Good day, everyone, and welcome to the Movado Group, Inc. Fiscal Fourth 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 would 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; Ricardo Quintero, President; and Sallie DeMarsilis, Chief Financial Officer. .

Before we get started, I would like to remind you of the company's safe harbor language, which I'm sure you're all familiar with. The statements contained in this conference call, which are not historical facts may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995..

Actual future results may differ materially from those suggested in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC, which includes today's press release.

If any non-GAAP financial measure is used on this call, a presentation of the most directly comparable GAAP financial measure to this non-GAAP financial measure will be provided as supplemental financial information in our press release. .

Now I'd like to turn the call over to Efraim Grinberg, Chairman and Chief Executive Officer, of Movado Group. .

Thank you, Rachel. Good morning, and welcome to Movado Group's fourth quarter conference call. We delivered a solid year despite a very difficult retail market, especially in the United States.

While we recognized early on that the retail environment would be challenging in both brick-and-mortar and in the watch category, the trend accelerated throughout the year, especially in the fourth quarter. Even in this environment, we delivered sales within the range of our outlook and operating earnings towards the high end of our outlook.

We also continued to build our strong balance sheet, with cash growing to a record $256 million. .

During the year, we delivered a number of new leading products across our brand portfolio that we're very proud of, including the new Movado Heritage and Esperanza collections and saw the success from our Ultra Slim designs across our licensed brand portfolios and Movado collection.

Despite -- sorry, these products helped us gain market share in the segments in which we operate. Over the last several years, the watch category has been impacted by the decreased traffic to our retail partners, combined with the introduction of wearables.

We believe that the digital shift -- consumers moving to purchasing on their smartphones -- and the consumption of digital media has accelerated greatly over the last 18 months. Given this, investment behind our digital initiative is becoming our #1 priority.

For fiscal 2018, we will reallocate a much larger portion of our marketing dollars into the digital space, and we will focus on accelerating our e-commerce sales, both through our own site and our retail partners. The second impact to our category has been the introduction of wearables.

While disruptive to the fashion category, we're still big believers that there are many opportunities with conventional watches that are differentiated by great brands and innovative designs.

There has always been a saturation -- there's already been a saturation, slowdown and commoditization of the fitness men category and some of the major players are down-trending.

In the smartwatch space, there is continued opportunity as technology improves and consumers are able to get the creative designs they desire to deliver the functionality that they're looking for.

We're very excited to introduce our new Android Wear Movado Connected watch, powered by the new QUALCOMM's Snapdragon chip at Basel this week, which is a truly innovative design featuring Movado's groundbreaking edge-to-edge crystal and dial designs, inspired by a unique Museum dial that is celebrating its 70th anniversary this year.

We'll introduce new Android Wear watchers in HUGO BOSS and Tommy Hilfiger as well. Despite the challenging marketplace, we were able to deliver adjusted profit -- adjusted operating profit north of 10% of sales. Given the very difficult holiday season for a number of our major retail partners in the U.S.

and their increased focus on inventory management, with declining store traffic, we have decided to execute a cost-reduction plan for Movado Group. As a company, we have eliminated a number of positions in the U.S.

and are in the process of executing a similar program in Switzerland in an effort to maintain our operating profit objectives on our expectations for reduced sales in fiscal 2018. .

Eliminating positions is difficult, but we felt it was necessary in order to operate effectively and profitably in the evolving retail landscape. Our program will deliver $12 million of savings in fiscal 2018 and $15 million on an annualized basis.

As we look at the current year, we believe there are a number of important global growth opportunities that Ricardo will highlight in his comments. I'm proud of our teams around the world for executing on the company's initiatives.

We've successfully navigated changes in consumer behavior and the retail environment in the past and are confident that we will continue to do so going forward. .

Now I'd like to turn it over to Ricardo. .

Thank you, Efraim, and good morning. The fourth quarter proved to be challenging for retail in general, and particularly for the U.S. department store channel and mall-based retailers. The rise of online appears to be an accelerating trend that continues to grow double digits and although only represents 15% of the U.S.

watch category as tracked by NPD, it has had a significant effect on retailer brick-and-mortar traffic and its sales results. .

