Movado Group Inc (MOV) 2018 Q2 法說會逐字稿

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

Fiscal Second 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'd 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'd 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 that 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.

Good morning, and welcome to Movado Group's Second Quarter Conference Call.

I would like to start the call by saying that we are thinking about the people of Houston and the surrounding areas during this massive storm and hope that there's not much more devastation in the area.

I will share with you some highlights on our second quarter performance and some of our plans for the balance of the year.

Then Sallie will review our financial performance in greater detail, and we'll open the call up to your questions.

At the beginning of July, we announced that we had completed the acquisition of the Olivia Burton brand.

We're very excited to have acquired this distinctive and fast-growing brand started by 2 young entrepreneurial women in London: Jemma Fennings and Lesa Bennett.

Since its launch, Olivia Burton has become an important fashion watch and jewelry brand in the U.K. and is in the initial stages of expanding internationally.

We're truly excited about this acquisition and to have the Olivia Burton team join our company.

I will further discuss the Olivia Burton brand towards the end of my comments.

While the retail market remains challenging, especially in the United States, we're pleased with our overall results for the second quarter.

Excluding the Olivia Burton acquisition, our sales for the quarter were $127.9 million, relatively flat with $128.1 million last year.

Our adjusted operating profit for the quarter was $12.9 million versus $10.1 million, approximately a 28% increase.

Our adjusted earnings per share were $0.43 versus $0.27 last year, approximately a 57% increase.

These results demonstrate that we're successfully executing against our strategy.

Recognizing that the retail marketplace in the U.S. was challenged and that the retail environment is fundamentally changing, we initiated a significant streamlining of our organizational structure to reduce cost and operate more efficiently and faster in an environment where speed is a competitive advantage.

In addition, we focused on growing our digital footprint and communicating with our consumers through an increased presence in social media and marketing platforms.

We had anticipated that the retail channels in the U.S. would remain challenging during the first half of the year.

And that trend continued, particularly in the fashion watch business, a market that has become increasingly promotional.

As mentioned on our previous call, we made the decision to protect our brands for the future rather than to participate in this arena.

In the U.S., we saw our licensed brands business decline by 26%.

Movado brand sales in the U.S. continued to see improving trends during the quarter despite our wholesale customers' continued focus on inventory levels and driving productivity given that traffic to their stores remains challenged.

In this environment, a mid-single-digit decline was in line with our expectations for the Movado brand.

Turning to our retail business.

Our Movado company stores had a very strong quarter with sales growing 5.3% overall and 2.5% on a comp basis, driven by increased conversion levels.

Internationally, our wholesale business had a very strong quarter with sales growing by 7.7%, excluding 1 month of the Olivia Burton brand, led by the strong growth of Movado in China and double-digit growth of Tommy Hilfiger and mid-single-digit growth in HUGO BOSS.

Our licensed brand business grew 10.1% internationally and performed well in Europe, Brazil and the Middle East.

As we look at the second half of the year, we believe we have the right plans in place to be successful in an environment that we expect will continue to evolve.

The retail landscape continues to transform rapidly, and we are partnering with our customers to build a long term and strategic relationship.

We're also continuing to build our e-commerce capabilities, both for ourselves and for our customers on their e-commerce platforms.

In the Movado brand, we're excited to have recently introduced our Movado Connect watch in collaboration with Google and QUALCOMM.

Our product has been very well received by our retail partners and is already receiving very good reviews from publications and tech blogs.

We just recently introduced Movado Connect on movado.com and are encouraged by the initial response.

Movado Connect will be available at our retail partners beginning September 1.

Last year, we introduced the capsule collection of Movado Heritage at a limited set of our retail partners.

And for the second half of this year, we'll introduce several new models and expand our distribution yet keep it very selective.

We believe that Movado Heritage, inspired by Movado's great history, represents an important opportunity for the future as we are finding that the Movado Heritage collection's vintage feel is resonating with the younger consumer.

