Movado Group, Inc. (MOV) Q1 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Movado Group, Inc. Fiscal First Quarter 2016 Earnings Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded and may not be reproduced in whole or in part without permission from the company. I would now like to introduce 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; Ricardo Quintero, President; and Sallie DeMarsilis, Chief Financial Officer. Also in the room is Rick Coté, Vice Chairman and Chief Operating Officer, who will join us for questions and answers. 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 Ricardo Quintero, President of Movado Group.

Thank you, Rachel. Good morning, and welcome to our conference call. We are on track for the first quarter of fiscal '16, achieving net sales of $120.5 million, representing growth of 5% on a constant currency basis and essentially even on a reported basis. We are pleased with the continued strong sell-through performance of our brand portfolio which continues to outpace the market. From a wholesale perspective, we achieved net sales growth of 5.9% on a constant currency basis, led by our licensed brands at 7.4%, driven by both the U.S. and international wholesale business. Our luxury brands were up 3.5% on a constant currency basis. Our retail outlook saw a decline of 3.3%, resulting from a decrease in traffic from international tourists, which impacted sales in some of our key outlet destinations. Adjusted operating income came in at $9.5 million, a 12.6% decline from last year, largely driven by currency which impact our quarterly results by $2.6 million. On a constant currency basis, operating income increased 11.4%. Adjusted diluted EPS came in at $0.25 compared to $0.29 last year on a higher tax rate. As discussed in our previous call, we have taken many proactive measures in order to mitigate the effects of foreign currency fluctuations and expect our numbers to improve on a reported basis as the year progresses. A key driver will be our strategic price increases, which we have begun to implement this April. At this very early stage, we are confident with how we have executed this strategy. In the U.S., Movado continues to outperform the market and gain market share. For Q1, retail sales grew in mid-double digits across our key accounts in a market that was flat. This has yielded over 2.1% market share points on a rolling 12-month basis through March, now giving Movado a very solid market share of over 20% in the $300 to $3,000 price range according to NPD. Again, we experienced the strongest growth coming out of our Movado Bold collection, which is capturing a younger, more diverse consumer and with particular strength in the women's segment. This is very encouraging, as it demonstrates our product continues to resonate with the fastest-growing demographic segments in the country. Movado's performance at retail was also strong in the U.K. where we saw double-digit growth ahead of market. In Hong Kong and China, we continue to see pockets of growth in a difficult market, particularly in locations where we operate retail directly and we are -- where we have been able to make effective tweaking of our assortment and enhancing our communication and staff education to create a better experience for our consumer. We are quite pleased with our momentum in Brazil as Movado continues to grow and is now capturing business in the local market versus purchases made in the traveling corridor. In the U.S. fashion watch category, our licensed brands had market share gains across the portfolio, outperforming a slightly negative market. We saw noteworthy results in Coach and Tommy Hilfiger as well as a slight improvement in Lacoste trends. As discussed in our March call, we continue to see a disconnect between our sell-through results and sell in, as some of our major retail partners in key geographies like the U.S. have continued to focus on improving their retail metrics and control their inventory levels in a slightly declining market. We expect this trend to continue in the near term and are laser-focused on our drive to leverage our brand sell-through performance through bestsellers and compelling new product introductions to recruit more consumers and support overall category growth. In Europe, we continue to see great sell-through performance on a local currency basis, particularly in our HUGO BOSS and Tommy Hilfiger brands. For perspective, HUGO BOSS is one of the fastest-growing brands in the U.K., gaining 1.7% market share points according to GFK. Across Europe, we're also seeing the Lacoste and Scuderia Ferrari trends improve, as we cycle in new product and present a more focused assortment. We continue to work towards an alternative channel strategy for Scuderia Ferrari, and we hope to share more details with you later in the year. In Asia, we are seeing momentum building behind Coach and are increasing and focusing our investment behind the brand, particularly in China. Innovation is the lifeline of our business and this is one of our core competencies and strengths. We are encouraged by the consumer response we are seeing in our brand's retail sales performance, and we will continue to drive superior design, quality and style as key differentiators behind our brands. As we have discussed before, this will be a year of transition that carries risks and opportunities. We see the increased investment and attention to the watch category generated by new entrants into our new business as a clear opportunity, where we have the potential to recruit new consumers who find the offerings of our well-diversified brand portfolio as a compelling alternative that they may have not previously considered. We have some very exciting innovation prepared for the second half of our fiscal year, which includes our launch of wearable technology that is on track for the holiday season. We are creating beautiful product with desired functionalities and attributes. While we are confident with all of our company-wide initiatives, we remain focused on executional excellence in the variables we control with a proactive approach and putting the consumer first in everything we do. As such, we continue to refine our resource allocation to capture the biggest, fastest growing opportunities to generate the greatest profitability potential. In this journey, we are becoming a more agile, leaner and focused organization with a higher emphasis on productivity and fully leveraging our world-class infrastructure. As communicated in our press release this morning, we are reiterating our full year guidance for fiscal '16, bearing in mind that the majority of our key business drivers, particularly regarding innovation, will kick in towards the end of the year. I would now like to turn the call over to Sallie.

