Movado Group Q2 2024 Earnings Call Transcript

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August 24, 2023

There are 5 speakers on the call.

Operator

Good day, everybody, and welcome to the Movado Group, Inc. 2nd Quarter 20 24 Earnings Conference Call. As a reminder, today's call is being At this time, I would like to turn the conference over to Rachel Schacter of ICR. Please go ahead.

Speaker 1

Recorded. Thank you. Good morning, everyone. With me on the call is Efraim Grinberg, Chairman and Chief Executive Officer and Sally DeMarsilis, recorded. 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 recorded.

Speaker 1

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 recorded. Actual future results may differ materially from those suggested in such statements due to a number of risks and uncertainties,

Speaker 2

recorded, all

Speaker 1

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, recorded. A presentation of the most directly comparable GAAP financial measures to this non GAAP financial measure will be provided as supplemental financial information in our press released. Now I'd like to turn the call over to Efraim Grinberg, Chairman and Chief Executive Officer of Movado Group.

Speaker 2

Recorded. Thank you, Rachel. Welcome to Movado Group's 2nd quarter conference call. With me today is Sally DeMarsales, our COO and CFO. Recorded.

Speaker 2

After I review the highlights of the quarter and our strategies and initiatives for the second half, Sally will review our financial results and outlook in greater detail. Recorded. Our 2nd quarter performance reflects our strong execution in a difficult operating environment with net sales within our expectation. The retail environment in our category remained challenging during the Q2, particularly in the United States and Europe, our largest markets. Recorded.

Speaker 2

While economic numbers have remained stable, discretionary purchases have been challenged by inflation and a greater allocation of consumers' resources to travel and dining. Recorded. Overall, we remain excited about our second half initiatives, especially our brand refresh at Movado, which I will discuss in greater detail in a moment. However, we are lowering our outlook for the balance of the year given the cautiousness of our retail partners, which is expected to moderate shipments recorded and continued economic uncertainty. Turning to a review of the quarter.

Speaker 2

2nd quarter net sales declined by 12.3% from last year to $160,400,000 and our adjusted operating profit was $10,300,000 versus recorded to $31,400,000 last year. From a geographic perspective, sales declined by 12.4% in the U. S, driven by the wholesale recorded by 12.1 percent internationally. Our balance sheet remains extremely strong recorded with almost $219,000,000 in cash and no debt, allowing us to continue to invest in our brands and regions recorded despite the economic challenges that remain in the U. S.

Speaker 2

And Europe. For the 6 months, the company generated positive cash flow from operations recorded. As we have mentioned in our last conference call, we have begun embarking on a brand refresh for the Movado brand And we are very pleased with the progress that we have made. From a product perspective, this fall, we will launch the most important collection of new products in our Bold collection recorded since we first launched Bold over 10 years ago. Included in this introduction is the refresh of our best selling Evolution family, Evolution 2.0.

Speaker 2

With new sharper price points, the collection now opens at $5.95 We are also refreshing recorded. The original Bold TR90 collections with a brand new and exciting design in a variety of colorways. In addition, at the top end of our Bold assortment, recorded. We just launched a Museum Classic chronograph collection that has gotten off to a very strong start. Recorded.

Speaker 2

As I mentioned earlier, we're introducing a total brand update for the Movado brand, which includes new marketing initiatives that will roll out over the next few quarters, recorded beginning with the launch of our new brand building campaign in September. As part of this initiative, we will return to magazines for the first time in a number of years. Recorded. In addition, we will launch an outdoor campaign in New York, Miami, Los Angeles and Chicago to complement our strong presence in digital campaigns. Recorded during the Q4, we will round out the campaign with a significant program in both linear and digital TV.

Speaker 2

Recorded. This will be the most significant investment we have made behind our flagship Movado brand in several years. While recent history has demonstrated recorded as we have found that our customers engage with multiple media outlets. During the quarter, it is important to note recorded. With a challenging retail environment in North America, we experienced a single digit decline for both recorded in the quarter year to date period in our outlet stores, where we're up against a strong spring from last year.

