Movado Group Inc.

Good day, everyone, and welcome to the Movado Group, Inc. Third Quarter 2022 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 Schachter of ICR. Please go ahead. Thank you.

Good morning, everyone. With me on the call is Ephraim Grimmer, Chairman and Chief Executive Officer, and Sally DeMarsolis, Executive Vice President, Chief Operating Officer, and 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 Efrem Grimberg, Chairman and Chief Executive Officer of Movado Group.

Efrem Grimberg Thank you, Rachel. And good morning and welcome to Movado Group's third quarter conference call. With me today is Sally DeMarsalis, our Chief Operating Officer and Chief Financial Officer. After I've had a chance to review our third quarter performance and our strategic initiatives, Sally will review our financial results in greater detail. We would then be glad to answer questions. We are extremely pleased with our results for the third quarter. Our teams around the world continue to execute at a very high level against our strategic objectives. For the third quarter, we delivered record sales and operating earnings. Revenues for the third quarter were $217.7 million, an increase of 28% versus $169.9 million last year. Our adjusted operating income was $42.2 million, a 68.3% increase from $25.1 million last year. Adjusted operating income for the quarter was 19.4% of sales, also a record partially driven by adjusted gross margin expansion of 320 basis points to 57.7% from 54.5% last year. We continue to focus on remaining disciplined with operating expenses, which were 38.3% of sales and improvement of 140 basis points against the same period last year, while increasing marketing expenses by $8.1 million over last year. Our balance sheet also remains strong. We increased net cash by $75.9 million year over year to end the quarter with $201.8 million in cash while repurchasing 548,000 shares for $17 million. We are pleased that today we announced that our Board of Directors has approved a 25% increase in our quarterly dividend to 25 cents and an additional $50 million to our share repurchase program. Over the last several years, we have invested in and developed our digital capabilities, the COVID-19 pandemic accelerating these efforts. These initiatives proved beneficial as we began to transform into a consumer-focused omnichannel company focused on serving our consumers wherever they choose to shop. We have also evolved our marketing capabilities to be more digitally focused as the media landscape has continued to evolve. Over the last 20 months, we have made our company more efficient, continuing to build our business around world-class brands and driving consumer demand. We are driving innovation across our product portfolio and building industry-leading designs. Our flexible supply chain has allowed us to continue to have the right inventory in place for our consumers, our retail partners, our e-commerce sites, and our brick-and-mortar stores. We are serving our consumers wherever they choose to shop, whether in a department store, a jewelry store, a website, or one of our outlet stores. For the quarter, our sales grew by 41.7% in the U.S. and by 19.7% in our international markets. These results were driven by strong performance, both in brick and mortar and online. Our Movado brand continues to drive performance with the strongest growth of all of our brands for the quarter. Throughout the year, we have experienced strong demand for Movado across its product portfolio, led by compelling innovation in both our core and our bold assortments. The results have been powered by robust digital marketing efforts, complemented by an increased penetration of television advertising. During the third quarter, we were excited to launch a limited series designed by the Cuban-American artist Carmen Herrera that has performed extremely well on Movado.com, as well as enhancing our brand image. Our Movado website has continued to drive growth, today becoming the flagship for the Movado brand as both a revenue generator and a place for the consumer to familiarize themselves with Movado. For the quarter, our Movado website grew by almost 25%. We continue to raise the average selling price on our Movado website, with over 20% of our watch sales coming from watches that retail above $1,000. We are also seeing a strong response on our website to Movado jewelry for both men and women, and we believe this will continue to play an important role in the growth of Movado. In Movado, we have seen a strong response and an increasing penetration of automatic watches for the holiday season, and we are launching a new TV commercial to support our SE automatic, which we introduced this spring. We have also begun our television campaign earlier than is typical to support what we believe will be a longer holiday shopping season. Sales in our Movado Company storage division grew by 31.9% against last year's third quarter. Our e-commerce business for this division is growing to be an important component of this channel, and while traffic in our brick and mortar stores has increased, it continued to be challenged by a decrease in tourism. Overall, our average unit retail has increased, and less promotional activity has continued to drive strong increases in profitability. Our licensed brand portfolio continues to drive strong results, with almost a 28% increase over last year, powered by recovery in Latin America, the Middle East, and India, and continued strong growth in Europe and the United States. On the licensed brand side, each of our biggest brands performed extremely well with strong growth in Tommy Hilfiger, Hugo Boss, Coach, and Lacoste. In Tommy Hilfiger, innovation continues to drive our strong performance. This holiday season, our campaign will feature Harley for him and Kennedy for her. We also continue to drive great design in Tommy Hilfiger jewelry, both for him and her. We will have strong marketing support for the Tommy brand in digital platforms and using local celebrities in key markets like India, Mexico, and Europe. In Hugo Boss, we are seeing strong results at retail from our sports looks like Admiral. This holiday, we will feature our grand course collection, a dressier interpretation of a chronograph. We are also expanding our Hugo Boss jewelry business in Europe. We'll have strong support for Hugo Boss on digital platforms in our key markets. In Coach, we continue to show our iconic Arden collection, which features the signature C, Coach Proud. We're continuing to develop our men's category in Coach, with new introductions and sport luxury offerings. Coach is being supported with strong digital campaigns in both the U.S. and China. We're driving growth in Lacoste with strong innovation and marketing support. This fall, we introduced new watches in Lacoste that feature the iconic Peanuts character, Snoopy. These eco-friendly watches are made out of casserole case materials and vegan straps and contain a solar movement. In Olivia Burton, we're launching our first ever TV commercial for the brand in its home market of the United Kingdom. This holiday campaign will feature our iconic celestial collection in both watches and jewelry. In movement, we are driving higher price points. We have received an excellent response to our Raptor collection, with an average price point exceeding $200, and also to our ceramic collections. We've gotten a strong reception to our Honey Smoke colorway across our watch families. Our Movement Ocean Plastic Edition continues to perform very well. Movement will also increase their television advertising this fall as we focus on driving efficiency across our digital marketing investment. For the first nine months of the year, our teams have delivered record revenues and profits despite a volatile market. We continue to proactively manage and navigate a market that is challenged by an ongoing pandemic, inflation, and currency volatility. As we look at the balance of the year, we believe that these pressures will persist, so we will remain disciplined and agile in managing the business with focused attention on cost, while also continuing to make the important investments to support the growth of our brands, including awareness-building marketing. In terms of our outlook for the year, we are raising our full-year outlook today to reflect a return to a more normalized purchasing patterns from retailers, which drove increased wholesale shipments into the third quarter and helped us deliver our strong results. We're excited about the prospects that lie ahead for Movado Group as our teams continue to evolve our strategic plan, putting our consumers at the center of everything we do and continuing to deliver sustainable, profitable growth. Sally will now review our financial results and outlook in greater detail, and we would then be glad to answer any questions you might have.

