Movado Group - Q2 2024

Transcript

Operator (participant)

Good day, everybody, and welcome to the Movado Group Incorporated Q2 2024 Earnings Conference Call. 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 (SVP)

Thank you. Good morning, everyone. With me on the call is Efraim Grinberg, Chairman and Chief Executive Officer, and Sallie A. 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 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 CEO)

Thank you, Rachel. Welcome to Movado Group's Q2 conference call. With me today is Sallie A. DeMarsilis, our COO and CFO. After I review the highlights of the quarter and our strategies and initiatives for the second half, Sallie will review our financial results and outlook in greater detail. Our Q2 performance reflects our strong execution in a difficult operating environment, with net sales within our expectations. The retail environment in our category remained challenging during the Q2, particularly in the United States and Europe, our largest markets. While economic numbers have remained stable, discretionary purchases have been challenged by inflation and a greater allocation of consumers' resources to travel and dining. 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 and continued economic uncertainty. Turning to a review of the quarter, Q2 net sales declined by 12.3% from last year to $160.4 million, and our adjusted operating profit was $10.3 million versus $31.4 million last year. From a geographic perspective, sales declined by 12.4% in the U.S., driven by the wholesale channel, and by 12.1% internationally. Our balance sheet remains extremely strong, with almost $219 million in cash and no debt, allowing us to continue to invest in our brands and regions despite the economic challenges that remain in the U.S. and Europe.

For the six months, the company generated positive cash flow from operations and a reduction of $33.6 million in inventory from the same period last year. Importantly, we will continue to be extremely disciplined in our expense management. As we had 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 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. With new, sharper price points, the collection now opens at $595.

We are also refreshing 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, we are launching a new Titanium Diver that will retail at $1,495. In our Movado core collection, we just launched a Museum Classic Chronograph collection that has gotten off to a very strong start. 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, 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.

In addition, we will launch an outdoor campaign in New York, Miami, Los Angeles, and Chicago to complement our strong presence in digital campaigns. During the Q4, we will round out the campaign with a significant program in both linear and digital TV. This will be the most significant investment we have made behind our flagship Movado brand in several years. While recent history has demonstrated a significant shifting where consumers consume media, we believe that incorporating a broad media mix is important to our brand-building efforts, as we have found that our customers engage with multiple media outlets. During the quarter, it's important to note that our Movado.com business returned to growth.

With a challenging retail environment in North America, we experienced a single-digit decline for both the quarter and year-to-date period in our outlet stores, where we're up against a strong spring from last year. We have also intentionally slowed down the growth of our digital outlet channel, 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. 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, supporting both our watches and jewelry in digital venues, billboards, and at the point of sale.

For the quarter, Europe remained challenging, 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 spring introductions, particularly our opening price points. For the fall, we're excited about the introduction of Clark for him and Lexi for her, both multifunction models that begin at $189. The Hugo Boss 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 to our Troper and Gregor families. For the fall, we will continue to support these two 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. We are excited that for this holiday season, we will partner with the new BOSS brand ambassador, Suki Waterhouse. In Coach, we have seen success with our Caddy family. For the fall, we are introducing our new Elliot family, both for him and her. Elliot is a strong collection, which opens at $125. We are continuing to partner with Jennifer Lopez on our Coach marketing efforts globally and with Curley Gao in China, where we have seen strong growth during the first half. Lacoste is performing very well at retail, where we have seen strong sell-through of our third generation of our Lacoste 12.12 collection, inspired by the brand's iconic polos.

We have also seen excellent results from our introduction of Lacoste jewelry for both men and women. This fall, we will introduce a 12.12 Automatic collection, retailing at $255, and a new sporty diver family called Finn. In Calvin Klein, we are pleased with the progress for our second year of our introduction into the watch and jewelry category. This spring, we saw strong retail sales performance of our featured Sensation family, 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 touchpoints in the UK and the US, 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 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 competing against a very strong first half last year, and with easier compares in the second half. 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.

