Good day, everyone, and welcome to the Movado Group, Inc. Fiscal Third 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 conference over to Rachel Schacter of ICR. Please go ahead..

Thank you. Good morning, everyone. With me on the call is Efraim Grinberg, Chairman and Chief Executive Officer; and Sallie DeMarsilis, 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. Good morning, and welcome to Movado Group's third quarter conference call. I will provide some highlights on the quarter and our strategic initiatives, and Sallie will walk through our financial results in greater detail. We would then be glad to answer any questions you might have.

As we stated in our second quarter earnings call, we are operating in a challenging retail environment for our channels of distribution and our category, particularly in the United States and the United Kingdom. This continued to be the case in the third quarter.

While our increased investments to elevate our brands drove market share gains, we fell short of our sales plan due to market growth below our expectations. This combined with our increased marketing efforts drove reduced profitability.

For the third quarter, our sales were $205.6 million or 1.6% lower than last year, although sales increased 0.5% on a constant currency basis. Our adjusted operating profit was $24.2 million versus $35.7 million during the same period last year.

For the quarter, we invested $7.3 million more in marketing and supporting our brands versus the same period last year. Based on our results for the third quarter and existing marketing commitments, we are updating our outlook for the year.

While the watch category has had a challenging year, which in turn has impacted our performance, we have faced similar challenges in the past and know what we need to do. We know there are opportunities for us to drive improved performance and profitability.

As we plan for next year, we will be focused on ensuring appropriate cost structure and level of investments for our revenue expectations.

Although our results for the quarter are below our expectations, we believe that with our strong brand portfolio, our product innovation and the increased support we are giving our brands, we will maximize our performance at retail during the upcoming holiday season.

By the end of the year, we will have invested an additional $30 million in our marketing efforts, which are further strengthening our position within the watch category. Turning to some highlights for the quarter. While the U.S.

wholesale business continues to impact Movado's results, Movado continues to maintain the leading position within the $500 to $1,500 price category in the U.S. While the category and channel has been challenged, we see an opportunity to further enhance our assortment in watches between a $1,000 and $3,000.

On the e-commerce side, we grew our movado.com business by 98% during the last quarter. In our Movado BOLD offering, we continue to perform very well with ceramics, BOLD Evolution, which is now available in women's size and our new Fusion collection leading the way.

We have also had an excellent response to our new Movado Connect 2.0, our second-generation smartwatch. Our increased television campaign for the holiday season will launch on national cable networks next week with extra supports in key markets like New York and Los Angeles.

Year-to-date, our licensed brands have grown 6.3% and 9.7% on a constant currency basis with strong growth in Tommy Hilfiger, Lacoste and Coach. Our product innovation along with our digital marketing has helped drive our Tommy Hilfiger growth. In Coach, our successful Perry and Charles family continues to drive sell through.

We are also excited to introduce our new iconic Coach men's collection for the upcoming holiday season. In Lacoste, we continue to drive performance with innovation in our Lacoste 1212 collection, and in HUGO BOSS, we are excited about our new Air, Land and Sea collections. The most important season for MVMT is ahead of us.

This week, we just launched our first national television campaign, which we are very excited about, featuring a number of MVMT’s genuine relationships. The commercials are built to showcase the product, while telling the MVMT brand story. We remain focused on building MVMT into an important brand within the retail market.

During the last quarter, we successfully introduced MVMT into 150 Macy's doors. At Olivia Burton, we continue to be one of the leading women's fashion brands in the UK and remain focused on building our global distribution footprint. For the holiday season in the UK, we launched a collaboration with Cadbury on their iconic Cadbury Roses holiday tin.

Olivia Burton continues to perform very well in Asia and will continue to drive results with great new designs in both our watches and jewelry. Our Movado company stores had a strong end to the quarter. In an increasingly promotional environment within the outlet centers, we are giving up some profitability in order to drive sales growth.

