Rachel Schacter - Senior Vice President of Retail, Apparel, Consumer Goods Richard J. Coté - President, Chief Operating Officer and Director Sallie A. DeMarsilis - Chief Financial Officer and Principal Accounting Officer Efraim Grinberg - Chairman and Chief Executive Officer.

Oliver Chen - Citigroup Inc, Research Division Rick B. Patel - Stephens Inc., Research Division Kristine Koerber Eric M. Beder - Brean Capital LLC, Research Division Michael Richardson - Sidoti & Company, LLC.

Good morning, ladies and gentlemen, and welcome to the Movado Group, Inc. Second Quarter Fiscal Year 2014 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.

Please go ahead..

Thank you. Good morning, everyone. With me on the call is Efraim Grinberg, Chairman and Chief Executive Officer; Rick Coté, President and Chief Operating 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, our 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 Rick Coté, President and Chief Operating Officer of Movado Group..

the Coach Tristen and Boyfriend mini product offerings, the Tommy Hilfiger Ainsley and Harrison models, the Hugo Boss Aeroliner and Ultra Slim watches, the Juicy Pedigree and Stella Bling lines and the Lacoste Borneo and Seattle collections.

We are well on our path of repositioning Coach watches as fashionable modern classics, offering the quality and authenticity inherent in Coach, with an improved price value proposition to consumers within the fashion watch category. Early results certainly meet our expectations.

We are now on our fifth month of the initial rollout of the Scuderia Ferrari brand globally, and it is off to a great start. Our core product offerings range in price from $125 to $695, and we have opened approximately 1,500 of the planned 2,300 doors this year. We are excited about the initial sell-through results.

Our outlet retail division remains an important contributor to our business from both the sales and profitability perspective. The greater emphasis we have placed on branding and customer service at our existing stores has helped fuel sales conversion and profitability.

Our sales for the second quarter increased 7%, and our profitability continues to be strong. We just recently opened a new store in Phoenix, Arizona, keeping our store count at 34 outlet stores. We remain excited that the initiatives we have been diligently working on has succeeded in creating momentum in our business.

We believe our combination of powerful brands, superior infrastructure and our talented global management team position us to continue the path of above-average sales and profit growth. Now I'd like to turn the call over to Sallie to discuss our financial results and fiscal year '14 guidance..

a $2.1 million increase in marketing expense and a $1.2 million increase in other operating expenses, partially offset by a $500,000 decrease in compensation, benefits and the accrual for performance-based compensation. Operating income was $17 million or 12.3% of sales compared to $10.7 million, or 9.1% of sales in the year-ago period.

Income tax expense was $4.3 million, and our effective tax rate was 25.3% in the second quarter of fiscal 2014 compared to income tax expense of $2.5 million or 23.6% effective tax rate last year.

The tax provision for last year includes the effects on the applications of guidelines related to accounting for income taxes in interim periods, as well as accounting for valuation allowances.

The tax provision for the second quarter of fiscal 2014 includes a $1 million or $0.04 per diluted share benefit primarily related to favorable changes in connection with domestic and foreign tax audits in the current period. Net income in the second quarter was $12.5 million or $0.48 per diluted share.

Excluding the $1 million discrete tax benefit just discussed, adjusted net income would have been up $11.5 million or $0.44 per diluted share versus net income of $8.1 million or $0.32 per diluted share in the year-ago period. EBITDA increased to $20.1 million compared to EBITDA of $13.4 million in the second quarter of fiscal 2013.

Looking at the 6-month period ended July 31, 2013, sales were $248.3 million, an increase of 12% from fiscal 2013. And on a constant dollar basis, sales increased 11.8%. Gross profit was $134.7 million or 54.3% of sales as compared to $124.8 million or 56.3% of sales last year. Operating income was $27 million compared to $19.2 million in fiscal 2013.

As a reminder, during the first quarter of this year, a building was sold for a pretax gain of $1.5 million or $0.04 per diluted share. And as mentioned earlier, the tax provision for the second quarter of this fiscal year was favorably impacted by a $1 million or $0.04 per diluted share onetime item.

Net income was $20.7 million or $0.80 per diluted share as compared to $14.7 million or $0.58 per diluted share in the year-ago period. Excluding both the discrete tax benefit from the second quarter and the building sale in the first quarter, adjusted earnings per share for the first 6 months of fiscal 2014 would have been $0.72 per diluted share.

EBITDA for the 6 months of fiscal 2014 increased to $32.8 million from EBITDA of $24.9 million last year. Now turning to our strong balance sheet. Cash at quarter end was $151.5 million as compared to $156.3 million last year. We continue to have no debt outstanding. Accounts receivables increased to $17.6 million or 29.5% to $77.3 million.

