Movado Group Inc (MOV) 2018 Q1 法說會逐字稿

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

Fiscal First Quarter 2018 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 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; 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 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'd like to turn the call over to Efraim Grinberg, Chairman and Chief Executive Officer of Movado Group.

Thank you, Rachel.

Welcome to Movado Group's first quarter conference call.

I will review the highlights of the quarter as well as our strategies as we look at the balance of the year and then Sallie will review the details of our financial performance.

We will then open the call up to your questions.

The evolution of the retail marketplaces continue to accelerate, especially at the U.S. brick-and-mortar retail.

Department store and chain jewelers have continued to experience a reduction in traffic and the watch category has continued to remain challenging.

In this environment, retailers are focused on reducing their inventories and improving their productivity.

As highlighted during our fourth quarter conference call, we took the decisive action during the first quarter of the year to reduce our operating expenses and planned for a reduction in sales in our current fiscal year.

Within that context, we met our expectations.

Sales for the quarter were $99.3 million, down 13% from last year with sales in the U.S. down 25.4% as retailers focus on reducing their inventories in a challenging marketplace.

In contrast, our outlet division performed well as sales were flat to last year on lower traffic but with a higher rate of conversion.

In our international markets, we grew sales 5.1% on a constant currency basis with stronger performances in Europe and China.

In the United States, retail sell-through continues to outpace sell-in, and we anticipate that our sales performance through the balance of the year will show improvement as sell-in and sell-through become more balanced.

For the quarter, our adjusted operating profit was $2.7 million versus $7.2 million last year.

Had we had the benefits of our reduction in operating expenses for the full quarter, operating profit would have been over $2 million or $0.06 per share higher.

In addition, we had a discrete tax item of approximately $1 million or $0.04 per share resulting from the new tax accounting rules for stock-based compensation.

Our balance sheet continues to remain strong with cash at $233.6 million and inventory down 10.1% from last year.

As we continue to focus on ensuring that we operate our company by doing the right thing for our brands and market in a volatile environment that is evolving quickly and we have a number of initiatives that should help drive improvement through the balance of the year.

Within our Movado brand, we continue to drive innovation with the development of our successful Heritage collection, which will be expanded during the second half of the year.

We're also excited about the introduction of our first Movado Android Wear smartwatch, which will be introduced in the third quarter.

We have received an excellent response from our retail partners and the media as we previewed the watch during the Baselworld Fair in March.

In addition, our Esperanza collection, our Museum Ultra thin and our new Bold sport continue to perform very well.

In our licensed brands, we continue to build our international markets as the U.S. fashion watch market remains challenging and highly promotional.

In Tommy Hilfiger, the collaboration with Gigi Hadid has helped to drive the brand globally, and we had strong product introductions such as Decker and Eva.

In HUGO BOSS, we have had a 360-degree marketing program supporting the Grand Prix collection, which has helped drive sell-through trend.

In Coach, we continue to focus on our Delancey family with iconic hero straps as we develop our assortment to align with the Coach brand's successful modern luxury positioning.

Across all of our brand, the ultra-thin trend remains strong on a global basis, and we will expand our product introductions to support this trend throughout the year.

We are excited to roll out the Rebecca Minkoff watch collection in the second quarter.

It is an exciting collaboration with one of the fashion's leading millennial designers.

We will also launch Uri Minkoff watches for men.

We have seen an increased level of opportunities to continue to grow our market share in international markets as witnessed by our sales growth of 5.1% on a constant currency basis.

We are investing in the development of our Movado and Coach concessions in China.

In constant dollars, we're also seeing improvements over last year in Brazil, our largest market in Latin America; and growth in Germany, the U.K. and France, our newest wholly-owned subsidiaries.

As we grow our international market share, we'll make continued investments behind our Movado brand as we look to develop the U.K. and Germany for Movado.

On the marketing front, we are accelerating our efforts with an increased emphasis on digital initiatives.

We're investing a greater portion of our marketing budget in social media programs and online advertising to reach consumers.