The total U.S. watch category, in the 0 to $3,000 price range, declined approximately 14% in the fourth quarter, resulting in a full year decline of 11%, making it one of the weakest performing categories tracked by NPD. To note, the fourth quarter was also highly promotional, particularly in the U.S. fashion watch category.

Although our fashion brands were not as promotional as our competition, our sell-through trends for Coach, Tommy Hilfiger and HUGO BOSS declined in the mid-single digits compared to the market declining in the mid-teens. .

As mentioned on our third quarter earnings call, we chose not to participate with Movado Bold in certain promotional events in order to protect brand equity and the long-term health of the brand. As expected, this had an impact on our short-term sell-through, but despite this planned decision, the Movado brand outpaced the market.

During the fourth quarter, in the $300 to $3,000 price range, the Movado brand gained 50 basis points in market share and continues to be the leading player, holding at over 21% market share for the full year according to NPD. .

Given the challenging sell-through results and overall conservative outlook on the watch category, retailers are more focused than ever on reducing and re-basing inventory levels to significantly improve productivity. This resulted in the decline of 19.2% in our Wholesale business in the U.S. during Q4.

And this inventory reduction trend will certainly have an impact in fiscal '18, particularly during the first quarter of the year. To note, we have made the decision not to ship unusual quantities of inventory at lower margins and off-price channels to protect our brand integrity.

And we did a good job in managing our overall global inventory levels, which are down 5.7% versus last year and down 6.6% versus last year on a constant currency basis. .

A bright spot during the fourth quarter came from our outlet business in the U.S., delivering 7% growth versus last year and bucking the overall macro trend. Despite double-digit profit declines, our teams did a great job in increasing conversion, while maintaining a competitive value for the consumer.

During the fourth quarter, we were able to gain better visibility of the impact of connected watches to our business. For perspective, we have launched a total of 47 SKUs across 7 brands in over a dozen countries.

Sell-through results were generally in line with our expectations, seeing the strongest results in our latest version of Movado Bold and in Coach, Tommy Hilfiger and HUGO BOSS, with our beautiful hybrid watches that provide consumers with functionalities such as notifications, step count and world timer, all on a hidden screen.

As noted before, we are confident with our strategic approach to this emerging smartwatch category. And early results confirmed that this category is relevant, but technology has not caught pace with what consumers are looking for. We believe that Apple has played a disruptive role in the fashion watch category.

And with a second-generation of Android Wear, powered by the new QUALCOMM Snapdragon wear processor, we will begin to enter the fully connected smartwatch space.

As announced on March 8, we are excited about our partnership with Google and the launch of Movado Connect, one of the first watches designed specifically for Android Wear 2.0, to be introduced in the fall of 2017 across 5 men's styles as well as 2 styles in Tommy Hilfiger and 2 styles in HUGO BOSS.

All these new collections will be unveiled later this week at Baselworld 2017. .

Shifting to our international results by region. Our results were mixed. During Q4, international wholesale decreased by 5.3% compared to last year and 2.7% on a constant currency basis. We continue to see sell-through growth in certain key international markets.

Europe remains our strongest region, where France is showing signs of improvements in shipments while Germany and the U.K. continue to see solid sales growth on a sell-through basis. Our shipment performance in Asia was positive, and China continues showing healthy sell-through in our directly-operated concessions.

Our shipments in Q4 to Latin America decreased to mid-single digits, as these markets are U.S. dollar-based, and many of the major economies in the region have been impacted by currency devaluations and ongoing economic uncertainty.

Sell-through in Brazil, our largest market in the region, was positive, which was offset by softness in Mexico, Argentina and continued challenges in the travel retail channel. .

Looking into fiscal '18, we continue to believe there are many opportunities in the watch category. Innovation is the lifeline of our business, and we are committed to continuing to lead with superior watch design in the traditional watch category as well as in the connected segments.

