Movado Group - Q1 2024

Transcript

Operator (participant)

Good day, everybody, and welcome to the Movado Group, Inc. First Quarter 2024 earnings conference call. At this time, all parties are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, today's call is being recorded and may not be reproduced in full or in part without permission from the company. At this time, I would like to turn the conference over to Rachel Schacter of ICR. Please go ahead.

Rachel Schacter (Senior VP)

Thank you. Good morning, everyone. With me on the call is Efraim Grinberg, Chairman and Chief Executive Officer, and Sallie DeMarsilis, Executive Vice President, Chief Operating Officer, and Chief Financial Officer. Before we get started, I would like to remind you of the company's safe harbor language, which I'm sure you're all familiar with. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC, which include 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. I'd like to turn the call over to Efraim Grinberg, Chairman and Chief Executive Officer of Movado Group.

Efraim Grinberg (Chairman and CEO)

Thank you, Rachel. Good morning, welcome to Movado Group's first quarter conference call. With me today is Sallie DeMarsilis, our COO and CFO. After I've had a chance to review the highlights of our first quarter results and our progress on our strategic initiatives, Sallie will then review our financial results in greater detail. We would be glad to answer any questions you might have. As we had expected, the macroeconomic environment remained challenging during the beginning of the year, with inflation and rising interest rates continuing to affect purchases made by consumers of discretionary products in our key markets, the United States and Europe.

Against that backdrop, we were pleased with the results that our teams delivered for the first quarter, which met our expectations, while continuing to make progress with the key growth priorities we have for our business, delivering sought-after innovation and elevating our brand awareness. This, along with continued expense discipline, has us well-positioned to improve our performance as we move throughout the year. Reviewing the first quarter in more detail, sales were $144.9 million, an 11.3% decline versus last year's record first quarter, and increased 7.5% from fiscal 2022's first quarter. Currency negatively impacted sales growth by 1.2% in the first quarter. Gross margin remained strong at 56.6%.

Adjusted operating profit was $11.6 million, as compared to $26.1 million in the previous year. Earnings per share on an adjusted basis were $0.43 versus $0.82 last year. We ended the quarter with a strong balance sheet, including $198.3 million in cash, while paying $29.9 million in dividends, which included a $1 per share special dividend that our board had approved when we announced fiscal 2023 results. As we had talked about during our year-end conference call, we had expected a more difficult first half of the year, as we were comparing against a very strong record first half last year. This year, the consumer in both the U.S. and Europe is facing both elevated inflation and rising interest rates.

As many retailers have already reported, this is clearly affecting discretionary spending. From a geographical perspective, both our international and U.S. sales declined, with the U.S. declining 15.7% and international sales decreasing 8.1%, or 6% on a constant currency basis. On the international front, we had strong growth in Brazil, the Middle East, China, and travel retail that was offset by a decline in Europe. As retailers in key markets deal with slowing economic growth, they are very focused on making sure that they control their inventories. From a brand perspective, we are laying the foundation for an improving second half. In our Movado brand, we are beginning to introduce innovation through our BOLD collection and our BOLD Horizon family, which begins to fill price points that we had vacated over the last year.

We are getting a very good response from consumers on this collection, which opens at $695. Our Elevated automatic models continue to perform well, both at our wholesale partners and on our own website, with penetration doubling from last year. For Mother's Day, we drove our marketing program with both still lives and video content to emotionally connect with consumers. We have produced similar content for Father's Day. For Mother's Day, we saw strong results from our TV campaign, particularly on our website. Father's Day will also feature television in addition to our digital campaigns. Throughout the year, we will invest in refreshing the Movado brand image in a bolder and more impactful way. We are excited to make this investment behind our most important brand.

In our Licensed brands, we saw an 8.3% decline on a constant currency basis as consumers pulled back in our largest European markets, somewhat offset by stronger trends in Brazil, the Middle East, China, and travel retail. In all of our brands, we are driving innovation across the pricing matrix, with a particular attention to introduce some value price points to reach consumers who have been impacted by inflation and slowing economies around the world. In Tommy Hilfiger, we saw a strong initial response to our new opening price point collections, Pippa for her and Norris for him, and to our advertised styles, Lars and Monica. In Boss, where the parent brand has been highly energized by driving a new imaging campaign, we are seeing strong results from our new Troper collection, a sporty 46 mm chronograph.

We are also seeing a strong reception for our new Gregor family, a classically styled chronograph family. Both families open at $279. We're also excited to partner with the Boss brand's high-profile ambassadors with a new campaign, which will feature Suki Waterhouse as our ambassador for women, both for jewelry and watches, that will launch in the fall. In our Coach watches, our signature C collections continue to perform well, and we are seeing renewed demand in China, both at retail and online, as that market reopens. We are continuing to partner with Luo Yizhou as our ambassador in China, and with Jennifer Lopez in our global campaign. In Lacoste, we introduced a new interpretation of the iconic 12.12 polo shirt in a watch, aluminum versions in a number of new colors, including green khaki.

