Q2 2024 Movado Group Inc Earnings Call
Okay.
Good day, everybody and welcome to them Novato Group incorporated second quarter 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.
At this time I would like to turn the conference over to Rachel Schacter of ICR. Please go ahead.
Thank you and good morning, everyone with me on the call asked them Greenberg, Chairman and Chief Executive Officer, and Sallie you Marcella 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 this.
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 genius 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 well if he's provided as supplemental financial information in our press release now I'd like to turn the call over to us from Greenberg, Chairman and Chief Executive Officer of Nevada.
Thank you Rachael welcome to my motto group's second quarter Conference call with me today is Sally the Marsalis, our CLO and CFO . After I review the highlights for the quarter and our strategies and initiatives for the second half Sally will review, our financial results and outlook in greater detail.
Our second quarter performance reflects our strong execution in a difficult operating environment with net sales within our expectation.
The retail environment in our category remained challenging during the second quarter, particularly in the United States and Europe , our largest market 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 it in novato, which I will discuss in greater detail in a moment.
However, we are lowering our outlook for the balance of the year given the consciousness of our retail partners, which is expected to moderate shipments and continued economic uncertainty.
Turning to a review of the quarter second quarter net sales declined by 12, 3% from last year to $164 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 Novato brand and we are very pleased with the progress that we've made from a product perspective. This fall we will launch the most important collection of new products and our bold collection. Since we first launched bowled over 10 years ago included in this.
<unk> is the refresh of our best selling evolution family evolution to point out with new sharp with new sharper price points. The collection now opens at $595.
We are also refreshing the original bold tier 90 collections with a brand new and exciting design and a variety of color ways. In addition at the top end of our bold assortment, we are launching our new titanium diver that will retail at 1400 $95.
Novato core collection, we just launched a museum classic Chronograph collection that has gotten off to a very strong start.
As I mentioned earlier, we are introducing a total brand update.
The Novato 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 and digital campaigns during the fourth quarter, 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 in novato brand in several years. While recent history has demonstrated a significant shifting where consumers 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.
People media outlets.
During the quarter. It is important to note that our novato dotcom 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, we were up against strong a strong spring from last year. We are also intentionally slowed down the growth of our digital outlet channel, where we believe we were 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 continued 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 license brand portfolio for the fall we have strong marketing initiatives planned in our key European markets supporting both our watches and jewelry and digital.
Unused and digital that unused 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.
In Tommy Hilfiger, we have seen a strong performance from our spring introductions, particularly our opening price points for the fall. We are excited about the introduction of Clark for him and legacy for her both multi function models that begin at $189. The Hugo boss brand continues to amplify its messaging and we're continuing.
<unk> to partner with them on these efforts we have seen a strong reception from our.
Some consumers to our Choper and Greg our 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 will amplify our messaging at the point of sale as well as supporting.
The brand with our digital marketing efforts, we are excited for this holiday season.
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 Eliot family both for him and her Elliot has a strong collection, which opens at $125. We are continuing to partner with Jennifer Lopez on our coach marketing efforts globally and with currently 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 polo's. We've also seen excellent results from our introduction of <unk> jewelry for both men and women. This fall we will introduce a 12 12 automatic.
Collection retailing of $255 and our newest 40 died or family called spin.
And 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 I mean.
Modern design. This fall, we will be supporting the brand with our new campaign in digital and outdoor featuring model and fashion Influencer Leila Moss.
And Olivia Burton, we are well into our brand refresh across all consumer touch points in the U K and the U S 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.
Yes.
At the beginning of the year was very challenging we knew that we were comping 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're very excited around the plans that we have put in place for the second half of the year and our new product initiatives sharper values across our brands and creative marketing programs.
We are operating in a challenging retail environment and our largest market. 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 Nevada brand. We are willing to make this investment in order to ensure that our business will remain strong as the economic environment improve.
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. We have done in the past I would now like to turn the call over to Sally.
Thank you <unk> and good morning, everyone for today's call I will review our financial results for the second quarter and year to date periods 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 second quarter and year to date periods of fiscal 2024 and fiscal 2023.