This year, we're celebrating the 70th anniversary of the design of the Museum dial by Nathan George Horwitt, and we've introduced a number of limited edition watches available only online and marketed through social media.

We're already seeing a very strong consumer response.

In our licensed brands, we continue to focus on design, driving differentiation in the category at key price value equations.

In Coach, we are introducing our new brand family at opening price points for bracelets beginning at $195.

We're also excited about our marketing program featuring our Coach Tea Rose strap collection.

In Tommy Hilfiger, we're introducing Chelsea For Her as part of our collaboration with the social media icon Gigi Hadid.

In HUGO BOSS, where we have established a leadership position in men's classic watches, we're introducing a new Heritage-inspired companion collection and a new collection designed specifically for women, Allusion.

In Lacoste, we're expanding our successful ultra-slim Moon collection and introducing a new Lacoste watch for children for the holidays.

In Ferrari, we are introducing our new Primato collection and expanding our successful Pilota family.

We have also seen initial success in the launch of our Rebecca Minkoff and Uri Minkoff watches, where we are maintaining a very limited specialty store distribution and are excited about their potential for the holiday season.

Now I'd like to spend a few minutes talking about our recent acquisition of the Olivia Burton brand.

The fast growth of the Olivia Burton brand in the United Kingdom over the last few years has confirmed our hypothesis, that beautiful design with a true brand identity and an excellent value will attract a millennial consumer as well as their parents into the watch and now jewelry category.

The Olivia Burton brand built its presence in the U.K. by maintaining a very select distribution and building a significant online business.

We believe this strategy will also prove to be successful globally.

We will continue to run the Olivia Burton brand independently in London under the leadership of the Olivia Burton management team while allowing it to leverage our global resources and systems to expand internationally.

We also plan to support their marketing efforts to increase brand awareness in new markets as well as build significant direct -- a significant direct-to-consumer business.

Through the Olivia Burton brand, we'll expand our relationship with younger consumers and increase our presence in jewelry, which represents significant opportunity for the company.

I'm very pleased that the actions that we put in place earlier in the year are driving solid results in a difficult retail climate and that our strong balance sheet, allows us to continue to invest in future growth opportunities.

Our teams around the world have done an excellent job of executing against our plans during the first half of the year and establishing a strong foundation as we focus on returning the company to sustainable profit -- profitable growth for the future.

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

Thank you, Efraim, and good morning, everyone.

For today's call, I will begin with of 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 results for fiscal 2018 and fiscal 2017.

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

Movado Group acquired the Olivia Burton brand on July 3, 2017.

Included in the consolidated results for the second quarter of fiscal 2018 were $4.5 million of pretax charges primarily connected to the transaction as well as 1 month of amortization of the acquired assets.

Approximately $300,000 of the $4.5 million impacted gross margin and the remainder impacted operating expenses.

After tax, the charge related to the acquisition equates to $4.4 million or $0.19 per diluted share for the quarter.

Our GAAP results for the first 6 months of fiscal 2018 included $6.4 million pretax charge, which equates to $4.5 million after tax or $0.19 per diluted share in connection with our cost-savings initiatives.

$6.3 million of this charge was taken in the first quarter.

These initiatives began mid-first quarter in North America and at the end of the first quarter in Switzerland.

Breaking the charge down for the 6 months of fiscal 2018, gross margin was impacted by approximately $1.4 million or 60 basis points and operating expenses were impacted by $5 million.

Our GAAP results for the first 6 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 the vesting of stock awards and certain other compensation in the first quarter related to the announcement of our former COO's retirement.

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

Beginning with a review of our income statement, for the second quarter, net sales were $128.8 million, an increase of approximately $700,000 or 0.5% from the second quarter of last year or 1.2% on a constant currency basis.

This increase was driven by the acquisition of the Olivia Burton brand, which added approximately $900,000 of sales in the 1 month we operated the brand.

