Good day. Welcome to the Movado Group, Inc. Fiscal Second Quarter 2020 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 call 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, 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. I'll begin with a review of our second quarter performance and then share with you some of the brand highlights for the quarter and discuss our ongoing strategic initiatives and investments for the year.

Sallie will then review our financial results and updated outlook. And then we would be glad to answer any questions that you may have. For the quarter, sales grew by 9.5% to $157.8 million or 11% on a constant currency basis.

Excluding the addition of MVMT, which we acquired in the third quarter of last year, sales grew by 2.5% on a constant currency basis. Our gross margin for the quarter remained strong at 54.1% despite significant currency headwinds. Adjusted operating income for the quarter was $10.3 million versus $14.6 million in the same period last year.

The decline in operating income reflected our previously discussed brand building investments, currency impact, and the ongoing integration of MVMT into Movado Group. As we have previously discussed, MVMT currently makes the majority of its profits during the fourth quarter of the year.

During the quarter, we revalued the estimated contingency payments for MVMT to reflect our current growth projections for the brand. The reevaluation contributed $0.44 per share in GAAP earnings for the quarter and is excluded from our adjusted results.

We continue to expect MVMT to contribute ongoing sales and profit growth and we remain excited about its long-term prospects. We also continue to maintain a very strong balance sheet with almost $135 million in cash.

We recognize that we are operating in an increasingly challenging environment for our category and our wholesale partners and a global market made even more volatile by ongoing tensions and changes in trade policy. There is a reduced level of visibility in the retail distribution channel that we operate in on a global basis.

In addition, we are facing currency headwinds and the expected impact of tariffs affecting watches imported from China beginning September 1st. Given these challenges, we are updating our outlook today for the balance of the year.

We are confident that the investments that we have made over the last few years in building our international market the acquisitions of Olivia Burton and MVMT, important product innovation, and the establishment of our digital center of excellence are the right strategic decisions to position us to deliver results on both the top and bottom-line.

At a time when consumer shopping habits and preferences are evolving, we feel it is important to continue to use our resources to invest in making our brands and products top of mind with the consumer.

Our category is facing significant changes and challenges over the last few years including the impact of smartwatches and a significant shift in how and where retail sales are being conducted.

We have proactively responded and are pleased to note that in this environment, movado.com sales grew by over 100% in the second quarter and is on track to double for this fiscal year. We are accomplishing this by introducing innovative new products like our Movado BOLD Ceramics, Bold Evolution, and Modern 47 in our Museum collection.

The results online were driven by strong new video content and a spring television campaign that resonated with consumers. These efforts also helped our sell-through in our biggest department and specialty store channels during the second quarter.

While we saw strong results in these channels, we were not able to offset declines in mall-based jewelry store channel, an important part of our Movado distribution. Yet the strong momentum that we saw behind our spring marketing program convinced us that we are heading in the right direction with our Movado product and marketing strategy.

For the fall season, we are excited about the strong new product introductions that we have on the horizon including our new Movado Bold Evolution for Her and a new Men's Bold Fusion, featuring a ceramic bezel as well as our new Movado Connect 2.0 powered by Google's OS Wear, our first smartwatch available in two sizes for men and women.

We're producing great new content to support the launch of these terrific new products and are excited about driving our e-commerce business as well as our retailers' performance.

In China, we have begun to make progress in driving demand for the Movado brand, both online and at the point-of-sale as we increase our marketing investments in this region.

In our licensed brand portfolio, we drove double-digit growth with strong market share gains both internationally and domestically, but especially in Europe, the Middle East, Asia, and the Americas.

We have accomplished this with strong product innovation across our brand portfolio and continued investment in our digital marketing efforts, and we are excited about other initiatives for this fall. U.K.

is an important market for our fashion watch brands, and the retail environment is now facing significant headwind with the continued uncertainty surrounding Brexit. As we look at specific brands in our portfolio, Coach continues to perform well for us driven by product innovations, supported by compelling digital marketing.

