Movado Group Inc.

Good day, everyone, and welcome to the Movado Group, Inc. Second Quarter 2023 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 Ephraim Grimmick, Chairman and Chief Executive Officer, and Sally DeMarcillis, Executive Vice President, Chief Operating Officer, and Chief Financial Officer. Before we get started, I would like to remind you the company's Cape Harbor language, which I'm sure you're all familiar with. The statements contained in this comments 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 of 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 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. With me today is Sally DeMarcellis, our COO and Chief Financial Officer. I will start by giving you a brief overview of our results, followed by an update on our strategic initiatives and brands, and then Sally will review our financial results in greater detail. We would then be glad to answer any questions. In an increasingly volatile global economic environment, we are very pleased with our overall results. Facing significant currency headwinds, our sales for the quarter grew by 5.1% and 10.5% on a constant currency basis. Our gross margin was 58.5% of sales, an increase of 190 basis points from last year. We delivered adjusted operating income of $31.4 million or 17.2% of sales versus $25.5 million or 14.6% of sales last year. Adjusted EPS was $1.07 versus 85 cents last year. Additionally, our balance sheet remains strong with cash of $203 million at quarter end and no debt. Our teams around the world continue to execute against our plan while navigating a challenging environment with a higher level of uncertainty. For the quarter, our U.S. sales declined by 5.4%, while our international sales grew by 15.3% and 25.8% on a constant currency basis. In the U.S., we saw an increasingly difficult retail market impacted by rising inflation and the anniversary of robust stimulus programs that benefited consumers in multiple income categories. We have also seen the slowing of the U.S. economy as the Fed increased rates in its effort to bring inflation under control. In our international markets, where prior year results were less impacted by stimulus programs than in the U.S., we saw continued strong growth in our licensed brand performance, including the launch of Calvin Klein. As we look at our brands, we continue to effectively execute against the Movado brand's elevation strategy. Movado sales for the quarter declined low single digits, driven by slower retail in the United States, partially offset by the growth in our international business, particularly in India. We remain excited about the prospects of Movado as we continue to elevate both the product and the brand image. In Movado, we saw strength in our higher-priced watches, with the average retail price growing by 12% versus last year. Our Movado SE collection, which continues to perform extremely well, both on our website and our wholesale distribution, will be further expanded for the fall, with new colorways for men and women, as well as the introduction of a women's automatic version. In bold, we introduced a new Sport Verso family that has performed very well. For the fall, we are introducing new ceramic models in bold, as well as the new bold fusion automatics. We're excited to be launching our first influencer program in September under the Movado Always in Motion theme, including influencers and artists who are the best at their crafts, from a gold medal Olympian skier to a ceramicist who are at the top of their game. This campaign will run through the holiday season in addition to our television advertising. We'll also introduce a new Bold TV commercial that we are very excited about. Digital trends were more challenging during the quarter, with a slowing of the U.S. consumer and a return to a more normalized balance between brick and mortar and online shopping. As we look at our licensed brands, we saw growth across the portfolio, resulting in 14.8% growth during the quarter. Tommy Hilfiger watches and jewelry performed well for us, driven by strength in Europe and India. Our campaign watch for him, Matthew, sold nicely, driven by our two-tone execution. For women, Libby, featuring a minimalistic sparkle dial connected with the pH consumer. During the third quarter, we will drive performance with the launch of strong campaigns in Europe, Mexico, Brazil, and India. Hugo Boss continued to grow in both our Boss and Hugo labels. The Boss parent brand has amplified their product and marketing message, and we are seeing the benefit. We saw a strong sell-through in our Steer family for him and Novia for her. The Boss brand is resonating with consumers as we partner with Boss' stable of key influencers like Habi Lamy on TikTok and the rising Italian tennis star Matteo Bertolini. In Coach, our sales were driven by the continued focus on our ceramic collection, Grayson, with the pink version being worn by Jennifer Lopez in the parent brand's ad campaign on social media. The quarter for Coach watches was challenged by COVID closures in China, but we're already beginning to see a nice bounce back in that market. We have seen continued strength in Lacoste, with strong performances in our replay family for him, while the iconic 1212 remains our biggest family in the brand. We're excited to introduce the third generation of the 1212 this coming fall. For the launch, we are planning a strong marketing program in Lacasse Home Market of France beginning in September. We expect to begin the launch of Lacasse jewelry during the fourth quarter. We are excited by our launch of Calvin Klein in both jewelry and watches, which began early this year and has exceeded our initial expectations. To date, we have opened over 1,500 retail doors, as well as several key online retailers on a global basis. Watches represent approximately 75% of the sales, with men's watches at 30% of sales and women's at 70%. Products that feature iconic CK branding make up about 20% of the business. During the second half of the year, we will amplify our marketing message in key markets in Europe with both digital programs and billboards and a digital launch in China. We're really excited by the initial reception that CK has received across our distribution network. In our outlet division, we saw single-digit growth with digital growth partly offset by a decline in our brick-and-mortar business. During the quarter, we saw challenging traffic trends driven by higher gas prices and inflationary pressures. We're already seeing traffic and business trends improve in our stores early in the third quarter. In Olivia Burton, we are focused on invigorating our product assortment and updating our marketing message. We're excited by the progress that our team is making, and we are focused on making great new iconic Olivia Burton products with several new introductions this fall. but with the bulk of our introductions coming throughout the next year. In movement, our team is focused on continuing to elevate the product and fine-tuning our marketing message as we head into the fall. As you know, we have put in place a new leadership team in movement, and we are already seeing progress in the evolution of the movement brand, both on product and marketing. We are rounding out the team and are excited about the future opportunities for MVMT to grow with beautifully designed iconic products marketed in an evolving digital landscape. While there is increased uncertainty in the economic environment, we are very pleased with how our teams have adjusted and executed against our strategic plans. As we look at the second half of the year, we believe that we will need to continue to execute in an uncertain environment, including facing the impact of unfavorable currency due to the strengthening of the U.S. dollar. With our strong brand portfolio, amplified design innovation, and effective marketing support, we will continue to deliver against the available opportunities while investing in our brands for the long term. I would now like to turn the call over to Sally, who will cover our financial results in greater detail.