We're also introducing new 12.12 watches that connect with Lacoste sponsorship of three Netflix series, Stranger Things, Sex Education, and Lupin. Our Calvin Klein rollout continues to progress extremely well. We are successfully collaborating with the parent brand on the marketing front to build category awareness in watches and jewelry for the Calvin Klein brand. Within CK, we are driving some exciting innovation at appealing price points, including the introduction of Sensation for Her, which features a new, unexpected dial opening on a bracelet, and Charming, a new asymmetrically designed bangle. For men, we are seeing a strong response for Ambitious, a new all-black chronograph bracelet. For the first quarter, we saw a 3.5% decline in our Outlet business in a highly promotional environment in the U.S.

We have seen improving traffic trends as we approach the Mother's Day holiday, which we did have a calendar shift as Mother's Day moved later into May against last year's timing. As we look at the balance of the year, we are operating in a highly uncertain environment. Interest rates have risen at a very rapid pace, which is meant to curtail consumer demand in order to slow inflation in most developed markets. While the environment remains uncertain, we will continue to invest in our brands and drive innovation in our marketing and products to assure that our businesses will emerge strongly as more clarity develops in the marketplace. Of course, we will continue to closely monitor our expenses and prudently manage our inventory.

With a strong cash position and no debt, our balance sheet affords us the opportunity to invest behind driving long-term profitable growth. We are excited in the initiatives that we are investing behind, predominantly refreshing the Movado brand image beginning in the second half of the year, and supporting our licensed brands in their most developed and emerging markets. Our teams are energized and focused on executing and delivering against our strategic objectives. I would now like to turn the call over to Sallie.

Sallie DeMarsilis (EVP, COO, and CFO)

Thank you, Efraim. Good morning. For today's call, I will review our financial results for the first quarter of fiscal 2024 and balance sheet, and then discuss our outlook. My comments today will focus on adjusted results. Please refer to the description of the special items included in our results for the first quarter of fiscal 2024 and fiscal 2023 in our press release issued earlier today, which also includes a table for GAAP and non-GAAP measures. Overall, we are pleased with our performance for the first quarter of fiscal 2024, despite being negatively impacted by a challenging macro environment and lapping a record performance last year.

While down year-over-year, we achieved our internal expectations, continuing to deliver compelling offerings, maintaining expense discipline, and returning value to our shareholders through dividends and share repurchase activity. Turning to a review of the quarter. For the first quarter of fiscal 2024, sales were $144.9 million, as compared to $163.4 million last year, a decrease of 11.3%. In constant dollars, net sales decreased 10.1%. By segment, net sales decreased across owned brands, licensed brands, and company stores. By geography, U.S. net sales decreased 15.7%. International net sales decreased 8.1% as compared to the first quarter of last year.

On a constant currency basis, international net sales decreased 6%, with continued softening in our largest international market, Europe, partially offset by strong performances in certain markets such as the Middle East and Latin America. Gross profit as a percent of sales was 56.6%, compared to 59.2% in the first quarter of last year. The decrease in gross margin, as compared to the abnormally high gross margin results of the same period last year, was primarily driven by unfavorable channel and product mix, and the unfavorable impact of foreign currency exchange rates, partially offset by lower shipping costs. The unfavorable channel and product mix from the prior year period is a result of sales shifts from our relatively higher-margin brands to our relatively lower-margin brands, lower sales in our higher-margin channels and product mix.

We expect this tough comparison to continue in the second quarter when up against the same period of last year. Operating expenses were $70.4 million, as compared to $70.6 million for the same period of last year. The slight decrease was driven by lower marketing and performance-based compensation expenses, partially offset by an increase in payroll-related expenses. Primarily as a result of the reduction in sales and gross margins, operating income decreased by $14.5 million to $11.6 million, as compared to the $26.1 million in the first quarter of fiscal 2023. We recorded approximately a million dollars of other non-operating income in the first quarter of fiscal 2024, which is primarily comprised of interest earned on our global cash position.

We recorded income tax expense of $2.7 million in the first quarter of fiscal 2024, as compared to $6.2 million in the first quarter of fiscal 2023. Net income in the first quarter was $9.7 million, or $0.43 per diluted share, as compared to $19.1 million, or $0.82 per diluted share in the year-ago period. Turning to our balance sheet. Cash at the end of the first quarter was $198.3 million, as compared to $225.3 million in the prior year period.

