Movado Group Inc (MOV) 2018 Q3 法說會逐字稿

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

Fiscal Third Quarter 2018 Earnings 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.

Good morning, and welcome to Movado Group's third quarter conference call.

With me today is Sallie DeMarsilis, our Chief Financial Officer.

For this morning's call, I will begin with some brief remarks and turn the call over to Sallie to review our financial results and outlook.

Then we will take your questions.

I am delighted to share with you another solid quarter of performance for Movado Group, that included strong progress against key growth initiatives.

For the third quarter, sales grew 6% to $190.7 million.

Adjusted operating profit grew by 8% to $33.6 million, and adjusted earnings per share grew by over 14% to $1.04.

We also delivered adjusted gross margin of 54.9% for the quarter, adhering to our strategy of reducing costs, while limiting off-price sales.

In an effort to ensure we are directing our resources towards the areas of the business that we expect to drive sales and profit growth, during the quarter made the decision to discontinue our participation in the annual Baselworld fair.

This resulted in a $6.3 million pretax charge, which is excluded from our adjusted result.

I will spend some more time on the rationale behind this decision in a few minutes.

As it relates to our key strategies, the quarter highlights included: market share gains for the Movado brand, strength in international markets, a full quarter of a new brand added to our family with the acquisition of Olivia Burton, and the continued disciplined management of expenses and a strong balance sheet.

On the top line, we experienced growth across international markets and saw increases in license brand sales, online sales and a strong contribution from our outlet division.

The top line also benefited from our newly acquired Olivia Burton brand.

The increases were somewhat offset by a challenging retail market in the United States.

Overall, we are very pleased with our results.

We attribute the focus of our teams around the world on executing our strategies.

The strength of our business year-to-date has enabled us to increase our outlook for the year.

Turning to our brands, I would like to begin with Movado.

The United States retail market continues to remain challenging, given the ongoing reduction in traffic to brick-and-mortar stores.

Given this backdrop, in the U.S., Movado experienced sales decline of low double digits with sell-through exceeding sell-in.

A testament to the strength of Movado is that the brand continued to gain market share in the $300 to $3,000 price category.

Also positive is that Movado saw improvement in its sales trend in the department and specialty store channels during the quarter.

While still small, our movado.com business doubled for the quarter as a result of our increased digital marketing efforts and strong new product introductions.

We have seen our new product introductions resonate extremely well with consumers.

During the third quarter, we introduced our Museum Bauhaus collection, commemorating the Movado Museum Bauhaus 70th anniversary.

The collection, exclusively available on movado.com, has performed extremely well.

We also began the introduction of our first watch in collaboration with Google's Android Wear platform, which features the Qualcomm Snapdragon chip, and has seen excellent sell-through already.

For the holiday season, we'll be running the Movado Connect as featured watch in our holiday television campaign.

We've also seen a strong consumer response to our new Movado Bold introductions and the expansion of our Movado Heritage collection.

For the quarter, our licensed brands grew by 9.4%, with strong growth in Tommy Hilfiger, HUGO BOSS and Lacoste.

These performances were driven in international markets, particularly, Europe.

While the U.S. remained challenging for fashion watch brands.

In Tommy Hilfiger, we continued our collaboration with the social media superstar Gigi Hadid, and saw an excellent response to our Chelsea collection, which is featured in our Tommy ads.

In HUGO BOSS, we have amplified our digital initiatives on the brand and are seeing strong sell-through results in Europe and improving trends in the United States.

We have seen a very strong response to our vintage classic trends in HUGO BOSS, led by our companion collection.

In Coach, we have seen strong sell-through in our embellished Delancey charm collections, which features charm embellished styles.

We're also seeing strong demand for our Coach watches featuring VENUS characters as part of the dial design.

We're pleased to see that Lacoste's focus on the leadership position in the sportswear market has strongly benefited our trends in the Lacoste brand, with strong sell-through seen in our LACOSTE.

12.12 collection and our ultra slim Moon family.

In Ferrari, we are seeing a strong response to our Pilota family, a vintage inspired collection of watches, and we have generated a lot of excitement in our key markets with the introduction of father-son gift set for the holidays.