Thank you, Ephraim, and good morning, everyone. For today's call, I will review our financial results for the second quarter and year-to-date period of fiscal 2023, 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 the special items included in our results for the second quarter and year-to-date period of fiscal 2023 and fiscal 2022 in our press release issued earlier today. which also includes a reconciliation table of gap and non-gap measures. Overall, our performance for the second quarter of fiscal 2023 continued to be strong. Sales were $182.8 million as compared to $173.9 million last year, an increase of 5.1%, which exceeded our expectations of 2% to 4% growth. In constant dollars, the increase in net sales was 10.5%. Net sales increased across our licensed brands and company stores, partially offset by a decrease in our owned brands. U.S. net sales decreased 5.4%. As Ephraim mentioned, the retail market in the U.S. was difficult as we anniversaried last year's stimulus and continue to see the effects this year of increased inflation on the consumer in addition to slowing domestic growth, all of which creates a challenging comparison year over year. International net sales increased 15.3% as compared to the second quarter of last year. On a constant currency basis, international net sales grew by 25.8%. We saw strong trends, especially in Latin America, India, and Europe. First profit as a percent of sales expanded to 58.5% compared to 56.6% in the second quarter of last year. The increase in gross margin was primarily driven by favorable channel and product mix partially offset by the unfavorable impact of foreign currency exchange rates. Operating expenses were $75.6 million as compared to $73 million for the same period of last year. The increase was driven by higher marketing expenses and general operating expenses that directly support the increase in sales. This was partially offset by a decrease in performance-based compensation. as the percent of sales operating expenses for the quarter decreased to 41.3% from 42% in the second quarter of last year. Expansion in gross margin and controlled spending in the second quarter drove a $5.9 million increase in operating income to $31.4 million as compared to $25.5 million in the second quarter of fiscal 2022. We recorded income tax expense of $6.6 million in the second quarter of fiscal 2023 as compared to a $5.5 million as compared to $5.5 million in the second quarter of fiscal 2022. Net income in the second quarter was $24.6 million or $1.07 for diluted share as compared to $20.1 million or 85 cents for diluted share in the year-ago period. Now turning to our year-to-date results. Sales for the six-month period ended July 31, 2022, with $346.2 million as compared to $308.7 million last year. Total net sales increased 12.2% as compared to the six-month period of fiscal 2022. In constant dollars, the increase in net sales was 16.5%. International sales increased 24.1%, or 32.6% on a constant currency basis. U.S. net sales declined 5.2%. Gross profit was $203.6 million, or 58.8% of sales, as compared to $172.7 million, or 55.9% of sales last year. The increase in gross margin rate for the first six months was primarily due to favorable channel and product mix. For the six months ended July 31, 2022, operating income was $57.4 million as compared to $39.6 million in fiscal 2022. As a percent of net sales, operating income was 16.6% in the first half of fiscal 2023 as compared to 12.8% in the first half of fiscal 2022. Net income was $43.7 million or $1.89 for diluted share. as compared to $30.2 million, or $1.27 per diluted share in the year-ago period. Now turning to our balance sheet. Cash at the end of the second quarter was $203.1 million, as compared to $199.7 million at the same period of last year. Accounts receivable was $100.7 million, up $11 million from the same period of last year, primarily due to the increase in sales. Inventory at the end of the quarter was up $31.7 million, or 17.3%, above the same period of last year, primarily due to the timing of receipts and the addition of the Calvin Klein brand to our portfolio. In the first half of fiscal 2023, we repurchased approximately $21.5 million, or 587,000 shares, under our fair repurchase program. Capital expenditures for the six-month period were $3 million, and depreciation and amortization expense was $5.6 million, which included $1.4 million related to the amortization of acquired intangible assets of Olivia Burton and Movement. Now I would like to discuss our outlook. While we had a strong start to the fiscal year, we recognize that we are operating in a challenging environment. Our net sales are currently expected to be in a range of $780 to $790 million, which is the low to midpoint of the previous outlook range of $780 to $800 million. This is primarily driven by the impact of currency headwinds due to the strengthening of the US dollar. We continue to expect gross profit of approximately 58% of sales. Given the strong first half, we currently expect operating income at the high end of our outlook range of $125 to $130 million. And we continue to anticipate a 25% effective tax rate. I would now like to open the call up for questions.