Thank you, Ephraim, and good morning, everyone. For today's call, I will review our financial results for the third quarter and year-to-date period of fiscal 2022, and then I will provide an update on our outlook for the year. My comments today will focus on adjusted results. Please refer to the description of all of the special items included in our results for the third quarter and year-to-date period of fiscal 2022 and fiscal 2021 in our press release issued earlier today. which also includes a reconciliation table of GAAP and non-GAAP measures. Certain comments will include comparisons to fiscal 2020 to provide additional context due to the significant impact of COVID-19 on prior year results. Our performance for the third quarter of this fiscal year exceeded our expectations and resulted in record net sales and operating profits. Our financial performance was highlighted by overall strength in global sales, expansion in gross margin, and operational disciplines. We once again ended our quarter with a strong balance sheet and made meaningful progress on our strategic initiatives. For the third quarter of fiscal 2022, sales were $217.7 million as compared to $169.9 million last year, an increase of 28.2%. Strong response to our brands and offerings led to net sales increases across our segments of owned brands, licensed brands, and company stores, as well as across most geographies, most notably the United States, but also seeing improvement in Europe and Latin America. U.S. net sales increased 41.7%, and international net sales increased 19.7% as compared to the third quarter of last year. Total net sales increased 5.9% as compared to the pre-pandemic third quarter of fiscal 2020, with an 8.3% increase in the U.S. and a 4.1% increase in international net sales. Gross profit as a percent of sales was 57.7%, compared to 54.5% in the third quarter of last year. The 320 basis point increase in gross margin was primarily driven by favorable channel and product mix and leverage on certain fixed costs, primarily due to the increase in sales over the prior year period. Operating expenses were $83.4 million as compared to $67.4 million for the same period of last year. The increase was driven by higher marketing expenses and performance-based compensation, as well as general operating expenses to directly support the significant increase in sales, while still continuing to be disciplined in operating expenditures. As a percentage of sales, operating expenses for the quarter decreased to 38.3% from 39.7% in the third quarter of last year. Expansion in gross margin and leverage on our operating expenses in the third quarter drove a $17.1 million increase in operating income to $42.2 million as compared to $25.1 million in the third quarter of fiscal 2021. We recorded income tax expense of $9.7 million in the third quarter of fiscal 2022, as compared to $8 million in the third quarter of fiscal 2021. Net income in the third quarter was $32.1 million, or $1.36 per diluted share, as compared to a net income of $16.4 million, or $0.70 per diluted share in the year-ago period. Now turning to our year-to-date results. Sales for the nine-month period ended October 31, 2021, for $526.4 million, as compared to $328.1 million last year. Total net sales increased 3.2% as compared to the pre-pandemic nine-month period of fiscal 2020, with a 15.4% increase in the United States, partially offset by a 5.4% decrease in international net sales. Gross profit was $298.2 million, or 56.7% of sales, as compared to $173.3 million, or 52.8% of sales last year. The increase in gross margin rate for the nine months was due to favorable channel and product mix, favorable changes in foreign currency exchange rates, and leverage on certain fixed costs. For the nine months ended October 31, 2021, operating income was $81.8 million as compared to $6.9 million in fiscal 2021. Total operating income was $40.1 million higher than the pre-pandemic nine-month period of fiscal 2020. As a percent of net sales, operating income was 15.5% in the first nine months of fiscal 2022 as compared to a 2.1% in the first nine months of fiscal 2021, and 8.2% in the first nine months of fiscal 2020. Net income was $62.2 million, or $2.63 per diluted share, as compared to $1.7 million, or 7 cents per diluted share in the year-ago period. Now turning to our balance sheet. Cash at the end of the third quarter was $201.8 million, an increase of almost $40 million over last year, while paying down $37.3 million of debt and repurchasing $17 million of common stocks during the same period. Accounts receivable were $136.4 million, up $32.9 million from the same period of last year, primarily due to the increase in sales. Inventory at the end of the quarter was down $6.1 million, or 3.5%, below the same period of last year, while sales increased over 60%. Capital expenditures for the nine-month period were $3.6 million, and depreciation and amortization expense was $9.4 million, which included $2.5 million related to the amortization of acquired intangible assets of Olivia Burton and Movement. As Ephraim mentioned, during the third quarter, retailers returned to a more normalized purchasing pattern, which drove wholesale shipments to some degree and contributed to our strong results. And as such, we are increasing our overall outlook for the year. We currently expect fiscal 2022 net sales in a range of approximately $715 to $720 million. Gross profit of approximately 56.5 to 57% of net sales. Operating profit in a range of 15 to 15.5% of net sales. and diluted earnings per share of approximately $3.35 to $3.45. Assuming no changes in the current tax laws, our current outlook assumes a 25% effective tax rate. This updated outlook does not contemplate significant additional COVID-19-related retail closures, which can adversely affect results. I would now like to open the call up for questions.