In our press release issued earlier today, which also included a reconciliation table of GAAP and non-GAAP measures.
Overall, our performance for the second quarter of fiscal 2024 was within the lower end of the range provided on our previous earnings call.
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 $164 million as compared to $182 $8 million last year.
A decrease of 12, 3% in constant dollars a decrease in net sales was 13, 8%.
Net sales decreased across owned brands licensed brands and company stores.
By geography U S. Net sales decreased 12, 4% as compared to the second quarter 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 second quarter of last year.
The decrease in gross margin as compared to the exceptionally high gross margin result at 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 than the prior year period reflected sales shift from our relatively higher margin brands, who are relatively lower margin brands as well as lower sales in our higher margin channel.
We expect this tough comparison to continue into the third quarter. When we 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 compensation.
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 second quarter of fiscal 2023.
We reported approximately $1 $4 million of other.
Other nonoperating income in the second quarter of fiscal 2024, which is primarily comprised of interest earned on our global cash position.
We recorded income tax expense of $3 million in the second quarter of fiscal 2024, as compared to $6 $6 million in the second quarter of fiscal 2023.
Net income in the second quarter was $8 $5 million or <unk> 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.
<unk> for the six months period ended July 31, 2023, with $305 $3 million as compared to $346 $2 million last year.
Total net sales decreased 11, 8% as compared to the six month period.
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 in 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 rate and the deleverage of higher fixed costs over lower sales. This was partially offset by decrease in 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 reported approximately $2 $3 million of other non operating income in the six months period of fiscal 2024, which is primarily comprised of interest earned on our global cash position.
Net income was $18 $2 million or <unk> 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 second quarter was $218 9 million as compared to $203 $1 million at the same period of last year during.
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%. Although the same period of last year due to the timing of receipt and is aligned with sales.
And the first six months of fiscal 2024, we repurchased approximately 16000 shares under our share repurchase program.
$26 million remained available under that program.
Capital expenditures for the six months 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 movement.
Now I would like to discuss our outlook as Evan 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 to $700 million.
Belting and 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 to $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 to.
The $2.25 per diluted share.
I would now like to open the call up for questions.
Okay.
Thank you we will now be conducting a question and answer session.
I'd 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 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.
Okay.
Our first questions come from the line of Oliver Chen with TD Cowen. Please proceed with your questions.
Oh, yeah for them in Sally and good morning.
All right I'll hop out the you called out the U S consumer as well as just thinking about the consumer and weakness.
The results were in line with your expectations would love your thoughts on what's changed since the past quarter and what Youre seeing in the environment.
Also that from them on the product innovation it sounds like you're really focused on the opening price points would love your thoughts on that and what you need to do.
So those are some first questions I'll have some follow ups. Thanks.
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.
And increased C L.
An increase of challenges to the consumer on discretionary purchases and and.
So we are being cautious in terms of of our expectations.
Consumer returning on discretionary purchases. We also are experiences that as economic growth.
Slows.
Consumers become more value oriented and are experienced in the past has been that we've been.
Successful.
With entry level price points, but really strong innovation along those platforms. So.
And it's something that we're focused on both.
Both in the United States and globally as well.
Okay and specific to channels that from what are you seeing in U S wholesale and how might you contrast also relative to outlet.
And then on the international other trends that you want to call out between North and south are regions that are stronger versus weaker.
So I'll start I'll start with the international first I think Europe for US is 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 or 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.
And our most important licensed brands in the market as well as behind them Novato brand.
And then.
On the U S side, I think wholesale has been a little more challenging and that's true in Europe as well.
Where retailers are as they should be are being cautious and focused on.
On managing their inventories very prudently.
Thank you.
We have really strong marketing initiatives, but then across our licensed brand portfolio and I'm really excited about what we're doing to to Reenergize and support the Nevada Grand and we will launch that campaign in September as well as a complete brand refresh of the Nevada website at that time.
<unk>.
Ken that's a lot.
[noise] refreshing about motto brand I'm, what do you think it needs mouth, what's your hypothesis there and.
Longer term, how what will be the path to return to revenue growth what will be the keys there in your mind.
