Q2 2022 Movado Group Inc Earnings Call

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To everyone and welcome to the Nevada Group, Inc. Second quarter 'twenty 'twenty two 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 ICR. Please go ahead.

Good. Thank you good morning, everyone with me on the call from Grinberg, Chairman and Chief Executive Officer, and Sallie Marcellus 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.

And this Congress 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.

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 would like to turn the call.

Company from Greenberg, Chairman and Chief Executive Officer of Novato Group.

Thank you Rachel good morning, everyone and welcome to Novato group's second quarter Conference call with me today is Sallie the Marsalis, our chief operating officer, and Chief Financial Officer.

After I've had a chance to share with you the highlights.

Some of our second quarter performance Sallie will review the financial highlights in greater detail. We would then be glad to answer any questions that you might have.

We are very pleased with our second quarter results and the momentum that we've been building over the past several quarters. Our teams have done an excellent job of executing and delivering on our plans for the second.

Border represented a record in terms of both revenue and operating profit for the period.

Our sales grew by 96, 4% to $173.9 million or 10, 2% from pre pandemic levels from the pre pandemic levels of fiscal 2020.

Our adjusted operating profit.

It grew to $25.5 million versus a small loss in fiscal 2021.

Our adjusted operating margin was 14, 6% a record for the second quarter.

We also continued to build on our already strong balance sheet with cash of almost $200 million and no debt.

And with inventory growing just five 7% despite the near doubling of net sales.

Over the last 18 months, our teams have made tremendous progress in driving the opportunities that we that we had ahead of us and are quickly evolving retail and digital marketplace, we prioritize our investments.

<unk> and driving performance and continuing to support our brands as the pandemic unfolded over that time, we have delivered improving results in our last two quarters have generated record operating profit as we continue to drive efficiency in our marketing efforts, while also investing in innovation and brand building we.

We have seen our ecommerce.

Inflation continue to grow as a company and we have improved gross margins by 540 basis points in the second quarter year over year laying a solid foundation for continued improvement with.

With 28, 5% growth versus the second quarter two years ago, Our U S business continued to gain momentum.

Spending led by the very strong performance of our Novato brand, both on digital platforms, and improving brick and mortar stores and our Novato company stores. We're also seeing a strong response in the United States innovation in our coach brand as well as Hugo boss and Lacoste.

Internationally.

Despite continued COVID-19 COVID-19 related closures, we still had a strong quarter led by Europe, Mexico, and China versus last year in the same quarter two years ago that performance was led by our Tommy Hilfiger brand in Europe, and Mexico, and the continued growth of coach in China.

And our Novato brand, we drove outstanding results as we continue to strategically elevate the brand image, our novato dot com business for the quarter grew by 71% over last year, including continued growth in our jewelry category.

Nevada Dot Com is also selling higher price points driving up our average selling.

<unk> price, we continue to focus on building a direct relationship with our novato consumer base and becoming closer to the ultimate customer.

The Nevada wholesale business was also very strong for the quarter with continued growth in our department store channel driven by the return of consumers to brick and mortar shopping.

We're also seeing improved performance from novato watches and jewelry store distribution.

On the product side, we continue to develop Nevada, OFC and we recently introduced our <unk> automatic which starts at $795.

And our bold family, we see continued strength in our evolution.

<unk> collection and generated a very strong initial response to our new gold versus though both for him and for her.

On the marketing front, we experienced strong response to our digital marketing programs complemented by TV advertising support to support mother's day father's day and the graduation gift.

Giving season.

We will continue to support our novato marketing efforts with increased investments during the third and fourth quarter.

In our license brands, we drove growth in Tommy Hilfiger, both against last year, and pre pandemic levels driven by product innovation in both jewelry and watches.

Iconix.

Watches like Parker for him and sporty boyfriend watches for her drove performance for the third quarter, we will be introducing the new boulder looks for him and the Harley and a Harley and Maverick families and crystal embellishments for her and our Kennedy collection.

