Movado Group Inc (MOV) 2021 Q3 法說會逐字稿

Good day, everyone, and welcome to the Movado Group, Inc.'s Third Quarter 2021 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 this conference over to Ms. 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 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. With me today is Sallie DeMarsilis, our COO and CFO. I will share with you some highlights of the quarter as well as some of our initiatives for the important holiday selling season, and then Sallie will cover the details on our financial results and we would then be glad to answer any questions you might have.

We continue to operate amid a global pandemic, which is now experiencing a resurgence in Europe and the United States. Within this environment, we have prioritized the safety and well-being of our associates and customers around the world. Most of our teams have been working from home, and we have been able to keep our warehouses and stores operational with strict safety protocols. Within that context, we are very pleased with how our teams around the world have been operating and the results that we were able to deliver for the third quarter. We saw a sequential improvement in sales trends, which led to revenues of $169.9 million that exceeded our expectations. We delivered strong adjusted gross margin of 54.5%, a 100 basis point improvement from last year. Margin expansion and expense management gave us adjusted operating income of $25.1 million versus $24.3 million last year, even the decline in sales and while investing in the innovation on product front and marketing programs to support our brands. Adjusted earnings per share was $0.70 versus $0.82 last year on a higher tax rate during the third quarter of this year, which accounted for approximately $0.11 per share.

We also further strengthened our already strong balance sheet. At quarter end, net cash was $126 million, almost doubling over last year's $65.3 million, and inventory declined by 12%. And our expense and cash management discipline contributed to another quarter of positive operating cash flow. Operationally, we continue to make great progress, especially on the digital front, where we saw strength across our portfolio. During the quarter, we experienced an acceleration of our trends in our movado.com business, with sales more than doubling. The Movado brand also had strong e-commerce results across our brick-and-mortar partners and marketplaces, with sales in those channels growing over 150%.

In the U.K., we saw our OB, our oliviaburton.com business, deliver over 50% growth. In MVMT, we migrated the brand onto a Salesforce.com cloud solution to better align the brand with our other digital platforms during the quarter and gained significant synergies in our infrastructure. Over the final 6 weeks of the quarter, we fine-tuned the mvmt.com website in order to prepare for the holiday season. We are very pleased with the improved website performance and are already seeing it pay dividends, particularly on the international front.

A very important part of our direct-to-consumer business are our Movado company stores. While sales in our stores were down 11% for the quarter on lower traffic and reduced store hours, we saw conversion increase by 25%. Our stores provide an important place for our consumers to see and buy our products at an excellent value. In our stores, our focus has been on driving strong gross margins, which has led to a double-digit increase in profits. The brick-and-mortar department store portion of our wholesale business saw a significant improvement in our sales trends in stores, while experiencing a more than doubling of their online sales of our products.

In Europe, we saw improving sales trends in France and Germany, with more challenging results in the U.K. France and the U.K. have closed their retail for the month of November to try to flatten the curve, and we are hopeful that they will reopen in December, prior to the important holiday shopping season. E-commerce sales in Europe have been very strong, both through our brick-and-mortar partners as well as e-commerce marketplaces.

In China, we have also seen sales trends improve in brick-and-mortar and outstanding results from our Tmall sites for Movado and Coach. In the Middle East, we have also seen a shift to e-commerce sales in our key markets. Latin America has been more challenging as that region has suffered both economically and from COVID.

As we enter the holiday season, we are particularly excited by our new product introductions across our portfolio of brands. Let me share some highlights beginning with Movado. Earlier this month, we introduced our new Movado SE, a redesign of a Movado classic. Initial response has been excellent, with strong sell-through already happening on movado.com as well as our wholesale partners. We have a new television commercial launching this week nationally to support the new SE that we are really excited about. We began testing our own Movado jewelry last spring, and following a strong response, we have expanded the collection and supported it with additional digital marketing efforts. We have also introduced Movado men's jewelry and have begun to see strong sell-through there as well.

