Movado Group F4Q07 (Qtr End 1/31/07) Earnings Call Transcript

| About: Movado Group, (MOV)

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Movado Group (NYSE:MOV)

F4Q07 Earnings Call

March 29, 2007 10:00 am ET


Susan Rosenberg – Vice President, Investor Relations

Efraim Grinberg – President and Chief Executive Officer

Richard J. Cote - Executive Vice President and Chief Operating Officer

Eugene J. Karpovich – Senior Vice President and Chief Financial Officer


Jody Kane – Fidelity & Co.

Elizabeth Montgomery – Cowen

Jeff Blaeser – Morgan Joseph

Kristine Koerber – JMP Securities

David Taylor – David P. Taylor



Welcome to the 2007 Movado conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the call, please press star zero on your touchtone phone. And as a reminder, ladies and gentlemen, this conference is being recorded and may not be reproduced in whole or in part without permission from the company.

I would now like to introduce Ms. Susan Rosenberg of Movado group. Please go ahead.

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Susan Rosenberg

Thank you. Good morning everyone and thank you for joining us today. With me on the call is Efraim Grinberg, President and Chief Executive Officer, Richard Cote, Chief Operating Officer and Eugene Karpovich, Chief Financial Officer.

Before we begin, I would like to note that this conference call contains forward looking statements which are made in pursuance to the safe harbor provisions of the private security litigations reform act of 1995. Factors which could cause actual results to be materially different from any future results expressed or implied are discussed in our filings with the security and exchange commission. Such forward looking statements include statements regarding Movado performance for fiscal 2008 and beyond.

We currently expect to update estimates; however the failure to update this information should not be taken as Movado’s acceptance of these estimates on a continuing basis. Movado group may also choose to discontinue presenting future estimates at any time.

During the course of today’s conference call, management may present certain non-GAAP figures. For a reconciliation of these figures, along with information required under SCG regulation G, please view our earnings press release which has been posted on our website at

Let me now outline the order of speakers and topics for today’s conference call. Efraim will begin with the highlights of our fiscal 2007 performance. Gene will then review the financial details and Rick will provide you with an update on our operating initiatives along with our financial outlook. We would then be glad to answer any questions you might have.

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

Efraim Grinberg

Thank you Susan and good morning everyone. Movado group’s continued success in fiscal 2007 demonstrates the distinctive positioning of our brands, the clarity of our strategy, and the power of our business model. We delivered record sales, strong gross margins, and 18% increase in adjusted operating income and a record net income of $41 million on an adjusted basis. These outstanding results were achieved as we continue to support our existing brand portfolio and launch new business initiatives.

Today in a separate press release, we also announced a 33% increase in our dividends, marking the seventh consecutive year of increasing our quarterly dividends and underscoring our company’s strong cash flow and financial position along with our ongoing commitment to building value for our shareholders.

Now let me turn to our luxury brands performance in fiscal 2007. Ebel enjoyed a strong year with solid double digit sales gains over last year. The fourth quarter was marked by the introduction of Ebel’s 1911 BTR collection, an exclusive collection of men’s watches powered by Ebel’s proprietary mechanical movement. This introduction was supported by strong marketing and advertising initiatives as well as target public relations activities worldwide. In recent times, Ebel has predominantly targeted the female consumer. As we continue to expand Ebel, we expect to take a more balanced approach to reaching both male and female consumers.

Next month at Boggleworld, the international watch and jewelry trade fair will introduce several important extensions in Ebel’s Brazilia collection which was first introduced in April 2006. We will also introduce a new family of luxury sports watches for men, the 1911 discovery collection. Ebel continues to gain in relevant power and desirability while gaining the confidence of our retail partners around the world.

Fiscal 2008 will be a year of repositioning for the Concord brand. As you know over the past year, we have rationalized Concord’s expense structure and shrunk the overall size of the business while maintaining its profitability. At Boggle we are very excited to be introducing Concord’s new brand vision and strategy. In preparation for a worldwide re-launch, we have paired Concord down to the very essence of the brand. Swiss expertise with a passion to innovate and lead and we will use that brand DNA to create a powerful new Concord.