We are seeing good momentum as we enter the most important part of the year. We have made great progress in growing our digital footprint as a company and we are seeing strong growth in our licensed brands in important regions like France, Germany, Mexico, and the Middle East. In China, we are accelerating growth in Movado, Coach and Olivia Burton.

We are also progressing on the integration of MVMT and Olivia Burton into our global infrastructure and continuing to build these two young brands.

In closing, while we are disappointed with our performance this quarter, our brands remain well-positioned within the watch category and we are taking the necessary actions to drive improved performance and profitability going forward. I would now like to turn the call over to Sallie..

Thank you, Efraim, and good morning, everyone. For today's call, I will begin with a review of our third 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 fiscal 2020 and fiscal 2019.

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

Included in the year-to-date results of fiscal 2020 was $3.5 million of pretax 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 $2.7 million or $0.11 per diluted share.

$900,000 pretax dollars or $700,000 after tax of this charge was in the third quarter of fiscal 2020. Our consolidated GAAP results for fiscal 2019 year-to-date, includes $11.9 million of pretax transaction costs and amortization expenses related to the MVMT acquisition, $10.9 million of which was recorded in the third quarter.

After tax, the third quarter charges equated to $8.1 million or $0.34 per diluted share. Additionally, non-operating income for the nine months of fiscal 2020 included a non-cash gain associated with the remeasurement of a contingent consideration liability related to the MVMT acquisition of $13.6 million.

This gain was recorded in the second quarter of fiscal 2020. After tax, this benefit equates to $10.4 million or $0.44 per diluted share. Movado Group acquired Olivia Burton on July 3, 2017. Included in the results for the first nine months of fiscal 2020 was approximately $2.1 million of non-cash amortization of the acquired intangible assets.

After tax, the charge related to the acquisitions, equates to $1.7 million or $0.07 per diluted share. Similarly the first nine months of fiscal 2019 included approximately $2.2 million of a related charge, which after tax equated to $1.8 million or $0.07 per diluted share.

Our GAAP results for the third quarter and year-to-date period of fiscal 2019 included tax benefit of $7.6 million or $0.32 per diluted share related to a change in the estimated impact of the 2017 Tax Act as well as certain discrete foreign tax items.

Our GAAP results for the first nine months of fiscal 2020 included $300,000 pretax benefit, which equates to $200,000 after tax or $0.01 per diluted share in connection with a change in 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 third quarter of fiscal 2020, sales were $205.6 million or 1.6% decrease from the third quarter of fiscal 2019. The decrease in overall sales was driven by a decline in our owned brand. Our licensed brand business and retail outlet stores were slightly increased over last year.

To this end, sales were down 9.1% in the U.S., and in constant dollars increased 8.3% internationally. Sales in our watch and accessories brand segment were $185.6 million as compared to sales of $189.4 million for the same period of last year. In constant dollars, these sales increased 0.3%. By geography, the U.S.

watch and accessories business decreased 11.7% to $66.3 million compared to $75 million last year. This decrease was driven by both our licensed and owned brand. The international watch and accessories brand business increased 4.3% to $119.3 million compared to $114.3 million in the prior year.

In constant dollars, international sales increased 8.1% with our strongest sales growth being in Europe and the Middle East. Sales from the company stores business increased 2.3% compared to last year. At the end of the quarter, we operated 46 outlet locations, including two Canadian stores as compared to 44 locations last year.

Gross profit was $110.1 million or 53.5% of sales compared to $113.5 million or 54.3% of sales in the third quarter of last year. The decrease in gross margin percent was primarily driven by unfavorable impact of channel and product mix and unfavorable change in foreign currency exchange rate.

Operating expenses were $85.8 million increasing 10.4% from last year's third quarter. This increase was primarily due to approximately $10 million of operating costs related to recent business initiatives for future growth, including our newest brand, MVMT, our joint venture in Spain and our newest outlet locations.

