Earnings Call Transcript - MOV Q3 2022

Operator, Operator

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

Thank you, Rachel. And good morning and welcome to Movado Group's third quarter conference call. With me today is Sallie DeMarsilis, our Chief Operating Officer and Chief Financial Officer. After I've had a chance to review our third quarter performance and our strategic initiatives, Sallie will review our financial results in greater detail. We would then be glad to answer questions. We are extremely pleased with our results for the third quarter. Our teams around the world continue to execute at a very high level against our strategic objectives. For the third quarter, we delivered record sales and operating earnings. Revenues for the third quarter were $217.7 million, an increase of 28% versus $169.9 million last year. Our adjusted operating income was $42.2 million, a 68.3% increase from $25.1 million last year. Adjusted operating income for the quarter was 19.4% of sales, also a record, partially driven by adjusted gross margin expansion of 320 basis points to 57.7% from 54.5% last year. We continue to focus on remaining disciplined with operating expenses, which were 38.3% of sales, an improvement of 140 basis points against the same period last year, while increasing marketing expenses by $8.1 million over last year. Our balance sheet also remains strong. We increased net cash by $75.9 million year-over-year to end the quarter with $201.8 million in cash, while repurchasing 548,000 shares for $17 million. We're pleased that today we announced that our board of directors has approved a 25% increase in our quarterly dividend to $0.25 and an additional $50 million to our share repurchase program. Over the last several years, we've invested in and developed our digital capabilities, with the COVID-19 pandemic accelerating these efforts. These initiatives proved beneficial as we began to transform into a consumer-focused omni-channel company focused on serving our consumers wherever they choose to shop. We have also evolved our marketing capabilities to be more digitally focused as the media landscape has continued to evolve. Over the last 20 months, we have made our company more efficient, continuing to build our business around world-class brands and driving consumer demand. We're driving innovation across our product portfolio and building industry-leading design. Our flexible supply chain has allowed us to continue to have the right inventory in place for our consumers, our retail partners, our e-commerce site, and our brick-and-mortar stores. We're serving our consumers wherever they choose to shop, whether in a department store, a jewelry store, a website, or one of our outlet stores. For the quarter, our sales grew by 41.7% in the U.S. and by 19.7% in our international markets. These results were driven by strong performance both in brick-and-mortar and online. Our Movado brand continues to drive performance with the strongest growth of all of our brands for the quarter. Throughout the year, we have experienced strong demand for Movado across its product portfolio, led by compelling innovation in both our core and our BOLD assortment. The results have been powered by robust digital marketing efforts, complemented by an increased penetration of television advertising. During the third quarter, we were excited to launch a limited series designed by the Cuban-American artist, Carmen Herrera, that has performed extremely well on movado.com as well as enhancing our brand image. Our Movado website has continued to drive growth, today becoming the flagship for the Movado brand as both a revenue generator and a place for the consumer to familiarize themselves with Movado. For the quarter, our Movado website grew by almost 25%. We continue to raise the average selling price on our Movado website, with over 20% of our watch sales coming from watches that retail above $1,000. We're also seeing a strong response on our website to Movado jewelry for both men and women, and we believe this will continue to play an important role in the growth of Movado. In Movado, we have seen a strong response and an increasing penetration of automatic watches for the holiday season. And we're launching a new TV commercial to support our SE Automatic, which we introduced this spring. We have also begun our television campaign earlier than is typical to support what we believe will be a longer holiday shopping season. Sales in our Movado Company Stores division grew by 31.9% against last year's third quarter. Our e-commerce business for this division is growing to be an important component of this channel. And while traffic in our brick-and-mortar stores has increased, it continued to be challenged by a decrease in tourism. Overall, our average unit retail has increased, and less promotional activity has continued to drive strong increases in profitability. Our licensed brand portfolio continues to drive strong results with almost a 28% increase over last year, powered by recovery in Latin America, the Middle East, and India, and continues strong growth in Europe and the U.S. On the licensed brand side, each of our biggest brands performed extremely well with strong growth in Tommy Hilfiger, Hugo Boss, Coach, and Lacoste. In Tommy Hilfiger, innovation continues to drive our strong performance. This holiday season, our campaign will feature Harley for him and Kennedy for her. We also continue to drive great design in Tommy Hilfiger jewelry, both for him and her. We have strong marketing support for the Tommy brand in digital platforms and using local celebrities in key markets like India, Mexico, and Europe. In Hugo Boss, we're seeing strong results at retail from our sports looks like Admiral. This holiday we will feature our grand course collection, our interpretation of a chronograph. We're also expanding our Hugo Boss jewelry business in Europe. We'll have strong support for Hugo Boss on digital platforms in our key markets. In Coach, we continue to show our iconic Arden collection, which features the signature C coach proud. We are continuing to develop our men's category in Coach with new introductions in sport luxury offerings. Coach is being supported with strong digital campaigns in both the U.S. and China. We're driving growth in Lacoste with strong innovation and marketing support. This fall, we introduced new watches in Lacoste that feature the iconic Peanuts character, Snoopy. These eco-friendly watches are made out of Castrol case materials and vegan straps and contain a solar movement. In Olivia Burton, we're launching our first-ever TV commercial for the brand in its home market of the United Kingdom. This holiday campaign will feature our iconic Celestial collection in both watches and jewelry. In Movement, we're driving a higher price point. We have received an excellent response to our Raptor collection with an average price point exceeding $200 and also to our ceramic collections. We've gotten a strong reception to our Honey Smoke colorway across our watch families. Our Movement Ocean Plastic edition continues to perform very well. Movement will also increase their television advertising this fall, as we focus on driving efficiency across our digital marketing investment. For the first 9 months of the year, our teams have delivered record revenues and profits despite a volatile market. We continue to proactively manage and navigate a market that is challenged by an ongoing pandemic, inflation, and currency volatility. As we look at the balance of the year, we believe that these pressures will persist. So, we will remain disciplined and agile in managing the business with focused attention on costs, while also continuing to make the important investments to support the growth of our brands, including awareness-building marketing. In terms of our outlook for the year, we're raising our full-year outlook today to reflect the return to more normalized purchasing patterns from retailers, which drove increased wholesale shipments into the third quarter and helped us deliver our strong results. We are excited about the prospects that lie ahead for Movado Group, as our teams continue to evolve our strategic plan, putting our consumers at the center of everything we do and continuing to deliver sustainable, profitable growth. Sallie will now review our financial results and outlook in greater detail, and we will then be glad to answer any questions you might have.