In fiscal '17, we brought many initiatives to markets that drove solid performance across our portfolio. Our Ultra Slim initiative launched strong and has seen positive momentum, which we expect to continue into fiscal '18.

Movado Esperanza is the biggest launch in the brand's recent history and the ladies set Esperanza was our best-selling watch for the season. Our Movado Heritage line is off to a fantastic start, and we will see this collection gain further prominence during fiscal '18. .

As mentioned by Efraim, we're excited about the celebrations of the 70th anniversary of the Movado Museum dial, which will be supported by limited edition products and a special association with the Albert Einstein foundation under the theme "Design Genius." Highlights of this campaign will be announced later this week during Baselworld 2017. .

We're fully committed in our investments in digital and are very pleased with the multiple initiatives underway. Movado.com was our fastest-growing business unit with double-digit increases, and our digital advertising and social media footprint continues to grow and gain traction.

We will continue to shift resources into digital to capture the many opportunities for Movado Group that we believe exist on a global basis, including shipping a larger percentage of our marketing expenses to digital market.

As mentioned by Efraim, we have made the decision to implement certain cost-saving initiatives in fiscal '18 with the goal of delivering profitable growth while shifting resources to support the biggest opportunities, the fastest-growing brands and channels, with a continued focus on productivity and excellence in execution. .

As part of these strategic choices and rebalancing of resources, last quarter we announced a partnership with Rebecca Minkoff. We will also not renew our license with Juicy Couture, which expires on December 31, 2017. .

While the retail backdrop remains challenging and we recognize and are adapting to the major shifts in consumer behavior and preferences, we still believe there are many opportunities in the watch category for us.

We are decisive in our commitment to become a leaner, more agile organization, rightsizing to the current operating environment and making smart resource allocations against the biggest opportunities with a focus on delivering sustainable profitable growth in the long run.

Given the current environment, our guidance for fiscal '18 is that t sales will be in the range of a $515 million to $530 million and operating income will be approximately $50 million to $55 million. .

I will now turn the call over to Sallie. .

Thank you, Ricardo, and good morning, everyone. For today's call, I will first review our income statement and balance sheet and then discuss our outlook for fiscal 2018. .

Before I review the quarter and the year in total, I would like to point out the special items included in our full year results for fiscal 2017 in both our fourth quarter and full year results for fiscal 2016. Please refer to our press release for a description of these items as well as a table of GAAP and non-GAAP measures..

Our fiscal year 2017 GAAP results include a charge recorded in the third quarter of $1.3 million, which equates to $900,000 after tax or $0.03 per diluted share for an impairment of a long-term investment in a privately-held company.

Our fiscal year 2017 GAAP results also include a $1.8 million pretax charge, which equates to $1.1 million after tax or $0.05 per diluted share in connection with the vesting of stock awards and certain other compensation in the first quarter related to the announcement of our former COO's retirement. .

On fiscal 2016 GAAP results include a $4 million pretax charge, which equates to $3.9 million after tax or $0.16 per diluted share in connection with our operating efficiency initiatives and other items. $1.3 million or $0.06 per diluted share of is charge was in the fourth quarter and the remainder was in the first quarter.

The balance of my remarks will exclude the special items just discussed..

For the fourth quarter of fiscal 2017, our sales decreased 8.7% to $130.8 million, in line with our expectations. In constant dollars, sales decreased 7.5%, as currency unfavorably impacted our sales by $1.7 million. Decreases in our luxury brand and license brand categories were partially offset by an increase in our retail sales.

Sales decreased 11.7% in the U.S. and in constant dollars, decreased 2.7% internationally. .

Sales in our Wholesale segment were $107.2 million or 11.6% below sales of $121.2 million for the same period of last year. In constant dollars, sales in our Wholesale segment decreased 10.2%. By geography, our U.S. wholesale business decreased 19.2% to $44 million compared to $54.5 million last year.

Our international wholesale business decreased 5.3% to $63.2 million compared to $66.8 million in the prior year, a decrease of 2.7% in constant dollars. .

