Movado Group (MOV) Q1 2019 Earnings Conference Call Transcript

Movado Group (MOV -2.02%)
Q1 2019 Earnings Conference Call
May. 30, 2018 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

[Operator instructions] Good day, everyone, and welcome to the Movado Group Inc.'s fiscal first-quarter 2019 earnings 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 Schacter of ICR. Please go ahead, ma'am.

Rachel Schacter -- ICR Investor Relations

Thank you. Good morning, everyone. With me on the call is Efraim Grinberg, chairman and chief executive officer, and Sallie DeMarsills, 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 -- Chairman and Chief Executive Officer

Thank you, Rachel, and good morning, everyone. I would like to welcome all of you to Movado Group's first-quarter conference call. I will first provide some highlights of the quarter and discuss our strategic initiatives, and then Sallie will review our financial results. We will then open the call up to questions.

We're extremely pleased to report a strong start to the year, driven by a double-digit growth in sales and adjusted earnings per share. Sales surpass our plan, growing 28.1% to $127 million and 22.2% in constant currency. The quarter included $2.2 million of additional revenue from a timing shift based on a new accounting standard for revenue recognition. This shift will continue to impact each quarter for the balance of the year.

However, for the year, we expect it will be revenue neutral. Sallie will review this in greater detail. Our adjusted operating profit for the quarter was $8.9 million, versus $2.7 million last year. Our adjusted earnings per share grew to $0.37, versus $0.01 last year.

We also continued to maintain a very strong balance sheet with a cash position of $177 million while repaying all of our bank debt. Our teams did a tremendous job of managing our inventory levels, reducing inventory by $1.3 million from the same period last year despite the strong sales growth. Now I'd like to spend a few minutes on our key strategic priorities for fiscal 2019. Coming off a strong finish to last year, our teams around the world have been energized to build on that momentum for our brands and regions.

We are continuing to make progress on our digital transformation to become a leading omnichannel consumer-driven watch company. In our regions, our domestic wholesale business in Movado continues to perform well in our department and specialty store channels with a leading market share in the $300 to $3,000 price range and high single-digit sell-through growth for the season today. We showed very strong double-digit growth in Europe led by France, Germany and the United Kingdom, driven by the performance of our licensed brand portfolio and the addition of Olivia Burton, which helped fuel our International growth. We also had growth in our Latin America, Middle East and Asia Pacific markets.

We saw continued growth and excellent performance in our Movado company stores with double-digit comps and total sales growth of 24.3%, with continued strong gross margin -- with continued gross margins. In our e-commerce business, we are very pleased with the positive momentum we are seeing from the Movado and Olivia Burton brands. From a brand perspective, our Movado brand experienced modest increases in the U.S. as well as in our international markets.

On the product side, Movado's Bold men's bracelets performed well as well as Esperanza and the -- and classic Museum in the core collection. Movado Connect is also continuing to help drive retail performance. For Father's Day, we will deliver our new men's Museum Sport, which received a very positive reaction from our wholesale customers. We continue to focus on driving performance with our digital marketing efforts, both in paid and social initiatives.

Olivia Burton continues to deliver excellent results since we acquired the company during the summer of last fiscal year. We continue to focus on global expansion with limited distribution and building a powerful e-commerce business. The Olivia Burton design team continues to innovate and excite women in both the watch and jewelry marketplaces. Some of our best sellers in Olivia Burton are in our Marble Florals collection, and we are getting a very good reaction from consumers to our new Bejeweled Florals.

There are also still tremendous growth opportunities for the Olivia Burton brand, and we are looking forward to opening our first Olivia Burton retail store in early fall in Covent Garden in London. Our licensed brand division generated very strong results in the first quarter, particularly in Tommy Hilfiger, Hugo Boss, and Lacoste, driven by growth in Europe, the Middle East, Latin America, and Asia. In Tommy Hilfiger, we continue to perform very well, especially with our campaign styles featuring Blue IP in watches for both him and her. In Hugo Boss, our strong performance continues to be driven by our iconic Grand Prix and Companion collections for men.

