Movado Group, Inc.
Q4 2019 Earnings Call Transcript

Published: 28 Mar 2019

[Operator:]

Good day everyone and welcome to the Movado Group fiscal fourth quarter 2019 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 Ms Rachel Schacter of ICR. Please go ahead, ma’am.

[Rachel Schacter:]

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 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 supplement 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. Good morning and welcome to Movado Group’s year-end conference call. I will share with you the highlights for the quarter and the year as well as outline our strategic vision and plans for fiscal 2020, and then Sallie will walk you through our financial results in greater detail as well as our outlook for the coming year. We will then be glad to answer your questions In a challenging global retail marketplace, particularly during the holiday season, we were very pleased to deliver such a strong quarter and end to our fiscal year. Our sales for the quarter grew by 33.6% including the recent acquisition of MVMT and grew by 10.3% excluding MVMT, confirming that our strategic vision of driving innovation, expanding our digital footprint and focusing on our brands and regions is enabling us to gain market share around the world. Adjusted operating profit for the quarter increased 38.5% to $19.9 million, and adjusted EPS increased to $0.67 from $0.52 in the prior year period. For the year, our sales grew by 19.7% to $679.6 million. Our adjusted operating profit grew to $79.2 million, a 24% increase over last year, and our adjusted earnings per share for the year were $2.67 versus $2 last year. At the beginning of the year, we said we expected to return our U.S. wholesale business to growth, and in fiscal 2019 our U.S. wholesale revenue grew 2.9% without the addition of MVMT. We were also very pleased to have ended the year with over $189 million in cash despite having made the important acquisitions of Olivia Burton in fiscal 2018 and MVMT in fiscal 2019. Now I’d like to share with you some of the highlights in our brands as well as some of our plans for the coming year. In fiscal 2019, our Movado brand grew for both the quarter and the year. While traffic remained challenging, ecommerce performance was stronger. Our new product introductions in Movado, including our Museum Classic on Mesh and our new Bold Evolution resonated with our retail customers. Our Museum 47, a limited series collection available in various color waves in 40 mm and 35 mm helped propel our Movado.com business to over 50% growth for the quarter. For our Movado brand, we have put together a strong set of marketing plans to help drive continued growth, including a spring television campaign featuring our Bold Evolution collection for both men and women and a continued digital campaign to help drive demand and support for our retailers and our Movado.com website. In fiscal 2020, we will continue to focus on driving accelerated growth on Movado.com. In smart watches, we are excited to introduce Movado Connect 2.0 coming this fall, which will now be available in two sizes

[Sallie DeMarsilis:]

