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

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 |  About: Movado Group, Inc. (MOV)
by: SA Transcripts

Operator

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.

Operator

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

Elizabeth Montgomery – Cowen

Hello?

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.

Operator

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.

Operator

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.

Operator

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.

Operator

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.

Operator

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

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