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Movado Group, Inc. (NYSE:MOV)

F3Q08 Earnings Call

December 6, 2007 10:00 am ET

Executives

Efraim Grinberg - President, Chief Executive Officer,Director

Eugene J. Karpovich - Chief Financial Officer, Senior VicePresident, Interim Principal Accounting Officer

Richard J. Cote - Chief Operating Officer, Executive VicePresident, Director

Analysts

Jody Kane - Sidoti & Company

Kristine Koerber - JMP Securities

Jeff Blaeser - Morgan Joseph

Elizabeth Montgomery - Cowen & Company

David Taylor - David P. Taylor & Company

Unidentified Participant

-- Chief Financial Officer.

Before we begin, I would like to note that this conferencecall contains forward-looking statements which are made pursuant to the SafeHarbor provisions of the Private Securities Litigation Reform Act of 1995.Factors which could cause actual results to be materially different from anyfuture results expressed or implied are discussed in our filings with theSecurities and Exchange Commission.

Such forward-looking statements include statements regardingMovado's performance for fiscal 2008 and beyond. We current expect to updateestimates. However, the failure to update this information should not be takenas Movado's acceptance of these estimates on a continuing basis. The MovadoGroup may also choose to discontinue presenting future estimates at any time.

During the course of today’s conference call, management maypresent certain non-GAAP figures. For a reconciliation of these figures, alongwith information required under SEC Regulation G, please view our earningspress release, which has been posted at our website at movadogroup.com.

Let me now outline the order of speakers and topics fortoday’s conference call: Efraim will begin with the highlights of our thirdquarter performance; Gene will then review the financial details; and Rick willprovide you with an update on our operating initiatives along with ourfinancial outlook. We would then be glad to answer any questions you mighthave.

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

Efraim Grinberg

Thank you, Susanne and good morning, everyone. Today I amvery pleased to announce strong third quarter and nine month results, both on aGAAP basis and adjusting for unusual items. These items have been reconciled ina table attached to our earnings press release, which Gene will detail later inthe call.

We continue to recognize the growing uncertainty surroundingthe outlook for the U.S. economy. However, our strong results for the quarterand year-to-date period reflect the continued consumer appeal to our diverseportfolio of brands. These results are what led to the increase in our earningsper share projections, which Rick will detail later in the call.

Our brands are well-positioned in the marketplace, with boldnew products, aspirational advertising campaigns, including Movado's milestonecelebration of 60 years of modern design, and fully integrated marketingprogram.

We have also made great strides in building ourinternational business, which grew 33% from last year and represented over 40%of wholesale revenue during the third quarter. These results reflect thegrowing prominence of Ebel and the global expansion of our licensed brandbusiness.

In the third quarter, our licensed brands delivered a 33%sales increase over last year. Gains were achieved in Coach and Tommy Hilfiger,as well as our newest businesses, Hugo Boss, Juicy Couture, and our recentlylaunched Lacoste watch brand. These results demonstrate the success of ourpowerful partnerships as we synergize our product development, point of salepresence, and image building advertising campaigns with some of the mostpowerful brands in the world.

Our licensing partners share a long-term vision for theirrespective brands and have enabled our company to significantly expand ourglobal footprint.

Turning to our Swiss brand, demand in the Swiss luxury watchmarket has grown tremendously over the past few years, resulting inindustry-wide capacity constraints on the manufacturers of mechanical movementand other key components. This has led to the lengthening of lead times andsome product delivery delays and some shortages in our Swiss brand.

Our luxury watch categories, Concord and Ebel, posted a midsingle-digit sales decline, reflecting the strong momentum of Ebel more thanoffset by the repositioning of Concord in advance of our fourth quarterre-launch. Ebel’s third quarter was marked by the very successful worldwideintroduction of Hexagon, a modern reinterpretation of the Ebel classic. Newextensions of the Brasilia in steel and gold and the 1911 BTR featuringhigh-tech materials such as carbon fiber dials and rubber and titanium werealso launched in the quarter. These products, complemented by a strong productfocus men’s creative and a beautiful women’s advertising campaign featuringGisele, are driving Ebel’s strength in each of its key markets, and we lookforward to continuing this trend throughout the holiday season.