Speaker 2

We have also intentionally slowed down the growth of our digital outlet channel, recorded, where we believe we were opening with products that were too sharply priced. As always, we will take the right decisions for the long term health of our brands. Recorded. In our fashion brands, we continue to deliver innovation with compelling value and will support our licensed brand partners with strong regional marketing programs to build category awareness for our powerful licensed brand portfolio. For the fall, we have strong marketing initiatives planned in our key European markets, recorded, supporting both our watches and jewelry in digital venues, billboards and at the point of sale.

Speaker 2

For the quarter, Europe remained challenging, recorded. While we saw strong results in India and the Middle East and a return to growth in China. In Tommy Hilfiger, we have seen a strong performance from our recorded both multifunction models that begin at $189 The HUGO VOS brand continues to amplify its messaging And we are continuing to partner with them on these efforts. We have seen a strong reception from consumers recorded to our Tropper and Gregor families. For the fall, we will continue to support these 2 leading families as well as introduce the new top chronograph collection And our new Candor Automatic Sport Luxe family, opening at under $400 For BOSS, we will amplify our messaging at the point of sale, as well as supporting the brand with our digital marketing efforts.

Speaker 2

We are excited that for this holiday season, We will partner with the new Ross brand ambassador, Suki Waterhouse. In Coach, we have seen success with our Caddy family. Recorded. For the fall, we are introducing our new Elliott family, both for him and her. Elliott is a strong collection, which opens at $125 We are continuing to partner with Jennifer Lopez on our Coach marketing efforts globally and with Curly Gao in China, where we have seen strong growth during the first half.

Speaker 2

Recorded. Lacoste is performing very well at retail, where we have seen strong sell through of our 3rd generation of our recorded. We have also seen excellent results from our introduction of Lacoste jewelry recorded for both men and women. This fall, we will introduce a twelvetwelve automatic collection, retailing at $2.55 recorded and a new Sporty Diver family called Finn. In Calvin Klein, we are pleased with the progress for our 2nd year recorded in the watch and jewelry category.

Speaker 2

This spring, we saw strong retail sales performance of our featured Sensation family recorded with a uniquely shaped case design. For men, our leader has been black, a multi eye modern design. This fall, we will be supporting the brand with our new campaign in digital and outdoor, featuring model and fashion influencer, Lila Moss. In Olivia Burton, we are well into our brand refresh across all consumer touch points in the U. K.

Speaker 2

And the U. S. Recorded with all new product families, new point of sale and packaging and a new marketing campaign. We remain confident we are heading in the right direction recorded and are seeing strong results on our website and from our key retail partners. While the beginning of the year was very challenging, We knew that we were comping against a very strong first half last year and with easier compares in the second half.

Speaker 2

We remain committed to our strategy and believe in our brand building efforts to drive increased customer awareness and yield results over the medium and long term. Recorded. We are very excited around the plans that we have put in place for the second half of the year in our new product initiatives, sharper values across our brands recorded and creative marketing programs. While we are operating in a challenging retail environment in our largest markets, we feel that it is important to invest recorded and supporting our brands and company for the long term. We're particularly excited about our brand building efforts to support the Movado brand.

Speaker 2

We are willing to make this investment in order to ensure that our business will remain strong as the economic environment improves. Recorded. Our strong balance sheet allows us to do that while continuing to return value to our shareholders through our dividend and share repurchase program. Recorded. We will still operate prudently and diligently manage our operating expenses as we have done in the past.

Speaker 2

I would now like to turn the call over to Sallie.

Speaker 3

Recorded. Thank you, Efraim, and good morning, everyone. For today's call, I will review our financial results for the Q2 year to date period recorded in the Q4 and then I will provide an update on our outlook for the year. My comments today will focus on adjusted results. Recorded.

Speaker 3

Please refer to the description of the special items included in our results for the Q2 year to date period of fiscal 2024 and fiscal 2023 recorded in our press release issued earlier today, which also includes a reconciliation table of GAAP and non GAAP measures. Overall, our performance for the Q2 of fiscal 2024 was within the lower end of the range provided on our previous earnings call recorded as our business was negatively impacted by a challenging retail environment and lapping a strong performance last year. While down year over year, we maintained an extremely strong balance sheet. Turning to a review of the quarter. Recorded.