As the year progresses, we are focused on driving the performance of our brand in-store and increasingly in e-commerce.

We launched our Heritage collection successfully with a strong digital push and developed a customization tool that allows consumers to create their own personal Movado Heritage watches.

In addition, with our licensed brand portfolio, we are partnering with our licensors in social media and a strong array of bloggers and influencers.

We are operating in an environment that is changing very quickly.

And as a company, we have needed to adapt as well.

As we transform our efforts to the new realities of the market, we have taken the actions that are necessary to ensure our profitability while retail distribution remains challenged.

We reduced our operating expenses 11.6% for the quarter, and we are on track to realize $12 million in savings this fiscal year and $15 million in savings on an annualized basis.

Our teams are executing our plans and continue to drive innovation and develop products that consumers' desire.

While there continues to be risks and volatility in the retail channel, given what we know now, we believe we have adequately captured this in our original outlook and are, therefore, maintaining our outlook for the year.

As always, we remain focused on operating our business efficiently, but at the same time making the proper investments to help drive growth for the future.

The company's strong balance sheet and cash position allow us to maintain a high level of flexibility and explore new opportunities as we navigate an evolving market.

Now I'd like to turn the call over to Sallie.

Thank you, Efraim, and good morning, everyone.

For today's call, I will begin with a review of our first 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 first quarter results for fiscal 2018 and fiscal 2017.

Our press release also described these items and includes a table of GAAP and non-GAAP measures.

Our GAAP results for the first quarter of fiscal 2018 include a $6.3 million pretax charge, which equates to $4.4 million after tax or $0.19 per diluted share in connection with our cost savings initiatives, which began in the middle of the quarter in North America and at the end of the quarter in Switzerland.

Breaking the fiscal 2018 charge down has impacted gross margin by approximately $1.4 million or 140 basis points and impacted operating expenses by $4.9 million.

Our GAAP results for the first quarter of fiscal 2017 include a $1.8 million pretax charge to operating expenses, 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 compensations related to the announcement of Rick Coté's retirement.

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

Beginning with the review of our income statement, as Efraim mentioned, sales for the first quarter were in line with our expectations.

For the first quarter, sales were $99.3 million, a decline from the same period of the prior year by approximately $14.8 million or 13%.

This decrease was driven by our Wholesale business.

Sales were down 25.4% in the United States, and in constant dollars, increased 5.1% internationally.

Sales in our Wholesale segment were $87.2 million as compared to sales of $102 million for the same period of last year.

In constant dollars, wholesale sales decreased 12.3%.

Sales were down in both our luxury and licensed brand categories.

By geography, our U.S. wholesale business decreased 31.8% to $32.7 million compared to $48 million last year.

Our international wholesale business increased 0.9% to $54.5 million compared to $54 million in the prior year.

In constant dollars, international sales increased 5.1%, and our strongest sales were in Europe and China.

Sales from the company's retail business were equal to last year.

At the end of the quarter, the company operated 40 outlet locations.

Gross profit was $50.5 million or 50.9% of sales compared to $61.3 million or 53.8% in the first quarter of last year.

The 290 basis-point decrease in gross margin was primarily driven by the unfavorable impact of channel and product mix, unfavorable change due to foreign currency exchange rates and the reduced leverage of fixed costs due to lower sales.

As I'll be discussing greater detail in a few moments, the cost savings initiatives were not in place for the entire first quarter period.

If those initiatives had been in place for the entire quarter, gross profit would have been approximately $650,000 higher or 70 basis points.

Operating expenses were $47.9 million, below the prior year period by 11.6%.

The decrease was primarily the result of the following: a $2.1 million decrease in marketing expenses; a $1.1 million decrease resulting from the favorable impact of foreign currency exchange rates; and a $3.1 million decrease in other operating expenses as we continue to closely manage our expenses.

As a result of our lower sales and gross profit, partially offset by decreased operating expenses, operating income decreased $4.5 million to $2.7 million compared to $7.2 million in the year ago period.

