Earnings Call Transcript - MOV Q2 2026

Operator, Operator

Good day, everybody, and welcome to the Movado Group Second Quarter Fiscal 2026 Earnings Call. As a reminder, today's call is being recorded and may not be reproduced in full or in part without permission from the company. At this time, I would like to turn the conference over to Allison Malkin of ICR. Please go ahead.

Allison C. Malkin, ICR

Thank you. Good morning, everyone. With me on the call today are Efraim Grinberg, Chairman and Chief Executive Officer; and Sallie DeMarsilis, Executive Vice President 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 would like to turn the call over to Efraim Grinberg, Chairman and Chief Executive Officer of Movado Group.

Efraim Grinberg, CEO

Thank you, Allison. Good morning, and welcome to Movado Group's second quarter conference call. With me today is our Executive Vice President and Chief Financial Officer, Sallie DeMarsilis. After I review the highlights of the quarter and share our progress on key strategic initiatives, Sallie will take you through the financial results in more detail. We will then be happy to answer questions. We are pleased with our overall results this quarter as we return to growth in both sales and profitability. Sales grew by 3% to $161.8 million, and adjusted operating profit more than doubled to $7 million from $2.6 million last year despite a $2.2 million impact from unmitigated U.S. tariff expenses. Although we've taken certain actions to partially offset tariffs, those actions will predominantly impact future periods. After the quarter ended, the United States implemented a tariff rate of 39% on Swiss imports. During the second quarter, we have built a strong position in inventory of Swiss-made watches in the United States and would expect a substantial portion of the year's needs to be covered. We are hopeful that over the next several months, the United States and Switzerland will agree to lower tariff rates. Of course, we continue to monitor the situation closely and develop mitigation plans. We continue to operate with a strong balance sheet with over $180 million in cash and no debt. Overall, we are pleased with the progress that we have made on our strategic initiatives with a focus on returning the company to growth and profitability. We would expect to see approximately $10 million of annualized savings spread evenly throughout this year as a result of the actions we took late last year to reduce operating expenses. Although we experienced a 5.6% sales decline in our Movado brand, we continue to make progress on our Movado strategy, which I will discuss later in my remarks. In our licensed brands, we grew by 6.5% on a constant currency basis or 9.5% on a reported basis. Overall, we reported gross margins of 54.1% versus 54.3% in Q2 of last year despite the 130 basis point impact of additional tariffs in the U.S. Most of our strategic pricing actions to partially offset the impact of tariffs became effective July 1. Our international business grew by 6.9% or 3.9% on a constant currency basis, led by a strong performance in Europe, Latin America, and India, with Europe seeing particularly strong trends. As expected, this performance was offset somewhat by the Middle East, where we are in the process of rebuilding our team. Our U.S. business declined by 1.6% as we focus on rebalancing our chain jewelry store distribution, although we had an improved performance in our domestic department store and e-commerce channels. Our outlet store segment grew 2.4% for the quarter, and we're excited by the recent initiatives and accelerating trends in that channel. As we look at the progress that we're making in our brands, we're particularly pleased by the success that we are seeing in the overall performance of trend-right products across our brand portfolio. In Movado, we're making significant progress in returning the brand to growth in our wholesale distribution. We have seen strong performance in our own e-commerce site with 6% growth and strong trends in our digital partners. In brick-and-mortar, Movado brand sell-through has returned to growth in the second quarter in our department store channel, where we have implemented and expanded our coverage at the point of sale and installed our new point-of-sale display. We will continue to execute behind these initiatives as the year progresses. On the product front, Movado has seen increased penetration and success in women's watches, including our new iconic bangle watches and our new Mini Quest in BOLD, which, along with our BOLD tank watch, is the best seller. On the men's side, we're seeing strong performance in the Movado BOLD collection, including Verso Automatic and Quest Automatic. Our Heritage collection inspired by Movado's rich heritage continues to do particularly well while in a limited distribution across the country. The Movado brand marketing campaign for the second half will include new creative featuring our Movado icons, Ludacris, Jessica Alba, Julianne Moore, Christian McCaffrey, and Tyrese Haliburton. We're very excited by the digital-first content that our team has executed with a greater focus on products associated with each of the icons. We have exciting new products debuting this fall, like the new Museum Imperio with Christian McCaffrey and our Heritage 1917 with Tyrese Haliburton. On the women's side, Jessica Alba and Julianne Moore will be featured with different shapes of our Museum Bangle collection and a women's version of the Museum Imperio and Heritage 1917. Turning to our licensed brands, we're seeing a return to the fashion watch and jewelry category with increased interest by Gen Z consumers across digital platforms like TikTok, Reels, and YouTube. Sales in our licensed brands grew by 9.5% for the quarter or 6.5% in constant currency. In HUGO BOSS, we have experienced strong growth in our iconic families, Time Traveler and Candor. Our new updated Grand Prix is quickly becoming a best seller. We're also excited by our new women's watches led by the Mae family with a petite Square shape. In Tommy Hilfiger, we're very excited to be refocused on the women's watch category. Our MIA family is already showing signs of strong sell-through and will be featured in our fall campaign. Complementing Mia is Moira, a new mini East West Oval that has gotten a strong reception. On the men's front, we're excited by our new 70s inspired Chronograph Hudson collection, which will be featured in our holiday campaign, as well as by Regatta-TH, a new sports watch collection in exciting colors opening at $139. In Lacoste, we're introducing a new black and gold version of our iconic LC33 collection and will complement our Tank Parisienne with a new oval version. Our Lacoste jewelry business continues to exceed expectations, and we're very excited to introduce the Arthur and Crocodile families to complement our best-selling Metropole bracelet collection. In Calvin Klein, we're launching a new mini version of our best-selling Pulse collection, as well as a new 18-millimeter contemporary collection that has really caught our retailers' attention. Coach continues to perform extremely well, particularly in the United States, and is now showing momentum in Europe as well. For the second half, we have several new introductions in our best-selling Sammy Oval collection with a strong new 20-millimeter Reese tank. We'll also be expanding our best-selling charter collection for him. As we enter the second half of the year, we recognize that uncertainty remains around tariffs and the broader retail environment. At the same time, we're excited by the new products we have introduced and encouraged by the resurgence we are seeing in the fashion watch market. As a leadership team, our focus remains on driving profitability and delivering consistent growth in both sales and operating margin while maintaining the strength of our balance sheet and executing against our strategic plans across all of our businesses. While some of our initiatives have longer time horizons, we're confident that we're taking the right actions for the long term and positioning Movado Group for sustainable success. I'm happy about the plans that we're building for the year ahead, and I would now like to turn the call over to Sallie.