With category-leading products like Perry and Charles, new introductions and new products for the fall season like Audrey, a slim crystal-set watch for women our retail partners are excited about the upcoming holiday season. We are also beginning to see our investments gain traction in China both in our retail points of sale and online.

We have seen strong growth in Tommy Hilfiger around the world. Over the last few years, we have partnered with the Tommy Hilfiger brand to create compelling brand association with their marketing ambassadors, along with a powerful product assortment that has been able to drive double-digit growth.

This fall, we are excited to launch a new Tommy Hilfiger interactive shop-in-shop at Macy's Herald Square and we will also introduce on a limited basis a Tommy jeans watch collection. In HUGO BOSS, we have seen a strong response from the products that we introduced this past spring, especially our Ocean Edition chronograph.

We saw strong sell-through in France and Germany, while facing headwinds in the Brexit-challenged U.K. Yet, we remain the number one fashion watch brand in that market. For the past several quarters, we have seen strong momentum in LACOSTE driven by products closely associated with the brand and the iconic Crocodile like our new Parisian collection.

We have also driven these results with innovative marketing, including the use of localized influencers and billboard campaign. We continue to make progress with the integration of MVMT in the Movado Group's infrastructure. We've migrated the MVMT business into our SAP platform and successfully integrated the distribution operations as of August 1.

We're excited about the prospects of continuing to develop MVMT into a true global accessories brand powered by the watch category. This fall, we will launch the U.S. wholesale channel, providing MVMT with brick-and-mortar distribution, to support its e-commerce presence.

We will invest in support of a new groundbreaking campaign, which will be launched on national cable TV as well as digitally. This campaign is being developed by the team in Los Angeles, to support our wholesale rollout, strong new product introductions, and the e-commerce business.

We saw success in this spring, when we launched our new field watch collection, which quickly sold out in several styles. We also launched men's jewelry to a strong response. We continue to perform very well with MVMT – with both MVMT sunglasses and our iconic Everscroll collection to protect users from light generated by computer screens.

During the third quarter, the MVMT team will launch the new MVMT Elements watch collection that we are all very excited about. Olivia Burton has now been part of our company for two years, and has been a strong contributor from the start. This spring, we introduced our under the sea collection, which quickly became a bestseller.

Our store in Covent Garden continues to perform very well and we see our Olivia Burton jewelry collection becoming an even more important part of the brand. This coming holiday season, we are collaborating with Cadbury in the U.K. for their iconic Christmas tin and believe this will be great – will be great exposure for Olivia Burton.

In addition, we will also launch a new video campaign in the U.S. to support our holiday sales. Turning to our outlet stores. The second quarter saw continued soft traffic with sales flat on an overall basis, while our gross margins remain strong, increased expenses driven by new stores and increasing rents in several locations held back profitability.

Our teams are working on several initiatives to help drive traffic improvement. The investments we are making in our brands, marketing and infrastructure are leading the Movado Group gaining market share in a difficult environment.

We are fortunate to have strong brand, a talented team that has developed powerful innovation and a strategy in place to navigate, a difficult global environment, while continuing to invest for the future.

We believe we are taking the right steps to make sure that Movado Group has a solid foundation, with which to drive sustainable sales and profit growth for the long-term. With the initiatives that we are putting in place for the second half of the year, we're looking forward to delivering exciting and compelling products to our consumers.

Now, I would like to turn the call over to Sallie..

Thank you, Efraim, and good morning, everyone. For today's call, I'll begin with a review of our second quarter financial results and balance sheet, and then discuss our outlook. Before I begin, I would like to point out the special items included in our results for the first half of fiscal 2020 and fiscal 2019.

Our press release also describes these items and includes a table of GAAP to non-GAAP measure. Movado Group acquired MVMT on October 1, 2018.

Included in the six months of fiscal 2020 was $2.6 million of pre-tax charges, primarily comprised of the amortization of intangible assets, purchase accounting adjustments, and deferred compensation related to the MVMT acquisition. After tax, the charge equates to $2 million or $0.08 per diluted share.

