Q2 2021 Movado Group Inc Earnings Call
Good day, everyone and welcome to the Movado Group Inc. second quarter 2021 earnings Conference call. As a reminder, today's call is being recorded and may not be reproduced in whole or in part without permission from the company.
At this time I would like to turn the conference over to Rachel Schacter of I see our please go ahead.
Thank you good morning, everyone with me on the caused some Greenberg chairman and Chief Executive Officer until they do merciless Chief Financial Officer before we get started its I would like to remind you of the comedy Safe Harbor language, which I'm sure you're all familiar with.
It was contained in this conference call, which are not historical facts, maybe deemed to constitute forward looking statements within the meaning of the private Securities Litigation Reform Act 95.
Actual future results may differ materially from those adjusted impact she.
Yes, you a number of risks and uncertainties all of which are described in the company's filings with the FCC, which includes today's press release.
Any non-GAAP financial measure and use on this call.
Thank you shouldn't the most directly comparable GAAP financial measure kit. This non-GAAP financial measure well be provided supplemental financial information in our press release now I'd like to turn the call over to absent Greenberg, Chairman and Chief Executive Officer of Movado Group.
Thank you Rachel.
Good morning, and welcome to Movado Group second quarter Conference call. This morning, I will share some highlights for the quarter and the strategic initiatives that we're focused on as we begin the second half of the year. Sally will then review our financial results in detail. We would then be glad to take questions.
The last two quarters, we've been operating amid a global pandemic, which is greatly curtailed consumer discretionary retail businesses led to significant business closures around the world and cause dramatic economic dislocations globally, we remain focused on ensuring the safety and health of our employees customers and the communities where we operate.
Within that context, I am proud of party, how our teams have reacted and the results that we have delivered for the second quarter in a challenging environment that we continue to operate in our teams delivered sales better than our internal expectations strong gross margins and close to breakeven results on an adjusted basis, we cut expenses by.
Most $30 million reduced our inventories by more than $27 million year on year and finished the quarter with over $170 million, a cat well paying back $37 million of debt.
During the quarter, we took a number of actions that will enable us to weather. The climate that we are operating in and position the company to emerge strongly as we have done during previous crisis is.
Wow, Okay, well very painful to do we have reduced the size of our corporate headcount by 24% and lowered our estimated current year operating expenses by $90 million as we evolve into a more consumer facing company. We currently are running our business with many of our teams operating in remotely and are prepared ourselves.
To be able to continue to do so until the back of the pandemic subside, we reopened all of our stores and our achieving high levels of productivity. Despite reduced operating hours. We've continued to invest in our digital initiatives and are seeing strong result, but for our own sites and our wholesale partner sites Movado Dot com.
I'm sales ran up 128% for the quarter and we continue to see those trends accelerate.
Our Olivia burden dot com business in the UK grew by approximately 100%.
Movement Dot com significantly improved profitability during the quarter as a result of improved return on ad spend.
At wholesale our department store channel continues to perform well in a difficult environment and we've seen markets like Germany, and France exceed last year's sales result.
In China, we had a 16% increase in sales for the quarter with trends continuing to accelerate.
We continue to spend very carefully our marketing expenses highly variable and is being allocated as close to the time of execution as possible. So that we can incorporate current sales trend information into our south into our level of investment.
Driven by product innovation, we have strong brands within both our owned and our license brand portfolios that provide an advantage as we have seen continued demand for them across our digital platform and in our brick and mortar locations.
I'm very pleased that we were able to announce our partnership with Calvin Klein, a tremendous global brand for watches and jewelry beginning in 2022, we believe that the Calvin Klein brand has potential has tremendous potential when our categories and we're extremely excited about this partnership.
As we look to the second half of the year, we're operating in a highly uncertain environment and we're prepared to continue to focus on controlling our expenses and our inventory purchases.
We expect the decline in sales during the next two quarters to improve each quarter and we are focused on delivering profitability during the second half while continuing to maintain a very strong balance sheet.
Across our brand we are developing our digital efforts and introducing strong innovation on the product fraud, and Movado, we will introduce a new Movado Museum assay, a sport luxury collection starting at $995. There will be supported in our holiday television campaign.