In MVMT, we are seeing a strong consumer response to our new product introductions as well as some of our well-known classics. Our new Legacy Slim, a soon to be classic, is already a bestseller for men. We are also excited to introduce our new Minimal Sport Automatic. At $350, this is our most expensive MVMT watch and is available as a limited addition of 500 units. For women, our International Waters dials have been selling particularly well across a number of our collections. This is a pale blue dial that has garnered a strong consumer response. MVMT has also introduced several new sunglasses and Everscroll Blue Light Glasses for the holiday season. Our theme for the fall is around gift-giving with new holiday gift guide as well as allowing consumers to create their own gift sets online. For the holiday season, MVMT's digital marketing programs will be supported in podcast and television as well.

In Olivia Burton, we are introducing the Ice Cream Watch collection for the holiday season and expanding our jewelry with the introduction of our new Snowflake collection.

As we look at our licensed brands, we are very pleased with the results that we've experienced during the third quarter, as we received an excellent reception across our brand portfolio to our new product introductions and have innovative marketing programs in place to support our businesses.

In Tommy Hilfiger, we are seeing strong sell-through from our bank collection introduced in the spring, and consumer response has also been strong to Mason, a new multifunction stainless steel bracelet collection with iconic Tommy red and white and blue accents. On the women's side of our holiday -- the women's side of our holiday campaign revolves around Blake, a gray multifunction watch with rose accent. We have also seen strong results for our Tommy Hilfiger jewelry, which will also be featured in our holiday campaign. Tommy Hilfiger will get strong digital support across numerous platforms around the world.

At Coach, we are excited by the Arden collection, which has quickly taken off with very strong sell-through in the U.S. and China. Arden is iconically Coach with a signature C crown protector. We will further develop this iconic element across the portfolio. In HUGO BOSS, we will have strong support behind our Skymaster Chronograph. In addition to our digital campaigns, we will be supporting HUGO BOSS with holiday television campaigns in Germany and France. And in Lacoste, our iconic L.12.12 continues to perform, and we are introducing our new Boston Sport Chronograph, a stainless steel watch with an iconic Lacoste green bezel.

As you can see, I am excited about how our team has executed around the world under very challenging circumstances. None of us has ever operated during a pandemic, and our people have truly stepped up in creative ways. We have learned to operate on a leaner cost structure while continuing to invest in our brands, our products and our businesses. We have further strengthened our balance sheet and made strong advances on our digital development, increasing our e-commerce penetration around the world. We have partnered with our wholesale customers to help drive their success since our mutual businesses have reopened.

As we look to the finish of the year, we're continuing to manage our expenses carefully. While we are optimistic about how our brands will perform for the holiday season, we are cognizant of the resurgence of the coronavirus around many parts of the world and recognize that this year's holiday shopping will be very different than any we have ever seen, with people shopping to a much greater extent online, with safety restrictions in place at brick-and-mortar stores and with a longer, more spread out shopping season. As we move forward, we will continue to put the safety of our employees, customers and business first.

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

Thank you, Efraim, and good morning, everyone. For today's call, I will address the key highlights of our third quarter and year-to-date period of fiscal 2021, and then I will provide an update on our financial position.

My comments today will focus on adjusted results. Please refer to the description of all of the special items included in our results for the third quarter and year-to-date period of fiscal 2021 and fiscal 2020 and our press release issued earlier this morning. This all includes a reconciliation table of GAAP and non-GAAP measures.

Our third quarter performance improved sequentially from the second quarter and was highlighted by continued strength in e-commerce sales, expansion in gross margin and the disciplined management of expenses. We ended the quarter with a strong balance sheet and made progress on our strategic initiatives while navigating the significant impact of COVID-19 on our own and our retail partner store-based sales.