Sallie A. DeMarsilis, CFO

Thank you, Efraim, and good morning, everyone. In today's call, I will discuss our financial results for the second quarter and year-to-date of fiscal 2026, focusing on adjusted results. Please refer to our earlier press release for details on special items and a reconciliation of GAAP and non-GAAP measures. Overall, we were pleased with our performance in the second quarter of fiscal 2026. Sales reached $161.8 million, a 3.1% increase compared to $157 million last year. In constant dollars, net sales grew by 1.4%. Although we saw net sales increases in licensed brands and company stores, this was partially offset by declines in owned brands. U.S. net sales fell by 1.6% compared to the second quarter of last year, while international net sales rose by 6.9%. On a constant currency basis, international net sales increased by 3.9%, with strong growth in markets such as Latin America and Europe. Gross profit as a percentage of sales was 54.1%, slightly down from 54.3% in the same quarter last year. This small decline in gross margin was mainly due to higher tariffs and unfavorable foreign exchange effects, somewhat mitigated by a favorable channel and product mix. Operating expenses totaled $80.6 million compared to $82.6 million in the second quarter of last year. The $2 million decrease was mainly due to a strategic cut in marketing expenses, despite an increase in performance-based compensation. The combination of increased revenue and gross profit, along with lower operating expenses, raised our operating income to $7 million, an improvement of $4.4 million from $2.6 million in the second quarter of fiscal 2025. We recorded about $1.1 million in other non-operating income this quarter, down from $1.8 million last year, primarily from interest on our global cash position. The income tax expense for the second quarter was $2.7 million, compared to $843,000 last year. Our net income for this quarter was $5.3 million or $0.23 per diluted share, up from $3.5 million or $0.15 per diluted share last year. Now looking at our year-to-date results, sales for the six-month period ending July 31, 2025, were $293.6 million, compared to $291.4 million last year, marking a 0.8% increase. In constant dollars, net sales increased by 0.3%. U.S. net sales decreased by 1.6%, while international sales rose 2.6%. Gross profit was $158.9 million or 54.1% of sales, consistent with $158.2 million or 54.3% of sales last year. The decrease in gross margin for the first six months was mainly due to unfavorable foreign exchange and increased tariff costs, partially offset by a favorable channel and product mix. Operating expenses were $151 million, down from $153.4 million last year, primarily due to a strategic reduction in marketing costs, with some offsetting increase in performance-based compensation. For the six months ended July 31, 2025, operating income was $7.9 million, compared to $4.8 million in fiscal 2025. We recorded approximately $2.7 million of other non-operating income in the first half of fiscal 2026, primarily from interest, down from $3.8 million last year. Net income was $7.2 million or $0.32 per diluted share, compared to $5.5 million or $0.24 per diluted share last year. Turning to our balance sheet, cash at the end of the second quarter was $180.5 million, down from $198.3 million last year. Accounts receivable rose to $94.4 million, an increase of $7.7 million from last year, mainly due to timing and business mix. Inventory increased by $28.3 million, or 15.5%, compared to the same period last year. Of this increase, $5.1 million was due to foreign currency, and $4.6 million in reciprocal tariffs was included in the inventory at the end of this quarter. As Efraim mentioned, as of July 31, we have built a strong position in Swiss-made watch inventory in the United States, covering a significant part of this year's needs. We are comfortable with our current inventory. We repurchased around 100,000 shares under our share repurchase program, and as of July 31, 2025, we had $48.4 million remaining under this program. Depending on market conditions and the business environment, we plan to continue our share repurchase program to offset dilution in fiscal 2026. Efraim pointed out that we are closely monitoring the tariff landscape and will continue to develop mitigation strategies. Given the current macroeconomic environment and the uncertainty surrounding tariffs, the company is not providing an outlook for fiscal 2026. I will now open the call to questions. Thank you.