Sallie DeMarsilis, CFO

Thank you, Efraim. And good morning, everyone. For today's call, I will review our financial results for the third quarter and year-to-date period 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 third quarter and year-to-date period of fiscal 2022 and fiscal 2021 in our press release issued earlier today, which also includes a reconciliation table of GAAP and non-GAAP measures. Certain comments will include comparisons to fiscal 2020 to provide additional context due to the significant impact of COVID-19 on prior-year results. Our performance for the third quarter of this fiscal year exceeded our expectations and resulted in record net sales and operating profits. Our financial performance was highlighted by overall strength in global sales, expansion in gross margins, and operational discipline. We once again ended our quarter with a strong balance sheet and made meaningful progress on our strategic initiatives. For the third quarter of fiscal 2022, sales were $217.7 million as compared to $169.9 million last year, an increase of 28.2%. Strong response to our brands and offerings led to net sales increases across our segments of owned brands, licensed brands, and company stores, as well as across most geographies, most notably the U.S, but also seeing improvement in Europe and Latin America. U.S. net sales increased 41.7% and international net sales increased 19.7% as compared to the third quarter of last year. Total net sales increased 5.9% as compared to the pre-pandemic third quarter of fiscal 2020, with an 8.3% increase in the U.S. and a 4.1% increase in international net sales. Gross profit as a percent of sales was 57.7% compared to 54.5% in the third quarter of last year. The 320-basis point increase in gross margin was primarily driven by favorable channel and product mix and leverage on uncertain fixed costs, primarily due to the increase in sales over the prior-year period. Operating expenses were $83.4 million as compared to $67.4 million for the same period of last year. The increase was driven by higher marketing expenses and performance-based compensation, as well as general operating expenses to directly support the significant increase in sales while still continuing to be disciplined in operating expenditures. As a percentage of sales, operating expenses for the quarter decreased to 38.3% from 39.7% in the third quarter of last year. Expansion in gross margin and leverage on our operating expenses in the third quarter drove a $17.1 million increase in operating income to $42.2 million as compared to $25.1 million in the third quarter of fiscal 2021. We recorded income tax expense of $9.7 million in the third quarter of fiscal 2022 as compared to $8 million in the third quarter of fiscal 2021. Net income in the third quarter was $32.1 million or $1.36 per diluted share as compared to a net income of $16.4 million or $0.70 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, 2021, were $526.4 million as compared to $328.1 million last year. Total net sales increased 3.2% as compared to the pre-pandemic 9-month period of fiscal 2020, with a 15.4% increase in the U.S, partially offset by a 5.4% decrease in international net sales. Gross profit was $298.2 million or 56.7% of sales as compared to $173.3 million or 52.8% of sales last year. The increase in gross margin rate for the 9 months was due to favorable channel and product mix, favorable changes in foreign currency exchange rates, and leverage on certain fixed costs. For the 9 months ended October 31, 2021, operating income was $81.8 million as compared to $6.9 million in fiscal 2021. Total operating income was $40.1 million higher than the pre-pandemic 9-month period of fiscal 2020. As a percent of net sales, operating income was 15.5% in the first 9 months of fiscal 2022 as compared to 2.1% in the first 9 months of fiscal 2021 and 8.2% in the first 9 months of fiscal 2020. Net income was $62.2 million or $2.63 per diluted share as compared to $1.7 million or $0.07 per diluted share in the year-ago period. Now turning to our balance sheet. Cash at the end of the third quarter was $201.8 million, an increase of almost $40 million over last year, while paying down $37.3 million of debt and repurchasing $17 million of common stock during the same period. Accounts receivable were $136.4 million, up $32.9 million from the same period of last year, primarily due to the increase in sales. Inventory at the end of the quarter was down $6.1 million or 3.5% below the same period of last year, while sales increased over 60%. Capital expenditures for the 9-month period were $3.6 million, and depreciation and amortization expense were $9.4 million, which included $2.5 million related to the amortization of acquired intangible assets of Olivia Burton and Movement. As Efraim mentioned, during the third quarter, retailers returned to a more normalized purchasing pattern, which drove wholesale shipments to some degree and contributed to our strong results, and as such, we are increasing our overall outlook for the year. We currently expect fiscal 2022 net sales in a range of approximately $715 million to $720 million, gross profit of approximately 56.5% to 57% of net sales, operating profit in the range of 15% to 15.5% of net sales, and diluted earnings per share of approximately $3.35 to $3.45. Assuming no changes in the current tax laws, our current outlook assumes a 25% effective tax rate. This updated outlook does not contemplate significant additional COVID-19-related retail closures, which can adversely affect results. I would now like to open the call up for questions.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. One moment please while we poll for questions. Thank you. Our first question comes from the line of Oliver Chen with Cowen. Please proceed with your question.