A $5.1 million decrease in performance-based compensation and payroll-related expenses; a $1.4 million decrease in other operating expenses; and a decrease of $700,000 resulting from the favorable impact of foreign currency exchange rates. These were partially offset by a $2.1 million increase in marketing expense. .

Given the decrease in operating expenses, operating income was better than we expected for the fourth quarter. Operating income was $7.4 million or 5.7% of sales compared to $12.9 million or 9% of sales in the same year ago period. Income tax expense was $1.9 million compared to income tax expense of $2.9 million in the same period of last year.

Net income in the fourth quarter was $5.2 million or $0.22 per diluted share versus net income of $9.2 million or $0.40 per diluted share in the year ago period. Looking at the results for the full year ended January 31, 2017, sales were $562.8 million, a decrease of 7.1% from fiscal 2016. In constant dollars, sales decreased 6%.

Similar to the fourth quarter, sales declined in both our licensed brands and our luxury brand categories and increased in our retail category. U.S. sales decreased 9.2%. International sales decreased 4%. And on a constant-dollar basis, international sales decreased 2.2%. .

Gross profit was $294.8 million or 53.3% of sales as compared to $317.6 million or 53.4% of sales last year. Operating income was $55.8 million or 10.1% of sales compared to $74.1 million or 12.5% of sales in fiscal 2016. Income tax expense was $17.4 million compared to income tax expense of $23.5 million for last year.

And our effective tax rate was 31.9% for fiscal 2017 compared to a 32.1% effective tax rate last year. .

Net income was $37.1 million compared to net income of $49 million in the prior year. .

Diluted earnings per share decreased to $1.59 per share in the current year compared to $2.06 per share last year. .

Now turning to our balance sheet. Cash at year-end was $256.3 million compared to $228.2 million last year. We generated $58.4 million in cash flow from operations, repaid $10 million on our revolving credit facility, paid dividends of close to $12 million and repurchased $3.9 million of shares under our share repurchase program.

Accounts receivable decreased $4.2 million to $66.8 million compared to last year, and inventory decreased $9.3 million to $153.2 million or 5.7%. .

Capital expenditures for the year were $5.9 million, and depreciation and amortization expense was $11.5 million. .

I will now discuss our outlook for fiscal 2018. As Ricardo mentioned, our outlook is based upon the current challenging retail environment and volatile global economy and assumes currency rates consistent with recent levels.

Our results may be materially affected by many factors such as changes in global economic conditions and customer spending, fluctuations in foreign currency exchange rates and various other causes.

As Efraim mentioned, our cost-savings initiative is expected to result in annualized pretax cost savings of approximately $15 million, predominantly from payroll reductions. We expect to realize approximately $12 million of these savings this year, fiscal 2018.

Associated with this initiative will be a pretax charge in a range of approximately $7 million to $10 million related to the completion of the program, which will be reported predominantly in the first quarter, with the balance being reported throughout fiscal 2018. .

In light of the foregoing, for fiscal 2018, we anticipate our sales will be in a range of $515 million to $530 million.

We expect the first half sales performance to be below last year's levels, in the high single-digit range, with the first quarter being below last year by mid- to high teens, as the retailers continue to focus on optimizing our inventory. As usual, we will be closely managing our expenses for the current year.

However -- I'm sorry, fiscal 2018 will reflect the disciplined investments in growth opportunities of digital and e-commerce, as both Efraim and Ricardo mentioned. Operating income is projected to be in the range of $50 million to $55 million.

We expect our first half operating income to be below the prior year based upon our expected first half sales results. We also want to remind everyone that although we do not provide quarterly guidance, our first quarter ended April 30 is historically our smallest sales quarter.

With the expected sales levels just mentioned and only a partial quarter impact of the cost-savings initiatives, we anticipate the first quarter operating income to be below prior year. .

Due to the projected mix of global pretax results, excluding the impact of any potential U.S. tax reforms, the estimated effective tax rate is expected to be 32% and net income is expected to be in the range of approximately $33 million to $36.3 million.