We will also be expanding our movado jewelry collection featured exclusively on Movado Dot com.
At Olivia burden will be featuring sparkle florals, a glittery interpretation of our iconic florals.
Movement, we'll be introducing our new legacy Slim collection opening at $115 and the minimal sport automatic a limited edition of 500 units and a $350 are most expensive movement watch ever.
This August we introduced our Lucky seven limited edition honoring movements seventh anniversary and our 500 watches sold out on our web site under five minutes.
Within our licensed brand portfolio, we expect to drive results with a number of new product introductions. This fall, including our Tommy Hilfiger Mason collection, featuring branded rubber strives in a sporty look.
And Hugo boss, we will be featuring globetrotter, a new 46 millimeter athleisure chronograph collection with bold pops of color.
In coach we're introducing Arden, a beautiful new design with the signature see Crown protection and see 001, a new analog to digital design for men that will be supported with a strong social media campaign.
From a cost we are introducing Boston.
Sport inspired collection, featuring Lacoss iconic green dial.
As the world evolves at an accelerated manner. We continue to believe that great brands innovative design and compelling values will continue to generate demand from consumers and we are focused on reaching them in an increasingly digital environment wherever they choose to shop, whether that be on our own web site and our brick and mortar locations.
Through our wholesale partners stores and web site or E. Commerce marketplaces, I would now like to turn the call over to Sally to review our financial results.
Thank you have from and good morning, everyone for today's call I will address the key highlights of our second quarter into year to date period of fiscal 2021, and then I'll provide an update on our financial position.
My comments today will focus on adjusted result.
Before I begin I will point out the new matters, which impacted the GAAP results the second quarter of fiscal 2021.
Please refer to the description of all the special items included in our results for the first half of fiscal 2021 in fiscal 2020 in our press release issued earlier today, which also includes a reconciliation table of the GAAP and non-GAAP measure.
And the second quarter fiscal 2021, the company took a $7.4 million pretax charge, which equates to $5 million after tax or 22 cents per share related to a restructuring plan as part of the company's corporate initiatives to reduce operating expenses across all functional areas.
Also during the second quarter fiscal 2021, the company reported a 1.3 million dollar pre tax gain which equates to $800000 after tax or four cents per share on the sale of a non operating asset in Switzerland.
Once again the balance of my remarks will focus on adjusted result.
For the second quarter fiscal 2021 sale for $88.5 million as compared to $157.8 million last year.
During the first quarter of fiscal 2021, the impact of Cobot 19 resulted in the closure of the company's retail store and the majority of the stores of the company's wholesale customers.
During the second quarter of fiscal 2021, many worldwide regional and local government lifted or modified restriction.
By the end of the second quarter all of the company's retail stores and the majority of the stores at the company's wholesale customer had reopened. However, these stores have been impacted by a decrease in retail traffic and reduced hours at many locations.
As we progressed through the second quarter sales trends improved as cobot 19 restrictions began easing in various stages across the world, enabling some return a foot traffic in the company's retail store and those of its wholesale customer.
However, due to the closure of the stores during most of the quarter most of the second quarter sales declined across all segments.
Owned brand licensed brands and company store were down in both our U.S. and international businesses. Despite strong ecommerce sales both on our own website and those of third party marketplaces.
Gross profit was 51.2% of sales compared to 54.1% in the second quarter of last year.
The decrease in gross margin was primarily driven by unfavorable channel and product mix.
Favorable change in foreign currency exchange rate.
An additional special U.S. tariff.
These are partially offset by considerable savings on fixed cost, albeit on lower sales.
Operating expenses were $45.9 million as compared to $75.1 million over the same period of last year.
The decrease was driven by actions taken to minimize all non a central operating costs.
Including Rightsizing marketing expenses to the lower revenue base, while maintaining a focus on digital and ecommerce customer acquisition.
The furloughing of employees and temporary salary reductions for a portion of the period followed by permanent staff reductions.
The controlled spending in the second quarter contributed to a nearly breakeven quarter with a small operating loss of 600000 dollar for the second quarter fiscal 2021.
