Movado Group Inc. Q1 2024 Earnings Call

Speaker 1: And.

Speaker 2: Movado Group Incorporated 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 0 on your telephone keypad.

Speaker 2: 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 Schachter of ICR. Please go ahead.

Speaker 3: Thank you. Good morning, everyone. With me all I call is Efrem Grimburg, Chairman and Chief Executive Officer, and Sally DeMarcilis, 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.

Speaker 3: 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 FCC.

Speaker 3: Greenberg, Chairman and Chief Executive Officer of Movado Group.

Speaker 4: Thank you, Rachel. Good morning and welcome to Movado Group's first quarter conference call. With me today is Sally DeMarcellis, 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, I'd like to introduce our panelists.

Speaker 4: Sally will then review our financial results in greater detail. We would then 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 .

Speaker 4: 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 in the economy.

Speaker 4: growth priorities we have for our business, delivering sought-after innovation and elevating our brand awareness.

Speaker 4: This, along with continued expense discipline, has us well positioned to improve our performance as we move throughout the year.

Speaker 4: 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.

Speaker 4: 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 and earnings per share on an adjusted basis.

Speaker 4: were 43 cents versus 82 cents 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 dollar per share special dividend and $2.5

Speaker 4: 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.

Speaker 4: This year, the consumer in both the US and Europe is facing both elevated inflation and rising interest rates. As many retailers have already reported, this is clearly affecting discretionary spending.

Speaker 4: From a geographical perspective, both our international and US sales declined, with the US declining 15.7% and international sales decreasing 8.1%, or 6% on a constant currency basis.

Speaker 4: 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 .

Speaker 4: As retailers in key markets deal with slowing economic growth, they are very focused on making sure that they control their inventories.

Speaker 4: 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.

Speaker 4: 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 lifes and video games

Speaker 4: Throughout the year we will invest in refreshing the Movado brand image in a bolder and more impactful way and we are excited to make this investment behind our most important brand.

Speaker 4: 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.

Speaker 4: 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.

Speaker 4: 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.

Speaker 4: a sporty 46 millimeter chronograph. We're 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 Brands high profile ambassadors with a new campaign which will feature Suki Waterhouse.

Speaker 4: as our ambassador for women, both for jewelry and watches that will launch in the fall.

Speaker 4: and we are seeing renewed demand in China, both at retail and online as the market reopens. We are continuing to partner with Pearl Ligawa, as our ambassador in China, and with Jennifer Lopez in our global campaign.

Speaker 4: In Lacoste, we introduced a new interpretation of the iconic 1212 polo shirt in a watch, aluminum version in a number of new colors including green khaki. We're also introducing new 1212 watches that connect with Lacoste sponsorship of three Netflix series, Stranger Things, Sex Education, and Lupin.

Speaker 4: 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. With NCK, we are driving some exciting innovation at appealing price points, including the introduction of sensation for her.

Speaker 4: 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.

Speaker 4: For the first quarter, we saw a 3.5% decline in our outlet business in a highly promotional environment in the US.

Speaker 4: 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.

Speaker 4: As we look at the balance of the year, we're 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.

Speaker 4: 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 monitor

Speaker 4: 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.

Speaker 4: 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.

Speaker 4: Our teams are energized and focused on executing and delivering against our strategic objectives. I would now like to turn the call over to Sally.

Speaker 5: Thank you, Ephraim, and good morning. For today's call, I will review our financial results for the first quarter of fiscal 2024.

Speaker 5: and balance sheet, and then discuss our outlook.

Speaker 5: My comments are today focused 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 and our press release issued earlier today.

Speaker 5: which also includes a table for gap and non- GAAP measures .

Speaker 5: 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.

Speaker 5: While down year over year, we achieved our internal expectations, continuing to deliver compelling offerings, maintaining expense disciplines, 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, US 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%. We've 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 percent compared to 59.2 percent 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 upset 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 and 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 expenses $2.7 million in the first quarter of fiscal 2024, as compared to $6.2 million in the first quarter of fiscal 2000 in 23. Net income in the first quarter was $9.7 million, or 43 cents for deluded share.

as compared to 19.1 million dollars or 82 cents for diluted share in the year ago period. Now 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 35 cents 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 license brand, Calvin Klein for Watches and Jewelry. In the first quarter, we repurchased approximately 14,000 shares under our Sherry Purchase Program.

Capital expenditures for the quarter were $2.3 million and depreciation and amortization expense was $2.6 million, which included $700,000 related to the amortization of acquired and tangible assets of Olivia Burton and movement.

Now I would like to discuss our outlook. As that from 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 to $750 million. Although for the year, we expect the sales decline of 3.6% to relatively flat.

We continue to expect a bigger decline in the first half as the anniversary record results during the prior year. We would expect to see first half net sales to be down nine to 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.

And therefore, we expect operating income in a range of 80 to 85 million dollars.

Assuming no changes in the current tax regulations are outlook assumes a 22% effective tax rate in results in an expected range of earnings of $2.70 to $2.90 per diluted share.