We are seeing an increasing opportunity in Hugo Boss watches for women, beginning with the strong performance of Allusion and our Classic Sport families. We continue to see an improving trend in the retail performance of Coach, driven by our Grand collection. We are positioning well -- we are positioning ourselves well for some very strong product introductions in Coach for the fall season. We are seeing strengthening momentum in Lacoste, especially in Europe, driven by our Ultra Slim Moon collection and our iconic Lacoste 1212 watches.

We continue to grow our kids business in Ferrari and are excited about new product introductions for the balance of the year. In Rebecca Minkoff, we have learned a lot since our initial introduction and are introducing a more refined product assortment at appealing price points for the fall season. We are very pleased with our first-quarter results. While we are increasing our outlook today, we recognize that our first quarter is our smallest quarter, and we do not expect the benefits from the weaker dollar to continue for the balance this year.

Over the last year, we have fine-tuned our strategic direction and have made great progress in transforming the company into an omnichannel leader in the watch category. I would now like to turn the call over to Sallie.

Sallie DeMarsillis -- Chief Financial Officer

Thank you, Efraim, and good morning, everyone. For today's call, I will begin with a review of our first-quarter financial results and balance sheet and then discuss our outlook. Before I begin, I would like to point out the special items included in our first-quarter results for fiscal 2019 and fiscal 2018. Our press release also describes these items and includes a table of GAAP and nonGAAP measures.

Movado Group acquired Olivia Burton on July 3, 2017. Included in the results for the first quarter of fiscal 2019 was $767,000 of noncash amortization of acquired intangible assets. After tax, the charge related to the acquisition equates to $621,000 or $0.02 per diluted share. Our GAAP results for the first quarter of fiscal 2018 include a $6.3 million pre-tax charge, which equates to $4.4 million after tax, or $0.19 per diluted share, in connection with our cost-savings initiatives.

The balance of my remarks will exclude the special items just discussed. Now turning to our results. We are very pleased with our broad-based sales growth across each of our categories, owned brands, licensed brands and retail. The company adopted the new revenue recognition accounting standard as of February 1, 2018, which resulted in shifts in timing related to the recognition of returns and markdowns between quarters.

As Efraim mentioned, for the first quarter, our sales were favorable by $2.2 million due to the net decrease in returns and markdowns, which would have historically been recorded in this period. This change impacted operating income by $666,000 and after tax equated to $0.02 per diluted share. We anticipate a corresponding offset later this year. Sales for the first quarter were above our expectations and increased $27.9 million, or 28.1%, to $127.1 million.

Our newest brand contributed to this growth as we did not own it for the first five months of last fiscal year. Yet even without Olivia Burton, we experienced high double-digit growth in the first quarter. In constant dollars, net sales increased 22.2%. By geography, International sales increased 33% in constant dollars.

And in the U.S., sales increased 9%. Wholesale segment sales were $112.1 million, increasing 28.6% from $87.2 million in last year's first quarter. In constant dollars, wholesale segment sales increased 21.9%. U.S.

wholesale sales increased 3.4% to $33.8 million, compared to $32.7 million last year. International wholesale sales increased 43.8% to $78.3 million, compared to $54.5 million in the prior year, an increase of 33% in constant dollars. Sales were strongest in Europe, Brazil, the Middle East, and Asia. The company's retail business continued to be a positive contributor with sales up 24.3% from last year.

At the end of the period, we operated 40 outlet locations. Gross profit was $67.5 million, or 53.1% of sales, compared to $50.5 million, or 50.9%, in the first quarter of last year. The 220-basis-point increase in gross margins was primarily driven by the favorable change in foreign currency exchange rate and the increased leveraging our fixed costs due to higher sales. Operating expenses were $58.6 million, or 46.1% of sales, this year as, compared to $47.9 million, or 48.2% of sales, for the same period of last year.