Income tax expense of $2.2 million in the first quarter of fiscal 2018 compares to an income tax expense of $2.4 million reported in the first quarter of the prior year.

The effective tax rate for the first quarter of fiscal 2018 is higher than the expectation for the full fiscal year due to the unfavorable timing of discrete items.

This is similar to the first quarter of fiscal 2017.

However, this quarter also includes the impact of the new accounting rule for stock-based compensation, which increased our tax provision by $960,000 or $0.04 per diluted share.

We do not anticipate any additional material adjustments related to these new rules for the remainder of this fiscal year.

Net income in the first quarter was $258,000 or $0.01 per diluted share versus net income of $4.4 million or $0.19 per diluted share in the year ago period.

As noted, the cost savings initiatives were initiated in the middle of the quarter in North America and in Switzerland, it commenced at the end of the quarter.

Because of this timing, the first quarter of fiscal 2018 had only a partial benefit of the initiative and included over $2 million or $0.06 per diluted share of expenses that would not have been incurred if the initiative -- initiatives had been placed for the whole quarter.

Additionally, as just mentioned, the implementation of the new tax accounting rules lowered our diluted earnings per share by $0.04.

Now turning to our balance sheet.

Our cash at the end of the first quarter of fiscal 2018 was $233.6 million versus $203.9 million in the same period of fiscal 2017.

Accounts receivable were down $9.3 million as compared to the same period of last year.

As our sales for the first quarter were in line with our expectations, inventory was down approximately $18 million as compared to the same period of last year.

At the end of the quarter, we had $30 million outstanding on our revolver, down $5 million from a year ago, and we utilized approximately $1 million of the $50 million share repurchase program during the quarter.

Capital expenditures for the quarter were approximately $400,000, and depreciation and amortization expense was $2.9 million.

I will now discuss our outlook for fiscal 2018.

Our outlook is based on a current challenging retail environment and volatile global economy and assumes currency rates consistent with recent levels.

Our results may be materially affected by many factors, such as changes in global economic conditions and customer spending, fluctuations in foreign currency exchange rates and various other causes.

As previously mentioned, our cost savings initiatives are expected to result an annualized pretax savings of approximately $15 million, predominantly from payroll reductions.

We expect to realize approximately $12 million of these savings this year, fiscal 2018.

Associated with this initiative will be a pretax charge in a range of approximately $7 million to $10 million related to the completion of this program of which $6.3 million was reported in the first quarter with the balance being recorded throughout fiscal 2018.

In light of the foregoing, for fiscal 2018, we continue to anticipate our sales will be in a range of $515 million to $530 million.

We expect our gross margin percent to continue to be unfavorably impacted by channel and product mix and, therefore, to be approximately 52% for this fiscal year.

We will closely manage our expenses for the current year, and operating income is projected to be in the range of $50 million to $55 million.

Due to the projected mix of our global pretax results and excluding the impact of any potential U.S. tax reform, the effective tax rate is expected to be 32% and net income is expected to be in the range of approximately $33 million to $36.3 million.

We expect diluted earnings per share in fiscal 2018 to be in a range of approximately $1.40 to $1.55.

Capital expenditures for fiscal 2018 are estimated to be approximately $8 million.

The outlook we have provided assumes no unusual items for fiscal 2018, and therefore, excludes the approximately -- approximate $7 million to $10 million pretax charge in fiscal 2018 for the previously mentioned cost savings initiatives.

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

(Operator Instructions) We will take our first question from Oliver Chen from Cowen and Company.

It's Max on for Oliver.

We were just wondering if you could give more color on regional performance in first quarter.

And were there any surprises in the quarter versus your own expectations?

Well, I think as we highlighted in my comments, the U.S. was particularly difficult, and I think you've seen that as department stores and chain jewelers report their sales for the quarter.

But we did see improvements in Latin America, where Brazil began to bounce back for us and as well as in Europe.

In the U.K., Germany and France, we see those markets as growing this year, as well as we've begun to grow in China, which -- where we began implementing our concession strategy 1.5 years ago from Movado and Coach.

