Movado Group Inc.

Good day, everyone, and welcome to the Movado Group Inc. First Quarter Fiscal 2021 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 Rachel Schachter 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 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.

Efraim Grinberg Thank you, Rachel, and thank you all for joining us this morning for Movado Group's first quarter conference call. I want to open my comments by recognizing how upsetting I found the recent senseless deaths of George Floyd, Ahmaud Arbery, and Breonna Taylor. Over the last 10 days, we have had numerous discussions with our associates over the issues of racial discrimination, and as a company, we have tried to do what we can to support the continuation of the discussion Racism exists and it has no place in our society, our country, or our world. As a company, we have been focused on having the difficult discussions surrounding race, diversity, inclusion, and the biases that exist within all of us. We all need to do better. Our support goes out to the peaceful protesters who are focused on eliminating racism and discrimination from our planet. As a company, we have an obligation to take a position, and I know our employees feel very strongly about that. As we entered this year, we had a solid strategy in place, focusing on growing our profits and preparing ourselves for continued growth in an evolving landscape for retail and the watch category. For the month of February and the beginning of March, we were exceeding our internal plan, efficiently managing our expenses, even while we were continuing to experience supply constraints due to the effects of COVID-19 in China. Then by the middle of March, COVID-19 began making its way throughout the rest of the world. With the safety of our colleagues and customers at the forefront, we acted swiftly to close most of our operations around the world, including our retail stores. Most of our wholesale customers began doing the same. Our teams acted quickly to manage our expenses and our cash flow. We drew down approximately $30 million on our revolver and slowed the inflow of inventory into our warehouses. We began to manage our business remotely. I am proud of how proactively and effectively our teams executed around the world, as can be seen by the strength of our balance sheet and the 26% reduction in adjusted operating expenses during the first quarter. We ended with almost $188 million in cash and with inventory slightly down from the same period last year, despite significantly lower sales due to the pandemic. All of this was accomplished while seeing a reduction in our accounts payable and accrued liabilities of 29% from last year. Our leadership team has developed a plan to optimize our results for the balance of the year while continuing to build and prepare ourselves for the future. It is widely believed that the pandemic and the closure of many global businesses will accelerate trends already in progress, such as video conferencing, work from home, the digitalization of marketing, and of course the growth of e-commerce. While we had invested in these areas for a number of years, we recognized that the pandemic would provide for a sea change in the retail industry and our selling channels. Satya Nadella, the CEO of Microsoft, has said that they had seen two years worth of digital transformation in just two months. In aligning with this belief, we know we have to adapt our company and our management structure to this new environment. To that end, today we announce a significant realigning of our leadership team to make ourselves a truly consumer-focused company for this evolving environment. We have elevated Behzad Soltani, our Chief Digital Officer and President of our direct-to-consumer business, to Executive Vice President in charge of our whole commercial organization, including both our wholesale and direct-to-consumer businesses, as well as our Digital Center of Excellence and our IT group. We believe that we will now be able to place the consumer first wherever they choose to shop around the world, from our own e-commerce sites to our wholesale accounts, their websites, our own retail doors, and digital marketplaces. We will also see a much closer integration of our websites and our ERP system, focusing on servicing our customers. In addition, we have elevated Sallie DeMarsilis, our CFO, to Executive Vice President and Chief Operating Officer. In this role, she will add our end-to-end value chain and our global distribution operations to her responsibilities. Not only are these two proven executives within our team, but they will be supported by a seasoned and proven management team. Our company has been all about building and partnering with strong brands, connecting effectively with the consumer and designing beautiful products for them at compelling values. We also have established tremendous collaborations with our wholesale partners around the world who we will continue to support. We believe that the pandemic will have a sustained effect on global economies and markets, and we are bringing our expense infrastructure in line to maximize results while ensuring that we continue to support and build our brands through innovation and effective marketing. As we operate in an economic environment with a higher level of uncertainty, we will maximize the variability of our operating expenses and commitments. We have always succeeded in adapting our organization to challenging environments, and I am confident that we will do that now. Our teams are energized by the challenge. During this pandemic, we have seen a universal strengthening of our already strong e-commerce trends for both our own websites as well as our customers' websites. On Movado.com, we saw double-digit growth despite the fact that our principal distribution warehouse in New Jersey was closed for most of the month of April. Since reopening at the end of April, we have seen an acceleration in those trends. Olivia Burton in the UK has also shown strong growth and we have seen significant improvements in our movement website in both sales and profitability trends as we prepare to migrate them to the Salesforce e-commerce platform in July. We are encouraged by an improved performance in our customer acquisition metrics and we are continuing to invest in our digital capabilities. In China, which endured the effects of the business closures related to the pandemic early in our quarter, we have seen strong demand in our e-commerce channel throughout and improving trends in our retail business. Today, all of our retail doors in China have reopened. As certain markets around the world have begun to reopen, many of our customers are exceeding both their own and our own sales expectations. In Europe, our strongest performance has been in Germany, where May wholesale sales are approaching the prior year. In North America, we have opened 14 of our 47 Movado Company stores and expect to have 41 opened by June 17th. In the 14 stores we have opened, we have performed better than expected with sales down 10.6% when compared to the same period last year. In all of these stores, we have increased the safety measures to protect both our employees and our customers. As a whole, we are seeing some green shoots as businesses reopen, but we are still planning conservatively with a focus on maximizing cash flow for the year. We are taking the necessary actions to right-side our cost structure on an ongoing basis. I am pleased that in a challenging quarter, we protected our gross margin, delivering 50.8% on an adjusted basis despite lower volumes and increased tariffs in the US versus last year. While operating in an environment with limited visibility prevents us from being able to provide a specific outlook, we are focusing on maintaining a high level of flexibility in order to optimize our performance while maintaining a solid balance sheet. This has been a start to the year that no one could have anticipated or prepared for, but I am very proud of our team's resilience and how they embraced the challenges and they have put us on a solid footing to operate within the current environment as we continue to open our business operations around the world. I would now like to turn the call over to Sallie, who will provide details on our financial results.