The new Concord will be a brand defined by its bold philosophy, aggressive positioning, daring product and exclusive pricing. It will be a resolutely upscale and unique niche brand with a modern edgy point of view.

Our acceptable luxury category comprised of Movado and ESQ delivered low double digit increases for the year. Movado capped the year with a strong holiday selling season. We continue to infuse Movado’s product and advertising with fresh elements to excite consumers, never compromising Movado’s unique modern brand identity.

The second half of fiscal 2007 was fueled by new products such as the updated SE, a signature piece from Movado which experienced terrific success and continued momentum in our hard Mero-Fierro collection.

We also placed a strong focus on our jewelry inspired Ono watch collection during the holiday season. Phase one of the launch of Movado’s series A100 collection has been completed and we are now strongly positioned in 500 doors throughout North America, representing an exclusive selection of Movado’s overall distribution. We look forward to continued success in the sport luxury category as we introduce new products and support series 800 with a strong advertising campaign featuring Derek Jeter and Tom Brady.

Looking ahead to Boggle, we will kick off a major celebration for the Movado brand. The 60th anniversary of the iconic museum dials. Our celebration will pay tribute to 60 years of modern design and to the museum dial creator Nathan George Hartway. This special anniversary will be totally encompassing for the Movado brand both at wholesale and retail. In the second half of fiscal 2008, we will deliver special watch and jewelry collections commemorating this important anniversary such as the 60mm, 60th anniversary watch, a beautiful skeleton museum watch and a new piece called Concept 60.

We will also incorporate 60 years of modern design in our advertising and point of sales material. We will continue to strongly support Movado with a compelling advertising and marketing campaign, supporting the arts, revolutionizing design. Movado will continue to strengthen its position as the market leader in the accessible luxury category in North America, while continuing to focus on the development of the brand in the emerging China marketplace.

Our Movado boutiques experienced a challenging fiscal 2007 and we are disappointed with the results. We are in the process of refocusing and streamlining our efforts in this important brand building initiative. As a result of these actions, we expect a delay in the timing by when Movado boutiques will achieve profitability. The investment in this business has brought Movado a tremendous amount of exposure and we are committed to its future success.

Branded jewelry presents a major growth opportunity and we are taking the right actions in terms of product design and development to create jewelry that is truly iconic and purely Movado. As you know, we have delivered strong gross margin improvements in our jewelry offering. However in the process, we believe we vacated certain key price points. Moving forward, we will back sale these categories with terrific products at the right price while continuing to generate strong gross margins.

In terms of advertising and marketing support, in the second half of the year, we will focus on promoting greater synergies between Movado watches and jewelry. We are also streamlining our operations in this business to create a flatter organizational structure that is more efficient and more responsive to our customers.

Additionally, we will close 200 performing locations, Northbrook, which is outside of Chicago and our Soho store in New York. We plan to open two new locations in the first half of this year, Topanga Plaza in Conoga Park in Southern California and South Coast Plaza in Costa Mesa California. We expect to end the year with 31 boutiques nationwide.

ESQ experienced a very strong holiday season driven by strong reception to our land, air and sea collection. We continue to solidify ESQ’s positioning in the accessible luxury category with the recent introduction of Verona for women. And in May and June publications, we will support ESQ’s diamond fashion products through beautiful executions of our ESQ and new advertising campaigns.

Throughout fiscal 2007, we successfully expanded ESQ’s distribution with new customers and acquiring incremental space in existing retail locations. ESQ is filling a void in the market place by bringing affordable luxury to the consumer and the response by retailers and customers has been tremendous. In fiscal 2007, our license watch business posted strong double digit increases from last year with five powerful licensing partnerships in place; we have established a very well rounded portfolio of world class brands with great growth potential.

We are pleased to have recently extended our closed partnerships with Coach. A continuous flow of new and relevant products remains key to Coach’s success and our watches are no exception. Collections such as Signature, Gallery, Lexington and Madison continue to bring success to our coach watch business.

In fiscal 2008, we will continue to execute the Coach Brand strategy, targeting younger demographics.

This year additional focus will also be placed on the Japanese marketplace. For the first time, we will introduce Coach watches exclusively designed for Japanese consumers in terms of size, color pallet, and design.

