Earnings Call Transcript - MOV Q1 2020

Operator, Operator

Good day, everyone, and welcome to the Movado Group Incorporated Fiscal First Quarter 2020 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, 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 welcome to Movado Group’s first quarter conference call. I will begin by reviewing our first quarter results and discuss the progress made on the strategic growth initiatives we expect to drive our future performance. Sallie will then cover our financial results in greater detail as well as our outlook. We are pleased with our first quarter results, which confirm that our teams are executing against our strategic vision that we have developed for our business. This performance was delivered despite operating in a global retail environment undergoing transformation and even as we ramped up our investments to support our future growth. For the quarter, our sales were up 15.3%, or 18.9% on a constant dollar basis. Even excluding the addition of MVMT, our sales were up 5.2%, or 8.9% in constant dollars. Our adjusted operating profit was $7.2 million, a $1.7 million decline from last year due to our planned investments behind our brands, the ongoing integration of MVMT, and digital initiatives. We were pleased to deliver an 80 basis point improvement in gross margin, despite facing significant currency headwinds, which also had a $1.4 million negative effect on operating profit during the quarter. Our successful performance over the last number of quarters has been driven by recognizing the challenges in the marketplace and developing strategies that are driven by consumer-focused innovation and marketing initiatives. We continue to evolve our marketing and storytelling across our entire brand portfolio. In Movado, we introduced very strong video initiatives and social media content in support of our innovative BOLD Ceramic product during the Mother’s Day holiday, driving excellent results. In addition, we will launch two new TV commercials this week that truly symbolize a modern view of the iconic Movado brand. This television advertising will be our first spring TV campaign in a number of years, and it is aimed at building momentum behind the Movado brand for Father’s Day and Graduation, positioning the brand well for the important second half of the year. We’re excited about the product and marketing initiatives that we have coming during the second quarter and for the balance of the year, including the introduction of our new Movado Connected watch for men and our first smart watch for women during the third quarter. While the mall-based jewelry chain distribution remains challenging, we’re making strong progress across e-commerce platforms for both our retailers and movado.com. Our investment in our digital initiatives are paying off, as we have seen continued acceleration in the trends of our movado.com business even after a strong Q4 performance. After the first quarter-end, we upgraded movado.com to Salesforce’s latest commerce cloud technology. We believe this new platform will help us to continue to grow our movado.com business in the future. Our licensed brand business continued its very strong performance from last year into the first quarter, even while facing a difficult market for fashion watches on a global basis. We saw double-digit sales increases in this division, driven by strong performances in Europe, Asia, and Latin America. Tommy Hilfiger continues to drive strong growth, fueled by the continued momentum of the parent brand and our digital marketing initiatives featuring Tommy Hilfiger brand ambassador, Zendaya, and well-received new products like Shawn, a Blue IP watch for men, and Jenna, a two-tone mesh introduction for women. We will be expanding the retail locations of our new interactive point-of-sale display for Tommy Hilfiger, which has proven to accelerate sell-through in the locations where we have deployed them. Coach, led by our Perry and Charles collections introduced last year, continues to drive strong sell-through, particularly in the U.S. We have also launched a flagship Coach watch store with Tmall in China and are in the process of building a meaningful marketing presence by collaborating with local influencers in that market. HUGO BOSS continues to perform solidly, while