This year, we have focused on repositioning Concord into ahigh-end luxury watch brand, resolutely upscale with a modern, edgy point ofview. Concord now has a strong foundation with a renewed brand strategy, nicheluxury positioning and exclusive distribution. The buzz generated by our PR andcommunications programs is priming the market for the worldwide introduction ofthe new iconic C1 collection beginning in the fourth quarter. You can viewimages of this groundbreaking collection now on Concord’s redesigned website,www.concord.ch.

Excluding discontinued product sales, our accessible luxurysegment experienced a low single digit increase. During the third quarter, weintroduced our new Movado Sephora, with black PVD finish and Visio with carbonfiber dial and bracelet.

We also launched the new SE and Titanium, and severallimited editions, including the Fiero Automatic with Wynton Marsalis’ signatureetched on the glass and a 45-millimeter skeleton museum dial to commemorate 60years of modern design, retailing at $20,000.

By now, I hope you have all seen Movado's new beautifuladvertising campaign, 60 years of modern design, which was first launched onthe back cover of the all-important September issue of Vogue Magazine. We arepaying tribute to the iconic Movado Museum dial this holiday season. Dynamicproduct and marketing initiatives are showcasing the milestone achievement aswe leverage it through special products, high-impact media and variousmarketing vehicles, integrating all elements of the Movado brand from wholesaleto retail, from watches to jewelry.

Also for the first time, we have embarked on Internetadvertising for the Movado brand, partnering with thenewyorktimes.com andGoogle to build excitement during the holiday shopping season.

In China, Movado is also celebrating 60 years of moderndesign, as the museum dial has resonated strongly with the Chinese consumer.While China is still a small market for Movado, we continue to make progress assell-through grows and we look forward to introducing new products specificallytailored to the Chinese consumer beginning next year.

Series 800 is trending strong as we enter this holidayseason. During the third quarter, we introduced several new products, includinga sport luxury watch with fixed bezel for men and a beautiful diamond sportwatch collection for women.

Our art of performance advertising campaign, featuring DerekJeter and Tom Brady, brings great awareness and credibility to Series 800.We’ve also leveraged our relationship to create a limited edition series of TomBrady Series 800 models which launched at retail during the third quarter.

Our Movado boutiques recorded an 8.8% comparable store salesincrease in the third quarter. During our last conference call, we announcedthat we have engaged an outside consultant to assess the overall boutiquebusiness and identify opportunities for improvement.

We are in the process of completing our study and havealready been able to incorporate some of our findings into initial actions inadvance of the holiday. We’ve re-merchandised and re-assorted many of ourboutiques to better highlight key items, new arrivals, and exclusive products.These efforts have allowed our stores to better showcase our products,including three new jewelry collections introduced in the third quarter, Trio,Infinity, and [Miri], as well as the boutique exclusive, Museum Color Dialcollection.

We have also begun to increase our focus on watches in ourboutiques to leverage Movado's strengths and to reinforce its image as a luxurywatch brand. Movado boutiques represent a core pillar towards realizing theoverall Movado brand vision and we are diligently working to build ourboutiques into a true engaging expression of the brand. We will continue tocommunicate our progress with you as we move forward.

ESQ continues to benefit from very positive retailerresponse to new product collections and bold product focus integrated marketingcampaign. Productivity at retail has been strengthening, which furthersolidifies our positioning in the entry level Swiss watch category.

During the third quarter, we introduced strong leadershipproduct, including Fusion, featuring a combination of advanced materials, whichis being sold in select channels of distribution on a limited basis andsupported by a dedicated advertising campaign. We introduced a men’s watch witha complicated movement, the Quest Retrograde. We also introduced women’sdiamond fashion collections, such as Bali and the new Kingston collection,which was featured in our new execution of our ESQ and You advertisingcampaign.

We are pleased with our third quarter and year-to-dateresults. We have a well-balanced portfolio of brands and a growinginternational presence. There continues to be a growing sense of uncertainty asto the outlook for the U.S. economy. Nevertheless, we are well-positioned atretail with fresh new products, a strong branded point of sale presence, andimage-building advertising campaigns to strongly support each of our brands.

I would now like to turn the call over to Gene for a reviewof our financial results.

Eugene J. Karpovich

Thank you, Efraim and good morning, everyone. We recordedstrong financial results in the third quarter ended October 31, 2007, fueled bystrong international sales and solid gross margins.

Sales in the third quarter were $180.2 million, or 8.3%above prior year. Sales in both periods included liquidation of excessinventory of $11.3 million in fiscal ’08 and $12.1 million in fiscal ’07.Excluding the liquidation, sales for the third quarter were 9.6% above prioryear.