For the third quarter of fiscal 2021, sales were $169.9 million as compared to $205.6 million last year, driven by the impact of the COVID-19 pandemic. By the end of the second quarter and throughout the third quarter, all of our retail stores and the majority of the stores of our wholesale customers had reopened. However, these stores have been impacted by a decrease in retail traffic and reduced hours at many locations. During this time, sales trends improved as the COVID-19 restrictions began easing in various stages across the world, enabling some return of foot traffic in the company's retail stores and those of its wholesale partners -- wholesale customers. However, due to the restrictions affecting brick-and-mortar retail, sales declined across all segments. Owned brands, licensed brands and company stores were down in both our U.S. and international businesses, yet we did have a strong e-commerce sales, both on our owned websites and those of third-party marketplaces.

Gross profit as a percent of sales was 54.5% compared to 53.5% in the third quarter of last year. The increase in gross margin was primarily driven by the favorable change in foreign currency exchange rates, favorable channel and product mix and savings on fixed costs, albeit on lower sales. Operating expenses were $67.4 million as compared to $85.8 million over the same period of last year. The decrease was driven by actions taken to minimize all nonessential operating costs, including rightsizing marketing expenses to the lower revenue base while maintaining a focus on digital and e-commerce customer acquisitions and a decrease in overall payroll-related expenses.

Strong gross margins and controlled spending in the third quarter drove an increase in operating income to $25.1 million compared to $24.3 million in the third quarter of fiscal 2020. We recorded an income tax expense of $8 million in the third quarter of fiscal 2021 as compared to an income tax expense of $5.3 million in the third quarter of fiscal 2020. Net income in the third quarter was $16.4 million or $0.70 per diluted share as compared to net income of $19 million or $0.82 per diluted share in the year ago period.

Now turning to our year-to-date results. Sales for the 9-month period ended October 31, 2020, were $328.1 million as compared to $510 million last year. The decrease in net sales was primarily attributable to the ongoing impact of the COVID-19 pandemic. Gross profit was $173.3 million or 52.8% of sales as compared to $274.4 million or 53.8% of sales in the last year's 9-month period. The decrease in gross margin rate for the first 9 months was due to the unfavorable channel and product mix, partially offset by favorable changes in foreign currency exchange rates. For the 9 months ended October 31, 2020, operating income was $6.9 million compared to operating income of $41.7 million in fiscal 2020. Net income was $1.7 million or $0.07 per diluted share as compared to net income of $33 million or $1.41 per diluted share in the year ago period.

Now turning to our balance sheet. In addition to minimizing nonessential expenses, maintaining a strong balance sheet has been a top priority. We are closely managing inventories, and we have reduced capital expenditures, generally allowing only projects providing a relatively near-term return on investment, such as certain digital initiatives. Cash at the end of the third quarter was $163.2 million as compared to $116 million in the prior year period, with a decrease in debt of $13.4 million. Accounts receivable was $103.5 million, down $32.8 million from the same period of last year, primarily due to the decrease in sales. Inventory at the end of the quarter was $176.8 million, down 12.1% as compared to $201.2 million last year. This is due to the actions taken to closely manage our working capital. In fact, our operating cash flow improved over $37 million in the first 9 months of this fiscal year as compared to the same period of last year. Capital expenditures for the 9 months were $2.4 million and are lower than the first 9 months of last year by $7.6 million as a result of the disciplined actions just discussed. Depreciation and amortization expense was $10.5 million, which included $2.6 million related to the amortization of the remaining acquired intangible assets of Olivia Burton and MVMT.

In terms of outlook, we are not providing an outlook today given the dynamic nature of the COVID-19 pandemic. As Efraim mentioned, we are pleased with the progress we have made in this challenging environment and believe we are taking the right actions to drive our business. However, we do remain cautious due to the continued uncertainty around the duration of the COVID pandemic and the resurgence in Europe and the United States, our 2 biggest markets.

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

(Operator Instructions) Our first question comes from the line of Oliver Chen with Cowen.

Regarding the revenues and geographic exposure, which regions were you most impressed by and which regions would you say have more risk going forward? Also, gross margins were encouraging, just what underpinned the performance there? And which factors may continue through the next quarters?

