections across our licensed brand portfolio. Our approach is to offer beautiful, traditional-looking watches that provide consumers with new and preferred smart functionalities such as notifications, step counts, and world timer -- all on a hidden screen.

Early results indicate these collections have been very well received by consumers. Although we are excited and confident with our approach to this emerging smartwatch category, today we do not see this segment becoming a significant portion of our business, given the limitations in the functionalities and physical dimension of current technology. We will continue to engage in this category as the technology evolves and the opportunities arise.

Two of our licensed brands have new, important collaborations with Millennial celebrity. Gigi Hadid is featured in our Tommy Hilfiger marketing campaign, which includes the launch of our own Tommy Hilfiger Gigi watch collection. And Emma Roberts is featured in the digital collaboration for Coach watches, behind our new Delancey embellished leather strap watch that ties nicely into Coach's new modern luxury position.

Internationally, our results were mixed. International wholesale decreased by 1.7% compared to last year, but were up 2.4% on a constant currency basis. We continue to see sellthrough growth in certain key international markets.

Europe remains our strongest region from a sell-in and sellthrough perspective, led by our largest markets, Germany and the UK, where we continue to see solid sales growth on a reported basis and on a constant currency basis. Smaller markets like France and Switzerland remain soft, with a continued decline in tourism. The Middle East showed strength.

Our shipment performance in Asia was slightly down. China has turned positive in Q3, and we are encouraged with sustained double-digit increases in sellthrough in our directly operated concessions, which we will continue to strategically expand.

Our shipments in Q3 for Latin America decreased double digits, as these markets are US dollar-based, and many of the major economies in the region had been impacted by currency devaluations and ongoing economic uncertainty. Sellthrough in Brazil, our largest margin in the region, remained positive, offset by a softness in Mexico, Argentina, and continued challenges in the travel retail channel.

Operationally, we continue to be focused on smart resource allocation -- shifting resources to support the biggest opportunities, fastest-growing brands and channels, focusing on productivity and excellence in execution. We believe there are many opportunities in the watch category and are very excited with our new long-term global partnership with Rebecca Minkoff, one of today's most innovative and compelling Millennial designers. Our companies will collaborate on design, development, distribution, and marketing of women's watches for Rebecca Minkoff's global lifestyle brand and men's watches for the Uri Minkoff brand. The collections will launch in North America in summer of 2017.

We believe we are well positioned for the holiday season in all the variables that are under our control, but we recognize that we must continue to operate in an unpredictable global environment, and there are still many economic and political uncertainties in the short term. Therefore, we are maintaining our 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 strategy, our talented team at MGI, the strength of our brands, and the health of our balance sheet to position us 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 financial results for the third quarter and first nine months of fiscal 2017 and close with our outlook.

Before I begin, I would like to point out the special items included in our results for both fiscal 2017 and fiscal 2016. Our press release also describes these items and includes a table of GAAP to non-GAAP measures.

Our GAAP results for the third quarter of fiscal 2017 include a charge to nonoperating expense of $1.3 million, which equates to $900,000 after tax or $0.04 per diluted share for an impairment of a long-term investment in a privately held company. Our GAAP results for the first nine months of fiscal 2017 also include a $1.8 million pretax charge, which equates to $1.1 million after tax or $0.05 per diluted share in connection with the vesting of stock awards and certain other compensation in the first quarter related to the announcement of our former COO's retirement.

Our GAAP results for the first nine months of fiscal 2016 included $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 initiatives and other items.

The balance of my remarks will exclude the special items just discussed. Beginning with a review of our income statement, for the third quarter sales were $179.8 million, a decline from the same period of the prior year by approximately $5.8 million or 3.1%. This decrease was driven by our wholesale business as well as our retail business. Sales were down 4.2% in the US and in constant dollars increased 2.4% internationally.

Sales in our wholesale segment were $164.1 million as compared to sales of $169.4 million for the same period of last year. In constant dollars, wholesale sales decreased 1.2%, driven by a sales decline in the licensed brand category, partially offset by the luxury brand category.

By geography, the US wholesale business decreased 4.5% to $86.1 million compared to $90.2 million last year. The international wholesale business decreased 1.7% to $78 million compared to $79.3 million in the prior year. Although overall international sales declined, we had positive sales growth in the Middle East, Germany, the UK, and parts of Asia.

Sales from the Company's retail business decreased approximately $500,000 or 2.8% compared to last year. At the end of the quarter we operated 40 outlet locations as compared to 39 locations last year.

Gross profit was $98.6 million or 54.8% of sales compared to $100.1 million or 53.9% of sales in the third 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, partially offset by the leverage lost on certain fixed costs as a result of lower net sales and the unfavorable change in foreign currency exchange rate.

Operating expenses were $67.5 million, increasing 1.3% from last year's third 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 lowered sales and increased operating expenses, operating income decreased $2.4 million to $31.1 million compared to $33.5 million in the year-ago period.

