Earnings Call Transcript - MOV Q1 2022

Operator, Operator

Good day, everyone, and welcome to the Movado Group, Inc. First Quarter 2022 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.

Rachel Schacter, Moderator

Thank you. Good morning, everyone. With me on the call is Efraim Grinberg, Chairman and Chief Executive Officer; and Sallie DeMarsilis, Executive Vice President, Chief Operating Officer and 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.

Efraim Grinberg, Chairman & CEO

Thank you, Rachel. Good morning, and welcome to Movado Group's first quarter conference call. This morning, I will review the highlights of the quarter and our strategic initiatives and then Sallie DeMarsilis will cover our financial results in greater detail. We will then be glad to answer any questions you might have. We had a very strong start to the year and are pleased with our financial and operational results. During the first quarter, we anniversary at the height of the pandemic closures. And although we still saw significant closures during the quarter in Europe and Latin America, we delivered a 93.5% increase in sales to $134.8 million. Our adjusted gross margin percentage expanded 420 basis points to 55% versus 50.8% last year. And we delivered $14.1 million in adjusted operating profit versus an adjusted operating loss of $17.6 million last year. Our operating income represented a record for the first quarter of a year. Our balance sheet continued to strengthen with net cash of $177 million versus net cash of $105 million last year. Our US sales exceeded our plan, driven by strengthened Movado e-commerce and wholesale business, our Coach brand and our Movado company stores, with all three areas exceeding our pre-pandemic sales levels. Our US business increased to 131% versus last year and 10.8% versus the first quarter of fiscal 2020 or calendar 2019. Our international business grew 67.5% despite significant continued closures in Europe and Latin America. We are hopeful that these markets will continue to reopen during the second quarter as vaccinations begin to accelerate and case counts and hospitalizations drop. As a company we continue to focus on our strategy of expanding our digital footprint on our website, our customers’ website and our marketing initiatives, and driving product innovation while keeping a stringent focus on our expenses. As we look at our brands, we are very pleased with the performance of Movado. Over the last 18 months, we focused on delivering an increasingly aspirational message to our consumers, driving innovation in our products and drawing new customers to the brand. This strategy has proven to be effective with the success of our new Movado SE introduced last fall and our most recent introduction in our BOLD collection, Verso. During the quarter, we also introduced a collaboration with the world-renowned photographer, Alexi Lubomirski, a limited edition highlighting Alexi's doorways to veganism, featuring our first vegan straps that received an excellent reception from consumers. We also saw a strong and growing demand from Movado Jewelry, which is only available on movado.com. During the first half of this year, we're supporting the Movado brand with cable television advertising, as well as social and digital marketing efforts. We were extremely pleased to see continued robust performance on our movado.com website, which grew by over 250% during the quarter, demonstrating that our focus on digital is continuing to deliver results. Our Movado wholesale results continue to be strong with our department store channel showing double-digit increases over pre-pandemic results for the quarter and showing strength in both digital and brick-and-mortar locations. We are also beginning to see improvements in our chain jeweler channels. During the second quarter, we are launching a new SE Automatic that will be supported with a comprehensive digital marketing program that we are excited about. In our licensed brands, we were pleased with our performance exceeding our plan. With sales growing 89.5% compared to last year and off 7.1% to pre-pandemic levels despite the continued closure of some of our most important markets. The strong performance was driven by our e-commerce channels around the world and the reopening in our US markets. In Tommy Hilfiger, our performance was driven by our innovation in watches and jewelry, both Parker and Baker featuring iconic Tommy Blue dials and our iconic ID bracelets performed extremely well. We are also excited to introduce a collaboration this spring between Tommy Jeans and the Space Jam movie franchise. In Coach, we saw strong results in both the US and in China, driven by new products like Preston and Harrison. We're supporting Coach with a strong social media marketing campaign, particularly in China with compelling key opinion leaders. HUGO BOSS performed well in the US department store channel and in our e-commerce partners in Europe. Our new pilot edition chronograph featuring a black style and brown strap performed very well. We are also expanding our HUGO BOSS jewelry collection. Lacoste had a strong quarter in our US department store channel and in our key European markets through our e-commerce partners. We introduced a new iconic Lacoste 12.12, featuring multi-colored crocodiles that performed very well. In Movement, we continue to focus on fine-tuning our e-commerce business while driving the efficiency of our brand building and marketing campaign. During the first quarter, we introduced a new white ceramic family, which quickly sold out of our best sellers. With these models now replenished, we are running a new television campaign on our white ceramics for Father's Day and graduation that we are very excited about. While Olivia Burton's home market of the UK was closed for much of the quarter, our e-commerce sales drove performance. We're getting a strong reception around the world to our new tea party collection of watches, and we continue to see jewelry grow within our assortment. Our Movado company stores are performing extremely well, with our sales growing 190% over last year and 23% over our pre-pandemic results. Our gross margin percentage for our company stores is trending substantially higher than our pre-pandemic numbers, showing that there is strong demand for our products. At Movado Group, our role as a corporate citizen has always been very important to us. Our company and our brand's contribution to our society, how we take care of our environment and the importance of diversity and inclusion within our workforce have always been high priorities for us. This year, we're very proud to issue our first ESG report, which can be found on our corporate website, movadogroup.com. In this report, we are establishing baselines from which we can measure our improvement as we strive to be better in these areas. In summary, we are extremely pleased with the results that the team has progressively delivered on as we have navigated our way through a global pandemic. We are not taking anything for granted and continue to remain steadfast in managing our company in an environment that will continue to contain a level of uncertainty. Even with one of our largest markets, Europe, closed for much of the first quarter, we were still able to deliver record operating results. While it's difficult to predict what will happen as we reach improving levels of normalcy from the pandemic, we are extremely focused on managing what we can control and trying to do it as close to the time of execution as possible. The investments that we have made across our e-commerce infrastructure and digital capabilities are paying off. We will continue to focus on driving innovation and excellent design in our products and brands, which has been an important element to the results that we've been able to deliver. I would now like to turn the call over to Sallie.