This will be the first holiday season for Rebecca Minkoff and Uri Minkoff watches, and we are looking forward to driving holiday sales with a strong social media advertising campaign in support of rebeccaminkoff.com at our exclusive wholesale partner Nordstrums.

We could not be happier with our acquisition of Olivia Burton, which we completed in July.

It has met our expectations, and we believe it will have a great future as part of the Movado Group umbrella.

With uniquely designed innovative product, a limited distribution footprint and accessible price points, we have begun to see strong response from women around the world.

We're excited to launch a U.S-based oliviaburton.com website in the middle of October, on our salesforce.com platform, and we are already seeing very strong results in the U.S. to go along with continued double-digit growth of Olivia Burton's U.K. website.

We will be converting the U.K. site into the salesforce platform in the spring.

And in addition to the launch of a global -- of oliviaburton.com website.

Our teams around the world are making very strong progress in collaborating with the Olivia Burton leadership team, as we integrate them into our SAP ERP systems.

We just launched first-ever Olivia Burton advertising campaign in the U.K. and in the U.S., and we are very excited about the upcoming holiday selling season.

During the quarter, we saw very strong results in our outlet division, which grew comps by 11.2%, affirming strong demand for our products, even in the challenged outlet market.

At a time when retail is changing very quickly on a global basis, and with the growth of e-commerce, we felt that we could no longer justify our substantial investment in Baselworld, which runs the company approximately $10 million a year.

As such, we have taken a charge, which accounts the write-off of our exhibition booths as well as obligations associated with our decision not to participate in Baselworld 2018.

We'll reinvest the savings to host our retail partners and distributors in a more intimate setting at a substantially lower cost as well as build a digital center of excellence and execute consumer facing initiatives to support our brands around the world.

As we began the year, we shared our strategy with you, a very strong expense control discipline, reinvesting resources into an ever-expanding digital marketplace and closely managing our distribution in a challenging U.S. retail market.

Our teams have done an excellent job in executing against these objectives and beginning to lay a foundation to enhance future growth.

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 a review of our third 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 describes these items and includes a table of GAAP and non-GAAP measures.

Movado Group acquired Olivia Burton on July 3, 2017.

Included in the year-to-date consolidated results for fiscal 2018 was $5.9 million of pretax charges primarily connected to the transaction of which $1.4 million was recorded in the third quarter, approximately $850,000 of the $5.9 million impacted gross margins and the remainder impacted operating expenses.

Aftertax, the charge related to the acquisition equates to $5.5 million or $0.24 per diluted share for the year-to-date period.

Our GAAP results for the first 9 months of fiscal 2018, include a $13.4 million pretax charge, which equates to $10.3 million aftertax or $0.44 per diluted share in connection with our cost savings initiative.

This amount was higher than we previously discussed as we have now decided to no longer exhibit at the Baselworld fair, including the March 2018 event.

A $7 million pretax charge was taken in the third quarter, predominantly due to the Basel decision as well as $700,000 related to other initiatives which were put into motion earlier this year.

Breaking the charge down for the 9 months of fiscal 2018, gross margin was impacted by approximately $1.4 million and operating expenses were impacted by $12 million.

Our GAAP results for the third quarter of fiscal 2017, included charge to nonoperating expense of $1.3 million, which equates to approximately $900,000 aftertax 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 9 months of fiscal 2017 also include a $1.8 million pretax charge, which equates to $1.1 million aftertax or $0.05 per diluted share, in connection with the vesting of stock awards and certain other compensations 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 third quarter of fiscal 2018, sales were $190.7 million, an increase in the same period of the prior year of approximately $10.9 million or 6%.

The fiscal 2018 results include the addition of Olivia Burton for all 3 months of the quarter.

This brand is performing in line with the company's expectations.

The increase in overall sales was driven by our wholesale business as well as our retail business.

Sales were down 15.9% in the U.S. and in constant dollars increased 33.3% internationally.

Sales in our wholesale segment were $172.3 million as compared to sales of $164.1 million for the same period of last year.

In constant dollars, wholesale sales increased 4.3% driven by a sales increase in both our licensed brands and owned brands category.

By geography the U.S. wholesale business decreased 21.9% to $67.3 million as compared to $86.1 million last year.