Any thoughts around timing.
The easier compares sure I think I think returning to really re energized on the marketing front the brand with investments in media will.
We will prove to be very successful for the Nevada brand.
And we have moderated those investments over the last few years and as I said we were.
Upping.
But that quotient for this holiday season, and and really for the foreseeable future.
But I'm really excited by the product assortment has been as good as a as we've had on the product front in Novato brand in.
And we're really excited about the total brand refresh that we're doing and again, it's an evolution not a revolution of the brand.
But having a robust.
Our marketing mix and.
And media plan will really help support the brand.
For the holiday season and into the future.
Okay, Sally as we model you know three Q versus <unk> could you help us understand if there's any.
Person that we should be aware of and also we just expect a less negative for Q would love your thoughts on the on the revenue line as well as some of the key gross margin headwinds as well as Selwyn and all.
Also inventory inventory relative to sales growth, how do you see that evolve for the back half.
Okay. So I'm going to start backwards, just so I don't so I don't Miss any of your questions and inventory we were on the timing between last year's purchases Michigan's purposes, we're very different than we were able to moderate our incoming purchases. This year and you can see with much better aligned with inventory.
At this point, we will as you know as we head into the holiday season, we are still very much a wholesale.
Isn't it so we will be.
Back in the inventory they just in the third quarter to support our channels, but we will have them be more all of our purposes. It will be more in line with these forecasts straight through to the year and so we will keep an eye on it and you know there are lead times that we have to live with them, but definitely more in line with where our sales plans are.
As far as the two quarters you know they are both very important to us third and fourth quarter. There generally is a.
A little bit of a balance between those two.
Third and fourth quarters third is obviously very important to us as we.
Fulfill our wholesale commitments.
The quarter, 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 third and fourth quarter as we get towards the end of the year.
And as far as margin, we're going to see really the same comparison challenges to last year last year was an exceptionally high gross margin here. So this year when we talk about things like our mix or our deleveraging.
Again.
You know against lower net sales number is going to continue in the next few quarters.
Didn't see something very similar to what we've experienced in the first half of this year.
Okay, that's really helpful and on holiday.
But from an Sally what do you see happening in terms of holiday planning and key thoughts around the the consumer as well as like as inventory tightening gonna be ongoing at your wholesale partners.
I think for for holiday.
As I've said for a long time Christmas always comes on December 25th Hanukkah come 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.
The holiday.
There are comparing against some weaker numbers last year during the holiday period.
So I think things will start to fall in to balanced in.
But there remains a high level of uncertainty out there with interest rates with inflation, which is the political environment as well so.
But.
I think.
I think you always have a stronger holiday in terms of sell through in Q4.
Then in Q3, so I would expect that I would definitely expect that to occur again.
Okay and on this was an earlier question a follow up to a follow up the a the average unit retail you know as you think about your portfolio should.
Should we assume that the overall AUR you know may go down or will hold and be offset by transactions just how does that sum up to the bottom line on some of these changes you're making.
I'm hopeful as well.
So I think what we're doing is we're back filling some entry level price points that we had vacated but I think overall.
We will see a flattish AUR over the over the next.
Next year, so I'm not.
<unk>.
I think that that is not.
A lot of different it's not a big bulk of our offering but it enables.
Tumors, who are more challenged to enter the brand at accessible price points.
Thanks, and last question you have a really strong balance sheet and it's always been a hallmark of your.
Financial perspective.
Thoughts on on cash and how you're thinking about free cash flow generation and return to shareholders. Thanks.
So obviously our dividend continues to remain very important to us.
And.
So that that is part of our our balance sheet.
As well as share repurchases and and but.
But I think it is that balance sheet that allows us to feel comfortable.
Two focus on medium and long term initiatives.
N times become more challenging.
That yield overall.
Long term value to shareholders.
Okay. We're excited to see bold back that's regards thanks, okay. Thank you very much.
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.
I'd like to thank thank all of you for participating with us today and those of the United States I wish you a very good upcoming holiday weekend in the end of the summer. Thank you very much and we look forward to talking to you in our third quarter conference call.
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.