facing headwinds in its biggest market, the United Kingdom, where high-speed retailers have been very challenged as the economy faces Brexit uncertainty. Finally, in our licensed brand division, LACOSTE has also continued its success with great new products that coordinate very well with the LACOSTE brand, including a new introduction of our iconic Lacoste 1212 collection, now available at under $100. Olivia Burton continues to deliver strong results from Movado Group. As we grow the brand’s global presence and distribution, we have continued to grow both our watch and jewelry business and are now working on developing strong content to support our e-commerce and wholesale growth initiatives for the second half. We’ll also transition oliviaburton.com’s business to Salesforce’s latest release later this quarter. We continue to believe that Olivia Burton represents a significant opportunity in the growing e-commerce marketplace. In MVMT, we have been focused on integrating the MVMT brand into Movado Group’s infrastructure and systems and expect this to be nearly completed during the third quarter of this year. We’re also working on introducing the MVMT brand in brick-and-mortar distribution, and our team in Los Angeles is developing tremendous new products for the important second half of the year. They’re also developing an exciting marketing program, which includes both digital marketing initiatives as well as increased television advertising to continue to build the MVMT brand with younger consumers. MVMT’s positioning is highly relevant to millennial consumers, and we’ll continue to develop this brand as we expand its U.S. distribution. We’ll also roll out marketing initiatives in our key international markets to support wholesale expansion. As digital customer acquisition costs continue to increase, we believe that continuing to drive and grow the brand image is crucially important, as is the development of our wholesale distribution to help complement MVMT’s strong digital presence. We have continued to make significant progress since we established our digital center of excellence a little over a year ago. We know that to reach consumers in this evolving retail market, messaging needs to be very different today than in past years and where we reach them has also dramatically changed. We have made progress in this area and we’re starting to see results in our movado.com and oliviaburton.com businesses, as well as the digital support that we’re able to provide for our wholesale partners and our licensed brands. We have also invested behind building our data sciences capability and using software to understand our consumers and their changing desires. As we get closer to our consumers, we will make greater progress in becoming a leading consumer-centric omni-channel company in our industry. On the retail side, our outlet store sales were flat for the quarter. While this included four additional stores relative to the same period last year, it also reflected the temporary closure of two of our high-volume stores for much of the quarter for renovation. We managed to offset continued challenging traffic trends with increased gross margins and disciplined expense management. While the outlook for tariffs remains uncertain, we believe that most of the value of our U.S. imports will not be subject to the incremental tariffs that could potentially be implemented this summer. There is a great deal of uncertainty in the global political and economic environment and significant changes in the watch space and how retail is evolving. As a company, we have been forward-looking by making the changes needed to succeed in the future. We’re also focused on managing the variables that are within our control. We’ve been able to deliver solid results for the first quarter, despite making significant investments to support our growth initiatives, including the integration of MVMT into Movado Group’s infrastructure. We’re optimistic that the initiatives we’ve developed, including innovation across our product portfolio and creative marketing approaches are resonating with consumers and will continue to yield results throughout the year. I will now turn the call over to Sallie to review our financial results in greater detail, and then we’ll be glad to answer any questions.