Thank you, Ricardo, and good morning, everyone. For today's call, I will begin with a review of our first quarter financial results and then I will discuss our outlook. Before I begin, I would like to point out the special item included in our first quarter results for fiscal 2016. Please refer to our press release for a description of this item as well as the table of GAAP and non-GAAP measures. Our GAAP results for the first quarter of fiscal 2016 included $2.7 million pretax charge, which equates to a $2.5 million after tax or $0.10 per diluted share in connection with our efficient -- operating efficiency initiative and other items. Breaking the charge down, on a pretax basis, $1.3 million related to separation agreements associated with this initiative. This impacted gross margin by approximately $700,000 or 60 basis points. Operating expenses include a $1.4 million charge for occupancy expenses related to rental properties no longer utilized and the retirement of certain fixed assets associated with the closure of certain underperforming shop-in-shops in Asia. The balance of my remarks will exclude the special items just discussed. Beginning with a review of our income statement, sales for the first quarter were $120.5 million, a decline from the same period of the prior year by approximately $500,000 or 0.4%. In constant dollar, sales increased 5% as currency unfavorably impacted our sales by $6.5 million. This growth was primarily driven by our licensed brands and luxury businesses. Sales were up 3.7% in the U.S.; and in constant dollars, increased 6.5% internationally. Sales in our wholesale segment were $109.6 million, about flat as compared to sales of $109.7 million for the same period of last year. In constant dollars, wholesale sales increased 5.9%. By geography, our U.S. wholesale business increased 5.2% to $53.7 million compared to $51 million last year. Our international wholesale business decreased 4.7% to $55.9 million compared to $58.6 million in the prior year. This was primarily due to the unfavorable impact of currency. In constant dollars, international sales increased 6.5%. Sales growth was led by increases in Europe and Canada. Sales from the company's retail business declined approximately $400,000 or 3.3% compared to last year. This was primarily due to reduced traffic in tourism. At the end of the quarter, the company operated 38 outlet stores. Gross profit was $63.1 million or 52.4% of sales compared to $65.2 million or 53.9% in the first quarter of last year. The expected decline in gross margin was primarily driven by a 200-basis point unfavorable change in foreign currency exchange rates, partially offset by the 60-basis point favorable impact of channel and product mix. Operating expenses were $53.6 million, below the prior year by 1.2%. The decrease compared to the prior year was primarily the result of the following: a decrease of $2.2 million resulting from the impact of foreign currency exchange rates, partially offset by a $1.5 million increase in compensation and benefits. Operating income decreased 12.6%, as expected, to $9.5 million or 7.9% of sales compared to $10.9 million or 9% of sales in the year-ago period. Due to the global nature of our business, fluctuations in currency impact all aspects of our P&L, and as a reminder, our actions to mitigate currency were only partially in effect for the first quarter. On a constant dollar basis, our operating profit would have increased over 11% as compared to last year's first quarter results. Income tax expense of $3.3 million or a 34.6% effective tax rate in the first quarter of fiscal 2016 compares to an income tax expense of $3.4 million or a 31.6% effective tax rate recorded in the first quarter of the prior year. The increase in the effective tax rate is primarily due to the tax impact of fluctuations and losses incurred by certain foreign operations. Net income in the first quarter was $6.2 million or $0.25 per diluted share versus net income of $7.4 million or $0.29 per diluted share in the year-ago period. Currency headwinds negatively impacted our earnings per share for the first quarter by $0.07. The favorable impact of our share repurchase program offset the impact of our higher effective tax rate. Now turning to our balance sheet, our cash and short-term investments combined at the end of the first quarter of fiscal 2016 was $185.8 million versus $171.9 million in the same period of fiscal 2015. Accounts receivable were down $3.9 million and inventory was down approximately $500,000, as compared to the same period of last year. At the end of the quarter, we had $25 million outstanding on our new $100 million revolver, and we are continuing to execute share repurchases throughout fiscal 2016. Through April 30, 2015, we have utilized $59 million of the $100 million share repurchase program. Capital expenditures for the quarter were $1.5 million, and depreciation and amortization expense was $3 million combined. We continue to project capital expenditures of approximately $15 million for fiscal 2016, which includes projects in the ordinary course of business, such as facilities improvements, shop-in-shops, computer hardware and software. Now I would like to reiterate our guidance for the current fiscal year. We continue to assume moderate global economic growth and we are assuming no further significant fluctuations in foreign currency exchange rates. As mentioned on our March call, for the full 2016 fiscal year, we estimate the unfavorable impact of foreign currency exchange rates on our sales forecast is approximately $26 million and approximately $13 million on our forecasted operating income when compared with fiscal 2015 results. In the first quarter, we utilized $2.7 million of the planned $3 million to $4 million charge related to operating efficiency initiatives and other items in fiscal 2016. We continue to believe these initiatives will result in approximately $5 million of annualized savings with $4 million of savings being realized this year. We will continue to closely manage our expenses as we have successfully done in the past. For fiscal 2016, we continue to anticipate sales will increase to a range of $590 million to $600 million. On a constant dollar basis, sales would have increased in the range of approximately 5% to 6.5%. Gross margin rate is expected to be approximately 53.5% as compared to 52.8% in fiscal 2015. This is primarily due to the selective price increases, offset by the negative impact of currency. As mentioned, we will closely be managing our expenses for the current year and expect to see savings from our operating efficiency initiative. However, we will continue to invest appropriately in our brands. Our forecast also includes expense related to performance-based compensation based upon the assumption that our targets will be achieved. This was not the case in fiscal 2015. Operating income is projected to be in the range of $72 million to $75 million. Due to the mix of global pretax results, the estimated effective tax rate for the full year is expected to be 30% and net income is planned to be in the range of approximately $48.5 million to $51 million. We expect diluted earnings per share in fiscal 2016 to be in a range of approximately $2 to $2.10. As a result of the impact of currency as well as the timing of the execution of our selective price increases, operating efficiency initiatives and the new product introduction, we would expect our sales and operating profit growth to be in the second half of the year. The guidance we have provided assumes no unusual items for fiscal 2016. As mentioned a moment ago, we would expect to record a total of $3 million to $4 million pretax charges related to operating efficiency initiatives in fiscal 2016. These charge is excluded from the guidance just provided. I would now like to turn the call over to Efraim.