This increase was primarily due to the overall increase in sales including the timing of the Coach and Ferrari initiative. Inventory increased $9.5 million or 5.6% to $179.9 million at the end of the quarter. On a constant dollar basis, inventory increased by only 2.6%.

Capital expenditures for the 6-month period were $10.2 million and depreciation and amortization expense was $5.8 million, combined.

Once again, I would like to remind you that our capital expenditures were planned higher than normal for the first half of fiscal 2014, due to the spending related to the Basel Fair booths and our Swiss corporate offices. We continue to project capital expenditures of approximately $19 million for fiscal 2014.

Previously, we announced the $50 million share repurchase program. The purpose of this program is to offset normal dilution caused by share awards.

Because this repurchase program will only be in place for a partial period of this year, we do not expect the share repurchase program to have a significant impact on the weighted average number of shares outstanding for fiscal 2014.

For the first half of fiscal 2014, approximately 100,000 shares were repurchased under this program, which began in April. Now I would like to discuss our increased guidance for the current fiscal year.

And let me note that we are still taking a cautious view of the global economy, and we are assuming no significant fluctuations in foreign currency exchange rates. For fiscal 2014, we anticipate our sales will increase approximately 13% to a range of between $575 million and $580 million.

Gross margin rate is still expected to be approximately 54%, a decrease from fiscal 2013 due to the planned mix of business, the repositioning of the Coach brand and the launch of the Ferrari branded watches. Operating income is projected to increase over 20% to $70 million. EBITDA is expected to increase to $81.5 million.

Due to the mix of the global pretax results, the estimated effective tax rate for the current fiscal year is expected to be 28%, and net income is planned to increase to approximately $49 million. We expect diluted earnings per share in fiscal 2014 will increase to approximately $1.90.

The guidance we have just provided assumes no unusual items for fiscal 2014 and excludes the sale of the building in Switzerland in the first quarter and the $1 million favorable discrete tax items in the second quarter. Now I would like to turn the call over to Efraim..

Thanks, Sallie. We are pleased with our second quarter results, which accelerated in pace from the beginning of the year and included a 17% increase in sales and a 59% rise in operating income.

Our top line strength was fueled by strong innovation across our Movado and licensed brands, and included the continued successful introduction of our Scuderia Ferrari watch brand and positive response to our newly repositioned Coach watch brand into the fashion watch category.

This, combined with the disciplined execution of our growth strategies, enabled us to leverage our infrastructure and produce operating income growth of more than triple the rate of our sales. Our strong balance sheet and planned cash flow generation led our board to approve a 60% increase in our cash dividend to $0.08 per share.

As we enter the second half of the year, we will continue to implement the strategies that have allowed us to deliver 14 consecutive quarters of year-over-year increases in sales and earnings.

We are excited about the innovative new products that we're introducing across our brand portfolio this fall and expect this, along with our high-impact marketing programs, to fuel continued growth in the second half of the year. Given our strong year-to-date performance and our positive outlook, we have increased our annual guidance.

We remain focused on our long-term business strategies, which we believe will position us to deliver sustainable profitable growth. We would now like to open the call up to questions..

[Operator Instructions] We'll go first to Oliver Chen of Citigroup..

On your Wholesale growth numbers, if you could just help us understand if that's mainly productivity driven versus point of distribution and how you see that evolving? Also, related to your full year net sales guidance of plus 13%, it seems like it's potentially conservative relative to the pretty awesome revenue growth numbers you just posted.

If you could just explain what informs the way you're guiding there, that would be great..

This as Rick. Thank you, Oliver, for the compliment on the results for the quarter. From the standpoint of looking at our sales in the first half, clearly we do have some new door openings as it relates to Scuderia Ferrari. Those are entirely new doors.

So that business is truly incremental, and we will continue with sell-through in those existing doors, as well as new door openings for the second half of the year. Coach, obviously, the repositioning will also result in some increase in new doors.

I suspect most of that will happen really in the second half of the year with very little happening of that in the first half of the year. And also, the sales growth is all driven by productivity. When you look at it -- and I'll remind you of the percentages of market growth that took place in the U.S.

When you look at the Movado brand -- and again, this is third-party independent data -- the market excluding Movado in our price points of $300 to $3,000, grew 1% for the 12-month period ended June 30, 2013. Movado grew in excess of 15%. So it is very much driven by productivity, the sales growth that we've realized.

Looking forward to the second half of the year, again our sales grew 12% for the first half.

We're looking for a heightened level of growth for the second half, so very much continuing the momentum that we have and then also getting some additional benefit because of the Coach repositioning, as well as some additional door expansion in Scuderia Ferrari. So we don't think those numbers are conservative.

We think they're still very strong growth numbers. And those are productivity and market share increases that will continue to take place and drive that..

And I have a follow-up. Could you just share with us your view on the potential launch of more smart watches and electronic guy watches in the marketplace and how....