Additionally we will incorporate our advertising effort with the Coach parent plan, conveying a comprehensive brand presentation to the consumer.

Tommy Hilfiger watches also delivered a strong performance in fiscal year 2007, generating very strong double-digit sales gains for the year. New product introduction such as (inaudible) and Blackbird were standout performers during the holiday season and kept consumers excited for what’s to come.

Our watches are keeping in step with the overall marketing and merchandising direction of a more refined Tommy Hilfiger. In the first quarter, our Tommy Hilfiger watch collection is very focused on highlighting classic styling with great sport and fashion looks.

Since launching the collection last year, our Hugo Boss watch business has been excellent. New products are being strongly received with a majority of the sales being generated outside of North America. France, Spain, and the United Kingdom are proving to be strong markets for the brand as is Asia.

In fiscal 2008, we’ll focus strongly on Hugo Boss’s home market of Germany. Also this year we will launch a completely new collection under the Boss Orange name with watches featuring more urban and sportier designs.

In the second half of fiscal 2007 we launched our first collection of Juicy Couture watches to great reception with signature Juicy dials performing extremely well. This year we will debut Juicy Couture watches on a much larger scale at Bosel and throughout the year we will focus on growing our specialty store business, while enhancing our performance in the high-end department stores.

This year at Bosel we were also very excited to introduce our new watch collection. As you can see from our results, fiscal 2007 was a very successful year for Movado Group. As we continue to focus on building and managing the aspirational positioning of all of our brands.

Looking ahead, we will maximize the potential of our existing portfolio while remaining focused on continuing to improve our financial returns.

I would now like to turn the call over to Gene who will review our financial results in greater detail.

Eugene J. Karpovich

Thank you and good morning everyone. We are pleased with our financial performance for the fourth quarter and for the full year ending January 31st, 2007.

In fiscal 2007 we recorded four unusual items which I would like to discuss first. In the third quarter we recorded a $2.2 million pre-tax gain from an out of period adjustment related to foreign currency.

We recorded a change in estimate of the company’s reserve for accounts receivable. This resulted in a $6 million pre-tax, non-cash charge in the third quarter. Also in the third quarter we recorded an income tax benefit resulting from the further utilization of our (inaudible), which resulted in a full year tax rate of 5.4%.

In the fourth quarter we recorded a gain on the sale of the non-financial asset resulting in an after-tax gain of $0.5 million. In fiscal 2006 we also recorded a number of unusual items which are detailed in the reconciliation table attached to today’s press release.

For purpose of today’s conference call my comments will refer to adjusted figures which exclude these items and which are outlined for you in the reconciliation table.

We believe the adjusted figures present a more accurate picture of our ongoing operations and allow for an apples to apples comparison when discussing year over year results.

My comments will focus on the year, but first let me provide you with some highlights from the fourth quarter. Sales for the fourth quarter increased 12.8% over last year to $142.4 million. During the quarter we liquidated additional discontinued non-core Concord and Movado product which we initiated in the third quarter. The liquidation amounted to $4.4 million. Excluding liquidation, net sales were $137.8 million or 9.3% above prior year.

Gross margin for the quarter was 61.1%. Excluding the liquidation sales, gross margin was 63.1% compared to 61.3% last year. Operating profit increased by 8.7% year over year to $15 million as compared to adjusted operating profit of $13.8 million in the prior year period. Adjusted net income increased 15.2% to $11.4 million or $0.42 per diluted share versus adjusted net income of $9.9 million or $.038 per diluted share in the year ago period.

Turning now to our full year fiscal 2007 results. Net sales were $532.9 million or 13.1% above prior year. Excluding the liquidation sales of $16.6 million, net sales were $516.3 million or 9.6% above prior year.

For the year, sales increases were recorded in all our brands and business segments except Concord. Sales in our wholesale segment were $443.2 million or 15% above prior year and excluding the liquidation was 10.7% above last year.

The US wholesale business was above prior year by 14.8% and excluded liquidation by 7.9%.

International wholesale business was above prior year by15.4% to $166.2 million, led by the strong performances of our licensed brands primarily in Europe and Asia as well as Ebel in Europe and the Middle East.