Thank you, Sallie. We are pleased with our results for the first quarter. Although retail growth in the watch category has been challenging, we were able to outperform the category, delivering a flat sales performance and a 5% increase on a constant currency basis. I am even more pleased by the actions that we are taking to ensure that we are successful in the future. We are focused on maximizing the potential of our brands. We believe we have global growth opportunities for each of our brands and our strategies are being geared towards capturing those opportunities. We have continued to drive innovation across our brand portfolio and are very excited about our new product pipeline as we approach the second half of the year. Included in that new product pipeline will be our first entrée into the wearable technology space within our Movado brand. While growth in the watch category has slowed in certain respects, we believe that we can continue to deliver growth in fiscal 2016 by continuing to drive product innovation, strong marketing programs and focusing on our strategic priorities. Through our proactive approach to managing our business, we should see our gross margin strengthen throughout the year and our profitability improve as we leverage our global infrastructure. I would now like to open up the call to questions.

[Operator Instructions] And we will now take our first question's from Rick Patel from Stephens Inc.

Can you talk about the disparity of sell-in versus sell-through at the department store channel in the quarter? I'm just curious if there were any changes versus the trend in the prior quarters. And I think in the next quarter or so, you're going to anniversary the pullback that you had last year. So do you expect the sell-in to improve meaningfully once you get into that point?

I think our belief is that this is somewhat of a permanent transition and that retailers will continue to be more cautious on their inventory levels. But as long as we can drive sell-through, we believe that our numbers will be commensurate with that improved sell-through. So obviously, as retailer sell-through improves with our products, they have to purchase into those trends.

And can you give us a little more color on the selective price increases? Perhaps give us a sense of the magnitude of the changes and which brands they affected. And it seems like you're still rolling these out, so when should we expect these higher prices to be fully implemented?

Ricardo?

So the majority of our price increases have already been implemented, essentially in the U.S. is where we started, and we started to roll out in the U.K. and Europe, Middle East and very little -- very selective in Asia. So we expect the impact to start showing up in Q2. Now we also have to remember that retailers had inventory level, so the real impact will probably be seen through Q3 and Q4. The order of magnitude, I mean it's -- in some cases, we did something like maybe 6%. I would say 6% to 7% on average is the balance number for the full globe [ph].

And even most of what -- of those price increases that took place took place in the latter part of the first quarter, so we'll feel the full effects of that in the second quarter.

Great. And then just one more, if I may. Any updates to the launch of the new Coach men's collection, perhaps how the discussions have been going with the department stores and how big do you expect that business to become relative to the core women's assortment?

So we are in the final stages of this launch. It's going to be happening most likely in the second quarter. And this -- the product is absolutely beautiful, everyone that has seen it has been very compelled by the design, and it really reflects the spirit of the Coach brand. Potentially, this could be north of 10% of the total brand. So we're very encouraged, and we're starting with this launch, like I said, you'll see it in the second quarter. We're in the final stages of finalizing the launch details.

And we'll take our next question from Oliver Chen from Cowen and Company.

Regarding the on-trend to wearable technology, could you characterize for us like what you feel like your core competencies are as you enter this arena? And is this going to be across all your brands over time? Or how do you see that evolving? And I was also curious about the channel in which you think this would be appropriate in terms of where on the floor or where you look to distribute this kind of product.

So I believe that we will use technology as we always have to make beautiful products, and so that is our mission. And we do see a part of the category moving into connected watches, and that's what we are focused on. Right now, it will first be launched in Movado in the second half of the year and most likely in our traditional channels. That doesn't mean there won't be possibilities for expanded channels in the future.

Efraim, is this going to be in the fine jewelry area of the department store? Where do you feel like department stores will be most interested in selling this?

I think Movado operates in the fine watch area of department stores, chain jewelers and independent jewelers, so we will continue to be positioned in that department with our Movado brand. So we will stay true. In fact, one thing that's very important to us is that in this area, we will stay true to what Movado does and what Movado does well.

And did you feel like it was going to be in Bold or in the flagship line like -- or both?

Oh, I think you'll eventually see it in both, in Movado core done one way and in Movado Bold gives us an opportunity to do it differently.