Excluding the impact of the Olivia Burton brand, our sales would've decreased approximately $200,000 from the second quarter of fiscal 2017.

For the quarter, our wholesale business was down 0.2% while our retail business increased 5.3% from last year.

Sales were down 7.4% in the U.S. and, in constant dollars, increased 10.7% internationally.

Sales in our wholesale segment were $111 million as compared to sales of $111.2 million for the same period of last year.

In constant dollars, wholesale sales increased 0.6%, driven by an increase in the licensed brand category, partially offset by a sales decline in our owned brands.

By geography, our U.S. wholesale sales decreased 11.7% to $44.1 million compared to $49.9 million last year.

Our international wholesale sales increased 9.3% to $66.9 million compared to $61.3 million in the prior year.

In constant dollars, international sales increased 10.7% with our strongest sales growth being in portions of Latin America, Europe and Asia.

Sales from the company's retail stores increased approximately $900,000 or 5.3% compared to last year.

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

Gross profit was $66.4 million or 51.6% of sales compared to $70.3 million or 54.9% of sales in the second quarter of last year.

The decrease in gross margin percentage was primarily driven by the unfavorable impact of channel and product mix as well as changes in foreign currency exchange rates, partially offset by a reduction of certain fixed costs as a result of our cost-savings initiatives.

Operating expenses were $53.5 million, declining 11.1% from last year's second quarter.

The decrease was primarily the result of the following: a $3.6 million decrease in other operating expenses as we continue to closely manage our expenses, combined with a full quarter’s savings from the cost-savings initiatives; and a $900,000 transactional gain in the current quarter as compared to $1.7 million transactional loss last year; as well as a $500,000 translational gain from the fluctuations of foreign currency exchange rates.

As a result of our lower operating expenses, partially offset by decreased gross profit, operating income increased $2.8 million to $12.9 million compared to $10.1 million in the year-ago period.

Income tax expense is $2.7 million or a 21.5% effective tax rate in the second quarter fiscal 2018 compared to an income tax expense of $3.4 million or a 35.1% effective tax rate reported in the second quarter of the prior year.

The effective tax rate for the second quarter of fiscal 2018 is lower than the expectation for the full fiscal year due to the timing of discrete items as well as changes in jurisdictional earnings.

The lower tax rate in the second quarter of fiscal 2018 favorably impacted EPS by approximately $0.06 per diluted share.

Net income in the second quarter was $9.9 million or $0.43 per diluted share versus net income of $6.3 million or $0.27 per diluted share in the year-ago period.

Now looking at our year-to-date results.

Sales for the 6-month period ended July 31, 2017, were $228 million, a decrease of 5.8% from fiscal 2017.

On a constant dollar basis, sales decreased 4.5%.

Gross profit was $116.9 million or 51.3% of sales as compared to $131.6 million or 54.3% of sales last year.

The decrease in the current year gross margin percent for the first 6 months was a result of reasons similar to the second quarter just discussed.

For the 6 months ended July 31, 2017, operating income was $15.6 million compared to $17.3 million in fiscal 2017.

Net income was $10.2 million or $0.44 per diluted share as compared to net income of $10.7 million or $0.46 per diluted share in the year-ago period.

Now turning to our balance sheet.

Cash at quarter end was $162.4 million versus $205.8 million at the end of the second quarter of last year, a very strong position seeing that we used cash held outside of the U.S. for the acquisition of the Olivia Burton brand in the quarter.

At the end the quarter, we had $30 million outstanding on our revolver, down $8 million from a year ago.

Accounts receivable increased $8.8 million as compared to the same period of last year.

Inventory was down approximately $9.1 million as compared to the same period of last year, in line with our expectations.

Year-to-date, we repurchased approximately $1.7 million of stock under our previous $50 million share repurchase program.

As announced this morning, our Board of Directors authorized a new $50 million, 36-month share repurchase program, primarily to offset the potential dilution of stock awards.

Capital expenditures for the first 6 months period were approximately $2 million, and depreciation and amortization expense were $6 million.