Speaker 3

Sales were $160,400,000 as compared to $182,800,000 last year, recorded a decrease of 12.3%. In constant dollars, a decrease in net sales was 13.8%. Recorded. Net sales decreased across owned brands, licensed brands and company stores. By geography, U.

Speaker 3

S. Net sales decreased recorded 12.4% as compared to the Q2 of last year. International net sales decreased 12.1%. Recorded. On a constant currency basis, international net sales decreased 14.9% with continued softening in our largest international market, Europe, recorded, partially offset by strong performances in certain markets such as the Middle East, India and travel retail.

Speaker 3

Recorded. Gross profit as a percent of sales was 55.7 percent compared to 58.5% in the Q2 of last year. Recorded. The decrease in gross margin as compared to the exceptionally high gross margin results of the same period last year was anticipated recorded and was primarily driven by the deleverage of higher costs higher fixed costs over lower sales, unfavorable channel and product mix recorded and the unfavorable impact of foreign currency exchange rates. The unfavorable channel and product mix from the prior year period reflected sales shift from our relatively higher margin brands to our relatively lower margin brands as well as lower sales in our higher margin channels.

Speaker 3

We expect this tough comparison to continue into the Q3 when we're up against the same period of last year. Recorded. Operating expenses were $79,000,000 compared to $75,600,000 for the same period of last year. Recorded. The increase was driven by an increase in payroll related costs, partially offset by lower marketing expenses and a decrease in performance based compensation.

Speaker 3

Recorded. As a result of the reduction in sales and gross margin, operating income decreased to $10,300,000 as compared recorded to $31,400,000 in the Q2 of fiscal 2023. We reported approximately $1,400,000 recorded in the Q2 of fiscal 2024, which is primarily comprised of interest earned on our global cash position. Recorded. We recorded income tax expense of $3,000,000 in the Q2 of fiscal 2024 as compared to $6,600,000 in the 2nd quarter recorded for fiscal 2023.

Speaker 3

Net income in the 2nd quarter was $8,500,000 or $0.38 per diluted share recorded as compared to $24,600,000 or $1.07 per diluted share in the year ago period. Recorded. Now turning to our year to date results. Sales for the 6 month period ended July 31, 2023 were $305,300,000 recorded as compared to $346,200,000 last year. Total net sales decreased 11.8% as compared to the 6 month period of recorded in fiscal 2023.

Speaker 3

In constant dollars, the decrease in net sales was 12.1%. International net sales decreased 10.2% or 10.6% on a constant currency basis recorded and U. S. Net sales declined by 13.9%. Gross profit was $171,300,000 or 50 recorded in the quarter as compared to $203,600,000 or 58.8 percent of sales last year.

Speaker 3

Recorded. The decrease in gross margin rate for the 1st 6 months was primarily due to unfavorable channel and product mix, the unfavorable impact of foreign currency exchange rates recorded and the deleverage of higher fixed costs over lower sales. This was partially offset by decreased shipping costs. Recorded. For the 6 months ended July 31, 2023, operating income was $21,900,000 compared to $57,400,000 in fiscal recorded.

Speaker 3

We recorded approximately $2,300,000 of other non operating income in the 6 month period of fiscal 2024, recorded, which is primarily comprised of interest earned on our global cash position. Net income was $18,200,000 or $0.80 per diluted share recorded as compared to $43,700,000 or $1.89 per diluted share in the year ago period. Now turning to our balance sheet. Cash at the end of the second quarter was $218,900,000 as compared to $203,100,000 at the same period of last year. Recorded during the 1st 6 months of fiscal 2024, we had positive cash flow from operations of $9,200,000 Accounts receivable was $95,800,000 down $4,900,000 from the same period of last year, primarily due to the decrease in sales.

Speaker 3

Recorded. Inventory at the end of the quarter was down $33,600,000 or 15.6 percent, below the same period of last year due to the timing of receipts recorded and is aligned with sales. In the 1st 6 months of fiscal 2024, we repurchased approximately 16,000 shares under our share repurchase program. Recorded. $20,600,000 remains available under that program.

