Rachel Schacter - IR, ICR, Inc. Efraim Grinberg - Chairman and CEO Ricardo Quintero - President Sallie DeMarsilis - CFO.

Ed Yruma - KeyBanc Capital Markets Oliver Chen - Cowen and Company David Burdick - Dougherty & Company Frank Camma - Sidoti & Company.

Good day and welcome to the Movado Group’s Fiscal Second Quarter 2017 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 Ms. Rachel Schacter of ICR. Please go ahead ma’am..

Thank you. Good morning, everyone. With me on the call is Efraim Grinberg, Chairman and Chief Executive Officer; Ricardo Quintero, [technical difficulty]. Before we get started, I would like to remind you of the Company’s Safe Harbor language, which I am sure you are all familiar with.

The statements contained in this conference call, which are not historical facts, maybe 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 risk 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 or 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. Good morning and welcome to Movado Group's second quarter conference call. While our sales and earnings for the quarter were behind last year, we delivered against our plan.

Navigating in a challenging retail environment and one that is particularly challenging for the watch arena, we felt that it was prudent to update our outlook for the year.

Over the last several years the fashion watch category has had a very strong growth and over the last number of quarters the market became somewhat saturated and entered a period of correction.

During the last several quarters, retailers focused on rightsizing their inventories to the new realities of the marketplace, which accelerated during this past quarter. Our sell-in during the quarter was lower than our sell-through. In a highly promotional environment, we chose to protect our brand and not engage in unusual off-price activity.

You can see the results of this decision contributed to our 90 basis point increase in gross margin for the first half. We believe in the long-term prospects of the watch business in the category. While there will be continuing challenges, we see opportunities for growth both domestically and internationally.

To succeed in this increasingly volatile environment, you need to provide new and fresh design giving consumers a reason to buy.

We're excited about our innovation pipeline for the second half, which includes some of our most exciting new products ever like the new Movado Esperanza, as well as the new connected -- as well as new connected timepieces in Movado and for the first time in each of our licensed brands.

Ricardo will share some of the highlights in our innovation pipeline. We continue to focus on executing our strategic initiatives across our brands and regions and controlling our expenses.

Our balance sheet with over $200 million in cash remains extremely strong, which gives us a high-level of flexibility for the future as we continue to pursue sustainable profitable growth. I'd now like to turn the call over to Ricardo and Sallie, and we will then be available to answer your questions.

Ricardo?.

Thank you, Efraim, and good morning. Our second quarter results are in line with our expectations, delivering approximately $128 million in net sales, down 12% versus last year. Gross margin at 54.9%, up 60 basis points versus last year and operating income at $10.1 million, down 8.1 million versus last year.

Relative to a very difficult retail environment, our brands continue to outpace the competition, gaining market share in major markets around the globe and setting ourselves up for improvement in the second half and in fiscal '18.

The second quarter has continued to be especially difficult for the U.S department store channel and for the fashion watch category, particularly in the women segment. According to NPD, the overall category under $500 was down 14% in the May, June period.

Although our overall sell-through trends for our licensed brands in the U.S brick and mortar department store channel were better than market, retailers pursued an even sharper approach to reducing inventory to reset stock levels and open to buy for the fall season.

We're working closely with our retail partners to focus our resources on the most productive doors to improve overall retail metrics and online. To note, our total U.S. licensed brand online business grew over 30% in Q2. The combination of all these variables resulted in wholesale shipments in the U.S., down 20.7%.

At this point, we expect to build from here with fresher, more desirable products and restore healthier selling trends in the holiday season. A cornerstone of our strategy is to put the consumer first in everything we do. We have been conducting qualitative and quantitative research in the U.S.

to understand millennial consumer behavior, and we are encouraged from what we learned. The results confirm the watch category has growth potential not only with connected watches, but more importantly in traditional watch.

We will continue to invest in innovation, driven by superior design and developing new product that is desirable, relevant, and competitive.

We are encouraged by consumer interest in the smart watch and are excited to continue to add SKUs to our Movado brand throughout the year and for the first time in our licensed brand portfolio in the second half of the year.

Our new connected watches will allow us to participate in the smart watch category at key price points, offering consumers new and preferred functionalities, such as readable notification, step count, world timer, but as part of the traditional looking watch driven by design.