So I'll start with that and then turn it over to Sallie and see if she has anything to add. In terms of performance, we're really pleased with our licensed brand performance in Europe. And despite still a resurgence of COVID occurring at the end of the third quarter, we did see increased sell-through in many markets in Europe, particularly France and Germany, which are 2 of our biggest markets now in Europe, so I would say that was probably the strength geographically. On the digital front, we saw a lot of strength in the U.S., especially in our movado.com site, and that's becoming a really important part of our business, I believe, as we move forward, and that also contributed to a strengthening of our overall gross margin as well as the performance of our outlet stores that really grew gross margin and profitability during the quarter. So I'll see if Sallie has something to add.

So I absolutely concur with that Efraim, thank you. The growth in gross margin, as we talked about, sales mix was a big component of that and having a larger direct-to-consumer business, and the improvement of our gross margin in the outlet definitely contributed to that.

Okay in...

And then I think to follow-up, Oliver, fourth quarter, we have generally a larger direct-to-consumer business in the fourth quarter anyway as gift-giving is taking place. Now we do know that it started earlier this year, but we would continue with that in the fourth quarter, which is generally a stronger gross margin quarter for us.

Okay. And e-commerce is a big topic, and you mentioned it a few times in the prepared remarks. So how should we think about how big that business will get over time? And also the margin implications, I know you have e-commerce wholesale partners and your own e-commerce as well.

So I think the combined combination of our own websites and our customers' websites is a really powerful combination. And we think that ultimately, that will be a much more significant part of our business and for our customers as well, obviously, and then that will be, for us, should be margin accretive also, both on a gross margin basis, but also on an operating basis. We're really pleased with how our websites are performing, and I think there's still a lot of opportunity ahead in the next number of years within that segment.

Okay. And some of your comments were also encouraging with traffic, less negative than we would have thought and what we're seeing at some others. So has traffic continue to be fairly volatile? And do you expect it to continue along the trends you're seeing now? And also, Efraim, this holiday season is unlike any other. The promotion starting earlier, what's your interpretation of how it's proceeded relative to all the dynamics that are happening with the crisis and other competitors?

Yes. So I think on the traffic front, I think you're still seeing traffic that's down significantly from last year. What you're getting is the people who are going to stores have a much higher intention of purchasing, I think they're not going as much to browse. And we're seeing better than expected, I would say, demand for our products, so we're pleased with that, and the conversion has been really good. And so we're really pleased with that. I think the unknown this holiday season is the fact that people will be shopping for a longer period of time. I don't think you're going to have the Black Fridays in the department store or brick-and-mortar channel that you have had in the past. And so you'll see that go on, it will just be very different. Some of it probably came forward, and then I think some of it will actually go later as, at the end, people will be in stores. People will choose second-day shipping options or next-day shipping options. And in some cases, we'll add those to our -- as our products get more expensive, we end up giving that anyway. So I think it's going to be very, very different. And obviously, there's a resurgence right now, but it does not seem to have impacted traffic dramatically from where it was, which is still a negative number.

Okay. And our last question, on your wholesale partners, particularly in the United States, how do you think about sell-ins versus sellouts as well as your inventory position and freshness and flowing that in the context of some of your earlier comments? Your inventory seem very clean, but how are you generating the right level of newness and flow?

Yes. So we -- I'm really pleased with how our teams have executed on that front in terms of delivering innovation and at the same time, making a meaningful impact to our return on our inventory. And we think our retail partners with us, as a whole, especially in the department store channel, are doing better than expected and especially even on the brick-and-mortar front and on the digital front just becoming a really significant part of their overall business. So -- and our inventories are, we think, in a very good shape, a lot of newness now in stores and really ready for this holiday season. And as I said earlier, if you look at our Movado SE, which we think is going to be a bestseller really quickly, it already is the bestseller in less than a month out there, so we just see a lot of opportunity out there as we continue to deliver on our strategies.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Efraim Grinberg for closing remarks.

I would like to thank all of you for participating on today's call, and wish everybody a happy and obviously a very unusual Thanksgiving, and are hoping that next year, our Thanksgivings can return to normal. Again, so thank you very much, and we look forward to talking to you again next year.

Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.