All the sales results I will discuss will exclude the impactof liquidation year-on-year.

Sales in the wholesale segment increased 9.5% to $147million. The sales increase of $12.7 million was primarily the result of marketexpansion in our licensed brands. Our licensed brands were above prior year by33.4%.

All brands were above last year. The growth was primarilythe result of the launch of the Lacoste brand as well as international marketexpansion of our Hugo Boss and Tommy Hilfiger brands.

The U.S. wholesale segment was below last year by $2.1million or 2.3%. This was primarily the result of reduced sales in our luxurycategory. Sales in the luxury category were below prior year by $2.2 million.The lower sales that were recorded in the Concord brand with the new productscheduled for delivery in the fourth quarter.

The international wholesale segment was up 33% from $44.8million to $59.6 million. The increase of $14.8 million was primarily due togrowth in the licensed brand category as mentioned previously.

The retail business posted a 10.2% increase over last year.Movado boutique sales increased by 14.7% [inaudible]. This was the result of an8.8% comparable store sales increase along with sales increases innon-comparable stores year over year.

The company outlet stores were above prior year by 7.4%.This was primarily the result of non-comparable store sales increases.Comparable store sales were below prior year by 0.8%. As of October 31, 2007,the company operated 31 Movado boutiques and 31 outlet stores.

Gross profit for the quarter was $109.9 million, or abovelast year by $12 million. The increase in gross profit is primarily due to thesales increase, as well as an increase in the adjusted gross margin. Grossmargin was 61% versus 58.9% last year. Excluding the previously mentionedliquidation, gross margin for the quarter was 64.7% as compared to an adjustedmargin last year of 63.5%.

The increase of 120 basis points was driven by marginimprovements across most brands, due in part to higher margins on new modelintroductions, as well as the favorable impact of price increases.

In addition, gross margin was favorably impacted by foreignexchange, both in terms of translating our European financial results as wellas from the favorable impact of our European license brand businesses.

Operating expenses were $81.4 million or 4.2% above lastyear. The increase of $3.3 million is attributed to higher payroll and relatedcosts of $2.4 million reflecting salary and benefit cost increases, increasedheadcount to support the growth of new and existing brands, and higher equitycompensation costs.

In addition, increased spending of $2.1 million was made forconsulting and outside service fees and higher spending of $1.1 million tosupport the retail expansion.

The increase also reflects the non-recurrence of the prioryear out-of-period foreign currency adjustment of $2.2 million. These increaseswere somewhat offset by a reduction of accounts receivable expense of $6.3million recorded last year aged customer receivables.

Net interest income was $144,000 compared to our prior yearexpense of $234,000. This was the result of lower debt as well as greaterinterest earned on our cash. Our average debt for the quarter was $67.6 millioncompared to $96.3 million prior year. Our average borrowing rate was 4.8%versus 3.9% prior year.

We recorded a tax expense of $1.9 million for the threemonths ended October 31, 2007 as compared to a tax benefit of $2 million forthe same period last year. In both years, as a result of the revised incomeprojection, the company recognized that it would be able to utilize a greaterportion of its Swiss net operating loss carry forward. The taxes recordedduring the three months ended October 31, 2007 reflect a discrete benefit of$2.9 million as well as an adjustment to reflect the projected 20.5% annualeffective tax rate.

For the three months ended October 31, 2006, we recorded adiscrete benefit of $3 million as well as an adjustment to reflect theprojected 11% annual effective tax rate.

Net income was $26.5 million versus $21.9 million last year.Earnings per diluted share were $0.97 versus $0.82 last year.

Looking now at the year-to-date results, sales for the ninemonth period were $421 million or 7.8% above prior year. Sales for both periodsinclude liquidation of our excess inventory of $22.3 million in fiscal ’08 and$12.1 million in fiscal ’07. Excluding the liquidation, sales were 5.3% abovelast year.

Once again, I will discuss the sales results excluding theliquidation. Sales in the wholesale segment increased 4.4% to $335.4 million.The sales increase of $14.1 million was the result of growth in the licensedbrand category, particularly internationally. Our licensed brands were aboveprior year by 35.1%, reflecting the launch of the Lacoste brand and theinternational market expansion in the Hugo Boss and Tommy Hilfiger brands.