Although we're excited and confident with our approach to this emerging smart watch category, we will remain focused on traditional watches, which we believe still have great growth potential in the segments in which we compete. Our innovation strategy continues to drive market share gains and momentum continues to build behind the Movado brands.

In the U.S. for the January, June period, the Movado brand achieved 21.9% market share in the $300 to $3,000 segment where we compete according to NPD gaining 50 basis points versus last year. Although we continue to see sell-through growth in key international markets, we’ve seen a relative slowdown since our last call.

Europe remains our strongest region from a sell-in and sell-through perspective led by Germany and the U.K where we’ve seen only a slight decrease on a sell-through basis, post Brexit. But definitely a more conservative approach regarding sell-in as key retailers manage their inventories with more caution.

We've also seen a slight slowdown in France as the threat of terrorism curtails travel and domestic spending, but see good results in Spain and Italy. Switzerland remains difficult with a continued decline in Chinese tourism. Our shipment performance in Asia turned slightly positive in Q2 as we anniversaried softer numbers from last year.

China continues to be challenging in the wholesale channel, but we're very encouraged with double-digit increases in sell-through in our directly operated concessions, which we will continue to strategically expand. Hong Kong continues to be challenging.

Our shipments in Q2 for Latin America decreased double digits as these are U.S dollar based and many of the major economies in the region have been impacted by currency devaluations and economic uncertainty remains.

Sell-through in Brazil, our largest market in the region remain positive with a relative slowdown in Mexico, Argentina, and continued challenges in the travel, retail channel. We're ready for the second half of the year and are gearing up for a very strategic marketing plan to support our outstanding innovation pipeline.

We continue to make progress in digital arena, not only on our e-commerce platform, now a full-year since we upgraded our Web site with successful results growing strong double-digits, but also across social media where we’ve increased our footprint and presence in a meaningful way.

We will continue to invest in digital with a mobile first approach in all we do. As we accelerate awareness and engagement into the second half of the year, our digital investments will be across our portfolio and includes an exciting collaborations tied into new product introductions for the holiday season.

We're also preparing an exciting television advertising campaign for the holiday season in the U.S behind Movado innovation with fantastic new creative and media support at unprecedented levels. To achieve all this, we continue to be focused on smart resource allocation.

Shifting resources behind the biggest opportunities, fastest growing brands and channels focusing on productivity and excellence in execution. Fiscal '17 was challenging from a growth perspective for the watch business and what we believe is a cyclical transition and we intend to continue outpacing our competition.

We're currently operating in an unpredictable global environment and there are many economic and political uncertainties in the short-term, particularly before the U.S. elections.

Therefore, we believe it is prudent to reduce our full-year fiscal '17 outlook projecting for sales to be between $550 million $560 million and EPS in the range of $1.40 to a $1.55.

We remain confident in our talented team at MGI, the strength of our brands, our innovation pipeline and the health of our balance sheet to set ourselves up for a future of sustainable profitable growth. I will now turn the call over to Sallie..

Thank you, Ricardo. Good morning, everyone. For today’s call, I will begin with a review of our second quarter financial results and balance sheet, and then discuss our outlook. Before I begin, I’d like to point out the special items included in our year-to-date results for fiscal 2017 and fiscal 2016.

Our press release also describe these items and includes the table of GAAP and non-GAAP measures.

Our GAAP results for the first six months of fiscal 2017 include a $1.8 million pre-tax charge, which equates to $1.1 million after tax or $0.05 per diluted share in connection with divesting of stock awards and certain other compensations in the first quarter related to the announcement of Rick Cote’s retirement.

Our GAAP results for the first six months of fiscal 2016 include a $2.7 million pre-tax charge in the first quarter, which equates to $2.5 million after tax or $0.10 per diluted share in connection with our operating efficiency initiatives and other items. The balance of my remarks will exclude the special items just discussed.

Beginning with a review of our income statement, as both Efraim and Ricardo mentioned sales for the second quarter were in line with our expectations. For the second quarter, sales were $128.1 million, a decline from the same period of the prior year by approximately $17.5 million or 12%.

This decrease was driven by our wholesale business, partially offset by an increase in our retail business. Sales were down 15.2% in the U.S, and in constant dollars, decreased 6.5% internationally. Sales in our wholesale segment were $111.2 million as compared to sales of $129.8 million for the same period of last year.