Sallie DeMarsilis, CFO

Thank you, Efraim, and good morning, everyone. For today’s call, I will begin with a review of our first 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 first quarter results for fiscal 2020 and fiscal 2019. Our press release also describes these items and includes a table of GAAP and non-GAAP measures. Movado Group acquired MVMT on October 1, 2018. Included in the first quarter results for fiscal 2020 was $1.5 million of pre-tax charges, primarily comprised of the amortization of intangible assets, purchase accounting adjustments, and deferred compensation related to the MVMT acquisition. After-tax, the charge equates to $1.1 million, or $0.05 per diluted share. Movado Group acquired Olivia Burton on July 3, 2017. Included in the results of the first quarter of fiscal 2020 was approximately $700,000 of non-cash amortization of acquired intangible assets. After-tax, the charge related to the acquisition equates to $600,000, or $0.02 per diluted share. Similarly, the first quarter of fiscal 2019 included approximately $800,000 of a related charge, which after-tax equates to $600,000, or $0.02 per diluted share. The balance of my remarks will exclude the special items just discussed. For the first quarter of fiscal 2020, sales were $146.5 million, a $19.4 million, or 15.3% increase from the first quarter of fiscal 2019. The increase in overall sales was driven by growth in both our owned and licensed brands. To this end, sales were up 21.8% in the U.S. and in constant dollars increased 17.1% internationally. Sales in our watch and accessories brand segment were $131.5 million, as compared to sales of $112.1 million for the same period of last year. In constant dollars, watch and accessory brand sales increased 21.5%, driven by sales increases in both our licensed brands and owned brand category. By geography, the U.S. watch and accessories brand businesses increased 32.2% to $44.7 million, compared to $33.8 million last year. The international watch and accessories business increased 10.9% to $86.8 million, compared to $78.3 million in the first quarter of the prior year. There was a significant unfavorable currency impact on the first quarter of fiscal 2020. In constant dollars, international sales increased 16.8%, with our strongest sales growth being in Europe and Asia. For the quarter, the company’s retail business was flat compared to last year. At the end of the quarter, we operated 44 outlet locations, including one Canadian store, as compared to 40 locations last year. Gross profit was $79 million, or 53.9% of sales, compared to $67.5 million, or 53.1% in the first quarter of last year. The 80 basis point increase in gross margin was primarily driven by favorable channel and product mix, and increased leverage on fixed costs due to higher sales. These were partially offset by the unfavorable change in foreign currency exchange rates. Contributing to the positive impact of channel and product mix was the inclusion of MVMT in the current period. Operating expenses were $71.9 million, a 22.6% increase over the same period of last year. This increase included approximately $10 million of operating costs related to the recent business initiatives for future growth, such as our newest brand MVMT, our joint venture in Spain, and our latest outlet location. The remaining increase in operating expenses was to support our overall sales growth across our portfolio. The expected increase in operating expenses more than offset our sales growth and the expansion in gross profit, leading to a reduction in our operating income for the first quarter. This was combined with the currency headwind, which unfavorably impacted operating income by $1.4 million. Income tax expense of $1.3 million in the first quarter of fiscal 2020, compared to an income tax expense of $5,000 recorded in the first quarter of the prior year. The effective tax rate for the first quarter of fiscal 2019 was impacted by approximately $2.1 million in the aggregate for a few discrete items, including the release of an evaluation allowance on certain deferred tax assets. The impact on earnings per share in the first quarter of fiscal 2020 due to the higher effective tax rate was $0.06. Net income in the first quarter was $5.6 million, or $0.24 per diluted share versus net income of $8.7 million, or $0.37 per diluted share in the year-ago period. Now turning to our balance sheet. Cash at the end of the first quarter was $150.7 million, as compared to $177 million in the prior year period. The year-over-year decrease was primarily driven by the acquisition of MVMT in the third quarter of last year, partially offset by $50 million borrowed on our revolver, which we are currently paying a 1% interest rate in Switzerland. Accounts receivable was up $5.8 million, as compared to the same period of last year, primarily due to the increase in sales. Inventory at the end of the quarter was $178 million, a $19 million increase from the prior year period. This was due to the inventory related to our newest brand MVMT, as well as to support the increase in overall sales. In the first quarter, we repurchased $2.6 million of stock under our share repurchase program, primarily to offset the potential dilution from stock awards. Capital expenditures for the quarter were $2.2 million and depreciation and amortization expense was $3.9 million. This included $1.4 million related to the amortization of acquired intangible assets of both MVMT and Olivia Burton. I will now discuss our reiterated outlook for fiscal 2020. Our outlook assumes currency rates consistent with recent levels and therefore, it does not contemplate further deterioration of foreign currencies, such as the euro and the British pound, which can have a considerable impact on our results. In addition to foreign currency, our results may be materially affected by other factors as well, such as changes in global economic risk, customer spending and various factors referenced in our 10-K filing. For fiscal 2020, we are reaffirming our guidance and continue to anticipate that our sales will be in a range of approximately $750 million to $765 million. Gross margin percentage should be flat to slightly improved from fiscal 2019. As for operating expenses, we have a disciplined approach to our spending. We will, however, continue to invest in our business initiatives and important opportunities to provide a strong foundation for future growth. We expect to make these investments throughout this fiscal year, but more heavily weighted to the first half as a percentage of sales compared to our historical levels. Operating income is projected to be in a range of $82 million to $85 million. Based on our jurisdictional earnings, we anticipate a 21% effective tax rate and net income is expected to be in a range of approximately $64 million to $66.4 million. We expect diluted earnings per share in fiscal 2020 to be in a range of approximately $2.70 to $2.80. Capital expenditures for fiscal 2020 are estimated to be approximately $15 million and include amounts to support improvements in our e-commerce sites. The outlook we have provided assumes no unusual items for fiscal 2020, and excludes the amortization of acquired intangible assets related to Olivia Burton, as well as purchase accounting adjustments related to MVMT. In total, these are estimated to approximate $9 million. I would now like to open the call up for questions.