This was offset by a decrease in performance-based compensation. Lower sales and an increase in operating expenses drove the decline in operating income to $24.2 million compared to $35.7 million in the year-ago period.

Income tax expense of $5.3 million or 22.1% effective tax rate in the third quarter of fiscal 2020 compared to an income tax expense of $7.8 million or 21.8% effective tax rate reported in the third quarter of the prior year.

Net income in the third quarter was $19 million or $0.82 per diluted share versus net income of $27.9 million or $1.18 per diluted share in the year-ago period. Looking at the nine-month period, ended October 31, 2019, sales were $510 million, an increase of 6.2% from fiscal 2019. On a constant dollar basis, sales increased 8.5%.

Gross profit was $274.4 million or 53.8% of sales as compared to $258.9 million or 53.9% of sales last year. Gross margin was relatively flat for the year-to-date period, with unfavorable currency being offset by leverage on certain fixed costs.

For the nine months ended October 31, 2019, operating income was $41.7 million compared to $59.2 million in fiscal 2019. Net income was $33 million or $1.41 per diluted share as compared to net income of $47.3 million or $2 per diluted share in the year-ago period. Now turning to our balance sheet.

Cash at the end of the third quarter of fiscal 2020 was $116 million versus $142.7 million at the end of the same period of fiscal 2019. The year-over-year decrease was primarily driven by dividends paid and the changes in working capital. Accounts receivable were up $10.2 million as compared to the same period of last year.

Inventory at the end of the quarter was $201.2 million or $17.6 million or 9.6% increase from the prior year, predominantly due to the timing of purchases for fourth quarter wholesale and direct-to-consumer sales. Year-to-date, we repurchased approximately $4.2 million of stock under our $50 million share repurchase program.

Capital expenditures for the nine-month period were $10 million and depreciation and amortization expense was $11.9 million, which included $4.3 million related to the amortization of acquired intangible assets of MVMT and Olivia Burton. I would now like to discuss our updated outlook for fiscal 2020.

As Efraim mentioned, our category and the retail industry faced an increasingly challenging environment and the global market continues to be volatile. Given this environment and our year-to-date results, we felt it was prudent to update our outlook.

For fiscal 2020, sales are now anticipated to be in a range of approximately $690 million to $700 million. Gross margin percent is expected to be flat to slightly down from last year, predominantly driven by unfavorable currency and product mix.

As for operating expenses, as we have previously discussed, we have committed earlier this year to invest in our business initiatives and important opportunities to provide a strong foundation for future growth. These committed expenditures will continue for the remainder of fiscal 2020.

Operating income is now projected to be in a range of approximately $46 million to $50 million, and net income is now expected to be in a range of approximately $36.4 million to $39.5 million, reflecting a 21% effective tax rate. Our updated diluted earnings per share expectation in fiscal 2020 is in the range of approximately a $1.55 to a $1.70.

Capital expenditures for fiscal 2020 continue to be estimated at $15 million and include amounts to support improvements in our e-com sites. The outlook we have provided excludes approximately $7.5 million of amortization of acquired intangible assets and other expenses for fiscal 2020 related to the acquisitions of MVMT and Olivia Burton.

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

Our outlook assumes no further unusual items, no significant fluctuations from prevailing foreign currency exchange rates and no further changes in prevailing tariff rates. I would now like to open the call up for questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Oliver Chen with Cowen. Please proceed with your question..

Hi, thank you. Good morning, Efraim and Sallie. Regarding your statements and the challenges intensifying, could you speak to categories channels and your thoughts on duration? I would also love your views on these challenges now.

You mentioned that they are similar to the past, but would love your characterization of how and why that maybe true just given the dynamicism of what retail looks like today? Thank you..

Sure. I don't think they are similar to the past. I said we faced challenges in the past, and we know what we need to do to react to them. So I think every challenge is different, and so you’re obviously getting a much bigger challenge from technology both in the space and then in the e-commerce platform affecting retail overall.