The retail segment increased 4.8% to $89.7 million for the full year. Sales increase in the Movado boutiques by 9% with comparable store sales in our boutiques increasing 2.3%. Company outlet stores recorded a total sales increase of 1.3% year over year.

Gross profits for the year were $322.9 million or above last year by $36.6 million, driven by higher sales volume as well as a higher gross margin. Our gross margin was 60.6% as compared to 60.8% in the prior year. Excluding the liquidation gross margin was 62.5%.

Adjusted operating profit for the full year was $56.1 million or 18% above prior year. We recorded other income of $1.3 million versus $1 million in the prior year.

Net interest expense for the full year is $0.5 million versus $4.1 million last year. This is the net result of higher average borrowings of $97.2 million with an average borrowing rate of 3.7% versus $78.7 million last year with an average rate of 5.2%.

In addition, we earned 4.9% on our investment cash.

Income taxes were recorded at a 5.4% effective rate versus a 40.8% effective rate in the prior year. Last years rate included a $7.5 million charge related to foreign earnings repatriated under the American Jobs Creation act. This year’s rate reflects the continued utilization of Ebel NOL.

Adjusted net income increased 26.1% to $41.2 million or $1.54 per diluted share versus net income of $32.7 million or $1.25 per diluted share in the year ago period.

Now I would like to discuss our balance sheet. Our cash at January 31st was $133 million versus $123.6 million in the prior year. The higher cash is the result of strong cash flow from operations. Our cash flow for operating activities for the year is in excess of $67 million which represents a record for the company. Accounts receivable of $111.4 million increased by $1.6 million or 1.4% above last year as compared to our sales growth of 13.2%.

Our day sales outstanding at year end are 62 days versus 70 days in the prior year period.

Inventory of $193.3 million decreased $5.2 million or 2.6% from last year. The decrease is primarily due to the previously mentioned liquidations.

Our long-term debt is $80.2 million versus $110 million last year as we paid down a portion of the debt from the excess cash generated throughout the year.

Our capital expenditures are $20.2 million and depreciation expense is $16.6 million. Our capital expenditures principally included the construction costs for new retail stores as well as the build out and renovation of existing retail stores, further automation of our distribution facility in New Jersey, and systems hardware and software acquisitions.

In summary we are pleased with our financial performance in all respects delivering a very strong P&L performance and maintaining a solid balance sheet. Now let me turn the call over to Rick.

Richard J. Cote

Thank you Gene, good morning everyone. Fiscal 2007 was an excellent year for Movado growth as we delivered record sales, record net income and exceptionally strong growth margins along with record cash flow.

Appropriate investments made in our brand and businesses continue to pay off in the form of brand image, sales growth, margin expansion, and earnings growth. This is a strategy that we will continue to employ in fiscal 2008 as we optimize our current brand portfolio growing both domestically and abroad.

Now let me outline our operating initiatives for fiscal 2008. First, we are focused on maximizing growth opportunities in our existing businesses, particularly in our newest businesses; Hugo Boss, Juicy Couture, and (inaudible). All three of these businesses are in their infancy stage and have significant global growth potential. Of course each of these businesses requires a certain level of investment.

Hugo Boss was launched in early fiscal 2006, Juicy Couture in the fall of 2006, and we will debut our Lacrosse collection at Bosel.

In addition to our newest businesses, across our portfolio we continue to see significant opportunities both domestically and internationally. Ebel continues to experience solid global growth trends as retails and consumers respond strongly to new product introductions and consistent brand image.

Fiscal 2008 will be a repositioning year for Concord as we finalize the brands new direction following the preview of our concept at Bosel.

On Movado brand we will focus on distribution and improving productivity in existing retail stores.

Turning to our Movado boutiques: as aforementioned, fiscal 2007 was a challenging year for this division. As you know, our original strategy was to grow to approximately 30 boutiques nationwide, achieve a certain sales level or what we define to be critical mass, and then convert it to a profitable operation.

We are not pleased with our boutiques performance this past year and while we still anticipate this division to become profitable it will take more time than we had originally projected.