Operator, Operator

Thank you. We will now take our first question from Oliver Chen of Cowen & Company. Please go ahead.

Oliver Chen, Analyst

Hi. We wanted to ask you about the U.S. wholesale channel and your thoughts on the inventory sell-in versus sell-out and volatility there. It’s been a tougher channel in terms of some of the results from department stores, we’d love an update? Thank you.

Efraim Grinberg, CEO

Sure. I think, and you’ve seen various other companies report recently, the U.S. channel and the department store and also the chain jewelry store channel for us continues to remain a little bit more challenging; department stores are doing better than jewelry stores. But inventories seem to be in good shape. They have been very careful about their inventory levels. So, we believe that sell-in and the inventories are pretty much in balance. And that’s what…

Oliver Chen, Analyst

Okay. And what are your thoughts on the outlet side of your business in terms of what you’re seeing with traffic there, and also in coming…?

Efraim Grinberg, CEO

Sure. So we continue to see traffic challenging; conversion rates continue to rise. The people who are going to the stores are buying. But certainly, down also in some tourist traffic in the outlet malls as well. We’re managing our gross margins and expenses very carefully there. So the performance overall is pretty good.

Oliver Chen, Analyst

And Efraim, regarding the digital center of excellence, what are some key strategies you have going forward and rolling out on different practices there?

Efraim Grinberg, CEO

So one of the things that we’ve worked on very diligently and, in fact, some of our learnings from our MVMT brand is the level and quality of the content that we’ve been producing from Movado; we’ve seen that drive immediate results. We’ve been very pleased with our movado.com business since really the second half of last year, and it has continued strong momentum. We’re seeing now strong momentum in the U.S. behind our oliviaburton.com business, and we believe that we’re able to talk to consumers in a different way there. And so we’ll be amping up the level of content that we use to reach consumers, but then how we reach them also is changing dramatically. And as we get to a direct relationship and know our customers better, it’s very rewarding how you can reach them through the vehicles that you use to reach them as well as build what we call the top of the funnel from a digital perspective, which is really to continue to build brand awareness and image for our brands, which is vitally important.

Oliver Chen, Analyst

Thank you. And our last question, just as you look across internationally, which geopolitical risk or markets have the highest risk factors that we should monitor as well? Thank you.

Efraim Grinberg, CEO

Well, I think you see continued issues in the UK with Brexit and retail in that marketplace. For us that’s a significant market. We are seeing excellent results in France and Germany, despite the economic challenges in those markets. We are seeing nice growth in those markets. We’re also seeing nice growth in pockets in Asia with Olivia Burton specifically. And so we believe there are still significant opportunities. Although there is a lot of economic volatility, especially complicated by trade wars and economic risks out there. So, we are being cautious in how we invest and spend our money as well.

Oliver Chen, Analyst

Thank you very much.

Operator, Operator

We will now take our next question…

Efraim Grinberg, CEO

Thank you, Oliver.

Operator, Operator

...the next question comes from Frank Camma of Sidoti. Please go ahead.

Frank Camma, Analyst

Good morning, guys. Thanks for taking the questions.

Sallie DeMarsilis, CFO

Good morning.

Efraim Grinberg, CEO

Good morning, Frank.

Frank Camma, Analyst

A couple of questions related to marketing. Efraim, you mentioned that on the digital side, you see increasing costs, which is understandable. You also mentioned that there are two new commercials, I think, you said launching this week. Is that…

Efraim Grinberg, CEO

Right.

Frank Camma, Analyst

…is that launch for the Movado brand, I assume specifically?

Efraim Grinberg, CEO

Yes.

Frank Camma, Analyst

Okay.