The international wholesale business increased 34.7% to $105 million compared to $78 million in the prior year.

In constant dollars, international sales increased 33.3%, with our strongest sales growth being in Europe, Latin America, Asia and the Middle East.

Sales from the company's retail business increased approximately $2.7 million or 16.9% compared to last year.

At the end of the quarter, we operated 41 outlet locations as compared to 40 locations last year.

Gross profit was $104.7 million or 54.9% of sales compared to $98.6 million or 54.8% of sales in the third quarter of last year.

The increase in gross margin percent was primarily driven by leverage on certain fixed costs, as a result of our cost savings initiatives and increased sales and the favorable change in foreign currency exchange rates.

These were partially offset by the unfavorable impact of channel and product mix.

Operating expenses were $71.1 million, increasing 5.3% 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.

The increase in operating expenses was primarily the result of the following: higher performance based compensation of $1.5 million; higher distribution costs of $1.3 million; higher marketing expense of $1.2 million; and higher other selling and operating costs.

These were offset by a decrease in the overall compensation and benefit expenses, primarily related to the company's cost-saving initiatives.

As a result of our higher sales, partially offset by an increase in operating expenses, operating income increased $2.5 million to $33.6 million compared to $31.1 million in the year-ago period.

Income tax expense of $9 million or 27.1% effective tax rate in the third quarter of fiscal 2018, compares to an income tax expense of $9.7 million or 31.5% effective tax rate recorded in the third quarter of the prior year.

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

Net income in the third quarter was $24.3 million or $1.04 per diluted share, versus net income of $21.1 million or $0.91 per diluted share in the year-ago period.

The lower tax rate in the third quarter of fiscal 2018 favorably impacted EPS by [$0.02] per diluted share.

Looking at the 9-month period ended October 31, 2017, sales were $418.7 million, a decrease of 0.8% from fiscal 2017.

On a constant dollar basis, sales decreased 0.3%.

Gross profit was $221.6 million or 52.9% of sales as compared to $230.1 million or 54.5% of sales last year.

The decrease in gross margin percent for the year-to-date period was primarily driven by the unfavorable impact of channel and product mix, the only unfavorable change in foreign currency exchange rates, these were partially offset by leverage on certain fixed costs as a result of our cost savings initiatives.

For the 9 months ended October 31, 2017, operating income was $49.2 million compared to $48.3 million in fiscal 2017.

Net income was $34.5 million or $1.48 per diluted share as compared to net income of $31.8 million or $1.37 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 2018 was $155.5 million versus $199.8 million at the end of the same period of fiscal 2017.

As a reminder, we used cash held outside of the U.S. for the acquisition of Olivia Burton during the second quarter.

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

Accounts receivables were up $2.9 million as compared to the same period of last year, while sales were up $10.9 million or 6% for the quarter, and we acquired Olivia Burton.

Inventory was relatively flat at $169.9 million as compared to the same period of last year.

Year-to-date, we repurchased approximately $3 million of stock under our current and prior $50 million share repurchase program, primarily to offset the potential dilution from stock awards.

Capital expenditures for the (inaudible) period were $3.6 million.

Depreciation and amortization expense was $9.8 million, which included $950,000 related to the amortization of acquired intangible assets of Olivia Burton.

Now I'd like to discuss our updated outlook for the current fiscal year.

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

Our results may be materially affected by many factors, such as changes in global economic conditions and customer spending, fluctuation in foreign currency exchange rate and various other causes referenced in our 10-K and 10-Q filing.

For fiscal 2018, we are updating our outlook.

We now expect sales to be in a range of $550 million to $555 million.

We expect our gross margin percentage to continue to be unfavorably impacted by channel and product mix, but expected to be slightly better than previously forecasted.

Our updated outlook estimates gross margin to be approximately 52.5% for this fiscal year.

We have a track record of disciplined spending of operating expenses.

And as Efraim just mentioned, this past year we shared with you our strategy to reinvest resources into the digital area, while remaining diligent on our overall spend.

This remains our underlying approach for the rest of the current year.

Operating income is projected to be in a range of $58 million to $60 million.

Due to the projected mix of global pretax results, the effective tax rate is now expected to be 30%.