The U.S. wholesale segment was below prior year by $17.1million or 8.5%. The decrease was the result of lower sales in the accessibleluxury category primarily due to reduced distribution in chain stores.Additionally, lower sales were recorded in the luxury category due to therepositioning of the Concord brand.

The international wholesale segment was up 25.8% from $120.7million to $151.9 million. This increase was primarily in the licensed brandcategory as I mentioned previously.

The retail business posted a 10.8% increase over last year.The increase was the result of an overall 8.4% increase in Movado boutiquesales. Comparable store sales increased by 1.1%, in addition to non-comparablestore sales increases year over year.

The company outlet stores were above prior year by 12.8%.This was the result of a 3.2% comparable store sales increase, as well asincreases in non-comparable stores.

Gross profit for the nine-month period was $254.9 million,or above last year by $18.9 million. The increase in gross profit is primarilydue to the sales increase, in addition to an increase in the adjusted grossmargin.

[Gross] margin was 60.5% versus 60.4% last year. Excludingthe previously mentioned liquidation, gross margin for the nine months was63.9% as compared to 62.4% prior year. The increase of 150 basis points wasdriven by the same factors as indicated for the quarter.

Operating expenses were $207.3 million, or 4.3% above lastyear. The principal reasons for the increase in expense are primarily the sameas outlined for the quarter. Net interest income was $702,000 compared to ourprior year expense of $589,000.

Our average debt for the nine-month period was $74.4 millionversus $100.6 million in the prior year period. Our average borrowing rate was4.5% versus 3.7% prior year and the average interest rate earned on our cashwas 5.2% versus 4.9% prior year.

The company recorded a tax expense of $6.7 million for thenine months ended October 31, 2007 as compared to a tax expense of $1 millionfor the nine months ended October 31, 2006. The changes in our tax rate forboth periods is the result of the same reasons that were discussed for thequarter.

Net income was $41.2 million versus $36.1 million last yearand earnings per diluted share was $1.51 versus $1.35 last year.

Now taking a look at our balance sheet, our cash as ofOctober 31, 2007 is $111.1 million versus $79.9 million last year. The highercash is the result of improvements in our cash flow from operations. For thenine months ended October 31, 2007, cash was provided by operating activitiesof $19.7 million as compared to cash used of $1.3 million for the nine monthslast year.

Accounts receivable of $151 million were below prior year by$8 million. In constant dollars, our accounts receivable were below prior yearby $11.6 million. This decrease is attributed to stronger cash collections aswell as the mix of our business with stronger growth in the licensed brands andretail businesses.

Inventories of $210.5 million increased by $2.8 million fromlast year. In constant dollars, inventory decreased by $5.6 million. This wasprimarily due to the liquidation sales of excess product, somewhat offset byhigher core inventory from our new brands.

Total debt consisting of both short and long term debt was$60.9 million versus $87.4 million last year. Capital expenditures were $18.5million and depreciation expense was $12.4 million. We expect our capitalexpenditures for the year to be approximately $29 million and depreciationexpense for the full year to be approximately $18 million.

The higher capital expenditures this year primarily relateto the implementation of SAP, the build-out and renovation of our retailstores, and the construction of booths used at the Basel Trade Fair for our newbrands.

Overall, we are very pleased with our financial performancein all respects, delivering a solid P&L performance and maintaining a soundbalance sheet.

Now let me turn the call over to Rick.

Richard J. Cote

Thank you, Gene. Good morning, everyone. Year-to-dateresults again demonstrate the benefits of our commitment to strong operatingdisciplines, which translated into expanded adjusted gross margins andoperating profit growth.

Here in the quarter, we continued our program of convertingaged discontinued product into cash, thereby improving our inventory mix anddriving cash flow. Going forward, we remain focused on growing our operatingmargin through a combination of gross margin improvement and the leveraging ofour existing infrastructure.

Our operating strategies remain consistent. First, maximizegrowth opportunities within our current brand portfolio. The primary driver oftop line growth for this year will come from our newest brands, Hugo Boss, JuicyCouture, Lacoste. All three of these businesses are in their infancy and havesignificant global growth potential. As Gene mentioned, the total licensedbrand category has posted a 35% sales increase year-to-date.

Second, the multi-year rollout of a worldwide enterpriseresource planning system. In the past few months, we have taken important stepstoward transforming our operations to be more efficient and customer focused.