Okay. And just the last question is on the gross margin. Will we continue to see that positive benefit from mix and channel? And could you just articulate what's driving that?

Well, obviously, the larger impact is currency. And mix and channel is something we work and strive for all the time based upon the very complex nature of our business from a global perspective and from a brand perspective. So something we work on all the time and hopefully we will continue to see some positive impact of that. And the pricing is really the bigger piece that we should start to see benefit of as we get towards the second half of the year.

And we'll now take a question from Ed Yruma from KeyBanc.

I know first you cited the continued issues at sell-in versus sell-through. I guess as it relates specifically to Movado product, how would you characterize in-stock levels at some of these key department stores and folks that have been reducing some of the sell-in?

Well, like I said before, our sell-through continues to outpace our sell-in. And to the degree that we continue to do this, we're going to find the replenishment orders against the bestsellers and the innovation. Obviously, we'd like to see more of that, but I think with good results, everybody responds the right way. So we're very encouraged by the sell-through. We know that our key retail partners are encouraged by our sell-through results. So it's just a matter of cycling through all their entire open-to-buy, it's not only what they have with our brands.

So as you have discussions with some of these partners, is it more a byproduct of kind of secular weakness in the watch category? Are they taking some kind of bet on wearables? Like how would you characterize their view on some of the reasons for the weaker sell-in?

Well, I think, overall, if you actually look at it, you're seeing slow growth in the retail channel overall. Everybody talks about the watch category, but I think you're actually seeing it across multiple categories. And retail, overall, has had low comp store sales growth. So I think as all retailers are focused on their inventory and productivity versus their inventory overall, and that obviously has impact on our category as well. So I don't -- I think a little bit of it is category-specific, but I think you're actually seeing it across categories.

Got it. The final question on wearables. As you plan for the launch, I guess, in the back part of the year, how material of it is it to your financial plan? Would you expect some kind of stepped-up marketing? And I guess, is the inventory risk-different than the traditional watch business?

I think it -- we are looking it -- for it to be somewhat neutral overall to the company's bottom line this year. And so we will make investments against that -- against the category. And we believe that longer term it will have a definite -- presents a definite opportunity for the company. You're getting a tremendous amount of interest brought into the category overall, and people who may have been -- consumers who may have been getting out of the watch market are now developing an interest in the watch category, and I think that's on overall positive for the category, especially long term.

We will take a question now from Kristine Koerber from Barrington Research Associates.

Just a quick follow-up on the wearable smart watch category. So did you -- is this going to be October launch? Is that what we should expect at this point?

I would think you're looking at end of third quarter, beginning of fourth quarter. So it's -- we expect to launch our first wearable into the Movado brand before the holiday season. So -- and that would be our expectation right now.

And I guess, as a follow-up on that, as you've worked on developing -- work on developing your smart watch wearable technology, can you kind of give us some idea of kind of what you were thinking around developing your smart watches as far as features or functions as you look at the other products that are currently on the market?

I think it's a little early for us to probably say that publicly. I would think we'll have more information in that later in the year as we publicly announce what we're doing in that segment.

Okay. And then internationally, I mean, wholesale business was up pretty solidly. Can you just talk about -- give us a little more color on -- if we look at U.K., I mean, you had strong double-digit growth there, kind of what's been driving the brands driving U.K.? How's Movado doing abroad at this point?

So the U.K. is one of the markets where we are seeing traction. Movado is doing well. HUGO BOSS, as I mentioned, is really a great success story. Other places in Europe, where we're starting to see some sparks of business that are building which we're very happy, is, for example, Spain. Spain has been a market that, for a very long time, has been difficult one. We're starting to see some very strong results on some of our licensed brands in Spain. Germany continues to do well. We see accelerated growth on a couple of our licensed brands, as well as some of our Ebel business. In Germany, we're seeing very strong sell-through from our New Wave introduction. And it's very interesting because we're -- there's been a shift in the traveling corridor, the Chinese consumers. We saw the decline here in the U.S., but we're seeing a pickup in Europe. And also, if you think about the Middle East region, we're seeing a pickup in Middle Eastern consumers also. In Europe, we're seeing that in Switzerland and particularly in Germany. So one of the things we're being very mindful of is how do we capture this traveling consumer with a product that is relevant to them in the locations that they're traveling. So we're -- we've been able to make some shifts in that regard and I think we're seeing the results.