Net income is expected to be in a range of approximately $39.7 million to $41 million.

We expect diluted earnings per share in fiscal 2018 to be in a range of approximately $1.70 to $1.75.

The lower tax rate now expected for fiscal 2018, favorably impacted EPS by $0.05 per diluted share.

Capital expenditures for fiscal 2018 are now estimated to be approximately $6 million.

The outlook we have provided assumes no unusual items for fiscal 2018.

And therefore, excludes the approximate $13.4 million pretax charge in fiscal 2018 for the previously mentioned cost savings initiatives as well as the estimated $7 million pretax charge impacted to the acquisition of Olivia Burton and non-GAAP amortization of the related acquisitions accounting adjustments.

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

(Operator Instructions) We'll go first to Oliver Chen with Cowen.

Just curious about the online sales, the tremendous growth there, relative to wholesale, and how are you feeling about the wholesale points of distribution right now?

A related question on wholesale is, is there a risk factor in discontinuing Baselworld as you think about your wholesale partners and making sure that you maintain the revenue growth that you want even when you discontinue that relationship?

Sure.

So -- Oliver, let me start with the second one part first.

We evaluated the Baselworld decision very carefully and we felt that in the changing environment and with people reigning in travel budgets around the world, and as the digital landscape grew, that it was no longer really a viable option for us at the expense that we were investing there.

And felt that we could reinvest that really into consumer facing initiatives, and we felt that the potential loss of revenue would be minimal from that exit.

We're also going to have, on a smaller scale, an alternative venue specifically for our customers.

And that's an experience that we have been doing with distributor conferences for our businesses around the world previously.

So we've seen a very good experience in those type of venues.

On the second part, your -- on the first part of your question, which is about digital growth, it was one of our priorities for the year.

We're really excited about the results that we're seeing across our brands in digital growth.

And as we invest in digital marketing efforts on both in our own website as well as our retail partner's websites, and that is somewhat offsetting some of the traffic lost to retail partners around the world.

So I think that, that certainly has a big future for us and its one reason that we're going to make substantial investment continuing into the future on building a digital center of excellence, and that we think will add a significant return to the company for the future.

And Efraim, what about the wholesale channel going forward, and what should we look for as key catalyst and ways to -- that you can continue to gain share and then grow over time?

Well, we've seen -- so the wholesale channel in the U.S. is more challenged than in the rest of the world, and that's probably because we have more retail stores than the rest of the world.

And -- so I think, at a certain time (inaudible) it will reach a point of stability.

We have seen in our specialty store channels and department store channels now beginning to grow in our -- in both some of our fashion brands and certainly in Movado.

So -- and we continue to gain market share in both fashion brands and Movado, and so we still think there's a future in department stores, there's a future in the chain jewelry store business.

I think it'll just -- it'll probably just take several more quarters until it stabilizes in the U.S. But we've chosen to be proactive in how we manage our business, and I think you can see the results accordingly.

And last question, Sallie, on the gross margin prospects, will there be a time when the comparison eases, so that some of the channel product mix headwinds abate later?

Would love your thoughts.

Yes, sure.

Few things on gross margin, Oliver.

First of all, there is some seasonality to our gross margin.

So it's always helpful to look year-over-year versus maybe quarter-to-quarter.

This year, obviously, the impact of the U.S. channels, which is one of our more profitable channels, impacts gross margin a lot, and I kind of explained that, that's part of our mix challenge.

So as that stabilizes or as we replace it with other profitable business, then it will be an easier comparison.

But unfortunately this year, it was -- is impacted by our strongest brands and our strongest channels being challenged.

We'll take our next question from Eddy Yruma with KeyBanc Capital Markets.

This is Matt on for Ed.

So we've noticed some pretty positive switch -- Swiss watch export data recently, especially, at the higher end.

Was curious how your different price tiers are performing, and can you also comment on what you believe is driving the stabilization of the watch industry as a whole?

I think the Swiss data had a strong month off of a week comp from last year, because I saw that this morning as well.

And the U.S. was still challenged as a market in those numbers.

We're seeing that through innovation and great product design and creating demand for our brands and keeping our distribution clean and limited that, that's adding to the rewards, and really is what -- is contributing to growth in our brands and in specific markets.