And we have plans in place to be able to address the e-commerce side and as well as we believe in Movado which is our biggest brand in the United States. We believe that there's an opportunity in scaling up actually our price points to price points that we have been in the past.

We're doing extremely well in the $500 to a $1,000 category and have given up some space we believe just through our own product development and innovation in the $1,000 to $2,000 price range and think that that's going to present a significant opportunity for the company going forward..

So Efraim, what are your thoughts on why the challenges have intensified now? And are you geographically speaking, are there more concerns in the U.S.

wholesale market or within certain countries?.

I think the U.S. wholesale market has certainly been the most challenged overall. And I think it has to do with really the changes that have been occurring in the large-scale, mall-based retailers as well as current interest in traditional watches, which I think we believe will ultimately be cyclical as well.

And that's where I think that the opportunity presents itself. Internationally, we see less pressure on the traditional watch space. You're obviously seeing some pressure in the UK overall and really economically and Brexit-related.

But as you can see, our licensed brand business internationally has been driving growth for the company and continues to do so..

Okay. And it sounds like it's the lower price point items, the more fashion watch category that's having more pressure, is that the right interpretation? And what are the innovation steps that you think….

I think domestically that is correct. And I think that the chance – and we have been gaining market share in that space as well. But I believe that there's opportunity in innovating product and challenging ourselves and raising up the innovation that we bring to the category, which we've done in the past and has resulted in very strong results..

Okay. And Sallie, the inventories were trending up relative to sales.

What about the freshness of the inventory now and going forward? And since the results were different from what you expected, do you have more inventory than you'd like to now?.

So yes, Oliver, so we do have inventory that is – part of it is relating from our slight miss in sales.

But the inventory is very healthy, it’s all current inventory are forecasted to be utilizing all of that inventory in this fourth quarter, not all of the inventory, but back to a normal level or even slightly below a normal levels in the fourth quarter with our direct-to-consumer retail and wholesale shipments, so we feel very good about it.

There was some timing, some of our receipts were earlier this year than traditionally based upon some opportunities we had in the sourcing area..

Yes. Okay, thank you..

So we're not concerned at all with the health of that inventory..

And then again regarding the watch category, Efraim, what do you see happening longer term? And it sounds like you're also prudently managing and proactively managing your expense base, given your views.

But how should we interpret the watch category and for people who are more cautious on the – yes?.

Sure. So I think that the technology and wearables has had an effect on it, but it's really focused on one company and that being Apple. And I believe that people will continue to wear traditional watches and that that actually brings people into the watch space who are not wearing watches in the past.

I think we will be more cautious from an expense point of view and that's kind of the message that I’m trying to get out there. Our investments are committed for this year.

We did not feel it would make sense to not do our fourth quarter marketing programs, which is the most important time of the year for us, so continued to go forward on those investments.

But believe as we plan for next year, we can really cautiously manage our expense base which is what we have done in similar periods in the past and what the company is traditionally done is returned to very healthy and efficient growth patterns after cycles like this one..

Okay.

And lastly, on your own retail, are you seeing similar trends in terms of the customer demand and the challenges as in wholesale and within wholesale do you foresee space and square footage allocations to the weaker category declining in terms of the square footage in wholesale channel?.

Interestingly enough, and I’ll answer, I guess, the first question first. In our own retail, which is our company stores, I did mention that we have had to be more promotional, but we’ve seen that that has really had a really positive effect on sales.

In our existing retailer footprint, we are gaining space because our brands are performing better than competition, but the space probably allocated to the category is being reduced slightly and varies by retailer.

So I think that there's actually an opportunity for us to gain space as we add new brands like MVMT and Olivia Burton into some of the wholesale partners that we work with..

Okay. Thank you. Best regards..

Okay. Thank you very much Oliver..

We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments..

Okay. I would like to thank all of you for participating today. I hope you begin to see our marketing initiatives in online or on television over the next few weeks. And I would like to wish everyone a great Thanksgiving holiday. Thank you..

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..