Thank you Efraim, and good morning everyone. For today’s call, I will first review our financial results and then discuss our outlook for fiscal 2020. Before I begin, I would like to point out the special items included in our fourth quarter and full year results for fiscal 2019 and fiscal 2018. Our press release also describes these items and includes a table of GAAP and non-GAAP measures. Movado Group acquired MVMT on October 1, 2018. Included in the consolidated results for fiscal 2019 was $14.4 million of pre-tax charges primarily connected with the integration of the acquisition, $2.4 million of which was recorded in the fourth quarter. After tax, the fourth quarter charge equates to $2.5 million or $0.10 per diluted share. Included in the consolidated results for fiscal 2019 were tax benefits of $12 million or $0.51 per diluted share related to finalizing our accounting for the impact of the 2017 Tax Act as well as certain discrete foreign tax items. $4.4 million or $0.18 per diluted share was recorded in the fourth quarter. Our GAAP results for the fourth quarter and fiscal 2018 included charge of $45 million or $1.95 per diluted share due to the estimated impact of the enactment of the 2017 Tax Act last year. Movado Group acquired Olivia Burton on July 3, 2017. Included in the results for fiscal 2019 was $2.9 million of non-cash amortization of the acquired intangible assets, of which approximately $700,000 was in the fourth quarter. After tax, the year-to-date charge related to the acquisition equates to $2.4 million or $0.10 per diluted share. Included in the consolidated results for fiscal 2018 was $6.8 million of pre-tax charges primarily connected to this acquisition, of which $900,000 was recorded in the fourth quarter. After tax, the charge related to the Olivia Burton acquisition equates to $6.2 million or $0.27 per diluted share for the year-to-date period last year. Our GAAP results for fiscal 2018 included a $13.6 million pre-tax charge which equates to $10.5 million after tax, or $0.45 per diluted share in connection with our cost savings initiatives. Approximately $150,000 of this pre-tax charge was in the fourth quarter of fiscal 2018. In the fourth quarter of fiscal 2019, a small reduction to this charge of $300,000 was recorded. The balance of my remarks will exclude the special items just discussed. As a reminder, as of October 31, 2018 the company’s two operating segments, wholesale and retail, are now referred to as watch and accessories brands and company stores. The company stores segment comprises our retail outlet locations and our watch and accessories brand segment comprises the rest of our business, including all the wholesale distribution as well as direct-to-consumer sales channels other than our retail outlet locations. Now turning to our results, for the fourth quarter of fiscal 2019, sales were $199.4 million, a $50.2 million or 33.6% increase from the fourth quarter of fiscal 2018. The fiscal 2019 results include the addition of MVMT for the quarter. Excluding the impact of MVMT, sales grew 10.3% over last year. The increase in overall sales was driven by strength across our owned and licensed brands as well as growth in our company stores. To this end, sales were up 55.7% in the United States and in constant dollars increased 18.2% internationally. Excluding MVMT, sales increased 7.8% in the U.S. and increased 12.5% internationally. Sales in our watch and accessories brand segment were $171.3 million as compared to sales of $121.6 million for the same period of last year. Excluding the impact of MVMT, sales grew 12.3% over last year. In constant dollars, these sales increased 43.1% driven by a sales increase in both our licensed brand and owned brand categories. By geography, the U.S. watch and accessories brand business increased 93.7% to $78.8 million compared to $40.7 million last year. Excluding the impact of MVMT, sales grew 13.2% over last year. This increase was driven by both our licensed and owned brands. The international watch and accessories brand business increased 14.3% to $92.5 million compared to $80.9 million in the prior year. In constant dollars, international sales increased 17.6% with our strongest sales growth being in Europe and Asia. Excluding the impact of MVMT, sales grew 11.9% over last year. For the quarter, the company’s retail business was up 1.6% from last year. At the end of the quarter, we operated 44 outlet locations, including one Canadian store, as compared to 40 locations last year. Gross profit was $111.1 million or 55.7% of sales compared to $78.6 million or 52.7% in the fourth quarter last year. The 300 basis point increase in gross margin was primarily driven by the favorable impact of channel and product mix and leverage on fixed costs. These were partially offset by the unfavorable change in foreign currency exchange rates. Contributing to the uplift in channel and product mix was the inclusion of MVMT in our largest ecommerce sales quarter of the year. Operating expenses were $91.1 million, an increase of 41.9% year-over-year. This increase was predominantly driven by a $17.9 million increase in marketing investments to appropriately support our business initiatives and brand awareness across our portfolio, including our newest brand, MVMT. Additionally, there was a $3.5 million increase in payroll and performance-based compensation. Strong sales growth and expansion in gross profit more than offset the increased operating expenses, leading to better than expected operating income for the fourth quarter. To this end, operating income was $19.9 million or 10% of sales compared to $14.4 million or 9.7% of sales in the same year ago period. Income tax expense was $3.9 million compared to $2.1 million in the same period of last year. Net income in the fourth quarter was $15.9 million or $0.67 per diluted share versus net income of $12 million or $0.52 per diluted share in the fourth quarter of fiscal 2018. Looking at the results for the full year ended January 31, 2019, we saw positive performances across key metrics with increased sales, expansion in gross profit margin, and significant growth in earnings per share. We reached record sales and record operating profit with or without the inclusion of MVMT in our results. Sales were $679.6 million, an increase of 19.7% from fiscal 2018. Excluding the impact of MVMT, sales grew 12.7% over last year. In constant dollars, sales increased 18.9%. Sales increased in our owned brands, licensed brands, and retail categories organically as well as with the inclusion of MVMT. Total U.S. sales increased 18.3%, total international sales increased 20.8%, and on a constant dollar basis international sales increased 19.4%. Gross profit was $369.9 million or 54.4% of sales as compared to $300.2 million or 52.9% of sales last year. The increase in gross margin percent for the year-to-date period was primarily driven by the favorable impact of channel and product mix and leverage on certain fixed costs. Once again, MVMT contributed to the uplift in channel and product mix for the full year results, but to a smaller extent than in the fourth quarter. Operating income was $79.2 million or 11.7% of sales compared to $63.6 million or 11.2% of sales in fiscal 2018. Income tax expense was $15.6 million compared to $16.1 million for last year, and our effective tax rate was 19.9% for fiscal 2019 compared to a 25.7% effective tax rate last year. Net income was $63.1 million compared to net income of $46.5 million in the prior year. Diluted earnings per share increased to $2.67 per share in the current fiscal year compared to $2 per share last year. Now turning to our balance sheet, cash at the end of the year was $189.9 million as compared to $214.8 million last year. During the third quarter, we acquired MVMT using cash on hand. At the end of the third quarter, we had borrowed the equivalent of approximately $50 million on our revolver as we had favorably amended and extended our global facility, and are currently paying a 1% interest rate on these borrowed funds in Switzerland. Inventory at the end of the quarter was $165.3 million, a $13.6 million or 9% increase from the prior year predominantly due to the inventory acquired for MVMT. During fiscal 2019, we repurchased approximately $7.4 million of stock under our share repurchase program primarily to offset the potential of dilution from stock awards. Capital expenditures for the year were $10.6 million. Depreciation and amortization expense was $14.2 million, which included $3.9 million related to the amortization of acquired intangible assets of MVMT and Olivia Burton. I will now discuss our outlook for fiscal 2020. Our outlook assumes currency rates consistent with recent levels. Our results may be materially affected by many factors, such as changes in global economic risk and customer spending, fluctuations in foreign currency exchange rates, and various other factors referenced in our 10-K filings. As Efraim mentioned, we have a solid foundation on which we plan to drive growth in revenue and profits for the year ahead. In light of the foregoing for fiscal 2020, we anticipate our sales will be in a range of approximately $750 million to $765 million. We expect our gross margin percentage to be flat or slightly improved from fiscal 2019. As for operating expenses, we have a track record of disciplined control over our spending. We will, however, invest to support our top line growth with initiatives to continue to build brand awareness and consumer demand across our portfolio. Operating income is projected to be in a range of approximately $82 million to $85 million. Based on our jurisdictional earnings, we anticipate a 21% effective tax rate, and net income is expected to be in a range of approximately $64 million to $66.4 million. We expect diluted earnings per share in fiscal 2020 to be in a range of approximately $2.70 to $2.80. Capital expenditures for fiscal 2020 are estimated to be approximately $15 million and include amounts to support improvements in our ecommerce sites. The outlook we have provided assumes no unusual items for fiscal 2020 and excludes the amortization of acquired intangible assets related to Olivia Burton as well as purchase accounting adjustments related to MVMT. In total, these are estimated to approximate $9 million. I would now like to open the call up for questions.