So I think we're seeing some nice bounce back in certain markets.

And our next question comes from Ed Yruma from KeyBanc Capital Markets.

Efraim, you commented during your remarks that you believe that sell-through is still stronger than sell-in and at some point, that trend should change this year.

I guess, how do we think about the magnitude based on the data that you look at of differential between sell-in and sell-through?

And when should we expect, at least based in the way that you've planned out your year, when should we expect that trend to inflect?

So I think we see improvements in that trend, we believe, throughout the year, especially as you get closer to holiday.

And so you should see some sequential improvement because holiday is obviously the biggest selling time.

The first quarter is really when -- is the biggest opportunity for retailers to bring down their inventory because there are no major gift-giving occasions other than really Mother's Day that this year actually fell in into the second quarter.

So it really is the biggest opportunity for retailers overall to bring down their inventory.

And I think as we've all read, that is a significant focus of retailers in this environment, domestically.

Great.

I wanted to follow up.

How should we think about the materiality of both the Minkoff and the wearable businesses this year in your guidance?

Well, I think the Minkoff business we think is an exciting opportunity, but it'll have a small financial role this year, but we believe has a nice opportunity for the future.

And then I think, again, wearables is not really material to us, although it will have some effect on our gross margins because the margins are not as attractive as traditional watches.

And our next question is coming from Frank Camma from Sidoti.

I just want to follow up on that last question with the guidance because I had a similar question.

And so given that both Minkoff and the new watches are not that material, if you look at the top end of your range, I mean, to hit the top end of the revenue range, I mean, what has to happen?

Is it basically, international has to deliver that number because, I mean, it doesn't seem like you're going to get it from traditional U.S. wholesale, is that what...

Well, our overall number for the year does show a decline in sales from...

Yes, it's a 4% decline now, if you look at the top end of the range, right?

Right.

A decline from last year.

And we would expect, as I said, that we would see a sequential improvement in domestic inventory levels and purchases by retailers.

And sell-through also sequentially improving as you're comping weaker numbers in the second half of the year as well as continued growth in our international markets.

So that's obviously, certainly plays a role.

And we did see that growth -- that nice growth in the first quarter where we grew 5% on a constant currency basis, about 1% on a reported basis.

So let me ask you this, so and that was internationally you're talking about?

That was international, yes.

So did you see, given the fall of Mother's Day, did you see some of that in the second quarter?

After the first quarter ended, do you see some tick up on U.S.?

I don't really think we'd talk about that yet, and we'll be able to give some color in that I think on our second quarter conference call.

So -- but we would expect that things will begin to stabilize especially from a replenishment and purchasing point of view.

And again, as I highlighted earlier, the first quarter is the biggest opportunity because it is a small quarter both at retail and for us is the biggest opportunity in the U.S. for retailers to bring down their inventories, especially after a challenging holiday season.

That's true.

Okay.

And my second question is just on the -- can you talk kind of specifically on what you're doing differently in digital and social media to get that going given I think that's probably a big opportunity since there's obviously a shift away from traditional bricks-and-mortar and like how you're addressing more of the traditional...

Well, I think that's a really good question, and I think that it's not only that there's a shift away from traditional bricks-and-mortar, there's also a shift away from traditional media.

So it's really the opportunity to reach the consumer and where they're spending the most amount of time today, which is on digital forms of media, whether it's the computer, predominantly on mobile phone and tablet.

So we are -- we began testing on a much heavier basis in -- predominantly in the second quarter, advertising to consumers in digital formats, retargeting consumers and reaching them in social media platforms with ads versus just our social media platforms.

So places like Facebook, Instagram, Google Search, things like that.

And at this time, I would like to turn the call back over to management for closing remarks.

Okay.

Well, thank you very much for your questions, and we look forward to speaking with you again after our -- at our second quarter conference call.

Thank you very much.

That concludes today's conference.

Thank you for your participation.

You may now disconnect.