This is Efraim. I think that's something now that we've been talking about for -- I guess during most of the first half of this year. We see it actually as adding interest into the category. We are really positioned around design and fashion and product innovation more than from a technology point of view.

So I don't think that, that -- I think it's an additional entry into the category, it's not a substitute for anything else. Especially young consumers and consumers overall who have been interested really in watch-wardrobing, and probably this is another aspect to that watch-wardrobing..

We'll go next to Rick Patel of Stephens Inc..

It seems like this past earnings seasons, there's been a number of department stores that have posted soft results. So I'm hoping you can talk about what you're seeing in the department store channel from an inventory perspective, and how that affects the way you're looking at the back half.

I'm just curious about your level of confidence on the watch category and your business in particular given some of the softness we've seen recently..

We've continued, Rick, to focus on continuing to drive productivity with our retail partners. So we believe our inventories are in a healthy position at Retail. And we are basing, as Rick Coté said earlier, basing our improved results for the year on some economic growth in the U.S.

but really driven by our product innovation and our strategic initiatives behind Coach and Scuderia Ferrari and then continuing to evolve and innovate in our product assortments in Movado and our licensed brands..

And then a question on gross margins. It looks like they're on track to continued declining in the back half, but I was hoping you could provide some color on perhaps the cadence of gross margins in the third quarter and fourth quarter.

I'm curious if once we reach the fourth quarter, if there's any potential for upside once you see Coach and Ferrari watches gaining a little bit more scale going into holiday..

I'll address that, Rick. This is Sallie. For this year, we did forecast a 54% gross margin, which is pretty much where we are so far. So we would anticipate that this would be the level that we would see the third and fourth quarter at. No significant changes. And of course, we wouldn't talk about any impact of these initiatives on future gross margin..

We'll go next to Kristine Koerber of Discern..

First, can you talk about advertising? The $2.1 million increase in the second quarter, was that for a particular brand? And what are your plans for the back half of the year?.

Well, really, our advertising is spread across our brands as we continue to drive our marketing plans within our growth initiatives. And for the second half of the year, we have really -- we have exciting plans in place. I think we'll talk a little bit more about those in the third quarter conference call.

But we'll be back on television, as well as an increased presence in magazines and digit -- and everything digital. So we really are focused on driving an omni-channel -- what we call an omni-channel marketing approach..

And we continue to -- that increase is consistent with increases that we've had over the last 4, 5 years. So we continue to invest behind the strong brands that we have to help fuel that sales growth that we have delivered and planned on delivering in the future..

Okay, great.

And then as far as the Movado brand, can you talk about how it's doing in the U.K., because I believe you recently launched in the U.K., and what your strategy is for other international markets with the brand?.

From a standpoint of in the U.K., our strategy on international, we are an international brand and we believe there's opportunities of further expanding our presence globally. And our strategy there is to focus with key retail partners throughout the world. So in the U.K., we've certainly done that with the Signet group, and we're off to a good start.

But we're taking things -- we're not in a rush to sit there and just have tremendous numbers. We're in a -- we believe in doing it in a logical manner and in a very successful manner and so allowing it to build and grow. So the U.K., we started off, we're very pleased with the results. We will continue to expand in the U.K.

And we continue to talk and partner with other important retailers as we look at expansion opportunities above and beyond where we are today in a lot of the markets around the world..

Okay. And then just lastly, the bigger picture question, just looking at the watch categories, could you talk about maybe the change in trends with the consumer, especially that younger consumer? You've seen the move back to wearing watches again.

I mean, clearly you're taking share, but just trying to get an idea of what's really going on with that younger consumer because they were relying on their phones to -- for time and now it appears that they're moving back to wearing watches..

Well, I think that people use both their phones and their watches to tell time. And you've always had different places to tell time. So whether you had clocks on the wall in the classroom or in offices. So they really are wearing watches as fashion accessories. And our job is really to innovate it and drive that through different initiatives.

So we've been very successful, for example, within the Movado brand in driving younger consumers into our Bold concept and creating exciting products for them. And we're doing it now again in our ESQ Movado assortment with ESQ One.

So I think as long as we continue to innovate and produce exciting products that are on trend and within -- and have a high design quotient and offering great value, we'll continue to be successful..

[Operator Instructions] We'll go next to Eric Beder of Brean Capital..

Could you talk a little bit about what -- a little more in depth on what you've learned about the Ferrari brand? It's 5 months into it. You have the license to go much higher in terms of pricing points in the core you talked about.

How do you think about that longer term in terms of getting to the higher price points there?.

Really, we're focused in a core price range where we believe that there's great volume between EUR 125 and EUR 600. We are today selling some watches at slightly higher price points than that and some limited additions up to about EUR 1,500.