[Operator:]

[Operator instructions] We’ll now take our first question from Oliver Chen from Cowen & Co. Please go ahead, your line is open.

[Oliver Chen:]

Hi, thank you. Good morning. We were curious about your views on the U.S. wholesale channel and how you see that trending in the year ahead, and your thoughts on inventory control within that channel. Also, as you look across globally, there’s a number of macro risks. If you could speak to your thoughts about U.K., France, and how the Chinese consumer is behaving as it reflects on your business, that would be helpful as well. Thank you.

[Efraim Grinberg:]

Okay, thank you, Oliver. Let me start with there’s obviously risk in the U.S. today and you’re seeing that in economic numbers and people believe that there’s going to be a slowdown in traffic patterns to stores, so we are taking that into account in our own forecasts. When there’s risk, people are obviously inventory conscious. Inventories are in good [indiscernible] we’ve taken a lot of market share and our growth in Europe has continued, even in a challenging environment, so I believe in the watch category and in the fashion watch category, we’re one of the bright spots for our retail partners in Europe. China for us is still a very small environment, so again we have opportunity there to gain share despite what goes on in the market.

[Oliver Chen:]

On the smart watch innovation and the announcements you’re making, what is your approach to thinking about how big or incremental this should be as a percentage of total, and how you inventory into this group of watches just to both mitigate risk but also pursue the right level of innovation?

[Efraim Grinberg:]

We’re excited about our smart watches. They’ll come for the second half of the year. What we have found in smart watches is that they do extremely well for the first and second season and then get a little more challenging afterwards as you need to bring more innovation into the marketplace, so we’re doing that. We believe we’re inventorying it properly and standing behind a strong marketing program in the second half of the year to support that with our retailers.

[Oliver Chen:]

The Olivia Burton team Mall Award was also very impressive. What are your thoughts for the Olivia Burton geographic breakout over time, and are there learnings there that help you with the balance of your portfolio as well?