As it relates to share repurchases as of April 30th, 2023, we have $20.6 million remaining under our Authorized Share Repurchase Program.

Subject to prevailing market conditions and business environment, we plan to utilize our tertiary purchase 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.

questions.

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 poll for your question. Our first questions come from the line of Oliver Chen with TD Cowen. Please proceed with your questions.

Hi Ephraim and Sally, good morning. So was the retail inventory tightening different from what you expected in terms of what you're seeing? So the market called it out and also the negative mixed impact headwind.

Were those in line with your expectations would love your take? And then on your cost, it's commentary. Why was it the right time to reiterate guidance given the cost and we're seeing around inflation and the pressure around traffic and the middle income customer? Thanks a lot.

Okay, so I think that the, you know, basically we still believe that we're on plan for the year and our plan was built, assuming a certain level of stress on the consumer. And in the first half, we're comping against very, very strong numbers.

in the marketplace. In terms of retail inventories, we did expect our retailers to be tight on inventory, and that's one reason that we did...

have a cautious tone, especially for the first half. We're from a retail perspective, the watch, and especially the watch category, is very skewed towards the second half of the year. So I think right now we see everything basically on our plan.

opinions vary across the board. And we 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. Okay, and what about geographic clear from China, Europe ?

And Trent, you're staying there. We're seeing some issues with this regarding the reopening.

XBB and also I would love your take on China as well as your your retail section and outlet Traffic level. Thank you So so Let's start with with your first question. I think you know China China for us is a small market

And we've seen, you know, it bounced back nicely in the first quarter against the very challenged first quarter last year. And we continue to make investments in China. It's really focused behind our license brands.

and believe that it represents a long-term opportunity for us. But 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. And I think again, the comp, comparable, the comps become easier in the second half of the year in,

in Europe and 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 traffic and the outlet stores.

We are seeing, you know, decent traffic in the outlet stores and, and, and, and what we're not seeing are the China buyers, the return to, to the outlet stores that had been there previously.

So, you know, I think that's gonna take a while for to reemerge. But overall, we're not, it's a highly promotional market. On the outlet side and 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. Okay, and the US 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 US retail market and then Sally 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 inventory?

So I think, as I've said several times in the class, just think there's a lot of uncertainty now. And nobody knows what's going to 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.

And but that'll eventually, I think with higher interest rates, also become somewhat stressed. So I think it's really operating in an uncertain environment and it's something that we're generally, and without now our history, we've been very good at adapting to the consumer needs.

And it's a very consumer-focused company, and that's why we're reintroducing some on-putting price points, particularly in our licensed brand portfolio, as consumers become stressed in other areas.

And we've seen some very good initial responses to some of the things that we've brought to the market quickly. And your other pieces on inventory Oliver and we are modeling that our inventory becomes 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.

Okay, Sally, and then as we model the back half, will the growth margin continue to have the negative fixed impact?

I would love your thoughts on key driver for the backup of the Gross March in line. Your balance sheet has always remained robust as well. What should we think about in terms of?

key driver for the backup of the growth margin line. Your balance sheet has always remained robust as well. What should we think about in terms of the purchases?

is a dividend, a special dividend as well. Thank you. Okay, I'll start on Gross Margin, and then we'll get to maybe some of the more questions on dividends and like. Gross Margin, the challenge is the comparison to last year. Really, this year we should have no unusual callouts. 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. So it's going to be, you know, the tough comparison this quarter. If you go back to two years ago, we are above where we were two years ago. It's just a comparison to last year makes it difficult. So 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. So that may help you a little bit on the modeling side. And then on the capital allocation dividends and cherry purchases, I think we're very generous with our 35 cent regular dividend per quarter. And we've talked about cherry purchases being a tool to offset delusion.

And I think, you know, I wouldn't anticipate there being another special dividend. I think that was, you know, we're being involved with that all the time and I think, I? vinegar more tax.

an event that we did at the beginning of the year when we had a we believed Would be a way to return value to our Shareholders and and now our focus is on our ongoing dividend As well as continuing to maintain a strong balance sheet throughout the year

Last question, I was a big fan of Movado bulb and the earlier endings of that. What's happening with the lower price point innovation and also how are you thinking about that distribution footprint if that's a relevant, different driver? How about the low price point stand, in committee where, I have not to quote the marketing general before the concept ofengraving. We're sweet, we focus on the airplane, squeeze through the streets, and then upgrade quickly. I go with the Rofl in the paper.

Okay, last question, I was the big fan of Movado Bold and the earlier endings of that. What's happening with the lower price point innovation and also how are you thinking about that distribution footprint? It's that's a relevant, a different driver. And what ending are you in terms of? And what's happening with the lower price point innovation and also how are you thinking about that.

pivoting your portfolio to make sure you address opening price points as well. Thanks a lot. 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...

to The seventh or eighth inning in the second half of the year in terms of filling opening price point So we're excited about those those opportunities And and 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

and expect that to continue throughout the year.

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.

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.