Oliver Chen, Analyst

Hi. Thank you very much. Congrats on great results. The guidance implies nice upsides that were accretive for the fourth quarter. Could you provide more detail on expectations that went into the guidance? And it sounds like you're quite optimistic about the health of the consumer. I would love to hear those thoughts relative to what you're seeing with the supply chain. Thank you.

Efraim Grinberg, CEO

I believe our team has excelled in supply chain management, starting with having the right inventory at the right time. We expect to maintain that trend. Thankfully, we typically transport most of our inventory directly to markets, which has helped us avoid the shipping delays others have faced. We're observing a strong consumer base and consistent demand in both physical stores and e-commerce across many of our key markets globally. Additionally, we've seen a recovery in Latin America over the last quarter. Currently, we're feeling optimistic about consumer behavior. There are some challenges, such as inflation and its potential impact on results in the short to medium term. However, we are closely monitoring our expenses while also increasing our marketing investments, especially in key markets for the holiday season and for important brands. Overall, we are excited about the opportunities in the fourth quarter. Sallie, would you like to add anything?

Sallie DeMarsilis, CFO

No, I think that covers most of it. We are looking forward to a healthy holiday season, that's for sure.

Oliver Chen, Analyst

Sallie, on inventory versus sales, how should we model that? It looks like you could be in a tight position. Are you losing any sales on the table or not? And then as we model gross margin in the near and longer-term, do you expect continued leverage on fixed costs? Are there items happening to cost of goods sold that we should be aware of?

Sallie DeMarsilis, CFO

Okay. We'll start with inventory. As I mentioned, we saw a small fluctuation in inventory, and when our quarterly report is released later today, you'll notice that our finished goods inventory is slightly up while our component inventory is slightly down, which is positive. We feel well-prepared for the holiday season based on our projected sales. Our supply chain has done an excellent job in addressing the global challenges we are all facing right now, so we are confident about our inventory situation. We have the right products, they are current and core, and they are selling well. It's interesting to observe how everything is functioning. Regarding gross margin, we will keep managing the cost containment efforts related to gross margin. The fourth quarter is expected to resemble the third quarter based on our outlook. This year has been strong for gross margin, influenced by factors such as the growth in U.S. wholesale and the year-over-year growth of the Movado brand. All of these elements contribute to a robust gross margin, and we anticipate continued strength in the fourth quarter compared to the third quarter.

Oliver Chen, Analyst

Efraim, you have run a really globally diversified business model. Are there call-outs for regions or channels that have been stronger versus weaker? And on the U.S. Department store front, how are you feeling about the trends you're seeing there? You mentioned a longer season as well.