We reported an income tax expense of $600000 in the second quarter fiscal 2021, as compared to an income tax expense of $1.8 million and the second quarter fiscal 2020.
Net loss in the second quarter was $1.7 million or loss of seven cents per share as compared to net income of $8.3 million or 36 cents per share in the year ago period.
Now turning to our year to date result sales for the six month period ended July 31, 2020, or $158.2 million as compared to $304.4 million last year.
The decrease in net sales was primarily attributable to the ongoing cobot 19 pandemic and the temporary closure of our retail store and the majority of the store of our wholesale customers.
Gross profit was $80.8 million or 51% of fail as compared to $164.4 million or 54% of sales last year.
The decrease in gross margin rate for the first six months.
The result of the reason similar to the second quarter just discussed.
For the six months ended July 31, 2020 operating loss was 18.2 million dollar compared to an operating income of $17.4 million in fiscal 2020.
Net loss was $14.7 million or a loss of 63 cents per diluted share as compared to net income of $13.9 million or 60 cents per diluted share in the year ago period.
Now turning to our balance sheet.
In addition to minimizing nonessential expenses, maintaining the company's strong balance sheet has been a top priority.
We are closely managing inventory and we have reduced capital expenditures, primarily allowing only project providing a return on investment such as certain digital initiative.
As previously announced we suspended our quarterly cash dividend and share repurchase program until further notice.
Cash at the ended the second quarter was $170.2 million after repaying $37 million on our revolving credit facility during the second quarter.
This compares to $134.9 million in the prior year period.
Accounts receivable was $60.1 million down 33.6 million dollar from the same period of last year, primarily due to a decrease in sales.
Inventory at the end of the quarter was $173.4 million as compared to $201 million last year.
The reduction is due to the actions taken to closely manage our working capital in fact, we had positive operating cash flow of over $14 million in the second quarter fiscal 2021.
Capital expenditures for the six month were $1.9 million and are lower than the first half of last year by over 5 million dollar as a result of the disciplined action just discussed.
Depreciation and amortization expense was 7.2 million dollar, which included $1.9 million related to the amortization of the remaining acquired intangible assets of Olivia Burton and movement.
In terms of outlook, we're not providing specific guidance, while we expect results to continue to be below last year, we expect friends to sequentially improve in the second half of the here.
I would now like to open the call up for questions.
Thank you, ladies and gentlemen, if he would like to ask a question at this time. Please press star one on your telephone keypad. The confirmation trends indicate that your line is my question Q.
Press Star to if he would like to remove your question from the Q for participants isn't speaker equipment, and maybe necessary to pick up your handset before pressing the star keys.
Our first question comes from the line of Oliver Chen with Cowen. Please proceed with your question.
Hi, the the digital momentum has been impressive where do you expect penetration to go over time and on the wholesale side. What are you seeing with distribution footprint there in terms of points of distribution relative to productivity.
And how you're handling regionally different aspects of closures and markets I would love your insights there. Thanks sure. So obviously the performance at retail varies around the world and as I said earlier, we've seen Germany, and France, a basically returned to normal.
Okay progressing really nicely.
But then other other markets like Latin America, and India more challenging China, we've seen very.
Strong momentum.
And we're happy both digitally and now we're starting to see it and brick and mortar as as well as as we look at at at the U.S., you're seeing the best performance of of retailers that have street side entrances. It malls and I think that that's why department stores are doing better from a brick and mortar perspective and department stores Gen.
We also have very good digital penetration. So we're seeing their digital business is also growing exponentially. So I think digital will obviously have a significant growth.
In the future for the company, but it'll be both through our own and through our wholesale partners and then digital marketplace is a really all over the world. So so we're seeing growth and in Amazon in Europe in Zalando in Germany.
And I think those have a tremendous.
Amount of potential.
So at from how do we Dimensionalize, how big digital may become and those manifestations and any guidance you could provide on relative margins that would help us and our modeling.
Sure.
I think it's for US we look at it and try to try to maintain the an equal sense of profitability from.
Digital when it's our own it how it can have a higher.
Rate of profitability and if it's a wholesale account, but I just think it's the natural evolution of word of where retail was going anywhere just on an accelerated basis due due to the pandemics. So.