Income tax expense of $9.7 million or a 31.5% effective tax rate in the third quarter of fiscal 2017 compared to an income tax expense of $11.2 million or a 33.9% effective tax rate recorded in the third quarter of the prior year. Net income in the third quarter was $21.1 million or $0.91 per diluted share versus net income of $21.5 million or $0.92 per diluted share in the year-ago period. The lower tax rate in the third quarter of fiscal 2017 favorably impacted earnings per share by $0.03.

Looking at the nine-month period ended October 31, 2016, sales were $422 million, a decrease of 6.6% from fiscal 2016. On a constant dollar basis, sales decreased 5.5%. Gross profit was $230.1 million or 54.5% of sales as compared to $242.3 million or 53.6% of sales last year. The increase in gross margin percent was primarily driven by the favorable impact of channel and product mix in certain sourcing improvements and the favorable change in foreign currency exchange rates. These were partially offset by the leverage lost on certain fixed costs as a result of lower net sales.

For the nine months ended October 31, 2016, operating income was $48.3 million compared to $61.2 million in fiscal 2016. Net income was $31.8 million or $1.37 per diluted share compared to net income of $39.7 million or $1.66 per diluted share in the year-ago period.

Now turning to our balance sheet, our cash at the end of the third quarter of fiscal 2017 was $199.8 million versus $181.2 million at the end of the same period of fiscal 2016. At the end of the third quarter of fiscal 2017, we had $38 million outstanding on our revolver.

Accounts receivable were up $5.6 million as compared to the same period of last year. This increase is principally related to both lower levels and the timing of the utilization of certain customer allowances.

And while sales were down $5.8 million for the quarter, inventory was down approximately $9.6 million as compared to the same period of last year. Capital expenditures for the nine-month period were $3.8 million, and depreciation and amortization expense was $8.5 million combined.

Now I would like to discuss our 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.

We are maintaining our outlook for fiscal 2017. We anticipate our sales will be in a range of $550 million to $560 million. 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 approximate 32%. And net income is planned to be in the range of $33 million to $36.5 million.

We expect diluted earnings per share in fiscal 2017 to be in a range of approximately $1.40 to $1.55. The outlook we have provided assumes no other unusual items for fiscal 2017 and excludes the $1.3 million impairment charge as well as the $1.8 million pretax charge related to the announcement of our former COO's retirement.

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

(Operator Instructions) Oliver Chen, Cowen and Company.

Really solid results. Great job.

We had a question regarding your guidance and what you're seeing in the marketplace. Does your guidance incorporate similar trends in terms of tourism and the incoming tourism and the tourism shifts, and also the reality of negative traffic in the department store channel?

Also, your remarks are really helpful about wearable technology. It sounded like you said it won't be a significant part of your business. Is that different from what you had previously thought? Just wanted to understand what underpins your thinking there lately, just because that sector is so dynamic.

Well, thank you, Oliver. On the first part, obviously our guidance takes into account what we believe is still a volatile marketplace -- we hope an improving marketplace. But we still believe there's a lot of volatility in tourist and traffic trends. We are planning them to continue to be challenging, although you probably -- we hope you will start to see an improvement.

So it certainly takes that into account. And obviously, a lot of the -- all of the holiday season happens between, really, Thanksgiving and the beginning of January. So there's a lot of retail sales to happen between now and then.

On the other side, I think we've always taken a kind of patient approach to the wearable technology space and smartwatch space. So we are really proud of the hybrids that we've introduced in our fashion brands, and the one that we will introduce in Movado this year. And we are continuing to explore other opportunities in that segment as well. But we also see a really continued large market for conventional watches, as long as you drive them with innovation, image, and design.

Okay. And the Minkoff deal sounds really great. It's a really differentiated brand, has always been trend-right amongst a nice, wide demographic. Where does that sit in your portfolio? And why did this deal make sense to you? And thoughts on what you are thinking that would be optimal in terms of the distribution opportunity ahead?

And, Efraim, on the Macy's and wholesale channel at large, as department stores engage in some of the shop-in-shop initiatives that they are conducting, how do you expect that to potentially impact your business?

Sure. So let me answer the first one first. We are really excited about Rebecca Minkoff. It reaches a younger Millennial consumer through highly differentiated design as well as excellent value. So for us it's really our entry level from a value perspective and where we can keep the fashion trend right and really exciting. So we will introduce it in a very limited way, really trying to do a significant direct business through the Rebecca Minkoff retail and dot-com channels, as well as a very limited distribution -- really keeping the exclusivity of the brand that the brand has maintained while appealing to a young Millennial consumer.

And the second part of your question --

Macy's and the shopping channel.

I think, you know, there is a tech bar right now in some of the wholesale channels. And we are participating in that with our brands, Movado and our fashion brands -- and as well as in many stores we do, especially with our Movado brand, have shop-in-shops, including a flagship shop, for example, at Macy's Herald Square, but in other retailers as well. So we are excited about that opportunity to develop that in the future as well.