And so I think it's nothing outrageous, it's really sticking to the basics of the fundamentals of running a good business.

I also wanted to ask about your advertising strategy.

So can you elaborate a little more about how exactly that has changed, maybe versus this time last year?

And if you're able to quantify the impact of those changes on demand?

And I'm asking specifically about like, social media and digital versus more traditional forms?

Right.

So we've shifted, as we said earlier, in -- as we looked at this year, we shifted approximately 50% of our investment into digital this year.

And we're seeing significant rewards from that, driving younger consumers to our websites and driving demand across the board.

And we're not only seeing that in the U.S, we're able to see that around the world, both in Movado, our own brand, but our fashion watch brands, and now very excitingly, in Olivia Burton.

So -- that we got into a great launch and -- of oliviaburton.com in the U.S. We also have a very strong business with Nordstrums in the U.S., and we're excited about the prospects for Olivia Burton around the world.

Okay.

And last one for me.

How do you believe inventory is in the channel?

And do you have an idea on the composition of inventory between some of your newer products, some legacy products and wearables?

Sure.

So again, wearables is a small piece of our business, and so there's very little inventory in the channel of that segment.

And in terms of -- we believe inventories are at a healthy level, in some cases, actually a lower level probably than they should be, as retailers are really focused on maintaining lower inventory levels.

And our inventory, in our channels, is very, very healthy in terms of the quality of that inventory.

Okay, one of the things that we've tried to do is really maintain a business where promotionality is really not needed in our brands.

(Operator Instructions) We'll go next to Frank Camma with Sidoti.

Couple of quick questions here.

Can you breakout the Olivia Burton revenue just so we can get an apples-to-apples here, year-over-year?

We're not really breaking that out.

It did contribute to our growth for the quarter, and it's basically on plan for we had expected it to duplicate, raise guidance at the end of the second quarter, when we announced the acquisition of Olivia Burton at that time.

So we did increase sales I think by approximately...

$15 million?

$15 million.

By approximately $15 million.

Right.

Okay, that's fine.

But I guess, asked a different way, in the quarter most of Olivia's revenue was international, am I correct about that?

Yes, that is correct.

Okay, but (inaudible) we had growth excluding -- internationally we had growth (inaudible)

Yes, now I get it.

I was just trying to take a look...

Yes, if you noticed we highlighted some of our other well-performing brands with HUGO and Tommy and Lacoste.

Those are all so fashionably(inaudible) exquisite.

Yes, correct.

But those were the licensed brands.

You called those out specifically as licensed brands being up 9%.

So Olivia Burton, obviously, not in that...

Correct.

Right, okay.

Good.

Could you just give us -- you said Movado brand itself had made further strides in market share, I think about $300 to $3,000 range.

In the past I think you've called out of market share about 22%.

Is that about right, still?

A little higher maybe?

It's probably a little bit higher now, since -- but just -- I don't have the exact numbers, okay.

But we have certainly seen the market share continue to grow.

But at the level that we're at, it grows in small increments.

So in a declining market place, Movado declined less, and the number of channels actually increased for the quarter with some nice increases.

Got it.

And my last question is just given what's going on, I know you talked about it a lot, but is it possible to quantify what type of investment it takes, maybe on the U.S. side of the business, to really beef up your direct-to-consumer, your digital presence?

Or is there a lot of offset in other places, if you understand what I'm saying?

Sort of, to switch your business over.

Sure.

So in terms of media that's probably somewhat offset in terms of being able to move media budgets around, in terms of building a digital infrastructure.

That's one of the areas that will use some of the savings from Basel to reinvest in next year.

So although, Basel cost us $10 million a year, we would expect to reinvest substantially all of that into customer facing marketing initiatives, including building a digital center of excellence.

So we think that, that will help deliver accelerated growth for the company in the future.

We have no further questions.

I'd like to turn it back to management for closing remarks.

Okay.

Thank you very much for participating in our conference call today.

We look forward to joining with you again after our year-end.

And I would like to wish all of you happy Thanksgiving, and happy holidays to all.

Thank you.

That concludes today's conference.

We thank you for your participation.

You may now disconnect.