And one of the things that we've taken the opportunity to do and I think.
Is really.
Evolve and an accelerated matter from a wholesale focused company to consumer focused company, so serving the consumer wherever.
They want to shop, and I think that's really where what what the future is all about thank you in Sally on the gross margin line.
How might that trend going forward in terms of of mix shifts and dynamics that you're seeing and cash flow.
Purging in second quarter positive cash flow sustainable throughout the year would also love.
Your overall take on inventory I mean, some retailers don't have enough inventory some.
Have too much what's the cleanliness of your inventory relative.
What you're seeing now supply chain hasn't been easy for people to deal with the most dynamic environment.
Okay. So, let's take we'll take a step by step and I'm, sorry from a pipe in especially on the inventory supply chain side. So gross margin I'm. You know we're doing you know, we're managing that very well, especially in light of what everyone is talking about with things like you know the E com and wholesale mix.
So we've been so we're very happy about how strong our gross margin is at the over 50% and we will continue to look at that and obviously part of that was taking a look at the fixed cost from.
A portion of any type of gross margin. So we're not being highly promotional or anything like that that's going to deteriorate amar margin because of being on sale or anything like that from a cash flow perspective, we're managing a very closely we are thrilled with how this quarter was having positive cash flow in the second quarter that was significantly impacted by a global pen.
Then it gets really attribute to the full organization with managing how we're doing things.
We do have some seasonality to cash flow with.
Third quarter is generally where we would.
The little sticker with inventory and so forth as we head into holiday. So you know I would expect that we're going to be managing it very closely but I would also expect that you do have some seasonality bilton for cash flow and I think on inventory I know one you know how that from speak a few words and then I'll jump in but we are watching that very close so in internally were watch.
Seeing it really carefully and I think our teams have been really reactive.
And planning ahead in terms of being able to manage.
Our inventories and our objective is obviously to continue to bring them down by the end of the year I would think the third quarter. We always is as we prepare for our fourth quarter shipments so, but I think they should be in pretty good shape and retail we feel pretty comfortable with where.
Tories are in retail varies by brand and by channel.
And especially as we see better than expected sales in brick and mortar locations we see.
We see inventories are beginning to decline and and.
And people needing replenishment. So so that's a good side.
And and retailers that have started up or more slowly or in a heavier inventory position and that's to be expected.
But my expectation is that throughout the year, we'll continue to balance itself out and by the end of the European really good balance.
Thank you very much or last question is about a Calvin Klein congrats on that deal.
How do you see the distribution footprint, there and the magnitude and.
This business also work where might the price points fee and how does it fit into your current portfolio that to minimize cannibalization risk sure. So so you know we actually feel really comfortable that it really has its own place in our portfolio.
As a as a minimalist.
I Konik brand.
And we don't really have anything like that it is a mega brand of any of the of the of the fashion brands is one of the top.
I would say three or four American designers and we have a few of those now and but also has a great global footprint, which is where our licensed brand business is really strong is on the international side, especially in Europe and has great.
Great opportunities in Asia, where the brand.
Has been really strong in China, So we see it as as a long term partnership.
We obviously partner with PVH on on our Tommy Hilfiger brand.
As well and we're thrilled to have.
This this opportunity.
Price points are probably within the 150 to 500 dollar price range and and what we're also really excited about is that it includes both watches and jewelry and jewelry for US is a growth opportunity today, we have a Tommy hilfiger jewelry, which is now becoming a meaningful busy.
This, especially in Europe, we launch Hugo boss jewelry.
In the UK and.
At the beginning of the year and it's gotten a very good reaction in both Olivia Burton movement and now Movado.
How jewelry and so believe that that's a growth.
Opportunity for the company.
In the next several years.
Thank you best regards.
Thank you.
Thank you we have no additional questions at this time I'd like to pass the floor back to management for closing comments.
Okay, I would like to thank everyone for participating with us today and.
And wish everybody, a safe and as a safe balance of the of the summer.
As it comes to an end and hopefully everything in the world. The from from a health point of view will continue to improve.
You very much.
Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.