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, 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 in supporting our brands and company for the long term. We're particularly excited about our brand-building efforts to support the Movado brand. We are willing to make this investment in order to ensure that our business will remain strong as the economic environment improves. Our strong balance sheet allows us to do that while continuing to return value to our shareholders through our dividend and share repurchase program. We will still operate prudently and diligently manage our operating expenses, as we have done in the past.

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

Sallie A. DeMarsilis (EVP, COO and CFO)

Thank you, Efraim, and good morning, everyone. For today's call, I will review our financial results for the Q2 and year-to-date period of fiscal 2024, and then I will provide an update on our outlook for the year. My comments today will focus on adjusted results. Please refer to the description of the special items included in our results for the Q2 and year-to-date period of fiscal 2024 and fiscal 2023 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, 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. Sales were $160.4 million, as compared to $182.8 million last year, a decrease of 12.3%. In constant dollars, the decrease in net sales was 13.8%. Net sales decreased across own brands, licensed brands, and company stores. By geography, U.S. net sales decreased 12.4% as compared to the Q2 of last year. International net sales decreased 12.1%. On a constant currency basis, international net sales decreased 14.9%, with continued softening in our largest international market, Europe, partially offset by strong performances in certain markets, such as the Middle East, India, and travel retail.

Gross profit as a percent of sales was 55.7%, compared to 58.5% in the Q2 of last year. The decrease in gross margin as compared to the exceptionally high gross margin results of the same period last year was anticipated and was primarily driven by the deleverage of higher costs, higher fixed costs over lower sales, unfavorable channel and product mix, and the unfavorable impact of foreign currency exchange rates. The unfavorable channel and product mix from the prior year period reflected sales shifts from our relatively higher margin brands to our relatively lower margin brands, as well as lower sales in our higher margin channels. We expect this tough comparison to continue into the Q3, when we're up against the same period of last year.

Operating expenses were $79 million compared to $75.6 million for the same period of last year. The increase was driven by an increase in payroll-related costs, partially offset by lower marketing expenses and a decrease in performance-based compensations. As a result of the reduction in sales and gross margin, operating income decreased to $10.3 million, as compared to $31.4 million in the Q2 of fiscal 2023. We reported approximately $1.4 million of other non-operating income in the Q2 of fiscal 2024, which is primarily comprised of interest earned on our global cash position.

We reported income tax expense of $3 million in the Q2 of fiscal 2024, as compared to $6.6 million in the Q2 of fiscal 2023. Net income in the Q2 was $8.5 million, or $0.38 per diluted share, as compared to $24.6 million, or $1.07 per diluted share in the year ago period. Now turning to our year-to-date results. Sales for the six-month period ended July 31, 2023, were $305.3 million, as compared to $346.2 million last year. Total net sales decreased 11.8% as compared to the six-month period of fiscal 2023. 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, and U.S. net sales declined by 13.9%. Gross profit was $171.3 million, or 56.1% of sales, as compared to $203.6 million, or 58.8% of sales last year. The decrease in gross margin rate for the first six months was primarily due to unfavorable channel and product mix, the unfavorable impact of foreign currency exchange rates, and the deleverage of higher fixed costs over lower sales. This was partially offset by decreased shipping costs. For the six months ended July 31, 2023, operating income was $21.9 million, compared to $57.4 million in fiscal 2023.

We recorded approximately $2.3 million of other non-operating income in the six-month period of fiscal 2024, which is primarily comprised of interest earned on our global cash position. Net income was $18.2 million, or $0.80 per diluted share, as compared to $43.7 million, or $1.89 per diluted share in the year-ago period. Now turning to our balance sheet. Cash at the end of the Q2 was $218.9 million, as compared to $203.1 million at the same period of last year. During the first six months of fiscal 2024, we had positive cash flow from operations of $9.2 million.