Sallie DeMarsilis, Executive VP & CFO

Thank you, Efraim, and good morning, everyone. For today's call, I will review our financial results for the first quarter of fiscal 2022 and then I will provide an update on our outlook for the year. 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 first quarter of fiscal 2022 and fiscal 2021 in our press release issued earlier today, which also includes a table for GAAP and non-GAAP measures. Our performance for the first quarter of this fiscal year exceeded our expectations and resulted in record operating profit. For the first quarter of fiscal 2022, sales were $134.8 million as compared to $69.7 million last year, an increase of 93.5%. Strong consumer response to our brands and offerings, coupled with the beginning of the easing of restrictions that brick-and-mortar retail in certain geographies led to net sales increases across our segments of owned brands, licensed brands, and company stores, as well as across certain geographies, most notably the United States. US net sales increased 130.9% and international net sales increased 67.5% as compared to the first quarter of last year. Total net sales decreased 8% as compared to the pre-pandemic first quarter of fiscal 2020 with a 10.8% increase in the United States, offset by a 20.8% decrease in international net sales. This reflects continued closure of retail stores in Europe and Latin America. Gross profit as a percentage of sales was 55% compared to 50.8% in the first quarter of last year. The increase in gross margin was primarily driven by leveraging certain fixed costs as a result of higher sales, favorable channel and product mix, and favorable changes in foreign currency exchange rates. Gross margin was 110 basis points higher than the pre-pandemic first quarter of fiscal 2020, primarily due to favorable channel and product mix, as well as favorable changes in foreign currency exchange rates. Operating expenses were $60.1 million as compared to $53 million for the same period of last year. The increase was driven by higher marketing expenses and performance-based compensation, partially offset by the company's continuing focus on operating expenses. Compared to the pre-pandemic first quarter of fiscal 2020, operating expenses declined by $11.8 million, primarily due to corporate initiatives and restructuring programs executed to reduce such expenses. As a percentage of sales, operating expenses for the fourth quarter decreased to 44.6% from 76.1% in the first quarter of last year and 49% in the pre-pandemic first quarter of the year before. Expansion in gross margin and controlled spending in the first quarter drove a $31.7 million increase in operating income to $14.1 million as compared to a $17.6 million loss in the first quarter of fiscal 2021. The operating income for the first quarter of fiscal 2022 was almost double the operating income of the pre-pandemic first quarter of fiscal 2020, which was $7.2 million. We recorded income tax expense of $3.5 million in the first quarter of fiscal 2022 as compared to a benefit of $4.8 million in the first quarter of fiscal 2021. Net income in the first quarter was $10.1 million or $0.43 per diluted share as compared to a net loss of $12.9 million or $0.56 per diluted share in the year-ago period. Now turning to our balance sheet. Cash at the end of the first quarter was $187 million, relatively flat to last year. However, we paid down $72.5 million of debt over the same period. Accounts receivable was $78.6 million, up $28.8 million from the same period of last year, primarily due to the increase in sales. Inventory at the end of the quarter was down $7.9 million for the same period of last year. Capital expenditures for the quarter were $407,000 and depreciation and amortization expense was $3.2 million. This included $800,000 related to the amortization of acquired intangible assets of Olivia Burton and Movement. While we continue to see the negative impact of COVID-19-related store closures and restrictions on consumer mobility across several regions, including Europe and Latin America, our operations in other parts of the world have benefited from the relaxation of restrictions in which, along with continued strength in e-commerce, has contributed to our strong first quarter performance. We remain hopeful that additional markets will begin to reopen as more people become vaccinated. Taking these factors into account, we currently expect fiscal 2022 net sales to be in the range of approximately $650 million to $665 million, gross profit of approximately 54% to 55% of sales, and operating profit to be in the range of 10% to 11% of sales. Assuming no changes to the current tax laws, we anticipate a 25% effective tax rate. I would now like to open the call up for questions.