The second major focus for our company in fiscal 2008 is a multi-year rollout of a world wide enterprise resource planning system. We have signed an agreement with SAT and are now in the beginning stages of the implementation process. This is an important undertaking for our company and will ultimately provide us with a fully integrated end-to-end view of our multiple businesses.

We have added and developed key talent leadership and a dedicated team of resources within our organization that makes us confident that our approach and activities related to the implementation will have a profoundly positive impact on our business.

The implementation of SAP will support the company’s growth strategy and integrate our global sourcing, wholesale, and retail operations. We are bringing our operation to a whole new level of sophistication by re-engineering our business processes and promising technology to make a significant and sustainable impact on our global operations.

In addition to the growth margin expansion and increased scale, the implementation of the new enterprise resource planning system will be a key enabler toward enhancing our overall cost structure, improving our operating margin performance and enhancing our customers experience.

Our third major focus this year is continued improvement of our financial returns, namely operating margin, which remains a top priority for our company. Our goal is to ultimately expand our operating margin from the historic 10% level to the mid teens. This improvement will be driven by increased scale along with a combination of gross margin expansion and the enlarging of our existing infrastructure.

In the near term, our operating margin goal is to reach 11.5% in fiscal 2008, which represents a 150 basis point improvement over fiscal 2006.

Another component of improving our financial returns and an ongoing focus of our company is reducing inventory and improving our overall inventory mix.

During the second half of fiscal 2007 we took advantage of an opportunity to convert discontinued product into cash thereby reducing inventory, improving our inventory mix and driving cash flow. We will continue to work diligently on improving our inventory position and would expect further reductions of discontinued product in fiscal 2008.

We continue to exclude these discontinued sales in our financial guidance as we view them to be above and beyond our normal course of business.

We remain focused on driving shareholder value over the long term and believe our company is positioned to achieve that goal.

Now I’d like to turn to our financial outlook for fiscal 2008, which assumes continued economic strength. As a reminder, in fiscal 2007 we reported full year sales of $532.9 million. This includes $16.6 million of excess discontinued product. We project net sales to range between $550-560 million in fiscal 2008 excluding the potential for any future discontinued product sales.

I mentioned earlier, given the dynamics of our brand portfolio, top line growth will be driven predominantly by our newest businesses as we focus on increasing productivity on retail on our more established brands, beginning the transition of Concord to its new direction and streamlining the boutique business.

Additionally, on a quarterly basis, net sales will be impacted by a shift in retailers buying patterns given the shift in the 454-retail calendar. Therefore we would expect slower sales growth rates in the first half of fiscal 2008 than our full year projection. I will discuss the impact of the calendar shift on our profits in a few moments.

Gross margin is expected to remain strong and in line with adjusted fiscal 2007 levels of approximately 62.5% which represents a 170 basis point improvement from fiscal 2006. We anticipate full year operating profit in fiscal 2008 to grow approximately 14% from the adjusted operating recorded in fiscal 2007, which you can see in the reconciliation table attached to today’s press release.

Expanding the differential between our sales growth and operating profit growth is part of our long-term strategy. This will result in operating margin going from our historic 10% level to its projected 11.5% in fiscal 2008.

Our tax rate in fiscal 2008 is projected to return to its normalized 25% level and excludes any potential impact associated with the adoption of FIN 48, which we continue to evaluate.

In terms of diluted shares, we project our share account to increase approximately 2.5% from fiscal 2007, which is in line with our historic growth rates and dilutes earnings per share by approximately $0.04 from last year.

Finally, we anticipate earning per diluted share in fiscal 2008 to be approximately $1.72. This represents a 12% increase from adjusted EPS of $1.54 recorded in fiscal 2007.

As you know, in the second quarter of last year we made the decision to cease providing quarterly earnings guidance. As it is not consistent with the long-term view we apply to our business. However, certain unusual situations such as the shift in the retail calendar of which we are not on, does significantly impact our business and therefore we would like to provide you with a better understanding of that impact on the quarterly earnings.

As a result of the shift, we would expect approximately $8 million of sales to shift from the first quarter into the second half of fiscal 2008. Since the first quarter is our smallest, clearly this will have a material affect on our first quarter results. Therefore we would expect to record a small loss in the first quarter.