But we really think that the great opportunities here are within the continued focus of offering EUR 125 to -- up to about EUR 600, EUR 700 in terms of being able to do volume. And again, offering a great design quotient tied in with an unbelievable brand has an unbelievable design philosophy.

So it's been really exciting for our designers and our retailers and consumers around the world that reacted to it..

Okay. And in terms of Coach, how should we think about the ramp-up in the SKUs? I know this quarter was -- Q2 was the start of that.

How is that going to roll out?.

I think what you're seeing is right now, we're really just delivering to customers. We are beginning to see some initial successes of retail sell-through, particularly at Coach stores of our new product.

But I think you will see it full swing in October, November and December into the holiday quarter as we transition into the fashion watch department within department stores.

And then throughout the coming years, we will continue to evolve newness at a faster pace, increasing our overall assortment and then -- as well as point of sale with the Coach watchband..

Great. And we should think about -- I know this year is a decline in gross margins driven by some onetime items.

How should we think about gross margins on a longer-term basis like, in your terms, a 4-year plan for gross margins and other pieces as you anniversary kind of the onetime things that happened this year?.

I'll let Rick -- why don't you take that, Rick and Sallie..

When we look at the gross margin again, the 54% guidance that we have this year, we think that's kind of our base level. As we look at moving forward, obviously, we'll continue leveraging and getting some benefit in some of our fixed costs in there. And then obviously, it is our job to look at opportunities of being able to move that forward.

But we think it's been very important for the last couple of years, and we see this really for the next couple of use as well of having a great price value relationship for consumers out there. So when we're done, we're not afraid of having a 54% margin for the next couple of years.

Obviously, we'd like to move that up a little bit, but we're comfortable of doing that because when we're done, we see our operating expenses growing at a significantly lower level than our top line sales growth. So we see our opportunity and our strategy of being able to grow our operating profit percent of sales to very nice levels.

So it's an opportunity above and beyond, but we see ourselves in that 54% range for this year and probably the next year or 2..

And we'll go next to Mike Richardson of Sidoti..

With regard to the Ferrari door openings, can you tell us what geographies they've been focused in and what is the goal for the number of doors?.

For this year so far, we've opened about 1,500, most of that throughout Europe. That's probably the biggest area so far. Second, followed probably equal Asia and the U.S. Expanding it to 2,300 doors is our plan for this year. We'll see a lot more door activity in the United States, North America, as well as South America.

And the overall door plans are, over the next couple of years, to get to that 5,000, 6,000 door level. We will pretty much be in all geographies and all major countries around the world.

So it's more about managing the pace to be able to manage as well the inventory availability that we have and making sure that we can support strong levels of sell-through that are taking place. So we see that over the next 3 years expanding to that $5,000, $6,000 door level..

Okay, great.

And so Ferrari is not being offered in South America currently?.

No, no, we do have some. I'm just saying when we look at the number of doors that we have to open another 800, most of those will probably happen in North America and South America. So we have some already certainly, but we will continue to expand.

So what we've done initially in the rollout is all of our key customers around the world certainly were offered products, and then we continue to expand in that doors and other customers in a priority basis..

Okay. And just one more. I know you touched on it briefly in your opening comments, Rick, but I was hoping you could talk a little bit about what you guys might be seeing in Europe. We've been hearing about some improvements in some of the European economies. I'm just wondering if you've been seeing that as well..

the Greece, Italy, the Spain markets. From our business, we were up strong double digits. So we continue to do well. We're pleased with it. We seem to be outperforming what the economies theoretically are doing, and that's a testament to the strong brands and the great product innovation that we have out there.

Obviously, it helps with launching Scuderia Ferrari that from our standpoint, even though there's a recession in southern part of Europe, we continue to do well. Part of that is because of a major new launch that is very exciting for those consumers in that part of the world..

We have a follow-up question from Oliver Chen of Citigroup..

I just have a couple of broader questions. What are your thoughts in M&A within this sector, and what are you seeing in the marketplace and if there may or may not be consolidation opportunities of other brands out there? And secondly, if you could just talk to us a little bit about your feelings on the back-to-school sentiment.

Overall, outside of your subsector, there's been very much caution around traffic and the health of the consumer. Just be great to have your insights there..

I think, in terms of M&A, and I think what we've said in the past, is that our internal plans and the ones that we've shared with everybody and our strategic plan basically call for executing our plan based on organic and internal growth. So that's what we are planning right now.

On the other side, I think it's a little too -- I think back to school is not indicative, overall, for the watch category. Our big season is really the holiday season coming up. And as we said earlier, we have really exciting plans in place for the holiday season..

At this time, we have no further questions. I would like to turn the call back over to management for any additional or closing comments..

Okay. I would like to thank anyone for participating on today's call. And we look forward to talking with you again after our third quarter. And we wish all of you a great holiday weekend coming up. So thank you very much..

That does conclude today's conference. We thank you for your participation..