We expect diluted earnings per share in fiscal 2018 to be in a range of approximately $1.40 to $1.55. Capital expenditures for fiscal 2018 are estimated to be approximately $8 million. .

The outlook we have provided assumes no unusual items for fiscal 2018 and therefore excludes the approximate $7 million to $10 million pretax charge in fiscal 2018 for the previously mentioned cost-savings initiative. .

I would now like to open the call up for questions. .

[Operator Instructions] We'll take our first question from Oliver Chen with Cowen and Company. .

We have a few questions. Regarding the shift to digital, what percentage of your spend will be in digital? And is this going to be a bigger catalyst for your wholesale or direct-to-consumer? And what is kind of the rationale for accelerating now versus prior? It does seem like this is highly relevant with how the consumer is moving.

Also, a second question on, as you think about the cost-savings opportunities, which operations where you have the most opportunities? And how do you balance those against the changes happening and just ensuring that you have the right investments in the right places? Just curious about what your thinking is around where you see the most savings?.

Well, on the first part, the digital part, we've obviously been increasing our digital investment. And this year, I would believe that out of our media budget, it will be approaching 50%. So that's a significant increase.

And it's done to drive both our e-commerce business, our overall brands, because that's really where the consumer is not only shopping, but also getting their information and their education on products and drive retail demand both in brick-and-mortar and e-commerce for our retail partners.

So -- and we've already launched that campaign now but it will obviously be accelerating through the spring gift-giving season. .

And then on the second question, Oliver, in terms of where we see bigger opportunities, we're seeing great traction in Europe, as I mentioned in my prepared remarks. So we want to build and invest in these markets where we're seeing a stronger return on a sell-through basis.

So certainly places like the U.K., like Germany, France, which are markets where we now have our direct-operated subsidiaries are places where we want to continue investing. .

Okay. On the guidance, your overall revenue growth seems less negative on the guidance than how the industry has been trending and it looks like the back half, there's an expectation for an improvement.

So what gives you the confidence? I mean, should we have concerns that your new revenue guidance isn't conservative enough just given the rapid changes that have happened in the fourth quarter, how fourth quarter unfolded relative to your expectations?.

Well, I think -- the fourth quarter already has some of that built in for us, because you did see a decline in replenishment from Christmas based on the challenging holiday season, and that's probably the part that had the greatest effect on the fourth quarter.

And that's why believe that there is still an inventory -- that retailers would be very focused on their inventories and rightsizing the size of their business during the first half of the year, but the trend should begin to stabilize in the second half of the year. .

Okay. And lastly, on the Android Wear product, the announcement is exciting.

What's the price range of that product and where will it fit? And how have you been feeling overall, Efraim, with how consumers have embraced wearables? It still feels very fragmented and evolving and -- I'm a little unsure about how this will manifest on a multiyear basis with the technology and the pricing. .

So we will start at approximately $295 in Tommy Hilfiger and then our entry price point in Movado will be $495. We believe it's still a competitive price -- competitive marketplace for pricing in the technology sphere.

As Ricardo and I both shared in our comments, we are big believers still in traditional watches and believe that that category will stabilize and begin to grow again.

But there is an opportunity for wearables, although we believe it's not as large an opportunity as it might be for some of the people who make -- who were in the sport watch market or directly in that connected space.

And you already have seen a saturation, for example, in fitness bands, and the category is beginning to really get highly, highly commoditized. So it's not a space where we want to play. .

Okay. One last question, which we're getting some comments on. You have a really nice balance sheet.

Just could you remind us of your strategy for use of cash in terms of your long-term views on how you prioritize cash versus investments?.

Well, I think, in this environment, it gives us a great deal of flexibility in terms of what we can do and provides a solid foundation and security for the company. Obviously, you are also -- there may be ability to repatriate significant portions of that cash in the future.

And we have bought back stock through our plan to offset dilution as well as continue to pay dividend. .

We'll take our next question from Ed Yruma with KeyBanc. .

This is Matt on for Ed.