In constant dollars, wholesale sales decreased 13.4% driven by a sales decline in both our luxury and licensed brand category. By geography, our U.S wholesale business decreased 20.7% to $49.9 million compared to $63 million last year. Our international wholesale business decreased 8.3% to $61.3 million compared to $66.8 million in the prior year.

In constant dollars, international sales decreased 6.5%. Although overall international sales declined, we’ve positive sales growth in portions of Asia as well as Europe.

Sales from the Company's retail business increased $1.1 million or 6.7% compared to last year, primarily due to an increase in our comp store sales, as well as an increase in the number of doors. At the end of the quarter, we operated 40 outlet locations as compared to 38 locations last year.

Gross profit was $70.3 million or 54.9% of sales compared to $79 million or 54.3% of sales in the second quarter of last year.

The increase in gross margin percent was primarily driven by the favorable impact of channel and product mix and certain sourcing improvements, as well as the favorable change in foreign currency exchange rates partially offset by levered loss on certain fixed costs as a result of lower net sales.

Operating expenses were $60.2 million, declining 1% from last year's second quarter. As mentioned on previous calls, we continue to closely manage our expenses, yet at the same time continue to invest appropriately to support our business initiatives and brand awareness.

As a result of our lower sales partially offset by slightly decreased operating expenses, operating income decreased $8.1 million to $10.1 million compared to $18.2 million in the year-ago period.

Income tax expense of $3.4 million or 35.1% effective tax rate in the second quarter of fiscal 2017 compared to an income tax expense of $6.1 million or 33.8% effective tax rate, recorded in the second quarter of the prior year.

The effective tax rate for the second quarter of fiscal 2017 is higher than the expectation for the full fiscal year due to the unfavorable timing of discrete items. This is similar to the second quarter of fiscal 2016.

Net income in the second quarter was $6.3 million or $0.27 per diluted share versus net income of $12.1 million or $0.50 per diluted share in the year-ago period. Now looking at our year-to-date results.

As we mentioned on our first quarter earnings call, we expected the first half sales performance to be below last year's levels in the high single-digit range. Sales for the six months period ended July 31, 2016 were $242.1 million or a decrease of 9% from fiscal 2016. On a constant dollar basis, sales decreased 8.4%.

Gross profit was $131.6 million or 54.3% of sales as compared to $142.2 million or 53.4% of sales last year. The increase in the current year gross margin percent for the first six months was a result of reasons similar to the second quarter just discussed.

Once again, as mentioned on our first quarter earnings call, we expected operating income for the first half to be below the prior year. For the first six months ended July 31, 2016, operating income was $17.3 million compared to $27.8 million in fiscal 2016.

Net income was $10.7 million or $0.46% per diluted share as compared to net income of $18.2 million or $0.75 per diluted share in the year-ago period. Now turning to our balance sheet. Our cash at the end of the second quarter of fiscal 2017 was $205.8 million versus $188 million in the same period of fiscal 2016.

Accounts receivable were down $8.1 million as compared to the same period of last year. As our sales for the second quarter were in line with our expectations, inventory was down approximately $2.4 million as compared to the same period of last year.

At the end of the quarter, we had $38 million outstanding on our revolver, down $2 million from year-end. And year-to-date we utilized approximately $2.9 million of the $50 million share repurchase program. Capital expenditures for the first six months were approximately $1.8 million and depreciation and amortization expense was $5.7 million.

I’d now like to discuss our updated outlook for the current fiscal year. Please keep in mind that our results may be materially affected by many factors, such as changes in global economic conditions, customer spending, fluctuations in foreign currency exchange rates, and various other causes.

Predicated on the headwinds we’re facing in the marketplace, our updated outlook for fiscal 2017 is as follows. We anticipate our sales to be in the range of $550 million to $560 million.

Although we're excited about our product pipeline for the holiday season, we anticipate the headwinds to persist for the near-term with progressive improvement during the final two quarters of this fiscal year. As previously noted, we will be closely managing our expenses for the current year especially in light of our updated outlook.

Operating income is projected to be in a range of $50 million to $55 million. The estimated effective tax rate for the year continues to be approximately 32%. Net income is planned to be in a range of $33 million to $36.5 million. We expect diluted earnings per share in fiscal 2017 to be in a range of $1.40 to $1.55.