Accounts receivable was $95.8 million, down $4.9 million from the same period of last year, primarily due to the decrease in sales. Inventory at the end of the quarter was down $33.6 million, or 15.6%, below the same period of last year due to the timing of receipts and is aligned with sales. In the first six months of fiscal 2024, we repurchased approximately 16,000 shares under our share repurchase program. $20.6 million remains available under that program. Capital expenditures for the six-month period were $4.6 million, and depreciation and amortization expense was $5 million, which included $1.3 million related to the amortization of acquired intangible assets of Olivia Burton and MVMT. Now I would like to discuss our outlook.

As Efra mentioned, we are operating in a challenging retail environment, 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 million-$700 million, resulting in our second half sales being down low to mid-single digits as compared to last year. This is an improvement from the first half decline of 11.8%. 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 while we continue to tightly manage our discretionary spending, and therefore we expect operating income in a range of $62.5 million-$65 million.

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-$2.25 per diluted share. I would now like to open the call up for questions.

Operator (participant)

Thank you. We will now be conducting a 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 if you would like 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 poll for your questions. Our first questions come from the line of Oliver Chen with TD Cowen. Please proceed with your questions.

Oliver Chen (Managing Director, Senior Equity Research Analyst, Retail and Luxury)

Hi, Efraim and Sallie. Good morning.

Sallie A. DeMarsilis (EVP, COO and CFO)

Good morning, Oliver.

Oliver Chen (Managing Director, Senior Equity Research Analyst, Retail and Luxury)

You called out the U.S. consumer, as well as just thinking about the consumer and weakness, yet 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. Would love your thoughts on that and what you need to do. Those are some first questions, and I have some follow-ups. Thanks.

Efraim Grinberg (Chairman and CEO)

Yeah, I think. Look, I think our feeling throughout the years that the consumer has been challenged, and I think with higher interest rates, inflation, you're seeing an increase of challenges to the consumer on discretionary purchases. And, you know, so we are being cautious in terms of our expectations on the consumer returning on discretionary purchases. 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 with entry-level price points, but really strong innovation along those platforms. So, it's something that we're focused on both in the United States and globally as well.

Oliver Chen (Managing Director, Senior Equity Research Analyst, Retail and Luxury)

Okay. And specific to channels, Efraim, what are you seeing in U.S. wholesale, and how might you contrast, wholesale relative to outlet? And then on the international, are there trends that you want to call out between, north and south or regions that are stronger versus weaker?

Efraim Grinberg (Chairman and CEO)

I'll start with the international first. I think, you know, Europe for us is running more consistent to the U.S. market, and so it's been a little more challenging than the rest of our international footprint. So we're seeing very strong growth in India, which was a subsidiary that we launched a year ago. We're seeing continued strong results in the Middle East, and continued strong sell-through in Latin America and Mexico. So those markets are going very well for us. China is a small market for us, but it's returned to growth. We continue to invest in China in our most important licensed brands in the market, as well as behind the Movado brand.

Then, on the U.S. side, I think wholesale has been a little more challenging. That's true in Europe as well, where retailers are and, as they should be, are being cautious and focused on managing their inventories very prudently. I think that you know, we have really strong marketing initiatives both across our licensed brand portfolio, and I'm really excited about what we're doing to reenergize and support the Movado brand. We will launch that campaign in September, as well as the complete brand refresh of the Movado website at that time.

Oliver Chen (Managing Director, Senior Equity Research Analyst, Retail and Luxury)

Okay. Efraim, on refreshing Movado brand, what are you thinking it needs most? What's your hypothesis there? And longer term, what will be the path to return to revenue growth? What will be, you know, the keys there in your mind, and any thoughts around timing? We will-

Efraim Grinberg (Chairman and CEO)

Sure, I—

Oliver Chen (Managing Director, Senior Equity Research Analyst, Retail and Luxury)

Likely easier compares.