Thank you. We will now 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 would 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 poll for questions. Thank you. Our first question comes from the line of Oliver Chen with Cowan. Please proceed with your question.

Hi. Thank you very much. Congrats on great results. The guidance implies nice upside to where it is for fourth quarter. Could you provide more detail on expectations that went into the guidance? And it sounds like you're quite optimistic for the health of the consumer. I would love to hear those thoughts relative to what you're seeing with supply chain. Thank you.

Well, I think our team's done a fabulous job of managing supply chains. I'll start with that first. And we've had the right inventory at the right time. We feel like we're going to continue that pattern. And fortunately for us, we've always flown most of our inventory into markets and So we've not had shipping delays that some have experienced. I think on the side, we're seeing a healthy consumer and continuing demand both in brick and mortar and e-commerce. And that's, you know, in most of our key markets around the world, we've also seen bounce back in Latin America over the last quarter. And so I think we're feeling right now pretty good about the consumer. Obviously, there are some headwinds like inflation and inflationary pressures that can affect overall results in the short to medium term. But I think we're also continuing to monitor our expenses very closely while continuing to increase our marketing investments at the same time. So especially in key markets for the holiday season and behind key brands. So right now we're excited about the prospects for the fourth quarter. I'll see if Sally, if you'd like to add something to that.

No, I think that covers most of it. Looking forward to a healthy holiday season, that's for sure.

Sally, on inventory versus sales, how should we model that? It looks like you could be in a tight position. Are there sales being lost on the table or not? And then as we model gross margin, in the near and longer term, do you expect continued leverage on fixed costs? I mean, are there items happening to cost of goods sold that we should be aware of?

Okay. So we'll start with inventory. So as I mentioned, you know, we did have a small fluctuation in inventory. And when our queue is out later today, you'll see that our finished goods inventory is actually slightly up and our componentry is actually what's slightly down, which is a good place to be. So we feel like we're in a really good place for holiday season based upon what our forecasted sales are. And as again, as Ephraim led, our supply chain really has done an outstanding job at meeting the challenge that is facing everyone around the globe right now. So we feel like we're in good place with inventory. It's the right product. It's very current. It's core. It's what's selling. So fascinating there as to how that's all working. On gross margin, yes, we will continue to, as part of our cost containment is costs that are in gross margin. So we will continue to manage those. The fourth quarter will look a lot like it was this quarter based on our outlook that we just gave. You know, it's a strong year for gross margin with changes that have been, that we've been seeing, such as the growth of the U.S. wholesale, the growth of the Movado brand year over year. Those are all things that contribute to a strong gross margin. and we should continue to see that in the fourth quarter relative to what we experienced in the third quarter.