Capital expenditures for fiscal 2008 will approximate $30 million. This cost includes cost associated with the SAP implementation, the majority of which will be incurred this year and next year. Capital expenditures will also be made to support our retail operations including three new stores – one outlet and two boutiques, our brand positioning at retail and efficiency improvement in our worldwide operations.

We will also continue to focus on generating strong cash flow at least commensurate with net income.

With that I would now like to open up the call for your questions.

Question-and-Answer Session


Ladies and gentleman at this time we will be opening up the call for the question and answer session. Please press *1 on your touch-tone phone if you would like to ask a question. In order to allow time for everyone’s inquiries to be answered management asks that you please limit yourselves to one question and then return to the queue to ask any follow-up questions. If your question has already been answered you may remove yourself from the queue by pressing the pound key. Also, if you are using a speakerphone, please pick up the handset before pressing the button.

Your first question comes from Jody Kane of Fidelity and Company.

Jody Kane – Fidelity & Co.

Hi, thanks, I just want to get a better idea of the slower growth rate in ’08 than we’ve seen in previous years. Is there anything that you can put your finger on why we’re not looking at 18-20% growth?

Richard J. Cote

Well, I think I’ll take a crack at answering that. We believe that we’re very well positioned to continue to expand our operating profits as a percentage of sales and that’s what we’re focused on doing at the same time continuing to build a healthy and strong base for future expansion and we believe that the range that we’re in of approximately 14% is the correct range for the year.

Jody Kane – Fidelity & Co.

And then it sounds like the licensing brands are doing very well. Is there more expansion opportunities there or can we look for a bigger jump over the next several years in corporate brands?

Efraim Grinberg

Well I think that the expansion opportunity in the license brand is organic meaning that one of these brands we haven't even launched yet, Lacrosse. Two of the brands, Hugo Boss and Juicy Couture, we just launched this past year so we see accelerated growth opportunities over the next several years in those brands as well as we believe that the Concord brand, not this year but next year, will return to sales growth and we continue to experience very healthy sales growth in Ebel as well as a very solid improvement in the Movado and the SQ brand.

Jody Kane – Fidelity & Co.

And I've got just one more question. The advertising expense of '08, is that going to be in line with what it was this previous year or is it going to be increased?

Efraim Grinberg

Pretty much in line from the standpoint of percent of sales. From a dollar standpoint that pretty much grows each year almost in line with sales growth but obviously in support of the new businesses that we're launching but the percent of sales should remain reasonably consistent.

Jody Kane – Fidelity & Co.

And the 60th anniversary has caused an increase more than it usually does?

Efraim Grinberg

No, it just means we're reallocating our investment within the Movado brand toward the 60th anniversary in the second half of the year and it will also give us an opportunity to link both the boutique and watch advertising much much more closely and effectively.

Jody Kane – Fidelity & Co.

Alright great. Thank you very much.

Efraim Grinberg

Thank you.


Thank you and your next question comes from Elizabeth Montgomery of Cowen.

Elizabeth Montgomery – Cowen


Efraim Grinberg

Yes. Good morning.

Elizabeth Montgomery – Cowen

Hi. Good morning. Sorry, I wasn't sure if you could hear me. Congratulations on the big year. My question is about the boutique and I apologize if you mentioned it but do you think it's a function of maybe that your initial store performance has been too aggressive on the boutique or do you think it was location? I know that you mentioned it could also be the product. But do you think that it could also be a case where you just need to get a greater number of boutiques before you really hit that leverage point in terms of infrastructure cost?

Efraim Grinberg

Well I think from the stand point of the strategy we outlined which is getting to that critical mass of around 30 stores, with which we are very comfortable. I would say to you that from my sales stand point, it's taken a little bit longer and perhaps we were a little bit aggressive early on from the standpoint of some of the new stores particularly in new regions of the world where we've open some new stores. So really it's the sales level.

Obviously we're taking the opportunity of obviously focusing on product and focusing on sales to be able to help drive that but also taking the opportunity of saying we have two wonderfully performing stores where we had the opportunity to do that at virtually no cost and also focusing on inlining our expense structure a little bit.