Now I would like to discuss our outlook for the current fiscal year.

Our outlook is based on the 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 referenced in our 10-K and 10-Q filings.

We're updating our outlook to include the addition of 7 months of the Olivia Burton brand.

Excluding transaction-related costs and the amortization of acquisition accounting adjustment, we expect to incur approximately $7 million of pretax costs in fiscal 2018.

This amount is comprised of approximately $4.5 million related to transactions costs and approximately $2.5 million of noncash amortization of acquisition accounting adjustment.

Also, as previously mentioned, our cost-savings initiatives are expected to result in annualized pretax cost-savings of approximately $15 million, predominantly from payroll reduction.

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 $6.4 million was reported in the first half of fiscal 2018.

In light of the foregoing, our fiscal 2018 -- for fiscal 2018, we expect our sales will be in a range of $530 million to $545 million.

We expect a shift of some of our quarterly sales flow into the fourth quarter from the third quarter as retailers increasingly prefer to reduce shipments closer to the holiday season.

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

We will continue to closely manage our expenses for the current year, and operating income is projected to be in a range of $53 million to $58 million.

Due to the projected mix of global pretax results, the effective tax rate is expected to be 32%.

Net income is expected to be in the range of approximately $35.5 million to $38.8 million.

We expect diluted earnings per share in fiscal 2018 to be in a range of approximately $1.50 to $1.65.

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 approximate $7 million to $10 million pretax charge in fiscal 2018 for the previously mentioned cost-savings initiatives as well as the estimated $7 million pretax charge connected to the acquisition of the Olivia Burton brand and the noncash amortization of the related acquisition accounting adjustment.

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

(Operator Instructions) And we'll go first to Ed Yruma from KeyBanc.

This is Matt on for Ed.

So last quarter, you guys mentioned that you expected sales -- sell-in and sell-through to come in line later in the year.

I'm just wondering how they aligned this quarter.

I think -- so people are still focused on reducing inventory levels, and we think that, that trend will continue throughout the year, especially in the U.S. with the challenging fashion watch market and retail marketplace.

So you're seeing that, I think, not only in our category, but in many categories as well for major retailers.

Okay.

And one follow-up.

So for orders from Movado Connect, are those mostly incremental?

Or are your wholesale customers now ordering fewer traditional watches to make room for Connect?

We believe in the case of Movado that it's truly incremental, and we're doing it in a very focused way and limited way.

So it will not have a huge availability for this year as well.

And we'll go next to Oliver Chen with Cowen and Company.

On the Olivia Burton acquisition, we're just curious about the context and timing and why now and why -- and how this also fits into your portfolio versus your other brands.

Also, on -- second question is on the realities and the challenges of the fashion watch section.

You're doing so much innovation yourself across a lot of your brands and products.

But what do you think is happening in this category?

And when will pressures abate?

If you have any sense of timing or key catalysts that you're watching because it seems like a difficult part of the store for multiple retailers that we cover.

Sure.

So let me answer the first part.

So we're really very excited to acquire the Olivia Burton brand.

It's a brand that's had very strong growth, only started a little over 5 years ago and had quickly become one of the top women's fashion brands in -- fashion watch brands in the U.K. and really reaching the type of customer that I think everybody aspires to today, a younger consumer but a well-rounded consumer base, and that we thought -- they begun initial expansion internationally, but we could provide the resources to really help that and make it a very important brand on a global basis.

It also gives us our first owned brand in the fashion watch category.

So we're very excited about that as well.

And it's a brand that has a very clear DNA and imaging and very British identity.

So we're really excited about all of the ingredients that come into that mix.

The direct-to-consumer business, that's an important part of the present and the future.

So all in all, a very good mix to -- and blend into our portfolio and our distribution.

On the second part, I think that the retail marketplace in the U.S. continues to be challenged.

And in addition to that, the fashion watch category continues to remain challenged.