On the marketing front, we supported the Tommy.

Carnival brand with television in Germany for mothers day, and strong digital campaigns around the world.

In coach we experienced strong performance both in the U S and China with double.

And triple digit growth, respectively versus pre pandemic levels.

Innovation across the coach brand.

Hilfiger, driving performance with new dialed treatments as well as crystal embellishments.

The third quarter, we will expand our winning Arden family with line extensions as well as expand our men's collection with the introduction of Ken a new sport chronograph.

In coach we have seen a strong response in China.

So our Chinese Valentine's day campaign, which took place earlier this month.

In Hugo Boss, we saw an almost 56% increase over last year. Despite a significant retail closures in Europe, our biggest market for Hugo boss, our performance was driven by the expansion of our pilot family.

<unk> is the introduction of our Santiago family for the third quarter. We're excited about the introduction of our new 46 millimeter Grandmaster Chrono and the expansion of our women's assortment with the introduction of Grand Force and Novia.

Our Lacoste business continues to be driven by the continued success of the Lacoste.

And it is truly an iconic brand and we continue to drive performance by the development of our Al 12, 12 collection and our tiebreaker families. We're looking forward to introducing the new Lady Crock with Crystal embellishments during this upcoming quarter.

During the court during the quarter we saw.

Sales grow in our outlet division by 168% versus last year, and 30.31, 8% versus pre pandemic fiscal 2020, while improving operating margin for the first time, we are now offering styles made exclusively for our Novato company stores and we are seeing a strong.

<unk> initial response from consumers.

For the quarter, both Olivia Burton and movement exceeded their performance over last year and movement, we introduced.

We introduced new collections that we were excited about led by our new ceramic chronograph that seems to sell out as quickly as we bring it in.

In our Ocean plastic edition, which is made from reclaimed ocean plastic and features a solar movement. Both collections are at higher price points, where the movement brand.

In the early stages of the third quarter, we are seeing a strong response to our new Raptor family and movement.

And Olivia Burton.

We introduced our new iconic tea Party collection and are excited to expand our already are already successful celestial collection, which is right on trend with a renewed interest in space.

During the second half we are planning on launching our first Olivia Burton television commercial in the U K complemented with a strong.

Digital marketing effort.

As a company we have made great progress over the last 18 months.

The efforts that our teams have made in driving innovation on the product and marketing front and controlling our expenses, while still investing in our brand building efforts have delivered strong results, we're excited to deliver record.

Operating margin for the quarter and we are focused on continuing to support our strategic initiatives and investments to drive growth and performance over the long term.

We believe our brands have additional runway to drive growth and we are preparing for the launch of Calvin Klein watches and jewelry in January of this fiscal year.

While.

<unk> been reopening around the world, we remain concerned about the potential impact of new COVID-19 variance and we will continue to plan prudently.

Over the last eight over the last few years, our business model has changed with a higher proportion of our sales coming from e-commerce and direct to consumer businesses the inverse.

A market that we have made in our digital efforts have provided a meaningful return and we expect to continue to see continued growth from this channel over the next several years.

As a company we have had a successful track record of navigating challenging times proactively and positioning ourselves to drive improvement as times improve.

I cannot be prouder of what our teams have accomplished during this period.

And setting the stage for the second half of the year in the future. During this pandemic, we have accelerated our transformation as a truly consumer driven company I would now like to turn the call over to Sallie.

And good morning, everyone.

For today's call I will review, our financial results for the second quarter and year to date period of fiscal 2022, 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 all of the special items included in our results for the second quarter and year to date.

Our fiscal 2022 and fiscal 2021, and our press release issued earlier today, which also includes a reconciliation table of GAAP and non-GAAP measures.

Certain comments will include comparisons to fiscal 2020 to provide additional context due to the significant impact of COVID-19.

On prior year results.

Our performance for the second quarter of this fiscal year exceeded our expectations and resulted in record net sales and operating profit.