So we're still committed as a vitally important strategic initiative for us. We're very comfortable with it that it will be a very profitable business. It will just take a few years longer than we had possibly anticipated.

Elizabeth Montgomery – Cowen

OK. And can you remind me again on what the mix of jewelries versus watches on the showcase has been over the past year?

Efraim Grinberg

It's approximately 40% watches and about 43% jewelry and then the balance is after sales service and gift items.

Elizabeth Montgomery – Cowen

OK. Great, thanks guys and good luck.

Efraim Grinberg

Thank you very much.


Thank you. Your next question comes from Jeff Blaeser of Morgan Joseph.

Jeff Blaeser – Morgan Joseph

Good morning. A couple quick questions. Can you talk a little bit about investment from the new brand and its impact on current margins in potentially fiscal year '08?

Efraim Grinberg

Well one of the things that actually continues to grow the licensing part of our business is that we have gotten synergies in that business so our gross margins continuously improve in those brands. That's one of the things you'll see flow in from our income statement. The investment is really more when you start up a brand and in the first year as you build the critical mass.

Jeff Blaeser – Morgan Joseph

And I guess the coast license, is there any change in the terms there? And the projected CapEx for fiscal year '08, is the year-over-year difference primarily the SAP system?

Efraim Grinberg

From the standpoint of the Coach contract, really no major changes at all in that, and I think we probably(inaudible) a couple weeks ago about that. From the standpoint of CapEx, our CapEx is predominantly growing from $20 million to $30 million because of the first year of that SAP investment.


Thank you. Your next question comes from Kristine Koerber of JMP Securities.

Kristine Koerber – JMP Securities

Yeah hi. A couple of questions first of all can you give us a little more detail on the timing of the SAP implementation? It sounds like a two year project. When will it be fully implemented and when are we going to see same of the savings flow through?

Efraim Grinberg

Basically that's a two to three year project. We will first focus on bringing in our wholesale business and our global back office operations and then the second part will be doing the front-end of retail so yes it is possibly a two or three year program.

And if you recall we talked about our strategy of growing from the historical 10% level of operating margin to the mid-teens over the next number of years. We said the first early part of that would be focusing and we see improvement in margin where as a lot of the part you'd see benefits coming out of the operating expense line and obviously the SAP and the business process re-engineering will be a vitally important part of helping us achieve those synergies in the latter part of that strategy.

Kristine Koerber – JMP Securities

OK and then looking at the Concord repositioning, it sounds like you've taken it up to scale. Can you talk about the price points of some of the new introductions?

Efraim Grinberg

Sure. We've basically identified that we believe that Concord belongs and has bigger opportunity to be a smaller, healthier successful brand in the $5-15,000 and even up to $20,000 arena and the image that it's had worldwide outside of the United States, and so we're repositioning it in that area. We're really focused on one new project that we'll introduce in Basel this year entitled C1 and that we have previewed with some of our major partners around the world and we have begun to get a very good reaction to this so we're taking the whole strategy that we believe there's an opportunity in the niche market place in that area and the Concord brand will continue to be profitable for the company in that area.

Kristine Koerber – JMP Securities

Is there still a major focus outside of the US though?

Efraim Grinberg

Absolutely. We view that Concord is a brand that really should ultimately be 30% North America based, 70% outside of North America.

Kristine Koerber – JMP Securities

Great and then lastly, as far as the boutique, you mentioned something about back-billing, some of the price points. What price points are you missing?

Efraim Grinberg

They're in two areas. Predominantly as we increase prices we vacated some opening price points in sterling silver and so we have back billed some and we will continue throughout the year and the other year is the entry price points for what we call diamond fashion which is 18-karat gold and diamond which used to be in the $1,000 to $2,000 range and today we're in the $1,500 to $3,000 range so we will be back selling in some of those areas.

One of the areas I also commented on that we will be very focused on but will have a greater impact in the second half of the year is our design focus, and we got a little unfocused in that area and we are now refocusing our efforts in really producing designs that are clearly identifiably Movado and we believe that there's a great opportunity especially with the return of the desire for modern design products and whether it's in the world of furniture, jewelry, or watches, and Movado is the brand in jewelry and watches to do that.