We believe that innovation and value and great brands, in the end, will win with the consumers, especially in the traditional watch base.

We're big believers still in that category but understand the challenges that still remain ahead, and we don't see a quick recovery to that category in the United States.

As you can see, internationally, it's a different story, and that category continues to grow for us as a company.

So Efraim, why do you think there's a disparity between international versus domestic?

And what's your thought on what's happening in the industry and what needs to happen?

And if you have a time line when it will abate or will compares ease?

So I think the brand got very saturated in -- the category got saturated in the United States, and I think we're paying a little bit of price for that.

I also think that -- you read all these articles about how the U.S. is over-stored, and retail isn't exciting enough in U.S. And I think those are the equations that we have to address in this country.

And you're seeing that -- internationally, you see a different marketplace in terms of retail and the fashion watch category.

So I think there's a continued -- there's certainly a lot of room for improvement in the U.S. I think innovation will drive the category.

I think protection of brands will drive the category.

But at the same time, the promotion-ality of the marketplace does have its short-term effects on non-promotional items.

And Sallie, just a quick follow-up on gross margin trends.

Could you give us a little more detail on the channel and product mix interplay and what we should model going forward on a near- and long-term basis?

Sure, Oliver.

It's very similar to what we've been saying about the U.S. channel, in general.

As we've been talking about -- as you know in the past, we've mentioned that the Movado brand has our -- one of our strongest gross margin percentages in our portfolio, and that is a brand that has the heavy percentage of their sales in the U.S., in particular in the channel that we're saying is challenged.

So that's where the mix comes in, and that should -- we're saying that it's continuing throughout this year, which is why we got it to 52% for the year on balance.

And we'll take our last question from Frank Camma from Sidoti.

Just a couple questions, one question on Olivia Burton.

How much of their revenue today can you say is from direct-to-consumer?

I'm curious about that.

So I would say that between their own direct-to-consumer as well as e-commerce channels with their customers, it's probably over 50%.

And so we look at that as well.

They have a very good wholesale.

E-commerce distribution that's been growing -- not the distribution, but the sales have been growing very nicely.

So can you take similar learnings from what they -- I mean, that's pretty -- obviously, it's really strong, so from their business model and apply that maybe to your fashion brands to increase that shift?

I think it's -- we're growing our percentage of e-commerce across all of our segments, and that's one of the reasons that you see our European business has performed very well on an e-commerce basis as well.

So I think that -- and there's certainly an opportunity where, not only are we going to be able to add value to them in terms of giving them technology and giving them infrastructure to support their growth, we're also going to learn a lot about increased levels of innovation, speed and direct-to-consumer businesses.

So I think it's a great marriage for the company.

Great.

And does that help you with sort of your social media campaign that you've been working on to market the other brands as well, both U.S....

Well, I think -- so we will use social media, obviously, and digital marketing to build that brand on a global basis.

But we've seen some very good results in our digital marketing driving our movado.com sales.

If you go on there right now, there are some beautiful exclusives on movado.com in terms of our 70th anniversary watches as well as our new Movado Connect that we've been selling during the month of August exclusively on movado.com.

Okay.

And my last question is just -- as it relates to probably U.S. wholesale.

So I made the comment about the shift from -- of sales because of more just-in-time ordering.

Does that put any challenges on your supply chain and -- like as far as that type of ordering practicing?

And does it then, therefore, crimp gross margins, I'm wondering?

It doesn't really, because we forecast all of our sales.

So it's basically, you'll see some shift from the end of the third quarter into the beginning of the first quarter -- of the fourth quarter for holiday sales.

We still manage our business the exact same way.

And with our last question in the queue, we'll turn it back over to management for any additional or closing remarks.

Back to you.

I'd like to thank everybody for participating today, and we look forward to speaking to you during our third quarter conference call.

Thank you again.

Ladies and gentlemen, that does conclude our conference for today.

Thank you so much for your participation.

You may now disconnect.