Speaker 3

Capital expenditures for the 6 month period were $4,600,000 recorded. Depreciation and amortization expense was $5,000,000 which included $1,300,000 related to the amortization of acquired intangible assets recorded. Now I would like to discuss our outlook. As Efra mentioned, we are operating in a challenging retail environment, recorded with inflation continuing to affect the purchases made by consumers of discretionary products, especially in our key markets, the United States and Europe. Our net sales are currently expected to be in a range of $690,000,000 to $700,000,000 resulting in our second half sales being down low to mid single digits recorded as compared to last year.

Speaker 3

This is an improvement from the first half decline of 11.8%. Recorded. We expect gross profit of approximately 55% of sales for the year. As previously discussed, we are planning to prudently invest in our brand building initiatives, recorded. While we continue to tightly manage our discretionary spending, and therefore, we expect operating income in a range of $62,500,000 to $65,000,000 recorded.

Speaker 3

Based on our global footprint and our estimated jurisdictional taxable income, we anticipate a 23% effective tax rate with an expected range of earnings of $2.15 to $2.25 per diluted share. I would now like to open the call up for questions.

Operator

A confirmation tone will indicate your line is in the question recorded. Recorded. Our first questions come from the line of Oliver Chen with TD Cowen. Please proceed with your questions.

Speaker 4

Hi, Efraim and Sally. Good morning.

Speaker 3

Good morning, Oliver.

Speaker 4

You called out the U. S. Consumer as well as just thinking about the consumer and weakness, Yes, the results were in line with your expectations. Would love your thoughts on what's changed since the past quarter and what you're seeing in the environment. Also, Efraim, on the product innovation, it sounds like you're really focused on opening price points.

Speaker 4

Would love your thoughts on that and what you need to do? Those are some first questions and I have some follow ups. Thanks.

Speaker 2

Yes. Look, I think our feeling throughout the year is that the consumer has been challenged. Reconciled. And I think with higher interest rates, inflation, you're seeing An increase of challenges to the consumer on discretionary purchases. And so we are being cautious in terms of our expectations on the consumer returning recorded on discretionary purchases.

Speaker 2

We also our experience is that as economic growth slows, consumers become more value oriented and our experience in the past has been that we've been successful at with entry level price points, but really strong innovation along those platforms. So and it's something that we're focused on, both in the United States and globally as well. Recorded.

Speaker 4

Okay. And specific to channels that from what are you seeing in U. S. Wholesale? And how might you contrast wholesale relative recorded.

Speaker 4

And then on the international, are there trends that you want to call out between North and South or regions that are stronger weaker.

Speaker 2

So I'll start with the international first. I think Europe for us is running more consistent to the U. S. Market, and so it's recorded. It's been a little more challenging than the rest of our international footprint.

Speaker 2

So we're seeing very strong growth in India, which was a recorded. We're seeing continued strong results in the Middle East and continued strong sell through in Latin America and Mexico. So those markets Going very well for us. China is a small market for us, but it's returned to growth. We continue to invest in China, recorded in our most important licensed brands in the market as well as behind the Movado brand.

Speaker 2

And then on the U. S. Side, I think wholesale has been a little more challenging. And that's true in Europe as well, Where retailers are and as they should be, are being cautious and focused I think that we have really strong marketing initiatives both in across our licensed brand portfolio and I'm really excited about recorded as well as the complete brand refresh of the Movado website at that time.

Speaker 4

Recorded. Efraim on refreshing Movado brand. What are you thinking it needs most? What's your hypothesis there? And longer term, how What will be the path to return to revenue growth?

Speaker 4

What will be the keys there in your mind? And any thoughts around timing, we will Like the easier compares.

Speaker 2

Sure. I think returning to really reenergize recorded. On the marketing front, the brand with investments in media will prove to be very successful for the Movado brand. Recorded. And we have moderated those investments over the last few years.

Speaker 2

And as I said, we're Upping that quotient for this holiday season and really for the foreseeable future. Recorded. But I'm really excited by the product assortment. It's been as good as we've had on the product front in the Movado brand, recorded. And we're really excited about the total brand refresh that we're doing.