During the first quarter of fiscal 2024, we paid $29.9 million of dividends to our shareholders, comprised of a special cash dividend of $1 per share, in addition to the regular quarterly cash dividend of $0.35 per share. Accounts receivable were $94 million. Inventory at the end of the quarter was $195.2 million, an increase of $15.2 million, or 8.5% above the same period of last year, primarily due to the timing of receipts for Swiss brands, which have longer lead times, and business extension opportunities, such as our newest licensed brand, Calvin Klein, for watches and jewelry. In the first quarter, we repurchased approximately 14,000 shares under our share repurchase program.

Capital expenditures for the quarter were $2.3 million, depreciation and amortization expense was $2.6 million, which included $700,000 related to the amortization of acquired intangible assets of Olivia Burton and MVMT. I would like to discuss our outlook. As Efraim mentioned, we are operating in a highly uncertain environment, with inflation and rising interest rates continuing to affect purchases made by consumers of discretionary products in our key markets, the United States and Europe. Taking these factors into account, we continue to expect fiscal 2024 net sales in a range of approximately $725 million-$750 million.

Although for the year, we expect a sales decline of 3.6% to relatively flat, we continue to expect a bigger decline in the first half as we anniversary record results during the prior year. We would expect to see first half net sales to be down 9%-12% from the same period of fiscal 2023. Assuming the current composition of channel and product mix and current FX rates, we continue to expect gross profit of approximately 56% of net sales. We are planning to prudently invest in our brand-building initiatives, our employees, and our customers, while we continue to tightly manage our discretionary spending. Therefore, we expect operating income in a range of $80 million-$85 million.

Assuming no changes in the current tax regulations, our outlook assumes a 22% effective tax rate and results in an expected range of earnings of $2.70-$2.90 per diluted share. As it relates to share repurchases, as of April 30, 2023, we had $20.6 million remaining under our authorized share repurchase program. Subject to prevailing market conditions and business environment, we plan to utilize our share repurchase plan to offset dilution in fiscal 2024. This outlook does not contemplate significant further impact of economic deterioration and assumes no further significant fluctuations from prevailing foreign currency exchange rates. I would now like to open the call up for questions.

Operator (participant)

Thank you. Thank you. We will now be conducting the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for your question. Our first questions come from the line of Oliver Chen with TD Cowen. Please proceed with your questions.

Oliver Chen (Managing Director and Senior Equity Research Analyst)

Hi, Efraim and Sallie. Good morning.

Sallie DeMarsilis (EVP, COO, and CFO)

Good morning.

Oliver Chen (Managing Director and Senior Equity Research Analyst)

Was the retail inventory tightening different from what you expected in terms of what you're seeing? You called it out. Also the mix impact, the negative mix impact headwind, were those in line with your expectations? Would love your take. Then on your cautious commentary, why was it the right time to reiterate guidance given the caution we're seeing around inflation and the pressure around traffic and the middle-income customer? Thanks a lot.

Efraim Grinberg (Chairman and CEO)

Okay, I think that the... You know, basically, we still believe that we're on plan for the year. Our plan was built... Assuming a certain level of stress on the consumer. In the first half, we're comping against very strong numbers in last year's numbers. In the second half, the comps, both at retail and our own comps become better. Despite that, we still see a high level of uncertainty in the marketplace. In terms of retail inventories, we did expect our retailers to be tight on inventory. That's one reason that we did, you know, have a cautious tone especially for the first half.

Where, from a retail perspective, the watch and the-- especially the watch category, is very skewed towards the second half of the year. So I think, you know, right now, we see everything, basically on our plan, but, you know, have, I think, a fairly cautious, outlook in terms of. You know, I think there's a lot of uncertainty. Nobody can tell you whether rates are gonna stop going up, whether we're going into a recession or we're not going into a recession. So, the opinions, vary across the board.

We're also excited about the initiatives that we have in place for our brands, including, the newness that we have coming, some price points that we're filling to be able to reach consumers who are maybe, a little bit more economically stressed, and giving them reasons to buy.

Oliver Chen (Managing Director and Senior Equity Research Analyst)

Okay. What about geographically, from China, Europe, and trends you're seeing there? We're seeing some issues with regarding the reopening, XBB. Also, I would love your take on China, as well as your retail section and outlet traffic level. Thank you.

Efraim Grinberg (Chairman and CEO)

Let's start with your first question. I think, you know, China for us is a small market. We've seen, you know, it bounce back nicely in the first quarter against a very challenged first quarter last year. We continue to make investments in China. It's really focused behind our licensed brands and believe that it represents a long-term opportunity for us. I don't necessarily think that we're indicative of other categories, of other products in China because it is a small market for us. Europe, on the other side, is more highly stressed and is a very big market for us, as retailers there are really focused on bringing down inventory.