The financial performance was highlighted by overall by continued overall strength in the United States as well as global E Commerce sales expansion in gross margin and operational discipline.

Period, we once again ended our quarter with a strong balance sheet and continue to focus on our strategic initiatives.

For the second quarter of fiscal 2022.

Mills were $173.9 million as compared to $88.5 million last year, an increase of 96, 4%.

Strong consumer response to our brands and offerings, coupled with partial recovery from the global pandemic led to net sales increases across our segments of owned brands licensed brands and company stores as.

As well as across most geographies, most notably in the United States, but also seeing improvement in Europe.

U S net.

<unk> increased 145, 9% and international net sales increased 64, 4% as compared to the second quarter of last year.

Total net sales increased 10, 2% as compared to the pre pandemic second quarter of fiscal 2020, with a 28, 5% increase in.

Sales in our state, which was partially offset by a three 2% decrease in international sales.

Gross profit as a percent of sales was 56, 6% compared to 51, 2% in the second quarter of last year.

The increase in gross margin was primarily driven by favorable channel and product mix and favorable.

Changes in foreign currency exchange rates. This was partially offset by a relative increase in spending on certain fixed costs, primarily due to the furloughing of employees and temporary salary reductions during a portion of the prior year period.

Gross margin was 250 basis points higher than the pre pandemic second quarter of.

In the United <unk> 'twenty. This was primarily due to favorable channel and product mix as well as favorable changes in foreign currency exchange rates.

Operating expenses were $73 million as compared to $45.9 million for the same period of last year.

The increase was driven by higher marketing expense.

Fiscal two and performance based compensation compensation as well as general operating expenses to directly support the significant increase in sales, while continuing to be disciplined and operating expenditures.

A reminder, operating expenses last year also included the benefit of Furloughing employees and temporary salary reductions.

Which did not reoccur this year.

Compared to the pre pandemic second quarter of fiscal 2020 operating expenses declined by $2.1 million, primarily due to the corporate initiatives and restructuring program, which was executed to reduce such expenses and this but this was partially offset by performance based compensation.

As a percent of sales.

Operating expenses for the quarter decreased to 42% from 51, 9% in the second quarter of last year and 47, 6% in the pre pandemic second quarter of the year before.

Expansion in gross margin and controlled spending in the second quarter drove.

$26.1 million increase in operating income to $25.5 million. This compares to a $600000 loss in the second quarter of fiscal 2021.

Operating income for the second quarter of fiscal 2022 more than doubled the operating income of the pre pandemic second quarter a fifth.

Fiscal 2020, which was $10.3 million.

We recorded income tax expense of $5.5 million in the second quarter of fiscal 2022 as compared to a benefit of $600000 in the second quarter of fiscal 2021.

Net income in the second quarter was 21 million.

<unk> of <unk> 85 per diluted share as compared to a net loss of $1.7 million or <unk> <unk> per diluted share in the year ago period.

This also compares to net income of $8.3 million or <unk> 36 per diluted share in fiscal 2020.

Now turning to our year to date results.

For the six.

Month's period, ending July 31, 2021 were $308.7 million as compared to $158.2 million last year.

Total net sales increased one 4% as compared to the pre pandemic six months period of fiscal 2020 with a 21% increase.

In the United States, partially offset by an 11, 8% decrease in international sales.

Gross profit was $172.7 million or <unk> 55, 9% of sales as compared to $80.8 million or 51% of sales last year.

The increase.

<unk> gross margin rate for the first six months was due to favorable channel and product mix favorable changes in foreign currency exchange rates and leverage on certain fixed costs.

Gross margin was 190 basis points higher than the pre pandemic first six months of fiscal 2020.

For the first six months ended July.

July 31, 2021 operating income was $39.6 million <unk>.

Compared to an operating loss of $18.2 million in fiscal 2021.

Total operating income was $22.1 million higher than the pre pandemic six months period of fiscal 2020.