$1.1 million pre-tax dollars or $900,000 after tax of this charge was in the second quarter of fiscal 2020. Our GAAP results for the second quarter of last year include $1 million pre-tax charge, which equates to $800,000 after-tax or $0.04 per diluted share. This is in connection with the pre-acquisition expenses related to MVMT.

Additionally, non-operating income included a non-cash gain associated with the re-measurement of the contingent consideration liability related to the MVMT acquisition up $13.6 million in the second quarter of fiscal 2020. After-tax this benefit equates to $10.4 million or $0.44 per diluted share.

As you recall, the purchase consideration for MVMT included two contingent payments that will be determined by the brand's future financial performance through fiscal 2023.

These future contingent payments will be re-measured periodically to estimated fair value and we expect to recognize gains or losses as the case may be, based upon estimates and assumptions of the achievement of certain brand revenue and EBITDA performance hurdles, as well as changes in discount rates volatilities and other key assumptions.

Movado Group acquired Olivia Burton on July 3, 2017. Included in the results for the first half of fiscal 2020 was approximately $1.4 million of non-cash amortization of the acquired intangible assets. After-tax the charge related to the acquisition equates to $1.1 million or $0.05 per diluted share.

Similarly the first half of fiscal 2019 included approximately $1.5 million of a related charge, which after-tax equates to $1.2 million or $0.05 per diluted share.

Our GAAP results for the first six months of fiscal 2020 included $300,000 pre-tax benefit, which equates to $200,000 after-tax or $0.01 per diluted share in connection with the change in the estimate of the remaining accrual for our fiscal 2018 cost savings initiatives. The balance of my remarks will exclude the special items just discussed.

Now turning to our results. For the second quarter of fiscal 2020, sales were $157.8 million, a $13.7 million or 9.5% increase from the second quarter of fiscal 2019. The increase in overall sales was driven by growth in both our owned and licensed brands. To this end sales were up 12.7% in the U.S.

and in constant dollars increased 9.7% internationally. Sales in our watch and accessories brand segment were $136.8 million, as compared to sales of $123.1 million for the same period of last year. In constant dollars, watch and accessories brand sales increased 12.8% driven by a sales increase in both our licensed brand and owned brand categories.

By geography, the U.S. watch and accessories brand business increased 20.1% to $45.9 million compared to $38.2 million last year. The international watch and accessories brand business increased 7.1% to $90.9 million compared to $84.9 million in the second quarter of the prior year.

There was a significant unfavorable currency impact to the second quarter of fiscal 2020. In constant dollars, international sales increased 9.6% with our strongest sales growth being in Europe, the Middle East and Latin America. For the quarter, the company's retail business was flat to last year.

At the end of the quarter, we operated 45 outlet locations including one Canadian store as compared to 43 locations last year. Gross profit was $85.3 million or 54.1% of sales, compared to $77.8 million or 54% in the second quarter of last year.

The 10 basis point increase in gross margin was primarily driven by increased leverage on fixed costs due to higher sales and the favorable channel and product mix. These are partially offset by the unfavorable change in foreign currency exchange rates.

Contributing to the positive impact of channel and product mix was the inclusion of MVMT in the current year period. Operating expenses were $75.1 million, an 18.7% increase over the same period of last year.

This increase included approximately $11 million of operating costs related to recent business initiatives for future growth such as our newest brand MVMT, our joint venture in Spain and our latest outlet locations.

The expected increase in operating expenses more than offset our sales growth and expansion in gross profit leading to a reduction in operating income for the second quarter. This was combined with the currency headwind, which unfavorably impacted operating income by $900,000.

Income tax expense of $1.8 million or 17.8% effective tax rate in the second quarter of fiscal 2020, compared to an income tax expense of $3.9 million or 27.1% effective tax rate recorded in the second quarter of the prior year.

The effective tax rate for the second quarter of fiscal 2019 was impacted by changes in jurisdictional earnings and the timing of discrete and other items. The positive impact on earnings per share in the second quarter of fiscal 2020 due to the lower effective tax rate was $0.04.