I think, again, comparable, the comps become easier in the second half of the year in Europe. We continue, also, as I said earlier, to bring exciting new product across our licensed brand portfolio, where Europe is a very important market, for us. I think your last question was about-

Sallie DeMarsilis (EVP, COO, and CFO)

Outlet

Efraim Grinberg (Chairman and CEO)

... traffic in the outlet stores. We are seeing, you know, decent traffic in the outlet stores. What we're not seeing are the China buyers, the return to the outlet stores that had been there previously. You know, and I think that's gonna take a while for to reemerge. Overall, it's a highly promotional end market on the outlet side. While our margins on that side are slightly down from last year, we're still protecting our margins and protecting that business's profitability for the company.

Oliver Chen (Managing Director and Senior Equity Research Analyst)

Okay. The U.S., retail marketing or retail partners, we have some concerns about promotions overall and, inventories, running in line to perhaps getting a little bit worse as some of the trends decelerate. Would love your take on the U.S. retail market. Then, Sallie, as we model, inventory growth relative to sales, what should we expect in the back half, and how are you feeling about the freshness of your inventories?

Efraim Grinberg (Chairman and CEO)

I think, you know, as I've said several times on the call, I just think there's a lot of uncertainty now. You know, nobody knows what's gonna happen with interest rates, and I think that is certainly having an effect on the economy and on consumers. There's still a strong job market, which is a positive. But consumers have had to pay more for things that they need to buy. I think there's also been an increase in travel and dining out. But that'll eventually, I think with higher interest rates, also become somewhat stressed. I think it's really operating in an uncertain environment.

You know, it's something that we're generally, and with throughout now our history, we've been very good at adapting to the consumer needs. It's a very consumer-focused company, and that's why, you know, we're reintroducing some opening price points, particularly in our licensed brand portfolio, as consumers become stressed in other areas. We've seen some very good initial responses to some of the things that we've brought to the market quickly.

Sallie DeMarsilis (EVP, COO, and CFO)

Your other pieces on inventory, Oliver, and we are modeling that our inventory become more in line throughout the year. There was a bit of timing of receipts for some of our Swiss product that has a longer lead time and that we actually assemble. So by the end of the year, we expect to be at or below last year's year-end numbers for your modeling purposes.

Oliver Chen (Managing Director and Senior Equity Research Analyst)

Okay, Sallie, then as we model the back half, will the gross margin continue to have the negative mix impact? Would love your thoughts on key drivers for the back half of the gross margin line. Your balance sheet, you know, has always remained robust as well. What should we think about in terms of the purchases and dividends and special dividends as well? Thank you.

Sallie DeMarsilis (EVP, COO, and CFO)

I'll start on gross margin, then we'll get to maybe some of the more, the questions on dividends and the like. Gross margin, the challenge is the comparison to last year, really. This year, we should have no unusual call-outs. Last year, we happened to have abnormally strong margins, especially in the front half of the year. If you look at each quarter, they decelerated throughout the year, it's going to be, you know, it's a tough comparison this quarter. If you go back to two years ago, we are above where we were two years ago. It's just the comparison to last year makes it difficult. Last year, you saw very large increases due to mix. This year, you're just seeing those come back down a little bit more in line, but still better than we were two years ago.

That may help you a little bit on the modeling side. On the capital allocation, dividends, and share repurchases, you know, I think we're very generous with our $0.35 regular dividend per quarter, and we've talked about share repurchases being a tool to offset dilution.

Efraim Grinberg (Chairman and CEO)

I think, you know, I wouldn't anticipate there being another special dividend. I think that was an event that we did at the beginning of the year when we believed would be a way to return value to our shareholders. Now our focus is on our ongoing dividend, as well as continuing to maintain a strong balance sheet throughout the year.

Oliver Chen (Managing Director and Senior Equity Research Analyst)

Okay, last question. I was a big fan of Movado BOLD in the earlier innings of that. Like, what's happening with the lower price point innovation? Also, how are you thinking about that distribution footprint, if that's a relevant, a different driver? What inning are you in terms of pivoting your portfolio to make sure you address opening price points as well? Thanks a lot.

Efraim Grinberg (Chairman and CEO)

Sure. Okay, so I like the baseball analogy. I think that we're probably right now in the second or third inning, and we'll get to the seventh or eighth inning in the second half of the year in terms of filling opening price points. We're excited about those opportunities. We do have a lot of innovation coming in BOLD. In fact, some of it reminiscent of some of our very early introductions, and so we're quite excited about that. Our retailers are excited about it as well. We've already rolled out our first new product family this quarter, and expect that to continue throughout the year.

Oliver Chen (Managing Director and Senior Equity Research Analyst)

Best regards. Thank you.

Efraim Grinberg (Chairman and CEO)

Okay. Thank you. Thank you, Oliver. I would like to thank all of you for participating, on today's call. We look forward to talking to you after the second quarter. Thank you.

Operator (participant)

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.