We're wondering about how the cost savings will flow through to the income statement and if there is any seasonality to the cost reductions? And do you believe you will get to the $15 million annualized savings by Q2 or will the full changes take longer than only 1 quarter to implement?.

Okay. Matt, I'll address a little bit of that and just a little clarification. So as I mentioned in my comments, that cost-savings initiative will predominately impact the first quarter, with the remainder happening throughout the rest of the year as far as the charge goes.

We will identify that in our first quarter results as well as throughout the year and identify the amounts to you. It's predominantly in our operating expenses, it will be a little in gross margin, a little bit in our -- and the remainder being in OpEx. And the annualized number is $15 million, the number for this year. The savings will be $12 million.

And since we've just kicked it off now, being March, we're going to have a partial impact in this first quarter, with the remainder happening throughout the year as far as the savings impacting favorably to the P&L. .

Okay. Can you also talk about your comfort level with channel inventory? Particularly we want to know what the multi-brand, especially watch stores. .

Well, I think inventories have been declining, and you're seeing that and especially since, for us, our year-end is in January and retailers use that period of time to bring down their inventory and continue to focus on that in Q1.

What we're very pleased with is that the quality of our inventory, both our own and in the marketplace, is of excellent quality. So -- and that's something we always focus on. .

Okay. And one more, if we could. I believe you said your outlet sales were up 7% this quarter. Are you seeing similar trends at other discounters like T.J.

and Ross?.

We don't have a big role in those other off-price retailers. And I think that's a highly -- a fairly segmented business. So I wouldn't -- we don't really, particularly, know that, but we were very pleased with our trend in the fourth quarter in our own outlet stores, especially given the fact that that traffic continued to be down.

But when people came into the mall and came into our stores, they bought watches, which further affirms to us the fact that the consumers continue to be interested in nice watches. .

We'll take our next question from Frank Camma with Sidoti. .

Follow-up on the capital allocation question.

Are you opposed to -- because I know, obviously, most of our cash is still overseas -- are you opposed to borrow in the short term to repurchase your shares in hopes that you can repatriate later?.

I think we've done that in the past. So we're not averse to it. .

Okay. I just -- I think recently you've kind of pulled back on that.

Is that a fair statement or not?.

I think, in Q4, we generally have bought more stock back, I think, in the first of the year generally than in the second half of the year. .

Okay. And just a little more detail on the pretty significant drop in the gross margin. You did call out the channel and the product mix.

Now do you mean by channel that the retail -- that your outlets were more of a mix? I'm just trying to figure out why the drop? I mean, I understand what you're saying, but it's still a pretty significant drop when you compare it to your last multiple quarters there. So if you can just give me a little more detail on that. .

Frank, I'll try to address it a little bit and, perhaps, someone would want to add a little color. We do have some seasonality to our gross margin. Our gross margin in the fourth quarter is historically lower.

We have a certain amount of fixed costs, for instance, so in a smaller quarter, which the fourth quarter is one of them, it's hard to leverage some of those costs. I mean if you go back and look, perhaps, 2 years ago, we're right in line with where we were. We were not highly promotional.

So the decrease was a function of mix -- of where it's selling and what's selling and so forth, but we're not in a highly promotional situation as, perhaps, maybe some other people are. .

And I think, just to add to Sallie's, it's basically directly related to volumes. So the fact that replenishments were lower in January would certainly have an effect on our gross margin and mix. And being able to leverage the fixed production costs and that -- some of our cost cuts are also in the gross margin area as well. .

Okay. So going forward, I mean, in your guidance, is your gross margin -- it sounds like your gross margin is relatively stable year-over-year, not calling out specific quarters.

But is that a fair statement on a year-over-year basis?.

Yes. We would -- yes, that's fine. That's fair. .

And it appears there are no further questions at this time. I'd like to turn the conference back over to management for any closing remarks. .

Okay. I would like to thank all of you for participating on today's call. And we look forward to talking to you during our first quarter conference call. Thank you, again. .

And this concludes today's call. Thank you for your participation. You may now disconnect..