Net income in the second quarter was $8.3 million or $0.36 per diluted share versus net income of $10.6 million or $0.45 per diluted share in the year ago period. The currency headwinds in the second quarter of fiscal 2020 negatively impacted EPS by $0.03 per diluted share. Now looking at our year-to-date results.

Sales for the six-month period ended July 31, 2019 were $304.4 million, an increase of 12.2% from fiscal 2019. On a constant dollar basis, sales increased 14.7%. Gross profit was $164.4 million or 54% of sales as compared to $145.4 million or 53.6% of sales last year.

The increase in the current year gross margin percent for the first six months was a result of the reasons similar to the second quarter just discussed. For the six months ended July 31, 2019, operating income was $17.4 million compared to $23.5 million in fiscal 2019.

Net income was $13.9 million or $0.60 per diluted share as compared to net income of $19.3 million or $0.82 per diluted share in the year ago period. Now turning to our balance sheet. Cash at quarter end was $134.9 million versus $175.6 million at the end of the second quarter of last year.

The year-over-year decrease was primarily driven by the acquisition of MVMT in the third quarter of last year, partially offset by $50 million borrowed on our revolver. Accounts receivable was up $9.9 million as compared to the same period of last year, primarily due to the increase in sales.

Inventory at the end of the quarter was $201 million, a $29.5 million increase from the prior year period. This was due to inventory related to our newest brand MVMT, our New Spain joint venture, as well as to support the growth in overall sales.

Year-to-date we repurchased approximately $4.2 million of stock under our share repurchase program, primarily to offset the potential dilution from stock awards. Capital expenditures for the six months were $6.9 million and depreciation and amortization expense was $7.9 million.

This included $2.8 million related to the amortization of acquired intangible assets of both MVMT and Olivia Burton. I will now discuss our updated outlook for fiscal 2020. As Efraim mentioned, our category and our wholesale partners are operating in an increasingly challenged environment and the global market continues to be volatile.

In addition, we are facing currency headwinds more specifically with the Euro and the British pound and the impact of tariff affecting watches imported from China beginning September 1. Given these challenges, we felt it was prudent to update our outlook today for the balance of the year.

For fiscal 2020, sales are now anticipated to be in a range of approximately $725 million to $740 million. Gross margin percent to be flat to slightly down from last year, due to the impact of unfavorable currency and sales mix for the remainder of the year.

As for operating expenses, as we have discussed, we will continue to invest in our business initiatives and important opportunities to provide a strong foundation for future growth.

We continue to expect to make these investments, while heavily weighted as a percentage of sales than the prior year since we have not anniversaried the MVMT acquisition date or the timing of the execution of our Spain joint venture.

Operating income is now projected to be in the range of approximately $67 million to $70 million and net income is now expected to be in a range of approximately $52.5 million to $55 million. This reflects a 21% effective tax rate. Our updated diluted earnings per share expectation in fiscal 2020, is in a range of approximately $2.25 to $2.35.

Capital expenditures for fiscal 2020 continued to be estimated at $15 million and include amount to support improvements in our e-commerce site. The outlook we have provided excludes approximately $8 million of amortization of the acquired intangible assets and other expenses for fiscal 2020 related to the acquisitions of MVMT and Olivia Burton.

The $13.6 million of remeasurement related to the contingent consideration liability for the MVMT acquisition and the $300,000 change in the estimate for the remaining accrual for the fiscal 2018 cost savings initiative.

Our outlook assumes no significant fluctuations from prevailing foreign currency exchange rates and therefore does not contemplate further deterioration of foreign currencies such as the Euro or British pound which can have a considerable impact on our results. The company's outlook also assumes no further changes in prevailing tariff rates.

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

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Oliver Chen with Cowen and Company. Please proceed with your question..

Hi. Thank you. Good morning. Regarding your comments, what's driving the reduced level of visibility across retail and wholesale? And what are your thoughts on what you're seeing with the U.S. retail versus globally in terms of trends within geographies as well as channels? Thank you..