Thank you. And I'll be conducting a question and answer session. If you'd like to be placed in the question queue, 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 star 1. One moment, please, while we poll for questions. Our first question today is coming from Oliver Chen from Calendar Line, is now live.

Hi, Ephraim and Sally. Good morning. Good morning, Alex. The US experiencing those negative trends, does your guidance include a continuation of that happening? And given that it was negative, how are the inventories of that channel and the freshness of the inventories? I would also love you to elaborate on that outlet traffic. It sounded like a caution point.

Sure. So on both of those, yeah, our outlook does factor that there's going to be continued weakness in the U.S. and I think really due to two factors. One is the inflation and two is the the continued lapping of stimulus on the consumer that really did occur throughout the year last year and probably ends at the end of December. On the traffic front, we've always seen traffic challenged in outlets when gas prices are high. We have seen an improvement over the last year month, as I said in my comment, in both traffic patterns and business in our brick-and-mortar locations. And that business is still performing extremely well, and we're very pleased with it. But I do think that when you do see higher gas prices, those are generally destinations. and less people will drive to those destinations. I think on the inventory front, retailers have been very cautious on inventory levels. So inventory is pretty clean at the point of sale. Our inventory is very fresh. And you have to remember that our inventory is not seasonal. It is long lasting as a rule. And so I think we're in pretty good shape on that front.

Okay. And on the U.S. side, it's been really dynamic. We've seen a worse July than June, but then a better back half of July. What are you thinking with pricing trends in light of the negative trends in the U.S.? And do you expect the U.S. market to get worse or or better or stay at the rate you're seeing it now?

I think, you know, what I look is that we're returning to more normalized trends. And so we had a big boom last year in the U.S. based on all of the economic actions, low interest rates, stimulus that were taking place. And so if you look at most of our numbers against 2019, which is the last pre-pandemic year, I would expect that they'll be better than that, and they have been better than that. So, you know, within a more normalized environment and one that's not being made highly liquid by government actions, The business is performing well and will continue to perform really well. So I think it's important to look at trends against that kind of an environment. Okay.

And another cautious factor we're monitoring is Europe at large and recession risk and things getting worse there as well. You had really robust global numbers, but what are you seeing in those markets and are you concerned about that trends will slow or not?

I think overall we're pleased, we're really pleased with our performance in Europe. As my experience also leads me to believe, Europe doesn't get the highs and the lows that we do in this country. And although you are seeing already some economic challenges in countries like the UK, you know, part of that also has to do with their separation from the EU. We're seeing robust growth, for example, in some of our digital businesses in Europe and then also in travel retail, which had virtually disappeared for about an 18-month period and is now beginning to return as a real business.