And finally, we are committed to improving our financialreturns. By focusing on improving gross margins, we anticipate operating marginto expand to the mid-teens over the next few years. This year, our operatingmargin goal is to reach 11.5%. This projection excludes sales of discontinuedproduct.

We also continued to employ a disciplined approach toinventory management. Throughout the year, we maximize opportunities to convertdiscontinued product into cash, primarily in our Ebel and Concord brands.Looking ahead, we will continue to improve our inventory position and we expectto conclude the discontinued product sales by the end of this fiscal year.

As a reminder, we exclude these discontinued sales in ourfinancial guidance as we view them to be above and beyond our normal course ofbusiness.

Now I would like to turn to our financial outlook. Clearly therehas been a growing sense of uncertainty as to the outlook of the U.S. economyin the retail marketplace. Results for our fiscal year ending January 31, 2008will depend on the strength of the holiday season and retailer replenishment inJanuary.

Assuming that the U.S. economic environment does notdeteriorate and based upon our positive year-to-date results, we now projectfull-year adjusted diluted earnings per share to range between $1.74 and $1.78,based on an estimated 25% tax rate. The 25% tax rate represents the company’sassumed, normalized tax rate and allows for year-over-year financialcomparisons. This EPS projection represents a 13% to 16% increase from fiscal2007, adjusted diluted earnings per share of $1.54.

Fiscal 2008 and fiscal 2007 adjusted diluted earnings pershare [inaudible] the tax benefit resulting from the further utilization of theNOL acquired with Ebel in fiscal 2005. In fiscal 2007, adjusted dilutedearnings per share also excludes previously disclosed one-time items related toaccounts receivable and foreign currency.

On a GAAP basis, we project fiscal 2008 diluted earnings pershare to range between $1.95 and $2, with a 15.9% tax rate versus GAAP dilutedearnings per share of $1.87 with a 5.4% tax rate recorded in fiscal 2007. Infiscal 2008, net sales are projected to be approximately $560 million.

Also, you may have seen in a separate press release weissued this morning, we announced a share repurchase program. This programauthorizes us to repurchase up to 1 million shares of our common stock and willallow us to offset dilution caused by the shares of common stock issued uponthe exercise of stock options and in connection with other equity-basedcompensation plans.

With that, I would now like to open up the call for yourquestions.

Question-and-AnswerSession

Operator

(Operator Instructions) Your first question comes from Jeff Blaeserwith Morgan Joseph. Jeff, your line is live. You may ask your question. Thankyou. Your next question is coming from Jody Kane with Sidoti & Company.

Jody Kane - Sidoti& Company

Thanks. Just the first question about the SG&A. It’sbeen very well-contained over the last three quarters. Is that something weshould look for going forward?

Richard J. Cote

I think from the standpoint of our SG&A, clearly ourbiggest level of spend in support of our brand businesses is in the fourthquarter for the holiday season, so I think from that standpoint, you’llprobably see it going up a little bit on that and obviously also from a standpointof last year, we had a $6 million charge that took place in the third quarter,so that charge is obviously not being repeated in this year. So that makes thenumbers look a little bit better for the year-to-date.

Jody Kane - Sidoti& Company

Okay, I mean the -- in ’05 and ’06, it was growing --SG&A was growing about 11% to 13%, 14%. This year it’s down to 4% growth.How should we look at that going forward?

Eugene J. Karpovich

Certainly we don’t expect our operating expenses to grow atthe same rate as our sales growth. However, we expect expenses in the fourthquarter to be a bit higher than we’ve experienced in the first three.

Richard J. Cote

And as we go forward, one of the things we talked about isour five-year plan focuses on operating profit growth coming in the early yearsfrom gross margin improvement, which we’ve obviously been seeing and then thelatter part of the five-year plan coming from further SG&A leveraging,which will primarily come post the implementation and stabilization of SAP, ournew enterprise wide reporting system.

Jody Kane - Sidoti& Company

All right. One more question, if you don’t mind, and thenI’ll jump back in the queue. Expansion of the -- this sort of global brandexpansion, where would you say you are in that cycle? And how many newcountries can you add? How many new brands can you move into new countries? Ifyou can just talk a little bit about that, please.

Efraim Grinberg

Really I think that the expansion right now has come fromthe strength of our licensed brands internationally and that’s been verystrong, as well as Ebel internationally and Ebel has been performing very wellin Europe as well as in the Middle East.