[Efraim Grinberg:]

I think we’ve found that the Asian market overall has been very, very receptive to Olivia Burton and helped drive some healthy growth, but still it’s one of the most--Olivia Burton is one of the most significant fashion watch brands in the U.K. and growing its presence in Europe, and this year we’re focused on really beginning to build brand awareness in the U.S. and driving growth in the U.S. behind Olivia Burton as well.

[Oliver Chen:]

Thank you. Solid results, best regards.

[Efraim Grinberg:]

Thank you.

[Operator:]

Thank you. We’ll now take our next question from Frank Camma from Sidoti. Please go ahead, your line is open.

[Frank Camma:]

Good morning, guys, thanks for taking the questions. First, I’d like to start with just the guidance. Can you just remind us with MVMT the seasonality of that, because I know it’s different than your base business, and how that’s reflected in your guidance?

[Sallie DeMarsilis:]

Correct, so I’m going to start with that and I’m sure Efraim will go in too. MVMT is a very seasonal business right now with our ecommerce, and we mentioned this as we were purchasing them, they are very active in the back half of the year, the last three to four months during the holiday selling season, so that will impact the seasonality, and of course that will be anniversaried next year in the back half of the year with the timing of when we acquired this year.

[Frank Camma:]

Okay yes, so--go ahead, I’m sorry?

[Efraim Grinberg:]

In that light, we will make investments behind MVMT and all of our businesses in the first half, and I would think that a substantial part of our earnings growth for the year will come during the second half of the year.

[Frank Camma:]

Okay, that’s what I was getting at. Of MVMT’s business today versus maybe as you look out longer term, can you talk about what mix is watches versus accessories, because I know that’s sort of an important part of their business, correct, or at least their strategy?

[Efraim Grinberg:]

They’ve had a really very nice sunglass business and they’ve also recently had a very nice business in eyeglasses to be used on screens, so for gamers and computers, called Everscroll. It is one of our best selling items today online, as well as the launch of jewelry last year. We believe that is has a big opportunity as a lifestyle brand on a global basis, and overall we think that jewelry can have a significant opportunity for the company in the future. We’ve had now very good growth in Tommy Hilfiger jewelry. We launched Olivia Burton jewelry right when the company was acquired, and that’s done very well. We think there’s some significant opportunities on the jewelry front across our brand portfolio.

[Frank Camma:]

Okay, so you do have the rights or ability to perhaps extend those licenses beyond--

[Efraim Grinberg:]

Well, some of that--

[Frank Camma:]

--or some of them?

[Efraim Grinberg:]

Right. We are--currently we will launch Hugo Boss jewelry in the second half of the year, and we will begin testing Movado jewelry as well on our website.

[Frank Camma:]

Okay, so just staying on the guidance for a second, if you look at the high end at least, maybe if I did the math right, given that you’re keeping your gross margins roughly flat, that would imply a decent bit of spending or increase in the operating--which I think you explained, so is that mostly on--I don’t want to put words in your mouth, but on the digital side would you say, that increase in spending? Can you just give us a little bit more flavor into that build-up of investment?

[Efraim Grinberg:]

Sure. It’s a combination of digital spending, which remember we didn’t have MVMT during the first half of the year, so there’s significant investment [indiscernible] and outdoor as well as influencer campaigns, effective vehicles to reach consumers, so we will invest behind that. As you can see, we’re adding a Movado television campaign in the spring to our fall campaign. We’re excited about that, but those do take investments.

[Frank Camma:]

Okay. My last question is just on your balance sheet. It looks like you keep pretty--at least, continue to keep pretty tight controls on your own inventory, but can you specifically talk about the inventory of your U.S. retail partners and how they may be stacked right now?

[Efraim Grinberg:]

Our retailers have--you know, their inventories are in a healthy position and they’ve done a very good job of keeping their inventories in a healthy place. They adjust them periodically as the market adjusts.

[Frank Camma:]

Okay, great. That’s all for me, thank you.

[Efraim Grinberg:]

Thank you.

[Operator:]

Thank you. I would now like to close the call, turn it back to management for closing remarks.

[Efraim Grinberg:]

Okay, thank you very much everybody for participating today, and as you can tell, we’re excited about the upcoming year and the progress that the company has made on its strategic initiatives. We continue to focus to execute on our goals and we look forward to talking to you on our first quarter conference call. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today’s call. Thank you for your participation. You may now disconnect.