Thank you, Efraim, and good morning, everyone. For today's call, given our attention has been on navigating the disruption to our business created by the COVID-19 pandemic, my remarks will focus on the key highlights of our first quarter of fiscal 2021, and then I'll provide an update on our financial performance. As reported in this morning's release, the first quarter of fiscal 2021, we recorded two charges related to the impact on our business of the COVID-19 pandemic. First, we recorded $155.9 million in goodwill and intangible asset impairment charges associated with recent acquisitions. This non-cash charge was $131.1 million after tax, or $5.66 per share. The company revised its internal forecast, resulting in a reduction in both current and future expected cash flows due to the COVID-19 pandemic and the uncertain business environment. As a result, during the first quarter of fiscal 2021, the company recorded impairment charges related to goodwill of $133.7 million and intangible assets related to movement's trade name and customer relationships of $22.2 million. Second, the company took a $7.2 million charge, $5 million after tax, or 22 cents per share, for costs due to the impact on our business of the COVID-19 pandemic. The $7.2 million included $3.5 million related to an additional inventory reserve, which impacted gross margin, and $3.7 million related to unfunded trade show deposits, additional reserves against accounts receivable, and restructuring charges, which impacted SG&A. For the first quarter of fiscal 2021, I'm sorry, the first quarter of fiscal 2021 was also impacted by $700,000 of pretax amortization of intangibles and deferred compensation for the movement acquisition recorded prior to the impairment and $700,000 of pre-tax amortization of the acquired intangible assets for Olivia Burton. The first quarter of fiscal 2020 had similar amortization of $1.5 million related to movement and $700,000 related to Olivia Burton. Our press release also describes these items and includes a table of GAAP and non-GAAP measures. The balance of my remarks will exclude the special items just discussed. For the first quarter of fiscal 2021, sales were $69.7 million as compared to $146.5 million last year. Currency negatively impacted sales by approximately $700,000. As Efraim mentioned, for the first half of this quarter, we were exceeding our internal plan. The second half of our first quarter was adversely impacted as the company and the majority of our wholesale customers closed all of their retail stores as shelter and place orders were imposed. Sales declined across all segments, owned brands, licensed brands, and company stores, and were down in both our U.S. and international businesses. Although e-commerce sales were strong, they were not nearly enough to offset the declines in our wholesale and company stores businesses. Gross profit was 50.8% of sales compared to 53.9% in the first quarter of last year. The decrease in gross margin was primarily driven by reduced leverage on fixed costs due to lower sales, additional special U.S. tariffs, unfavorable channel and product mix, and the unfavorable change in foreign currency exchange rates. As part of the swift actions taken to control spend, which I will discuss next, we were able to reduce a portion of the fixed costs and cost of goods sold. Operating expenses were $53 million as compared to $71.9 million over the same period of last year. The decrease is driven by actions taken to minimize all non-essential operating costs. This includes right-sizing marketing expenses to the lower revenue base while maintaining a focus on digital and e-commerce customer acquisition, and temporarily reducing the company's workforce, either through furloughs or other available government programs in various countries, and temporarily reducing compensation for the company's management and salaried employees, as well as its board of directors. The reduction in sales resulted in an operating loss of $17.6 million for the first quarter of 2021. An income tax benefit of $4.8 million, a 27.1% effective tax rate, was recorded in the first quarter of fiscal 2021 as compared to an income tax expense of $1.3 million, or a 19.2% effective tax rate, in the first quarter of fiscal 2020. The tax benefit was favorably impacted by the CARES Act, which enables the company to carry back U.S. net operating losses generated in fiscal 2021 into prior taxable years with a U.S. statutory rate of 35%, partially offset by the recording of valuation allowances on certain foreign deferred tax assets. Net loss in the first quarter was $12.9 million, or 56 cents per share, as compared to net income of $5.6 million, or 24 cents per share in the year-ago period. Now turning to our balance sheet. In addition to minimizing non-essential expenses, strengthening the company's balance sheet and enhancing financial flexibility has been a top priority. During the quarter, we drew down an additional $30 million under our credit agreement to add to cash balances. We are tightly managing inventories by delaying or canceling inventory receipts as deliveries are prioritized. And we have reduced capital expenditures, allowing only projects with short-term return on investment such as certain digital initiatives. As we announced with our year-end release, we have also suspended the company's quarterly cash dividend and share repurchase programs until further notice. Cash at the end of the first quarter was $187.8 million as compared to $150.7 million in the prior year period. Our total liquidity as of April 30, 2020 was $205 million including the availability under our credit facility. Account receivable was $49.8 million, down $36 million from the same period of last year, primarily due to the decrease in sales. Inventory at the end of the quarter was relatively flat to the same period of last year at $177.8 million, due to the actions taken to cancel or delay inventory receipts. Capital expenditures for the quarter were just under $1 million, and depreciation and amortization expense was $3.9 million, which included $1.2 million related to the amortization of acquired intangible assets of Olivia Burton and Movement recorded prior to the impairment. As just mentioned, capital expenditures will be at a minimum this year, although we plan to complete the migration of Movement's e-commerce platform, our largest e-commerce business, to our global platform. As announced today, on June 5th, The company amended its existing credit agreement to increase flexibility regarding its financial maintenance covenants in light of the impact of the COVID-19 pandemic. This amendment was effective as of April 30, 2020. In terms of outlook, while we are not providing specific guidance, we would like to share that we expect our second quarter to continue to be significantly impacted by the crisis. Although we expect trends will improve in the second half of the year, our top line is expected to remain below last year. As previously mentioned, we are implementing strategic cost reductions across all functional areas to better align our cost structure to the lower sales level to maximize our operating results. 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. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for your questions. Our first question comes from the line of Oliver Chen with Cowan & Company.