Efraim Grinberg, CEO

So those are for Movado and – oh, sorry, go ahead.

Frank Camma, Analyst

No. Well, the question relates to what’s part of the reasoning for that just because costs are creeping on the digital side, or is it better to reach that type of customer on TV? What drove you to the conclusion that since most of the commentary you hear is that people are moving into digital, which is driving up costs? Are you taking advantage of maybe the lower cost of TV? I’m just wondering what drove you to that conclusion.

Efraim Grinberg, CEO

Sure. So we believe in a balanced media mix. Obviously, we are not using print almost at all today. So we’re using more things that people actually engage with, and digital is one of those. But so is television, and Movado has traditionally been on television in the fall and has been very successful for us. We intend to drive momentum behind our Bold Evolution product, which has had very good results for Graduation and Father’s Day. We would run a Father’s Day campaign as well as digital content to support those products. Some of those are some of our best sellers on our .com website as well. But we believe in a balanced media mix for most accessible luxury and luxury brands. So, I think you have to reach consumers in many different aspects. And even in our MVMT brand, they have used TV. We will amp up the use of television by them in the second half and help them with that investment, and we think that will yield significant rewards for the company down the road.

Frank Camma, Analyst

Good. And I actually had a tie-in to that question was, MVMT obviously more of a second-half story, right, particularly fourth quarter, is that correct?

Efraim Grinberg, CEO

Yes. MVMT and I think we have talked about this in the past. They make most of their money in the second half of the year. They’re break-even to slight losses probably in the first half, and so, they are significantly profitable in Q4. That’s when their biggest sales occur. As we build an omni-channel and wholesale presence, we will balance that out, but that will take some time.

Frank Camma, Analyst

So can you talk about MVMT’s distribution? Because I think you mentioned it—the distribution you’re expanding in the U.S.? Can you just talk about relative to your footprint today, and how much more you have to go to expand that distribution?

Efraim Grinberg, CEO

We virtually have very little wholesale distribution in the U.S. We will launch that for the second half, because we’re doing it in a very well-planned and executed manner, and believe that it represents a significant opportunity for the MVMT brand.

Frank Camma, Analyst

Sure. Okay. And then last question for me is just, I think, Sallie, you mentioned that $10 million of incremental operating costs; I know they are not really integration costs, but they seem to be costs that you are investing for the future. Could you just give us a little bit of color more on that? Like what portion of that might be towards your retail locations versus your true direct-to-consumer efforts or directed towards MVMT if there is a way to break that out or quantify it?

Sallie DeMarsilis, CFO

Yes. So I’ll do my best, and I’m sure Efraim will pop in. So the amounts that I was talking about were really items that weren’t even a part of our business a year ago. MVMT was not, our Spain JV was not, these new outlet stores were not. So, that $10 million really was related to items where there isn’t really a comparable base for the prior year.

Frank Camma, Analyst

Right.

Sallie DeMarsilis, CFO

…but we’re investing for the future with these initiatives, thinking that these are great opportunities for us to expand our business in ways such as new geographies, new brands, and certainly, new outlet locations.

Frank Camma, Analyst

Okay.

Efraim Grinberg, CEO

I think today, to reach consumers and to communicate and sell to them has evolved very quickly. If you see what the company has done over the last years with the acquisition of Olivia Burton, MVMT, the establishment of our digital center of excellence, we’ve made great progress in really becoming an omni-channel company versus a wholesale company. And so that’s going to be a continued focus of the company going forward.

Frank Camma, Analyst

Great. Thanks, guys.

Sallie DeMarsilis, CFO

All right, Frank. Thanks.

Efraim Grinberg, CEO

Hey, thank you.

Operator, Operator

This concludes today’s question-and-answer session. At this time, I’ll turn the conference back to management for any additional or closing remarks.

Efraim Grinberg, CEO

Okay. I would like to thank all of you for participating today, and we look forward to communicating with you during our second quarter conference call. Thank you very much.

Sallie DeMarsilis, CFO

Have a great summer.

Operator, Operator

This concludes today’s call. Thank you for your participation. You may now disconnect.