Operator, Operator

Our first question comes from Hamed Khorsand with BWS Financial.

Hamed Khorsand, Analyst

So there was lots of commentary about many watches. And I just want to understand what you're seeing from consumer habits or purchasing that makes you think that the mini is the route that you're taking?

Efraim Grinberg, CEO

I think we have both what we call mini watches and micro watches, which are smaller. Mini watches for us are those ranging from 23 to 28 millimeters. For a time, watches had become larger for both men and women, but recently they have started to get smaller again. This shift has attracted young women back into the category, supported by a lot of social media activity and the trend of layering women's watches with jewelry. We believe this presents a significant opportunity across our brand portfolio. As is often the case, this trend starts in luxury and then transitions to more accessible products as well.

Hamed Khorsand, Analyst

Okay. And during Prime Day, I know you guys were participating. Was there anything that stood out in that event that has continued since, or was it purely the consumer responding to price?

Efraim Grinberg, CEO

So we're probably a bigger participant in the prime events in Europe than we are in the United States. But we've seen our overall digital business with those retailers that are completely focused on the digital environment, whether it be Zalandos or the Amazons of the world, really doing very well on a global basis. And that's really, really good to see. And that's really across our brand portfolio. And so we believe that that's an increased opportunity as we continue to progress down our strategic plan.

Hamed Khorsand, Analyst

Okay. And then I know you talked about how you raised inventory because of the Swiss watches. But earlier this year, you had also raised inventory because of what's going on with tariffs; how much of your increase overall year-to-date—I'm speaking of the calendar, excuse me—year-to-date on the calendar. Can you just digest through the channel by the holiday shopping season?

Efraim Grinberg, CEO

Sure. So I'll start, and then I'll turn it over to Sallie. Our inventories got very low at year-end. So we began to rebuild inventory in Q1 of this year and now into Q2. We would expect our inventories to be in line by year-end. What that's allowed us to do at the same time is to offset some of the tariff impact by having inventory move to the United States prior to the implementation of certain tariffs. Obviously, we can't offset all of it. And then we have taken other actions, whether it be pricing or negotiations with suppliers to help mitigate some of the effect as well. But I'll turn it back to Sallie as well.

Sallie A. DeMarsilis, CFO

The only detail I will add to that, and thank you, Efraim, that was very thorough, is we have, as I mentioned, about $28 million of additional inventory at this time. We do expect to work it down by the end of the year to something more reasonable. But of that $18 million, about $16 million of it is in the U.S. So we did pull it forward into the U.S. so that we can manage through these tariffs and kind of get ahead of some uncertainty with that. And as we also mentioned, just to reiterate, we do think that a substantial portion of what we need in the U.S. is probably already here. We will add in what might be new styles or something that is an advertisement or maybe something that is just selling faster than we had anticipated and bring it in, but we should be in relatively good shape.

Hamed Khorsand, Analyst

Okay. Can I ask one more question?

Sallie A. DeMarsilis, CFO

Certainly.

Efraim Grinberg, CEO

Absolutely.

Oliver Chen, Analyst

You've taken a lot of these restructuring charges in the last few quarters. When do they stop? And when can we, as investors, see it show up in quarterly results?

Efraim Grinberg, CEO

Well, I think it's a combination of charges dealing with our event that occurred in the Middle East last year as well as some charges on the restructuring side. I would think on the restructuring side, they're predominantly done, and there could be some laggard still expenses on the other charges. But I would expect overall that they will be reduced significantly.

Sallie A. DeMarsilis, CFO

And just to remind you that we did mention when we were talking about the savings and the initiatives we were putting in place, those are offset by some increases this year in our cost. So you will see— they offset kind of some of the increases that we would have for regular year-over-year increases for merit, adding back performance-based compensation and, of course, currency.

Operator, Operator

Thank you. We have reached the end of the question-and-answer session. I'd like to turn the floor back to Efraim Grinberg for closing remarks.

Efraim Grinberg, CEO

Thank you all for participating with us today, and we look forward to joining you again for our third quarter conference call. We will—hopefully we'll be able to share with you the progress that we continue to make on our strategic initiatives. Thank you.

Operator, Operator

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.