As a percentage.

Of net sales operating income was 12, 8% in the first half of fiscal 2022 as compared to five 7% in the first half of fiscal 2020.

Net income was $30.2 million or $1.27 per diluted share as compared to a net loss of.

$1.7 million or a loss of <unk> 63 per diluted share in the year ago period, and net income of $13.9 million or <unk> 60 per diluted share for the first six months of fiscal 2020.

Now turning to our balance sheet.

Cash at the end of the first quarter was 199.

$7 million, an increase of almost $30 million over last year, while also paying down $48.3 million of debt during that same period.

Accounts receivable was $89.7 million up $29.6 million from the same period of last year, primarily due to the increase in sales.

Inventory at the end of the quarter was up $9.9 million or five 7% above the same period of last year, while sales nearly doubled.

Capital expenditures for the six months period were $1.8 million and depreciation and amortization expense was $6.3 million that included.

$1.5 million related to the amortization of the acquired intangible assets of both Olivia Burton and movement.

The company is increasing its annual outlook and currently expect fiscal 2022 net sales to be in a range of approximately $680 million to $695 million.

<unk> profit of approximately 55, five to <unk>, 56% of net sales.

Operating profit in the range of 13 to 13, 5% of net sales and diluted earnings per share of approximately $2.75 to $2.90.

Assuming no changes to the current tax laws.

Gross participate a 25% effective tax rate.

This updated outlook does not contemplate significant additional COVID-19 related retail closures, which can adversely impact results.

I'd now like to open the call up for questions.

At this time, we'll be conducting a.

As we mentioned and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue. You May pause Star Jones here. Most of your question from the queue for participants using speaker equipment and may be necessary for you to play comprehensive before pressing the.

A question one moment, while we poll for questions.

Our first question comes from the line of Oliver Chen with Cowen You May proceed with your question.

Hi, good morning, the quarter had such nice momentum.

To us that the guidance could have some conservatism could you speak to.

Start your rationale and thoughts and what's underlying some of the assumptions in the guidance and also Sallie will channel and product mix continue to be helpful to gross margins and how long might that be true. Thank you.

So yes.

Yes, So I think I think we're obviously in the first half.

Half of the year Comping against.

Again markets they were virtually completely closed and so I think the comparisons are obviously a lot easier in the first half of the year, we're seeing good momentum.

Our sell throughs around the world. So we're excited.

And but still cautiously optimistic about the second half.

Because we do still believe that.

There are the effects of the pandemic around the world and.

But we still see really strong momentum behind the business.

<unk>.

Ill take a little bit on the gross margins also and then turn it over to Sallie.

One thing that we have been able to do is also.

On the gross margin side.

We see that our brands have pricing power and so we've been able to.

To raise gross margin.

On the pricing side.

And we believe that that will have a continued impact during the second half as well and then I'll, let sallie talk about the mix, yes, so all of R.

Our outlook does reflect.

The continuation of the strength of the channel and product.

Both the growth of direct to consumer.

Whether it's in our stores or online and also the strength of the U S, where we know Nevada is a very important brand and has a very strong gross margin without the royalties and so forth to our license or so it is we do expect it to continue the you can see that it's kind of less.

Leveled off based on our outlook.

For the period that remains for this year.

Okay.

Could you help us understand geographically.

Stronger markets and less strong markets.

Also.

Okay.

We're seeing like a return of.

A good return of consumers to stores.

Is your view on the Department store channel.

Doors that you sell to of what's happening with traffic and is it really sustainable.

So Lisa I'll answer.

Both of those.

Geographically, our strongest region has been which is really nice to see because we had a few challenging years.

Has been the United States.

Where we've seen strong really strong momentum over two years ago and it's the combination now of sustained.

Performance on digital channels, but.

Turning to brick and mortar.

Being incremental.

So we've seen really good.

Really good performance.