And capital expenditures for fiscal 2017 are estimated to be approximately $8 million. The outlook we’ve provided assumes no other unusual items for fiscal 2017 and excludes the $1.8 million pre-tax charge in the first quarter of fiscal 2017 related to the announcement of Rick Cote's retirement. I’d now like to open the call up for questions..

Thank you. [Operator Instructions] And we will go first to Ed Yruma with KeyBanc Capital Markets..

Hi. Good morning and thanks for taking my questions. I guess, first, you articulated some of the weakness in the fashion watch market, obviously some of the market trends and promotions by competitors.

Can you talk a little bit more about the conditions in that kind of over $500 price point? I know that’s obviously where a lot of the Movado product kind of sits and whether you think competitors have been promotional there as well?.

So certainly the market has been somewhat more promotional, but that market has not had the negative effect that has been occurring in the fashion watch market over the last several quarters. And obviously if you look at the Swiss data, the Swiss watch market is more challenging, but in that market Movado has continued to gain market share..

Got it. Obviously very promotional environment, I know you did take a pricing, I think, late last year, early this year.

I guess, how do you feel about the overall pricing architecture of what you offer? Do you think you are priced competitively? And how should we think about pricing for some of the new products you are bringing in for holiday?.

Thank you, Ed. I think our price architecture is right. All of the new innovation we’re bringing in, we’re seeing whether it's an entry price point or not, we think we are competitive with the entry price points and we offer a lot of value in many of our collections.

One of the other components here, especially when we think about Movado, Movado is a very desirable brand. And consumers are voting with their pocketbook and therefore you see our market share gains. So we feel good about the decision we made.

That has also contributed to our expansion in gross margin and obviously we did get a 100% of all the increases right, so we’ve been adjusting. But we think we’re in a good place..

Got it. One follow-up if I may. What has the reception been on some of the watches that have the tech functionality, and are you selling to existing retailers, are they different ones and kind of has the order pattern for that -- is that materially different than it would be for a traditional fashion watch? Thank you..

So, we’re in the process of launching these products against our licensed brands and more sophisticated connected watches in Movado as well in the third and fourth quarter of this year. And we’re doing it in limited quantities and limited ways, predominantly with existing distribution. So we believe in the opportunity.

We feel very strongly and positive about our watches, but we also believe in the traditional watch space and it's not as much technology affecting the category as it is a cyclicality in the overall watch market.

And you see that from the high-end now really down into the fashion watch category, which we believe got saturated over the last number of years and is now rightsizing itself and there will be a new base, and from that new base we will see growth..

Great. Thanks so much..

Thanks, Ed..

We will go next to Oliver Chen with Cowen and Company..

Hi, good morning. We had a question regarding how we should think about the gross margin and drivers for the back half.

And Efraim, as this market evolves, what are your thoughts on hybrid versus trackers versus a smart watch that’s more fully functioned? Is that one way to think about how the market may segment? And I’m just curious about your strategy in that context.

Also, just lastly in inventory, what are your thoughts on managing the inventories relative to sales in the back half? Thanks a lot..

So, I will let Sallie answer the first one, gross margin, okay..

Okay. Then I will pass it off. So if you remember, Oliver, around the timing of our pricing, we now anniversaried that so the increases that we’ve seen resulted from great decisions we’ve made, though also that pricing strategy which has now anniversaried.

So our gross margin will remain strong and that we’re not going to be promotional, but the increase year-over-year is something that’s probably well behind us..

Okay. And then on the technology front, I think it will have a role in the category and we’re not playing right now in the segment of bands or fitness bands and in that area and are strictly right now in the watch space and for the time being in analog watches that have additional functionality.

Our license brand watches actually have a hidden screen, so when you receive notifications you can actually read the notification, the screen pops up and then disappears and it's a very, very cool feature. We’re very excited about it; we’re in the process now of testing these watches and we will begin delivering them in the third quarter..

And the last thing was inventory levels..

Inventory levels at retail I think one of the things that you’ve seen is retailers have right sized their fashion watch area and so they’ve really focused on bringing down their inventory in the first half of the year. There will be a holiday season that comes in the third and fourth quarter and I think you'll see people now preparing for that..