The decrease in operating expenses as a percent of sales was driven by sales leverage while also demonstrating disciplined cost control as we continued to invest in our growing business. The dollar increase in operating expenses was primarily the result of the following: a $6.1 million increase in marketing expense, a $1.3 million increase resulting from the unfavorable impact of foreign currency exchange rates, and a $3.4 million increase in other operating expenses to support our sales growth. Strong sales growth and the expansion in gross profit more than offset increased operating expenses, leading to better-than-expected operating income for the first quarter. To this end, operating income was $8.9 million, or 7% of sales, compared to $2.7 million, or 2.7% of sales, in the same year-ago period.

Income tax expense of $5,000 in the first quarter of fiscal 2019 compares to an income tax expense of $2.2 million recorded in the first quarter of the prior year. The effective tax rate for both years is impacted by the timing of discrete items, although in opposite directions. The first quarter of fiscal 2019 is lower than our expectation for the full fiscal year due to the favorable timing of approximately $2.1 million, or $0.09 per diluted share, and the aggregate of a few discrete items, including the release of a valuation allowance on certain deferred-tax assets. The effective tax rate for the first quarter of fiscal 2018 was higher than expected for the full fiscal year, primarily due to the unfavorable timing of the impact of stock-based compensation, which increased last year's tax provision by $960,000, or $0.04 per diluted share.

Net income in the first quarter was $8.7 million, or $0.37 per diluted share, versus net income of $258,000, or $0.01 per diluted share, in the year-ago period. Now turning to our balance sheet. Cash at the end of the first quarter was $177 million, as compared to $233.6 million last year. The year-over-year decrease was driven by the repayment of the $25 million outstanding on our revolver and the acquisition of Olivia Burton in the second quarter of fiscal 2018.

Accounts receivable was up $13.5 million as compared to the same period of last year, primarily due to the increase in sales. Despite the sales increase of $27.9 million, or 28.1%, for the quarter and the Olivia Burton acquisition, inventory decreased by $1.3 million as compared to the same period of last year. In the first quarter, we repurchased $1.2 million of stock under our share-repurchase program, primarily to offset the potential dilution from stock award. Capital expenditures for the quarter were $1.7 million, and depreciation and amortization expense was $3.4 million.

This included $767,000 related to the amortization of the acquired intangible assets of Olivia Burton. Now I'd like to discuss our updated outlook for the current fiscal year. 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, customer spending, fluctuations in foreign currency exchange rates and various other causes referenced in our 10-K filing.

For fiscal 2019, we are raising our outlook. Sales are expected to be in the range of approximately $615 million to $625 million. We expect our gross margin percent to be slightly improved from fiscal 2018. Our outlook estimates that gross margin will be in a range of approximately 53% to 53.5% for the full fiscal year.

We have a track record of disciplined control of our operating expenses, but we are also investing behind our International teams to support our growth. And with that, operating income is now projected to be in the range of approximately $71 million to $73 million. Based on the lower U.S. corporate tax rate, coupled with our jurisdictional earnings, the company now anticipates a 22% effective tax rate.

And net income is expected to be in a range of approximately $54.9 million to $56.4 million. We expect diluted earnings per share in fiscal 2019 to be in a range of approximately $2.35 to $2.40. Capital expenditures for fiscal 2019 are estimated to be approximately $12 million. The outlook we have provided assumes no unusual items for fiscal 2019 and excludes the non-cash amortization of the acquired intangible assets related to the Olivia Burton brand.

I would now like to open the call up for questions.

Questions and Answers:

Operator

Thank you. [Operator instructions] We'll first go to Oliver Chen with Cowen and Company.

Oliver Chen -- Cowen & Company -- Analyst

Hi. Thank you. Good morning. The comments around International -- building the International team are interesting.