Efraim Grinberg (Chairman and CEO)

Sure. I think returning to really reenergize on the marketing front the brand with investments in media will prove to be very successful for the Movado brand. And we have moderated those investments over the last few years, and as I said, we're upping that quotient for this holiday season and really for the foreseeable future. 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, and we're really excited about the total brand refresh that we're doing. And again, it's an evolution, it's not a revolution of the brand.

But having a robust marketing mix and media plan will really help support the brand for the holiday season and into the future.

Oliver Chen (Managing Director, Senior Equity Research Analyst, Retail and Luxury)

Okay, and Sally, as we model, you know, 3Q versus 4Q, could you help us understand if there's any comparisons that we should be aware of? And also, will we just expect a less negative 4Q? Would love your thoughts on the, on the revenue line, as well as some of the key gross margin headwinds as well as tailwinds, and also inventory, inventory relative to sales growth. How do you see that evolve for the back half?

Sallie A. DeMarsilis (EVP, COO and CFO)

Okay. So I'm gonna start backwards just so I don't forget, 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. We will, as you know, as we head into the holiday season, it is, we are still very much a wholesale business, so we will be back in the inventory business in the Q3 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 we will keep an eye on it.

You know, there are lead times that we have to, to live with, but definitely more in line with where our sales plans are. As far as the two quarters, you know, they're both very important to us, Q3 and Q4. There generally is, you know, a little bit of a, you know, a balance between those Q2, Q3, and Q4. Third is obviously very important to us as we, you know, fulfill our wholesale commitments, and Q4, 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, in both Q3 and Q4 as we get towards the end of the year. As far as margin, we're gonna see really the same comparison challenges to last year.

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, you know, 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.

Oliver Chen (Managing Director, Senior Equity Research Analyst, Retail and Luxury)

Okay, that's really helpful. And on holiday, Efraim and Sallie, what do you see happening in terms of holiday planning and key thoughts around the consumer, as well as, like, is inventory tightening gonna be ongoing at your wholesale partners?

Efraim Grinberg (Chairman and CEO)

I think, you know, for holiday, as I've said for a long time, Christmas always comes on December 25. 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 appropriately, given the environment for holiday. I do expect that holiday, we're comparing against some weaker numbers last year during the holiday period. So I think things will start to fall into balance. But there remains a level of uncertainty out there with interest rates, with inflation, with the political environment as well. So...

I think, you know, you always have a stronger holiday in terms of sell-through in Q4 than in Q3. So I would expect that. I definitely expect that to occur again.

Oliver Chen (Managing Director, Senior Equity Research Analyst, Retail and Luxury)

Okay, and on, this is an earlier question, a follow-up to a follow-up. The average unit retail, you know, as you think about your portfolio, should we assume that the overall AUR, you know, may go down or will hold, and be offset by transactions? Just how does it sum up for the bottom line on some of these changes you're making? That'd be helpful as well. Mm-hmm.

Efraim Grinberg (Chairman and CEO)

I think what we're doing is we're backfilling some entry-level price points that we had vacated. But I think overall, we will see a flattish AUR over the next year. So I'm not, you know, 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 to enter the brand at accessible price points.

Oliver Chen (Managing Director, Senior Equity Research Analyst, Retail and Luxury)

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

Efraim Grinberg (Chairman and CEO)

Obviously, our dividend continues to remain very important to us. That is part of our balance sheet, as well as share repurchases. 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.

Oliver Chen (Managing Director, Senior Equity Research Analyst, Retail and Luxury)

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

Efraim Grinberg (Chairman and CEO)

Okay. Thank you very much.

Operator (participant)

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.

Efraim Grinberg (Chairman and CEO)

Okay. I'd like to thank all of you for participating with us today, and those in the United States wish you a very good upcoming holiday weekend and the end of the summer. Thank you very much, and we look forward to talking to you in our Q3 conference call.

Operator (participant)

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