Efraim Grinberg, CEO

I think that regionally, we're experiencing our best performance in North America, which I haven't been able to say in quite a few years, so we're very pleased with that. We are also seeing improved results in Europe and, importantly, in Latin America, particularly in our main markets of Brazil and Mexico. Brazil is showing a nice recovery, although not quite at peak levels yet, compared to last year. We are also seeing stronger outcomes in the Middle East. If there's one area facing challenges, it would likely be China, where physical stores are struggling as people avoid malls and in-person shopping due to heightened COVID concerns. I should also mention that India has rebounded well. Our department store business remains very robust, and we are also observing progress in our jewelry store chain, with both sectors performing well, especially the department stores, which have shown consistent strength for quite some time now.

Oliver Chen, Analyst

Efraim, what about prices and price increases, and how you're thinking about like-for-like versus mix, especially as you work through some of the inflationary pressures?

Efraim Grinberg, CEO

I think we'll certainly see some price increases next year. We've already passed some, especially in Movado, and so far, the consumer has accepted those price increases. I think we're in an environment right now and the strength of our brands allows us to continue to have some pricing leverage as we enter next year.

Oliver Chen, Analyst

Okay. And on the digital frontier, the digital center of excellence, you called out television and other mediums. What's happening with the customer acquisition cost and strategy?

Efraim Grinberg, CEO

I believe everything works well together. Television has always been a key place for us to rebuild brand awareness, and it pairs nicely with digital advertising. As we know, the cost of digital advertising has risen alongside demand. Therefore, having a comprehensive marketing strategy is beneficial for the company, including outdoor advertising and point-of-sale visuals, which are also very important. Additionally, we have increased our television budget this year on a global scale.

Oliver Chen, Analyst

Okay. And we'll all be out in the stores for Black Friday and holiday, but are there highlights for your strategy as we approach this season, unlike any other in the history of our careers for what you're doing for Black Friday and the holidays?

Efraim Grinberg, CEO

We're being fairly consistent with what we've done in the past on Black Friday. We're not in a highly promotional category. And Black Friday, while it's important, the whole month is really important too, especially the last 10 days before our holiday. Certainly, there will be compelling values for consumers over the Black Friday weekend. I think Black Friday, hopefully, this year should benefit from the fact that last year there was limited capacity allowed in stores at any one time in many markets. And this year, at least in the U.S, those restrictions don't exist as more and more people continue to get vaccinated.

Oliver Chen, Analyst

Okay. And Efraim, on the product innovation front, you've made a lot of great changes and really executed on also some of the reinvention of classic as well. What's on your mind for what the consumer wants and what features and styling you're pursuing at core Movado, and any other highlights across the portfolio?

Efraim Grinberg, CEO

Well, I think our team has done a really good job in executing innovation and driving design leadership across our brand portfolio; an increased use of diverse materials from ocean plastic to the use of ceramics across our portfolio, and then also being able to upgrade what we give our consumers. While we're selling at higher price points, we’re also able to continue to give them great value. So, as I mentioned, an increased use of automatic movements within the Movado brand. I was really impressed with selling online; over 20% of our sales on our movado.com business were watches over $1,000. That's a really healthy number.

Oliver Chen, Analyst

Okay. Last, have the IDSA and Apple iOS privacy changes significantly impacted your business? Additionally, can you remind us of your priorities regarding shareholder returns, considering your solid cash balance and history of returning funds to shareholders?

Efraim Grinberg, CEO

Certainly, the increased privacy restrictions have complicated things and have also raised the costs of digital marketing. However, we believe there are other areas that can enhance the efficiency of our digital marketing efforts. A strong digital marketing campaign requires reaching consumers at various stages of the funnel, starting from the top. There are many ways to attract consumers at the top of the funnel and convert them online, both for us and to assist our wholesale partners in reaching our customers. We are learning to navigate this process effectively. Now, could you remind me of the second question?

Oliver Chen, Analyst

Shareholder returns.

Efraim Grinberg, CEO

Oh, shareholder returns. We obviously believe in paying a dividend. We increased our dividend, and I'm really pleased that we did that for this quarter. We've also bought $17 million of stock back since the beginning of the year, most of it in the second quarter. We increased also our share repurchase program by another $50 million. I think we still have $7 million or $8 million left on the existing plan, and then this will be an incremental $50 million. Our intention is to continue to generate cash and to be able to utilize it appropriately.

Oliver Chen, Analyst

Thank you. Best regards. Season's greetings.

Efraim Grinberg, CEO

Okay. Thank you very much, Oliver. Have a great holiday.

Operator, Operator

We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

Efraim Grinberg, CEO

Okay. I'd like to thank all of you for listening and participating today, and I wish everybody a great Thanksgiving holiday, and we look forward to the important selling season that's ahead as well. Thank you very much.

Operator, Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.