On that side, we continue to see strong performance in Europe. So Europe for US was ahead in the <unk>.

<unk> two years ago in the second.

Despite the fact that most of the markets had a lot of retail closures during the period and again really strong digital.

E Commerce sales.

In Europe, we see some continued challenges in Latin America, but better performance than last year.

And.

Quad.

We've seen really strong performance in China versus.

Versus last year and two years ago.

So geographically.

<unk>.

It seems pretty good and we like having North America.

Hi.

In the United States, having strong momentum behind it because it's where we make our highest gross margins as.

As well.

So and then as your second part of your question was on the on the Department stores and we have seen.

Performance.

Haven't really improve in brick and mortar and we're looking at that also against two years ago.

In the United States.

And especially in the Department store channel.

But we're seeing improved performance now.

Versus where the trends had been in our mall based jewelry stores.

Pro forma so so I think consumers have added a desire to return to stores.

And that.

That growth has been purely incremental to the business.

So.

Our strategy to focus on the omni channel marketplace.

As well to support our brands with innovation.

And strong marketing.

As as really.

<unk> begun to pay dividends.

Okay excellent and then one of the themes from.

In your prepared remarks is mobile auto brand in pricing and average unit retail.

And what's happening there like the magnitude of the increases.

Also I think you need to balance that with offering the consumer a strong value. So how are you how are you.

Are you doing that.

So about two years ago, we really embarked on a strategy to.

To make novato more aspirational it had always been aspirational, but really to go back to our roots in.

<unk> focused on building.

Building higher price points, but offering fantastic value and we've done that through design through innovation through.

Through greater.

Benefits that we design into the product and the consumer sees that and they pay for it. So so products like the bold versa at our high are at higher price points for the bold collection DSC is at higher price points for our Nevada.

Core collection and.

We've seen strong momentum behind those products, because while they're higher price points they offer.

<unk>.

Truly <unk>.

Excellent value to the consumer.

Okay.

Cash balance is really attractive.

<unk> you are managing your balance sheet.

Well, so could you refresh us on your shareholder return strategy and what Youre thinking with respect to capital structure.

So I'll take the first stab at that and then turn it over to Sallie So.

We.

And we instituted at the beginning of this year a dividend.

And we're pleased with that and obviously as we continue to build cash that's a possible use of cash and then.

We also.

Reinstituted a share buyback program.

And we did buyback.

Did almost $10 million I think of stock.

The second quarter.

And so I'll, let sallie and we still have availability under that stock buyback program.

I think you've covered it other than the regular working capital running it isn't.

Being able to.

Get the right inventory in.

And so forth.

That covers it Oliver.

Okay, and finally for <unk>.

Light chain has been a big topic also inventory availability and.

Place generic pressures.

Will you have enough inventory for holiday inventory constraining U <unk>.

The right company.

To your your supply base and supply chain I know you have a flexible approach to this.

So I think our team has just done.

And I called it out several times I think in my comments have just done an excellent job.

Across the board as we've had to flex down last year.

Whats for Covid and then flexing.

Our resources back up and our suppliers back up we.

We seem to be in pretty good shape in terms of product availability.

Costing.

And.

It all really.

<unk> strong planning on their side and.

So we feel pretty comfortable right now that will have the right amount of inventory.

To get through the end of the year I think I would add to that we are definitely placing strategic purposes, as we need to and our.

It comes through.

We really have great visibility into recognizing any potential shortages in being able to take the steps to mitigate that.

Thank you best regards.

Okay Fair.

Very much Oliver.

Ladies and gentlemen, we have reached the end of today's question and answer session.

I would like to turn this call back over to Mr. Ed from Greenberg for closing remarks.

Okay I'd like to thank all of you for participating on our call today and wish everybody.

Great end to the summer and we look forward to rejoining you for our third quarter conference.

Prince call. Thank you very much.

Thank you for joining US today. This concludes today's conference you may disconnect your lines at this time.

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Yes.

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