I don’t think we’re really focused on expanding marketsright now rather than increasing penetration in the markets that we are in butobviously we introduced Lacoste, which was brand new this year, and Hugo Bossis only in its second year, as well as Juicy is really in its first full year.

So there are a number of cylinders kicking in that havehelped to drive the international growth, as well as the increased penetrationof the Ebel brand in international markets.

Jody Kane - Sidoti& Company

So the countries you are, there’s still further penetrationopportunities in those countries?

Efraim Grinberg

We believe so, yes.

Jody Kane - Sidoti& Company

All right, great. I’ll jump back in the queue. Thanks.

Operator

Thank you. Your next question comes from Kristine Koerberwith JMP Securities.

Kristine Koerber -JMP Securities

Congratulations on a good quarter. As far as your commentaryon the watch component shortage, can you give us some idea of what the leadtimes are now, the inventory levels of Ebel and Concord and when do you expectthis issue to be resolved? Thank you.

Efraim Grinberg

Well, I don’t -- right now, it’s not really -- there is anexpansion in lead times but it’s an ongoing process and it’s really delaysalso, because as the mechanical movement phenomena grows, there is also --these are all handmade movements and handmade -- and hand assembled movements,so there are further delays and demand for those type of products.

That has not significantly had an impact on inventory. Ithas forced some delays in some of our deliveries of our Swiss brands and Ithink that there is the way that it will be solved is two-fold. There is theexpansion of some capacity being added but not a lot and but I think economictimes will dictate really whether the cycle gets shorter or longer.

Kristine Koerber -JMP Securities

What type of delays are you talking about? How much are thedelays time-wise?

Efraim Grinberg

Well, I think we would -- we missed some deliveries probablyin Ebel and some even in Movado in our more expensive watches, so -- butobviously the numbers were still fine with those delays. But you’re talkingshifts from one quarter into the next and probably that goes, we will continue tohappen for the foreseeable future.

Kristine Koerber -JMP Securities

Thank you.

Operator

Thank you. Your next question comes from Jeff Blaeser withMorgan Joseph.

Jeff Blaeser - MorganJoseph

Thank you. Sorry, I must have had a phone problem there.Just on the sales side, your guidance for $560 million, that excludesliquidation -- is that accurate?

Richard J. Cote

Correct.

Jeff Blaeser - MorganJoseph

So that would imply about $160 million in the fourthquarter?

Richard J. Cote

Correct.

Jeff Blaeser - MorganJoseph

And any seasonal factors or any reason that you would thinkthat gross margins shouldn’t be able to sustain this level?

Efraim Grinberg

I think as we said and has Gene said in his comments beforethat obviously we’ve had the benefit of our European business and the strengthof the Euro versus the U.S. dollar that certainly do give us a benefit in thethird quarter, so we would think from a standpoint of an ongoing basis, wewouldn’t plan on the currencies remaining at the levels that they were in thethird quarter and the dollar probably getting a little bit stronger. So thatwill have some impact but our margins are moving up and they are stronger, sowe are pleased that they are in that 63.5% range and perhaps slightly above.

Jeff Blaeser - MorganJoseph

Okay, great, and then one final one on the boutiquebusiness. Comps were obviously very strong. Would you say that was driven bysome of the signature lines or some of the new entry, lower-priced additionsthat you’ve been working on?

Efraim Grinberg

Well, it’s really the introduction of some new watches inthe third quarter, as well as three new jewelry families that we introduced inthe third quarter. I have to highlight also that the third quarter is a smallquarter at retail, so obviously the most important quarter is stillpredominantly ahead of us and the most important selling season for all of ourretailers is, for our own retail and our retailers is ahead of us.

Jeff Blaeser - MorganJoseph

Great. Thank you very much.

Operator

Thank you. Your next question is a follow-up from ElizabethMontgomery.

Elizabeth Montgomery- Cowen & Company

Congratulations on the great quarter. I have a questionabout the licensed brands in the U.S. I wondered if you could just go throughthe newer ones in terms of distribution, what you have now, and what your plansare for expanding distribution over the next year?

Efraim Grinberg

Obviously if you look at our licensed brands, and I’ll startin order of how long we’ve been working with the brands, Coach has a verystrong penetration in the U.S. between high-end department stores, as well astheir own stores. And we expand really distribution now predominantly as theyexpand stores and are really focused on improving productivity with our retailpartners and have been very successful with that over the last several years.