Operator, Operator

Our first question comes from Oliver Chen with Cowen & Co.

Oliver Chen, Analyst

The US performance was really impressive, particularly US wholesale. What are the factors that contributed to upside and do you see the momentum continuing? And how do you view the consumer environment and backdrop right now?

Efraim Grinberg, Chairman & CEO

So you have a number of factors. One, I think, pretty much from the second quarter of last year, we began to see increased demand for watches as a category overall within the US wholesale channel, especially the department store channel, and we're now starting to see a resurgence in the chain jewelry channel as well. And that combined with I think the innovation and product that we've delivered across our brands and also you have a US consumer that is now pretty flushed in terms of their resources for discretionary spending, and I think all of those factors have contributed. We're optimistic that with the things that we're doing within our brands, we're going to continue to create the innovation and excitement for consumers to keep purchasing our products.

Oliver Chen, Analyst

Efraim, what's the nature of product that's popular in terms of the reopening, whether that’d be price points or styles as people go out now?

Efraim Grinberg, Chairman & CEO

We're actually seeing less price resistance and more interest in innovation and new designs. And that's why I've called out our Movado SE, which is an iconic watch that the company redesigned and reintroduced last year. In the second half that's doing extremely well. We're introducing a new Movado SE that starts at about $1,500 and goes up to $2,000 that we're very excited about. And then we introduced the new BOLD Verso that's done extremely well. So we continue to see that innovation and newness is really creating demand.

Oliver Chen, Analyst

And Sallie, inventory versus sales, how should we think about that going forward? And also as we think about different inflation factors, labor and transport and others. Do you see that impacting your pricing, how might you manage that?

Sallie DeMarsilis, Executive VP & CFO

We'll address this separately. Regarding inventory levels, we will closely monitor our purchases. We anticipate strong sales, and we will adjust our buying accordingly, keeping our purchases aligned with demand. We are pleased with our current inventory, which consists of core products, and we will continue to manage it effectively. As Efraim mentioned, we are experiencing high demand for our products. In terms of costs, we are effectively managing our supply chain and are not observing any significant increases in our expenses for obtaining or delivering our products.

Efraim Grinberg, Chairman & CEO

We increased our warehouse workforce to a minimum of $15 an hour about two years ago. While there is demand for labor, we believe we are in a strong position, although there are some inflationary pressures in the market. We also see pricing opportunities in the marketplace. We have already implemented some changes and plan to implement more.

Oliver Chen, Analyst

Congrats on your ESG report. Cowen believes many new customers are much more attuned to environmental and social issues. How do you think about your ESG priorities in the context of demand creation?

Efraim Grinberg, Chairman & CEO

Well, I think across our brands, we have different initiatives on the ESG front, and from Tommy Hilfiger, where we put an emphasis on accessibility and product for people who have issues with being able to wear a regular watch or put on a regular strap or bracelet. So we've enabled accessibility options on some of those products. In other areas, like Movement, we’re involved in the environment and in the ocean because that's very close to their home in California. And they'll be introducing actually a watch made of recycled ocean plastics in the next month or two, and we participate also with 1% for the planet. And then in Movado, we were really excited by the reception we got to our pathways to veganism collection and in vegan straps in our most current introduction with Alexi on our website. So I think we're taking a number of initiatives and using social media and digital marketing to be able to communicate those initiatives with consumers and we're excited about those.

Oliver Chen, Analyst

Our last question, as your digital innovation has been very strong, as stores reopen, what do you think happens to that growth rate and the interplay between the channels?

Efraim Grinberg, Chairman & CEO

I believe we will see a balance in the growth of the e-commerce channel, especially as people are increasingly eager to take advantage of shopping in-store with the improving weather and the wider acceptance of vaccinations and masking. There seems to be a growing desire for consumers to return to physical stores, though e-commerce will continue to be a significant area of growth since people have become more comfortable with that shopping method. This will lead to a genuine omni-channel performance. We are committed to investing in omni-channel development, including implementing a new advanced point-of-sale system in our Movado company stores, which represents an improvement over our previous system. I anticipate ongoing opportunities for growth in the omni-channel environment.

Operator, Operator

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.

Efraim Grinberg, Chairman & CEO

I would like to thank all of our employees for the great job that they have been doing throughout this pandemic. I'm hopeful that we are beginning to see a return to normalcy. I would also like to wish everyone in the United States a really happy holiday weekend. Thank you.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.