Okay, and on everyone's mind, of course, and as you mentioned, it is the inflation topic, yet you had some pretty impressive average unit retail performance. How would you characterize your portfolio in terms of Inflation and what are what are you doing with pricing and it probably manifested? Differently across your portfolio.

So so we we did take early in the year some selective price increases to offset inflation, both on the operating side and on and on the cost side. I think we're seeing the results of that in our strong in our strong gross margins. that we delivered in the quarter. I think as the environment becomes more challenging, I think obviously price increases become more challenging as well. But costs will eventually moderate as well also. And you're starting to see that with hiring and areas like that. While there's still a lot of open positions, both at our company and in this country, we're seeing more candidates, for example, than we had been in the late last year.

Thank you. And Sally, it looks like the guide, the tweak of guidance is largely on FX. Could you help us understand the embedded FX impact on the gross margin line for the back half and guidance and what we should know about the magnitude of FX on the top line. And second question, Sally, will mix and channel continue to be helpful to the gross margin in the back half as we model that?

Okay, so let me start on the top line with revenue. That is the key factor in us tightening the range is due to the continuing strengthening of the US dollar. And we do have such a global business that it's pretty critical for us to try to call that out to you all. As it relates to the gross margin, that does also impact our gross margin. So the fact that our gross margin rate continues to be strong at 58, but stay at 58, there was also a piece of that related to the impact of currency on our gross margin rate. As for mixed, we will look at that. We are looking at that continuing in this challenging environment with the blend of the US business versus the international, as well as the direct to consumer and output. So all of that gets blended together and has us continue to be a relatively steady gross margin rate with a very complex calculation to get there.

Okay. And your balance sheet seems really healthy. What's on your prioritization list? Could a special dividend be in the realm of what you're thinking? Would love to hear. key priorities in terms of capitalization and returns to shareholders?

Well, I think we have both, we believe, a healthy dividend in place and intend to continue that. Obviously, we evaluate it based on our overall cash position and generally in the second half of the year, we generate a lot more cash than in the first half of the year. And then the other part is we also have a share repurchase plan in place that we've executed fairly well against in the first half of the year. And I would expect that we will continue to repurchase shares throughout the second half of the year.

Okay. And Ephraim, I'm the Calvin Klein business. So far, what have been your biggest surprises and or challenges? tweaks you've made as you've executed that part of the innovative business. It's a really great brand.

Yeah, look, it's a fabulous brand. It has global brand recognition. It's one of the big brands. We're really pleased to partner with them. We've seen robust international placement of both watches and jewelry between the Middle East and Europe. and parts of Asia. China has gotten off to a slower start and not due to anything other than the fact that they obviously had substantial closures during the first half of the year due to COVID. And then we've seen also robust reception to the product, probably more than we expected in Latin America and pretty strong sell-through results there. I think everything is working according to plan. What you always do is when you introduce a new brand, you learn from the product that you introduced. You fine-tune the product assortment as you grow the business. But we're as excited, if not more excited, about it today than we were when we first signed the license.

Okay, thank you. And last question, marketing as a percentage of sales. How are you thinking about that? What we've been seeing is a certain degree of digital disruption and fluctuation in customer acquisition costs, particularly with the Apple iOS changes as well as some of the Google algorithm changes. So we'd love your take on that also as you think digitally and use some of the best practices at Movement as well. Thank you.

Sure. So most of those changes came in place during the last year and so you're now, as we go into the second half of the year, we're in a market where a lot of those IOS privacy changes were already in place for the second half of last year. I think what we're also recognizing in some of the learnings, for example, that we got from movement is the success of our influencer campaigns that we're launching. a major one with Movado this second half that really is aimed at what we call the top of the funnel and continuing to build aspirational brand image for the brands. So we're excited about that as we progress. You know, one of the things that you do need to do in today's day and age is produce a lot more content for each of your brands. And our team has gotten really adept at doing that. As you know, we've also had a new chief marketing officer join us and I think we'll be integral to that effort as we move forward.

Thanks a lot. Best regards.

Thanks, Oliver.

Okay. Thank you. And I. Thank you.

We've reached the end of our question and answer session. I'd like to turn the floor back over to Efrem for any further closing comments.

Okay. I'd like to thank all of you for joining us today and wish you a very good end of the summer and the final holiday weekend next weekend. Thank you again, and we look forward to joining you for our third quarter conference call. Thank you.

That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.