(inaudible) Happy holidays. Thank you.

Ed Yruma, KeyBanc Capital Markets.

First, your comments about the potential for stabilization -- could you walk through -- you have always had some very illuminating contents on sell-in versus sellthrough. And I know sell-in has been weak for a prolonged period of time.

Are you seeing that pick up? Or are you just seeing sellthroughs accelerate, which it should precipitate more sell-in?

Everything -- and I'll turn it over to Ricardo after this, but I mean -- would be precipitated on increased sellthrough. So it's really about the market stabilizing and sellthrough beginning to improve.

Yes. As you know, Ed, these models in terms of inventory that retailers want to carry is predicated on sellthrough results. So we think we are well positioned now. We think the level of newness in our assortments is very strong for the holiday season and we hope that sellthrough materializes so that we can see this improvement in the stabilization. But again, everything is predicated on sellthrough results, concentrated into a short period of time.

Got it. I know you had some constructive comments around the Esperanza relaunch. Can you talk about how material the sell-in was for Esperanza? And then as we think about some of the innovation you have added -- so if it's Esperanza, if it's Heritage, versus some of the core Legacy Museum pieces -- has there been a difference in performance of new versus some of the legacy pieces? Thank you.

So we've had a lot of innovation in our Movado brand, starting really with Bold several years ago; Edge last year that continues to perform well; and then the introduction of Heritage in the spring on a very limited basis, which we believe has larger opportunities in the future; and then Esperanza is really a return to our roots.

So that -- and we are very excited. We got a very good reception from retailers, and our initial early sellthrough on the product is excellent. It's well priced for consumers, and it's a beautiful product.

We also have introduced Slim across our total brand portfolio, and that has done very, very well. And with the just current introduction, actually, at the end of last month, the introduction of Movado Slim that we've gotten an excellent reception to. And that's priced at $595 and $695, so it's an excellent value to the consumer as well.

And Heritage, as well -- just to build on what Efraim said -- we know that Heritage is very appealing to a Millennial consumer. So we are really excited about what I shared with you in our prepared remarks, the customization module on movado.com, which you can actually do on your smartphone as well.

And we know that customization is really important for today's consumer. So we have been very active in terms of innovation; and putting the consumer first; and making sure that we have a beautiful, compelling product at the right value equation.

Great, thanks so much.

Frank Camma, Sidoti & Company.

Good morning, guys, and congratulations. Since I didn't follow you at the time, could you just talk about -- with Esperanza, last time you had launched it, how long it played a material part of the business? Just trying to understand how meaningful that could be.

So Esperanza for us was a meaningful part of the business for probably now going back -- ended about 5, 6 years ago, for about a 15-year period. So it's a quite stable product that had gotten, quite frankly, dated.

And we feel that today's current design is really, really up-to-date for today's consumer. The consumer is telling us that so far. And what's actually interesting is the men's and the women's design are slightly different as well -- one slightly more masculine, the other one obviously more feminine.

And just building on this, Frank, one of the big trends we're seeing also in the fashion world is this cut-through negative space. We see it in shoes, we see it in apparel. So that trend is also playing very nicely with Esperanza, which has this beautiful -- you know, Esperanza is all about, obviously, the dot, but the bracelet has the cut-through approach, which is very compelling and ties in to this new trend.

Yes, it's definitely a nice-looking product. I had a question on the licensed brands. Was there any particular strength among those brands that you could call out?

Well, I think our fashion watch business in Europe was quite strong, especially in our key markets of Germany and the UK -- and the US, which have been challenging the whole year, continued to be challenging. And part of that was, again, people rightsizing their inventory based on their expectations for the fashion watch category in the US.

Okay. So as a follow-up to that, since Europe did well, the Minkoff brand -- correct me if I'm wrong -- is not -- is really a US brand, correct? And not so much in Europe?

They are establishing internationally, but they are very early stages of that expansion. But we believe that -- there are segments, we believe, where there's white space in the category to be able to succeed. And Rebecca Minkoff sits in that space.

Okay. Just two other quick questions -- the share repurchases: not much done in the quarter, given where the share price was. I was just wondering if you can comment on that, given the cash balance?

Well, we have continued to prudently, I guess, build out our cash balance. We have a share repurchase program out there, and I think we were really understanding the uncertainty and volatility that was in the marketplace -- played fairly conservatively with our balance sheet.

Sure. Okay. And just as clarification, most of your cash is held overseas, correct?

That is correct.

Thank you.

That concludes today's question-and-answer session. I'd like to turn it back over to our management for any additional or closing remarks.

I'd like to thank all of you for participating with us today and wish everybody a great Thanksgiving holiday coming up this week. So thank you very much.

Ladies and gentlemen, that does conclude today's presentation. Thank you for your participation. You may now disconnect.