Okay, and Ephraim, you run a really globally diversified business model. Are there call-outs for regions, indoor channels that have been stronger versus weaker? And on the U.S. department store front, how are you feeling about the trends you're seeing there? You mentioned a longer season as well.

You know, I think that... On a regional basis, we're seeing our strongest performance in North America, and it's been quite a few years since I can say that, so we're really happy about that. We're seeing improved performance in Europe, and certainly in Latin America, which for us, our biggest markets are Brazil and Mexico, and Brazil's having a nice... Not up to its height, but having a nice bounce back from where it was last year. The Middle East, we're also seeing stronger results in it as well. I think if there's one challenge right now, it would probably be China, where brick and mortar is challenged as... really limited as people kind of stay out of malls or shopping in person because of increased concerns over COVID. I'm sorry. We've also seen India bounce back pretty well. And then our department store business continues to be very strong. We're also seeing improvement in our jewelry store, our chain jewelry store channel. So both are performing well, and department stores have been performing well for us for quite a while now.

Efrem, what about prices and price increases and how you're thinking about like-for-like versus mix, especially as you work through some of the inflationary pressures?

I think we'll certainly see some price increases next year. We've already passed some, especially in Movado. And so far, the consumer has accepted those price increases. And I think we're in an environment right now, and the strength of our brands allows us to continue to have some pricing leverage as we enter next year.

Okay. And on the digital frontier, the digital center of excellence, I mean, you called out television and other mediums. What's happening with the customer acquisition cost and strategy?

Oh, sure. I think it all complements each other. And, you know, television has always been our probably the place where we build brand awareness, and it seems to also complement digital advertising very well. It's well known that the cost of digital advertising and marketing has increased as demand increases. has increased and so I think having a 360 degree marketing effort is beneficial to the company and that includes things like outdoor things like our visuals at the point of sale also really important and but we've certainly increased our television budget this year on a global basis.

Okay and I'm we'll all be out in the stores for Black Friday and holiday, but are there highlights for your strategy as we approach the season, you know, unlike any other in the history of our careers, you know, for what you're doing for Black Friday and the holiday?

You know, we're being fairly consistent with what we've done in the past on Black Friday. We're not in a highly promotional category yet, Um, and, um, and, and Black Friday, while it's important, the whole month is really important also. Um, and, and especially the last 10 days, um, before, before holiday. Um, but certainly there'll be compelling values for, for consumers over, over the Black Friday, um, I think Black Friday, hopefully this year, should benefit also from the fact that last year there was really, in many markets, limited capacity that was allowed in stores at any one time. And this year, at least in the United States, those restrictions don't exist as more and more people continue to get vaccinated.

Okay. And Ephraim, on the product innovation front, you've made a lot of great changes and really executing on also some of the reinvention of Classic as well. What's on your mind for what the consumer wants and what features and styling you're pursuing at Core Movado and any other highlights across the portfolio?

Well, I think our team has done a really good job in executing innovation and And driving design leadership across our brand portfolio and increased use of diverse materials from ocean plastic to the use of ceramic across our portfolio. And then also being able to upgrade what we give our consumers. So while we're selling at higher price points, we're also able to continue to give them great values. So as I mentioned, an increased use of automatic movements within the Movado brand. And for us, I was really impressed with selling online products over 20% of our sales in our Movado.com business were watches over $1,000. So that's a really healthy number.

Okay. Last two, this is a little technical, but IDFA and the Apple iOS changes, the privacy changes, has that had much impact on your business? And then On shareholder returns, just remind us of the different priorities. You have a nice cash balance and you have a track record of returning funds to shareholders as well.

So certainly it's made the privacy, increased privacy restrictions have made it more complicated and have also raised, as I talked earlier, raised the cost of digital marketing. But we do believe that there are other areas to also complement that, which improve the efficiency of our digital marketing. So part of... You know, part of executing a really strong digital marketing campaign is you have to reach consumers across all different parts of the funnel, starting with the top of the funnel. And there are many ways to reach consumers at the top of the funnel. And then convert them online, both for ourselves and help our wholesale partners grow. convert our consumers. So I think we're learning how to navigate that efficiently. And then the second question, you can remind me. Shareholder returns. We obviously believe in paying a dividend. We increased our dividend and are really pleased. So we did that for this quarter. And we've also bought $17 million of stock back since the beginning of the year, most of it in the second quarter. And we increased also our share repurchase program by another $50 million. I think we still have $7 or $8 million left on the existing plan, and then this will be an incremental $50 million. Our intention is to continue to generate cash and to be able to utilize it appropriately.

Thank you. Best regards. Season's greetings.

Okay. Thank you very much, Oliver. Have a great holiday.

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'd like to thank all of you for listening and participating today, and I wish everybody a great Thanksgiving holiday, and we look forward to the important selling season that's ahead as well. So thank you very much.

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.