Great, that's helpful. And just one last question, is -- we look at the licensed brand portfolio, do you see any opportunities to expand that portfolio with additional brands at this point?

Well, for us, the most immediate opportunity is we have a lot of runway ahead of our current portfolio. And that is our #1 priority. These are part of our company, and we have an obligation to fully exploit these powerful license brands around the globe. But that's our number one priority at this point.

And we will take our final question of the day from Jeremy Hamblin from Dougherty & Company.

First, I wanted to ask about gross margins. And you've seen, really, for the last -- on the last 11 quarters, you've had gross margins down 10 out of the last 11 quarters. We know the last couple have been impacted by currency. But can you help me understand a little bit more on the -- on this particular quarter, with gross margins down almost 150 basis points, how much of that is currency versus what you're seeing in the underlying business? Especially with -- I think you had indicated sell-through, you had in, I think, low double-digit range. But help me understand, because I would think that on some of your input costs with Swiss franc down, that you're getting some benefit actually on your gross margins from the lower cost of goods. Can you help me understand that a little bit?

Sure, you haven't seen that much of a fluctuation in the Swiss franc. It's over year-on-year. And if you look at it, I think Sallie it's -- said it's 200 basis points in the quarter of gross margin fluctuation is just currency. And you have to remember that we implemented most of our price increases very late in the quarter. So they had virtually no impact on the first quarter. And I think that the second and third quarter will be more indicative of our year-end gross margins. And we do, as I said in my comments, expect them to improve predominantly due to our price increases. We have not taken price increases in a number of years, and I think we said that in our last conference call. So this is the first time we've taken a significant pricing -- really, a price increase at all in 5, 6 years. And so we had made a strategic decision, prior to that, to absorb cost increases. And due to the extreme volatility of currency in the fourth quarter of last year, decided that, strategically, the best thing for the company was to implement a price increase, and we believe it was the right decision. So we'll see the benefit of that in the second half of the year.

Great, that's helpful. And just as a follow-up to that, on the price increases, the only concern that we -- or do you have any concern that as the watch category has clearly seen slowing sales overall over the last several quarters, but it seems to have really slowed down over the last couple of quarters. Is there any risk that price increases, there's going to be pushback especially if there are newer opportunities certainly with the wearables and so forth? How well do you think -- I mean, do you have some kind of initial indications as to how those price increases are being taken?

Well, as we discussed in our previous call, we were very, very mindful and strategic on how we implemented these increases. And one of the key things was we did not vacate key price points that are important gates for consumers. So prices like $495, $995, these price points we protected. Now what's very interesting is, in our research, pricing is not the one -- number one driver of the decision for a watch. Actually, design and style, brand, quality, these are the numbers -- the more important attributes in making a decision for a watch purchase. And these are areas where we feel very, very strong with all our brands in our watch offering. So obviously, there is a risk, but we believe the benefits are greater. And some of the things we asked around the globe, many consumers don't remember how much they paid for a watch or they -- if you ask them how much it is, they may actually think the price is higher. So this is a very -- it's not an exact science. And I think, again, with strong brands, strong quality, strong design, those are the key motivators for the purchase.

And with no additional questions at this time, I'd like to turn the conference back over to management for any additional or closing remarks.

I'd like to thank all of you for participating with us today, and wish you all an excellent summer. Again, thank you very much, and we look forward to talking to you after our next quarter's earnings.

And ladies and gentlemen, this does conclude today's conference, and we do thank you for your participation.