Sure. So, obviously you have a lot of volatility going on especially with brick-and-mortar channels, but also with e-commerce channels globally around the world, a lot of it having to do with global trade tensions. People -- you're getting a lot of commentary about slowing economies in Europe and then also the challenges of Brexit. So U.K.

retail sales have been highly challenged over the last number of months. So, I think you have that combination of many different factors all converging at the same time. That reduces the visibility and the predictability of what you see out there for the future..

And what are your thoughts on the U.S.

wholesale channel as well? And Sallie when you zoom out the inventory growth relative to revenue growth, does your change in guidance have implications for having too much inventory now?.

So I think we still see the U.S. especially the mall-based jewelry channel is being challenged. We are seeing -- we have seen as we rolled out some significant marketing programs in the spring, some strong results from those marketing programs and that's what's encouraging to continue to make those investments.

For the fall, I'll let Sallie address our inventory..

So yes the inventory levels are higher this second quarter than, obviously, the year before. We're very comfortable with our inventory levels. A lot of it has to do with the new businesses that have joined our team and then the timing of purchases. So we expect to be on track with those inventory levels at the close of the year..

Okay. And tariffs are a very relevant topic given the dynamism of them and the impact to the consumer as well as earnings.

What percentage of your portfolio is most exposed to tariffs? And how are you strategizing in your scenario planning about how to really execute on this happening?.

Sure. Sure. So I think it's very early on in the process. So it will just take effect on September 1st. They do affect our U.S. fashion watch business predominantly, and we will take certain actions in terms of pricing initiatives, in terms of working with our suppliers and some will have an effect to gross profits.

So definitely have an impact I believe on U.S. business. Obviously they don't affect our international businesses. But -- so it affects our licensed brands in the U.S. and our MVMT business in the U.S. as well as smartwatch..

Okay. And Efraim you called in your prepared remarks also just generally speaking to the watch category being very competitive and you also called our smartwatches.

Those have been factors for a while, but is there something incrementally different about the trends that you're seeing in the nature of the competition or even e-commerce and the circular economy that changes your perspective on the environment?.

I think we're seeing the trends that we've seen in the past number of years continue. And we're seeing our sales able to grow in this environment, which I think is really a testament to our team and our initiatives and our investments.

So we are, obviously, in a declining market, gaining market share and that is a sign that our investments are paying off but it's getting more -- it's more expensive to maintain that excitement and we will continue to do that because we believe it's the right thing to do to support our business and generally in the past it's always helped us come out stronger out of these type of cycles..

Okay. And our last question is the revaluation on the MVMT deal was interesting.

From a modeling perspective like what underlied? Why that was done? And how does it compare to your thoughts on the MVMT business relative to the time, at which you acquired the business?.

So I'll start with the first part and then -- the last part and then let Sallie talk a little bit about the revaluation. So we're still seeing that MVMT will add both sales in -- growth in sales and profits for the future and in the short-term and the medium-term and the long-term.

It’s just that this is a transaction that was staged over three to four-year period of time in terms of an earn-out, and it will not achieve that level of growth, and we believe and that can change.

So but it's still going to be growing really nicely for us and we're really excited about the acquisition, the learnings that we've gotten from an e-commerce perspective and the content perspective and really how to talk to consumers today has added to a lot of strength to the company. And we're excited about the wholesale rollout in the U.S.

and globally..

And then, Efraim, actually touched on the lot of points related to the calculation in his comments just a moment ago. The earn-out payment to happens, so there's two payouts one at the end of the average of the first two years, and one at the average of the second two years, so over the next four years' time.

And it's an estimate where you're going to be looking at the forecast of that business from a global perspective both wholesale and direct-to-consumer based up on top line, sales growth as well as EBITDA as defined by the agreement. So it's a very complicated process.

And annually, periodically we will have to be looking at that calculation and adjusting it.

So this is the first adjustment happened to be a fairly large one based upon the other things happening globally with our category, but you would expect that we would continue to be fine-tuning this up through the end of the earn-out period, which is at the end of fiscal 2023..

Thank you very much. Best of luck..

Okay. Thanks, Oliver..

Thank you. And I'd like to thank everybody for listening today and for being on our call and we look forward to talking to you at the end of our third quarter. Thank you..

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..