Good day, everyone, and welcome to the Movado Group, Inc. Second Quarter 2023 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'd like to turn the conference over to 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; and Sallie DeMarsilis, Executive Vice President, Chief Operating Officer and Chief Financial Officer. Before we get started, I would like to remind you 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.

Thank you, Rachel, and good morning and welcome to Movado Group's second quarter conference call. With me today is Sallie DeMarsilis, our COO and Chief Financial Officer. I will start by giving you a brief overview of our results, followed by an update on our strategic initiatives and brands, and then Sallie will review our financial results in greater detail. We would then be glad to answer any questions. In an increasingly volatile global economic environment, we are very pleased with our overall results. Facing significant currency headwinds, our sales for the quarter grew by 5.1% and 10.5% on a constant currency basis. Our gross margin was 58.5% of sales, an increase of 190 basis points from last year. We delivered adjusted operating income of $31.4 million or 17.2% of sales versus $25.5 million or 14.6% of sales last year. Adjusted EPS was $1.07 versus $0.85 last year. Additionally, our balance sheet remains strong with cash of $203 million at quarter end and no debt. Our teams around the world continue to execute against our plan while navigating a challenging environment with a higher level of uncertainty. For the quarter, our sales -- our U.S. sales declined by 5.4%, while our international sales grew by 15.3% and 25.8% on a constant currency basis. In the U.S., we saw an increasingly difficult retail market impacted by rising inflation and the anniversarying of robust stimulus programs that benefited consumers in multiple income categories. We have also seen the slowing of the U.S. economy as the Fed increased rates in its effort to bring inflation under control. In our international markets where prior year results were less impacted by stimulus programs than in the U.S., we saw continued strong growth in our licensed brand performance, including the launch of Calvin Klein. As we…

Thank you, Efraim, and good morning, everyone. For today's call, I will review our financial results for the second quarter and year-to-date period of fiscal 2023, 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 second quarter and year-to-date period of fiscal 2023 and fiscal 2022 in our press release issued earlier today, which also includes a reconciliation table of GAAP and non-GAAP measures. Overall, our performance for the second quarter of fiscal 2023 continued to be strong. Sales were $182.8 million as compared to $173.9 million last year, an increase of 5.1%, which exceeded our expectations of 2% to 4% growth. In constant dollars, the increase in net sales was 10.5%. Net sales increased across our licensed brands and company stores, partially offset by a decrease in our owned brands. U.S. net sales decreased 5.4%. As Efraim mentioned, the retail market in the U.S. was difficult as we anniversaried last year's stimulus and continue to see the effect this year of increased inflation on the consumer in addition to slowing domestic growth, all of which creates a challenging comparison year-over-year. International net sales increased 15.3% as compared to the second quarter of last year. On a constant currency basis, international net sales grew by 25.8%. We saw strong trends, especially in Latin America, India and Europe. Gross profit as a percent of sales expanded to 58.5% compared to 56.6% in the second quarter of last year. The increase in gross margin was primarily driven by favorable channel and product mix, partially offset by the unfavorable impact of foreign currency exchange rates. Operating expenses were $75.6 million as compared to $73…

[Operator Instructions]. Our first question today is coming from Oliver Chen from Cowen.

The U.S. experiencing those negative trends, does your guidance include a continuation of that happening? And given that, that -- it was negative, how are the inventories of that channel and the freshness of the inventories? I would also love you to elaborate on that outlet traffic. It sounded like a caution point.

Sure. So on both of those, yes, our outlook does factor that there's going to be continued weakness in the U.S. and I think really due to 2 factors: one is the inflation, and two is the continued lapping of stimulus that -- on the consumer that really did occur throughout the year last year and probably ends at the end of December. On the traffic front, we've always seen traffic challenged in outlets when gas prices are high. We have seen an improvement over the last month, as I said in my comment in both traffic patterns and business in our brick-and-mortar locations. And that business is still performing extremely well, and we're very pleased with it. But I do think that when you do see higher gas prices, those are generally destinations and you -- and less people will drive to those destinations. I think on the inventory front, retailers have been very cautious on inventory levels and -- so inventory is pretty clean at the point of sale. Our inventory is very fresh. And you have to remember that our inventory is not seasonal. It is not -- it is long-lasting as a rule. And so I think we're in pretty good shape on that front.

Okay. And on the U.S. side, it's been really dynamic. We've seen a worse July than June, but kind of better back half of July. What are you thinking with pricing trends in light of the negative trends in the U.S.? And do you expect the U.S. market to get worse or better or stay at the rate you're seeing it now?

I think what I look is that we're returning to more normalized trends. And so we had a big boom last year in the U.S. based on all of the economic actions, low interest rate, stimulus that were taking place. And so if you look at most of our numbers against 2019, which is the last pre-pandemic year, I would expect that they'll be better than that, and they have been better than that. So within a more normalized environment and one that's not being made highly liquid by government actions, the business is performing well and will continue to perform really well. So I think it's important to look at trends against that kind of an environment.