Tommy Hilfiger in the U.S., we believe there’s going to bean opportunity in the future and we are a strong partner with specificallyMacy’s and I’m commenting on that just because they have publicly announcedthat they have entered into an agreement to work very closely with the Macy’s brandover the next number of years and on an exclusive partnership and I think thatwill have a positive impact on the Tommy Hilfiger brand.

And then Juicy, we’re in really most of the departmentstores, as well as Juicy’s retail operations that they currently operate in. Andthe nice thing about Juicy is that we did launch it internationally thisquarter and have gotten a very good response in the third quarter to Juicyinternationally.

And in the case of Lacoste -- of Hugo Boss and Lacoste, theyare basically brand new and do have distribution opportunities as we moveforward. Both have significant department store penetration and specialty storepenetration, as well as their own retail venues, and so if you enter most HugoBoss stores or Lacoste stores, you will find their watches in those stores.

Elizabeth Montgomery- Cowen & Company

Okay. Thanks.

Operator

Thank you. Your next question is coming from David Taylorwith David P. Taylor & Company.

David Taylor - DavidP. Taylor & Company

Thank you. I’m getting over a cold so bear with me. I knowyou track the sales of your products that your retailers are making. Do youhave any sense of how they did in November?

Efraim Grinberg

We don’t really comment in inter-quarter sales and holidaysales, the big portion of them are yet to come so that is really --

David Taylor - DavidP. Taylor & Company

Well then, how did they do in the third quarter?

Efraim Grinberg

Our sell-through continues to be at levels that we’repleased with.

David Taylor - DavidP. Taylor & Company

Okay. A related question [inaudible] of high priced brands,there tends to be a heavier inventory at retail than on the mid-priced andlower-priced lines. How long a pipeline do your customers typically carry forEbel? I’ll leave out Concord because it’s being repositioned.

Efraim Grinberg

Well, I think one of the things that our sales teams acrosseach of our brands work with is with each of our retail partners to managetheir inventories correctly and at appropriate levels for their brand and theirperformance. Sell-through in Ebel continues to grow globally, including theUnited States and -- but I think you are correct in the statement that you madethat lower priced merchandise turns at a much faster rate than higher pricedmerchandise, but the expectations are exactly that.

David Taylor - DavidP. Taylor & Company

Does Ebel typically have a year’s worth of inventory in thefield? Is that normal?

Efraim Grinberg

I would think that that’s a fair statement. I mean, I’m notgoing to comment on specific brands but that’s a fair point of view.

David Taylor - DavidP. Taylor & Company

Very good. Thank you.

Operator

Thank you. (Operator Instructions) Your next question is afollow-up from Mr. Jody Kane with Sidoti & Company.

Jody Kane - Sidoti& Company

Thanks. When do you expect the liquidation sales to end forConcord?

Richard J. Cote

Basically, as I said in my comments, this will be the lastquarter so it will end with this fiscal year and basically it was a two-year --not even quite a two-year program. We started last year. We will have itcompleted over the next couple of months.

Eugene J. Karpovich

And this quarter being the fourth quarter, the last quarter.

Jody Kane - Sidoti& Company

And at that point, do you expect the gross margin to levelout at about 63.5%?

Richard J. Cote

Well, what we said is that’s kind of our level that we’venow achieved and obviously currency plays an impact on that on an ongoingbasis, but where we are now is we feel that that is a good level for us as acompany but again, it can have swings depending on what happens with currency.

Jody Kane - Sidoti& Company

And just as far as the tax rate, can you talk a little bit,you know, a longer term tax rate, when and where should it get back up to?

Richard J. Cote

Again, as we’ve talked about, even though we haven’t beenthere for a couple of years because of continued utilization of the Swiss NOL,we from a projection standpoint basically use a 25% tax rate. And again, I’duse that from a standpoint of where we assume to be on an ongoing basis in thefuture but also for comparison basis, taking out the NOL impact so we can seeperformance excluding that year over year, so 25% is the level I would suggestusing.

Jody Kane - Sidoti& Company

All right, great. Thanks very much.

Operator

Thank you. There appear to be no further questions. I’llturn the floor back to management for any closing remarks.

Efraim Grinberg

Thank you very much for participating today. I would like tothank all of you for being here and I would also like to wish all of you ahappy and a healthy holiday season and thanks again for your participation.

Operator

This concludes today’s conference call. Thank you for yourparticipation.

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