Speaker 2

And again, it's an evolution. It's not a revolution Of the brand, but having a robust marketing mix recorded and media plan will really help support the brand for the holiday season and into the future.

Speaker 4

Recorded. Okay. And Sally, as we model 3Q versus 4Q, could you help us understand if there's any Comparisons that we should be aware of and also we just expect a less negative 4Q. Would love your thoughts on the revenue line as well as Some of the key gross margin headwinds as well as tailwinds and also inventory relative to sales growth.

Speaker 3

Recorded. Okay. So I'm going to start backward just so I don't miss any of your questions. On inventory, we were the timing between last year's purchases and this year's purchases were very different. So we were able to moderate our incoming purchases this year, and you can see we're much better aligned with inventory at this point.

Speaker 3

We will as we head into the holiday season, We are still very much a wholesale business, so we will be back in the inventory business in the 3rd quarter to support Our channels, but we will have them be more all of our purchases will be more in line with these forecasts straight through to the year end. So recorded. We will keep an eye on it. There are lead times that we have to live with, but definitely more in line with where our sales plans are. As far as the 2 quarters, they're both very important to us, 3rd Q4.

Speaker 3

There generally is a little bit of a balance between those two, recorded. 3rd Q4, 3rd is obviously very important to us as we fulfill our wholesale commitments and 4th quarter obviously more of a direct to consumer. So it should be more balanced with, our normal cadence through the quarters. We should see an improving comparison against last year though recorded in both 3rd and 4th quarter as we get towards the end of the year. And as far as margin, we're going to see really the same comparison challenges to last year.

Speaker 3

Last year was an exceptionally high gross margin year. So this year, when we talk about things like our mix or our deleveraging of costs against a lower net sales number is going to continue in the next two quarters. So we should see something very similar to what we've experienced in the first half of this year.

Speaker 4

Okay. That's really helpful. And on holiday recorded. What do you see happening in terms of holiday planning and key thoughts around the consumer as well as like Is inventory tightening going to be ongoing at your wholesale partners?

Speaker 2

I think for holiday, As I've said for a long time, Christmas always comes on December 25th. Hanukkah comes sometime before that as well as other holidays. So people do buy for those holidays and our retailers are in the business to support their consumers and I think they will buy recorded. Given the environment for holiday, I do expect The holiday, we are comparing against the weaker numbers last year during the holiday period. Recorded.

Speaker 2

So I think things will start to fall into balance and but there remains a level of uncertainty out there with interest rates, with inflation, I think you always have a stronger holiday in terms of sell through in Q4 recorded? And then in Q3. So I would expect that I definitely expect that to occur again.

Speaker 4

Okay. And on, this was an earlier question, a follow-up to a follow-up. The average unit retail, as you think about your portfolio, Should we assume that the overall AUR may go down or will hold and be offset by transactions? How does it

Speaker 2

So I think what we're doing is we're refilling some entry level price points that we had vacated. But I think overall, we will see a flattish AUR recorded over the next year. So I'm not I think that it's not A lot of different it's not a big bulk of our offering, but it enables consumers who are more challenged recorded to enter the brand at accessible price points.

Speaker 4

Thanks. And last question, you have a really strong balance sheet. It's always been a hallmark of your recorded. Just thoughts on cash and how you're thinking about free cash flow generation and return to shareholders. Thanks.

Speaker 2

Recorded. So, obviously, our dividend continues to remain very important to us. And so that is part of But I think it is that balance sheet that allows us to feel comfortable, to focus on medium and long term initiatives When times become more challenging, that yield overall long term value to shareholders.

Speaker 4

Recorded. Okay. We're excited to see Bold back. Best regards. Thanks.

Speaker 2

Okay. Thank you very much.

Operator

Recorded. Thank you. There are no further questions at this time. I would like to hand the call back over to management for any closing remarks.

Speaker 2

Recorded. I'd like to thank all of you for participating with us today and those in the United States. I wish you recorded. Thank you very much, and we look forward to talking to you in our Q3 conference call.

Operator

Recorded. Thank you. That does conclude today's teleconference. We appreciate your participation. Recorded.

Operator

You may disconnect your lines at this time. Enjoy the rest of your day.

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Movado Group Q2 2024
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