What are your thoughts there in terms of what you're looking to do and what opportunities you see there? And then I was also just curious about the state of the U.S. wholesale department store channel. What are your thoughts on the levels of inventories here? And are you happy with the sell-through versus sell-in rates? Thank you

Efraim Grinberg -- Chairman and Chief Executive Officer

So I'll take those, Oliver. So on the first one, the investment is really behind some people in growing markets and as well as increased marketing expense behind our brands. And we're seeing very strong momentum in those markets, and you can see that by our International sales growth in the first quarter. And on the U.S.

side, we're seeing improving trends in the U.S. department store business. We believe that overall, those businesses are improving both in the watch category and overall and that we're cautiously optimistic about the trends of those businesses in the second half of the year. And with those improving trends, the retailers, I think, are stocking their positions appropriately.

Oliver Chen -- Cowen & Company -- Analyst

OK, and that's been encouraging regarding the investments in the digital center of excellence. As you've had more time with this initiative, what are your thoughts on the priorities there and the progress you've made and what you see ahead?

Efraim Grinberg -- Chairman and Chief Executive Officer

Sure. It's very early on for us. So we just really launched that at the beginning of this fiscal year, and we're in the process of staffing that area and placing a greater emphasis on digital throughout the company. So I think this year will really predominantly be an investment year in that area, and I would expect to begin really seeing a real impact toward the latter half of this year and the beginning of next year.

Oliver Chen -- Cowen & Company -- Analyst

OK. And our other question was regarding M&A, Efraim. What are your general thoughts on M&A as a framework in terms of looking for ROIC-accretive deals or opportunities? What would make sense for you as you think about organic versus M&A-driven growth?

Efraim Grinberg -- Chairman and Chief Executive Officer

Well, I think we have both opportunities to drive ourselves organically as well as we're still proving out our Olivia Burton model. And that's been a great acquisition for us, and -- but it's very early in that stage. So we have a very strong balance sheet that really does continue to give us a certain amount of flexibility in the marketplace as well.

Oliver Chen -- Cowen & Company -- Analyst

Thank you. Best regards. Great quarter.

Rachel Schacter -- ICR Investor Relations

Thank you, Oliver.

Efraim Grinberg -- Chairman and Chief Executive Officer

Thank you. Thank you, Oliver.

Operator

[Operator instructions] We'll go next to Edward Yruma with KeyBanc Capital Markets.

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Hey, good morning, guys. A couple of quick ones for me. First, lots of innovation at core -- in the core Movado product portfolio. Is the sales growth or sales improvement being driven out of kind of the new product lines, the heritage or the core? And then, I guess, as a follow-up, maybe a little bit of color on Minkoff since I think that underperformed a little bit.

Thanks.

Efraim Grinberg -- Chairman and Chief Executive Officer

So I think I'll answer the first part about -- Movado is really -- we're seeing actually a revitalization in our core business and strong -- continued strong performance in Bold. Heritage is still a very limited collection. And we're also seeing improving trends in our e-commerce business over the same period last year. So we're excited about that.

Rebecca Minkoff is still a very small part of the overall business and really a brand that we're incubating right now. We actually noted it has a very limited and exclusive distribution, and that actually makes it a very interesting opportunity for the company. And it's a millennially based brand, which also makes it an exciting opportunity for us.

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Great. Thanks so much, guys

Rachel Schacter -- ICR Investor Relations

Thanks.

Operator

And it looks like there are no further questions at this time, so I'd like to turn it back over to management for any additional remarks.

Efraim Grinberg -- Chairman and Chief Executive Officer

Again, thank you for joining us for our first-quarter conference call, and we look forward to seeing you again at the at the end of the of the summer for our second quarter. Thank you

Operator

[Operator signoff]

Duration: 26 minutes

Call Participants:

Rachel Schacter -- ICR Investor Relations

Efraim Grinberg -- Chairman and Chief Executive Officer

Sallie DeMarsillis -- Chief Financial Officer

Oliver Chen -- Cowen & Company -- Analyst

Edward Yruma -- KeyBanc Capital Markets -- Analyst

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