Please proceed with your question. Hey, good morning. This is Ross on for Oliver. Thanks for taking our question. Good morning, Ross. Good morning. 90% productivity of stores that have reopened is pretty impressive, definitely among the highest that we've heard in our coverage. Just can you talk about what you attribute the strength there to, whether you think it's pent-up demand or some sort of stimulus benefit or otherwise be helpful? Sure.

Okay. So, I actually think that this pandemic has kind of, to a certain extent, really fortified the need for a certain amount of brick and mortar centers, and especially outdoor ones. And so we're seeing that consumers like to shop, and they're coming to our stores and shopping at a pretty high level. And while traffic is generally down in those stores, about 40%, We're seeing higher conversion rates and higher average transactions. So both of those things, when people are going into stores, they're really going with the thought of buying. And so we're excited about that. Our people are excited to be back in the stores, and we're opening more every week. Got it.

Thanks. And then in terms of the digital prioritization, and the reorg you announced this morning. Can you just talk about how you expect digital and physical to interplay kind of over the longer term versus how it does today?

Sure. So we obviously expect digital to be a bigger part of our business, both in our direct-to-consumer business and our e-com businesses. So in that way, that over the last two, three years we've acquired. Olivia Burton and Movement, which are more digitally native brands and reach their consumers at a high level through digital aspects. And in addition to that, with our retailers, we're seeing a much more significant part of their business around the world become e-commerce oriented. And so in many cases, even during the first quarter, their sales performance penetrated to a much higher level on the digital front, obviously, but also made up for some of the losses in stores that were closed. And then on the third front, you have marketplaces, people like Amazon and Tmall in China that I believe have a big future also for us. And we're seeing that around the world as well, Amazon in the US and Europe. and Timal in China. So I think the idea of aligning to reach the consumer wherever they choose to shop, I think will pay some significant benefits for the company.

And just to follow up on the cost side of that, I guess in terms of sequencing the investments, could you just talk about that in terms of building out the digital You know, your digital presence, but also against the context of cash preservation. And then secondly, on the marketing side, just how the marketing strategy might evolve in terms of how you show up to your customers as you build out digital capabilities.

Thanks. Sure. So we've actually invested most of the cash resources that we've needed to invest in our digital initiatives over the last few years. So for example, what we're doing now with movement is rolling them onto our Salesforce on our Salesforce cloud solution for e-commerce. And so our whole company will be on one platform. The rest of the company is already on that platform. And we have all the support services and organization in place to support that. From a customer acquisition and digital investment point of view, we think also by really consolidating a lot of that effort also will gain significant efficiencies. We've already begun to experience that towards the end of the first quarter and as we enter the second quarter.

Great. Thanks so much.

Thank you. There are no further questions at this time. I'd like to turn the call back over to management for any closing remarks.

So really I would like to thank everybody for participating with us today. I would like to thank our team for the fabulous job that I believe they've been doing around the world in navigating this challenging environment. And while the world has been in a challenging place, I am optimistic that better days are ahead on many fronts and that progress will be made both on the racial initiatives that have been going on and protests that have been occurring as well as dealing with the pandemic and the world returning to a new normal and we're preparing ourselves very diligently for that. So thank you very much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.