Kristine Koerber – JMP Securities

Alright. Thank you.


Thank your next question comes from the line of David Taylor of David P. Taylor and Company.

David Taylor – David P. Taylor

Thank you. What was the non-essential asset that you sold?

Efraim Grinberg

If you saw the note that we had in the reconciliation table it was a piece of artwork that we had owned and it's on the bottom in the notes.

David Taylor – David P. Taylor

The performance of the boutiques, is there going to be any change in the management of that division?

Efraim Grinberg

You know, we have actually streamlined the organization of that division. Both Rick and myself are intimately involved. I would not say it’s an albatross. I think it’s done a tremendous amount of continuing to build the strength of the Movado brand that is number one in its category in this country, and far exceeds the second brand in the category.

So, we believe that what it’s done image-wise is invaluable, and although we did say that the boutiques had a difficult year, the financial results still improved year over year over last year and we expect them to continue to improve. And just as reminder, I would like to remind everybody, that our overall retail business which includes our company stores and our boutiques is quite profitable for the company.

David Taylor – David P. Taylor

You said that it would take a few years more for this division to become profitable, so it doesn’t look like it’s going to be profitable even in fiscal ’09. Is that correct?

Efraim Grinberg

Well, we’re really only looking at fiscal ’08 and we do believe we’ll improve over fiscal ’07 with an improvement over fiscal ’06, and the boutiques are on a four wall basis, actually quite profitable. And really, it’s just the infrastructure and the marketing costs that does further reinforce the brand image for the Movado brand. So, they are not that far away from being profitable. We’re not giving an exact time frame on when they will turn profitable.

David Taylor – David P. Taylor

I don’t quite understand but going to a different subject, the shift in the seasonality of the business, why is it occurring. Could you enlighten me please?

Efraim Grinberg

Sure. Basically, from the standpoint, a 4-5-4 Calendar this year coming up, basically the quarter end for a retailer is approximately a week later than a calendar quarter end. And basically the retailers are extremely focused on their inventory and their productivity, so they take approaches basically saying that after a certain period of time, they won’t accept any deliveries.

So, from that standpoint, that is an unnatural shift in what they’re doing and obviously we’re customer focused, so we’ll obviously be satisfying their needs. And with that, that’s going to have a shift from the first, second, and third quarter at the end of year, it gets back to a normal level. So, it’s just, I think, a phenomenon that happens every seven years or so with the 4-5-4 versus a normal quarter end calendar.

Efraim Grinberg

Thank you.


Once again, at this time, I would like to remind everyone if you would like to ask a question, please press Star one on your touchtone phone. We have a follow-up question from Jeff Blaeser of Morgan Joseph.

Jeff Blaeser – Morgan Joseph

Uh, yeah, just one follow-up question. You mentioned that you were not forecasting for any discontinued sales. Do you expect any in fiscal year ’08 and is it typical margin impact around 100-200 basis points per $10-15 million, is that in the ballpark?

Efraim Grinberg

Well, first of all, yes we would expect some discontinuance of sales this year, because from a standpoint of, as I said of my accountings before, we initiated last year, and there’s an opportunity this year particularly from a standpoint of Ebel, an older product that we had acquired that we have not incorporated in there.

So there’s an opportunity of that, however, when you’re done, the margin improvement that’s taken place had nothing to do with the discontinued. It was entirely from our on-going business, and that’s why it’s important when we talked about our margin, excluding the discontinued product was more for the whole year that 62.5% level, which is a sizeable improvement versus the last couple of years, and that’s really a new level for us on gross margin.

Jeff Blaeser – Morgan Joseph

OK, great, thank you very much.

Efraim Grinberg

Thank you. If there no other questions, I would like to thank all of you for participating today, and thank you again for your continued support. We’re obviously very pleased with our results for the fourth quarter in our fiscal year. New initiatives are in place across all of our brands for Fiscal 2008, and we look forward to the exciting products we plan to introduce at the Basel Watch Fair, including the debut of our new Lacoste watch collection. Again, thank you very much for participating today.


Thank you, this concludes today’s conference call. Thank you for your participation.

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