Okay. Thanks.

And Efraim, on the wholesale side, with your key wholesale partners, what about the two to five year plan in terms of how they'll present fashion watches and how this may evolve, if it will change a lot in terms of how customers are changing and what you’re seeing at your key wholesale partners and what they want for a presentation and category and shop-in-shops and any other changes that might be happening, because there's a lot of changes happening at major department stores.

So I want your longer-term view on how this may manifest with your category..

Sure. So, one, you’re obviously seeing a larger proportion of sales moved to online and our brands are performing extremely well online.

We are also moving a number of our marketing initiatives on to online and I think over the next -- you don’t have to wait two to five years, over the next 18 months you will see a greater shift of our resources go into online marketing.

And there is a large interest of Millennials and that’s what we found in our studies and our research in the watch category and in the watch category as fashion accessories. So I think that will continue. I think you're seeing a shift in retail over all.

And so I don't believe today that retailers could tell you what their three to five year strategy is. I think they’re planning much shorter term you’re seeing orders closer to the time period of sales.

You're getting -- we’ve to be faster today and that’s one of the areas that we’ve focused on and have made big improvements on for the future speed it's going to be very important in anything that you do, whether it's apparel or watches and that will play a role also in our business as well..

Thank you. Best regards..

Thank you..

Thank you, Oliver..

Thank you, Oliver..

Our next question comes from Jeremy Hamblin with Dougherty & Company..

Hi. This is David Burdick on for Jeremy. Thanks for taking my question..

Good morning..

Just hoping you would be able to provide some color on department store trends. And specifically Macy's, as an example, who will close 100 stores or 15% of their locations this year, just seems like this may be a trend that can continue. Was just wondering what kind of implications you see in both the short-term and long-term for Movado. Thanks..

Okay. So, we won't talk specifically about any retailer, but usually the doors that retailers close are the least productive doors. Some of those -- we’ve already been working with retailers on shrinking back in those doors. Generally Movado, which is our brand that’s in the most selective of the doors is not in a large proportion of those doors.

So if we speak about the Movado brand, I think what you're seeing right now is the rightsizing of retail overall. And especially as some retail begins to shift to online and eventually you will see a balance between brick and mortar and online. Brick and mortar will be here forever.

Online now, I believe, will also be here forever, but you will see a shifting of -- and it will come to a balance and then that balance both will have opportunities for growth..

Okay, thanks. And just one more.

Regarding the market share increase you guys saw this quarter, the 50 basis points, was that in the first half increase or was that just in Q2?.

That is for the January, June period..

Okay. So in Q1, you gained 120 basis points.

Is that correct?.

I think so. We don’t have that handy, but its -- that’s what we said in the last quarter, yes..

Okay. Okay, great. All right. Thanks, guys..

Thanks, David..

We will go next to Frank Camma with Sidoti..

Good morning, guys..

Good morning, Frank..

Hey, could you just -- quick question on your own retail stores.

What learnings are you having there? Is it anything different than the overall market that you’re seeing in those stores particularly?.

We are seeing traffic down slightly in those stores, but we’re seeing a much higher conversion rate. Our comps obviously -- we had a good comps in our outlet stores and -- so we obviously still see a very good demand for watches in that area..

Okay.

And the two store growth, was that just opportunistic opening of a couple stores?.

We’re very selective of where we open up stores, because we generally try to keep them out of our retail trading area with our wholesale partners. And so when we have the opportunity to open up in good centers, that are not in center cities we do that..

Okay. And just a clarification question on the new product launches.

You said shipping in September, when exactly will they be showing up on retailers' shelves?.

We ship -- we have new products that are being shipped now all through the second half of the year. So, I think I was talking specifically about connected watches that will ship in October and November..

Right. Thank you..

Okay..

Thanks, Frank..

This concludes our question-and-answer session for today. I’d like to turn the call back over to management for closing remarks..

Okay. Obviously, we’re disappointed in the results and also where we are for the balance -- where we’re heading for the balance of the year, but we believe the Company is well positioned to continue to expand and grow as the market begins to grow. And we’re doing all of the right things to make sure that we’re well positioned for that.

I'd like to thank you all for participating today and look forward to talking to you in our third quarter conference call. Thank you..

This concludes today’s conference. We thank you for your participation. You may now disconnect..