Okay. And another cautious factor we're monitoring is Europe at large and recession risk and things getting worse there as well. You had really robust global numbers, but what are you seeing in those markets? And are you concerned that trends will slow or not?

I think we're -- overall, we're pleased -- we're really pleased with our performance in Europe as -- my experience also leads me to believe Europe doesn't get the highs and the lows that we do in this country. And although you are seeing already some economic challenges in countries like the U.K., part of that also has to do with their separation from the EU. We're seeing robust growth, for example, in our digital -- in some of our digital businesses in Europe and then also in travel retail, which had virtually disappeared for about an 18-month period and is now beginning to return as a real business.

Okay. And then on everyone's mind, of course, and as you mentioned, is this -- the inflation topic, yet you had some pretty impressive average unit retail performance. How would you characterize your portfolio in terms of inflation? And what are you doing with pricing? And it probably manifested differently across your portfolio.

So we did take early in the year some selective price increases to offset inflation both on the operating side and on the cost side. I think we're seeing the results of that in our strong gross margins that we delivered in the quarter. I think with -- as the environment becomes more challenging, I think, obviously, price increases become more challenging as well. But costs will eventually moderate as well also. And you're starting to see that with hiring, in areas like that. While there's still a lot of open positions both at our company and in this country, we're seeing more candidates, for example, than we had been in -- late last year.

And Sallie, it looks like the guide -- the tweak in guidance is largely on FX. Could you help us understand the embedded FX impact on the gross margin line for the back half in guidance and what we should know about the magnitude of FX on the top line? And second question, Sallie, will mix and channel continue to be helpful to the gross margin in the back half as we model that?

Okay. So let me start on the top line with revenue. That is the key factor in us tightening the range is due to the continuing strengthening of the U.S. dollar. And we do have such a global business that it's pretty critical for us to try to call that out to you all. As it relates to gross margin, that does also impact our gross margin. So the fact that our gross margin rate continues to be strong at 58% but stay at 58%, there was also a piece of that related to the impact of currency on our gross margin rate. As for mix, we will look at that. We are looking at that continuing in this challenging environment with the blend of the U.S. business versus the international as well as the direct-to-consumer and outlet. So all of that gets blended together and has us continued to be a relatively steady gross margin rate with a very complex calculation to get there.

Okay. And your balance sheet is -- seems really healthy. What's on your prioritization list? Could a special dividend be in the realm of what you're thinking? Would love to hear key priorities in terms of capitalization and returns to shareholders.

Well, I think we have both, we believe, a healthy dividend in place and intend to continue that. Obviously, we evaluate it based on our overall cash position. And generally, in the second half of the year, we generate a lot more cash than in the first half of the year. And then the other part is we also have a share repurchase plan in place that we've executed fairly well against the -- in the first half of the year, and I would expect that we will continue to repurchase shares throughout the second half of the year.

Okay. And Efraim, on the Calvin Klein business, so far, what have been your biggest surprises and/or tweaks you've made as you've executed that part of the innovative business? It's a really great brand.

Yes. Look, it's a fabulous brand. It has global brand recognition. It's one of the big brands. We're really pleased to partner with them. We've seen robust international placement of both watches and jewelry between the Middle East and Europe and parts of Asia. China has gotten off to a slower start and not due to anything other than the fact that they obviously had substantial closures during the first half of the year due to COVID. And then we've seen also robust reception to the product, probably more than we expected in Latin America and pretty strong sell-through results there. So I think everything is working according to plan. What you always do is you -- when you introduce a new brand, you learn from just the product that you introduced. You fine-tune the product assortment as you grow the business. But we're as excited, if not more excited, about it today than we were when we first signed the license.

Okay. And last question, marketing as a percentage of sales, how are you thinking about that? What we've been seeing is a certain degree of digital disruption and fluctuation in customer acquisition costs, particularly with the Apple iOS changes as well as some of the Google algorithm changes. So would love your take on that, also as you think digitally and use some of the best practices at MVMT as well.

Sure. So most of those changes came in place during the last year. And so you -- now as we go into the second half of the year, we're in a market where those -- a lot of those IOs, the privacy changes were already in place for the second half of last year. I think what we're also recognizing in some of the learnings, for example, that we got from MVMT is the success of our influencer campaign. So we're launching a major one with Movado this second half. That really is aimed at what we call the top of the funnel and continuing to build aspirational brand image for the brands. So we're excited about that as we progress. One of the things that you do need to do in today's day and age is produce a lot more content for each of your brands, and our team has gotten really adept at doing that. As you know, we've also had a new Chief Marketing Officer join us and I think will be integral to that effort as we move forward.

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Efraim for any further or closing comments.

Okay. I'd like to thank all of you for joining us today and wish you a very good end of the summer and a final holiday weekend next weekend. Thank you again, and we look forward to joining you for our third quarter conference call.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.