Movado Group (NYSE:MOV) Q3 2019 Earnings Conference Call December 4, 2018 9:00 AM ET
Efraim Grinberg - Chairman, Chief Executive Officer
Sallie DeMarsilis - Chief Financial Officer
Rachel Schacter - ICR Investor Relations
Oliver Chen - Cowen & Co.
Good morning everyone and welcome to the Movado Group Fiscal Third Quarter 2019 Earnings conference call. As a reminder, today’s cal is being recorded and may be reproduced in whole or in part without permission from the company.
At this time, I would like to turn the conference over to Rachel Schacter of ICR. Please go ahead.
Thank you. Good morning everyone. With me on the call is Efraim Grinberg, Chairman and Chief Executive Officer, and Sallie DeMarsilis, Chief Financial Officer.
Before we get started, I would like to remind you of the company’s Safe Harbor language, which I’m sure you’re all familiar with. The statements contained in this conference call which are not historical facts may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in such statements due to a number of risks and uncertainties, all of which are described in the company’s filings with the SEC, which includes today’s press release. If any non-GAAP financial measure is used on this call, a presentation of the most directly comparable GAAP financial measure to this non-GAAP financial measure will be provided as supplemental financial information in our press release.
Now I’d like to turn the call over to Efraim Grinberg, Chairman and Chief Executive Officer of Movado Group.
Thank you, Rachel. I would like to welcome you to Movado Group’s third quarter conference call. I will first walk through the highlights of our third quarter results and share with you some of our product and marketing plans for the holiday season, as well as an update on our acquisition of MVMT, which we just completed on October 1. Sallie will then review our financial results in greater detail and we will open up the call to your questions.
We are pleased with our third quarter and year to date results and the progress we are making against our strategic initiatives, including our digital center of excellence. For the third quarter, sales grew by 9.6% to $208.9 million and adjusted operating income rose to $35.7 million, up $2.1 million from $33.6 million last year. Our adjusted earnings per share grew by 13.5% to $1.18 per share. Year to date, sales grew by 14.7% to $480.2 million and adjusted operating income grew by 20.4% to $59.2 million.
We continue to maintain a strong balance sheet with $142.7 million in cash despite the acquisition of MVMT, which was partially funded by a $50 million borrowing on our amended bank agreement at a current interest rate of 1%. We continue to make excellent progress on our strategic initiatives and are pleased with our positioning as we begin the important holiday selling season.
For the quarter, our domestic watch and accessory brands business grew by 11.5%. Excluding one month of MVMT sales, our domestic watch and accessories brands posted a 7.3% sales increase for the quarter with strong growth in Tommy Hilfiger and Coach. We are very pleased with these results which demonstrate that the strategies that we have been working on in our domestic businesses are delivering the desired results. On the international front, our business grew by 9.3% with very strong growth in our Tommy Hilfiger and Lacoste brands as well as the introduction of Olivia Burton into China.
It has been a little over two months since we closed on the acquisition of MVMT, a digitally native brand focused on a younger consumer. MVMT is a key strategic acquisition for the company intended to drive long-term growth and profitability for Movado Group. MVMT has demonstrated a proven ability to reach younger consumers through the ecommerce channel. Our plans call for leveraging our global distribution capabilities combined with our supply chain, systems and fulfillment capabilities to drive cost synergies in the years to come. Our teams are working on these integration initiatives with the goal of beginning to benefit from these synergies during the second quarter and back half of next year.
With over 5 million followers on Facebook and Instagram, it would be virtually impossible to recreate the level of awareness and engagement that MVMT has achieved within their target audience. We are excited about the prospects for MVMT’s future within Movado Group and the importance that MVMT can play within the fashion watch and accessory market around the world. MVMT has assembled a strong digitally native team in Los Angeles and we look forward to a high level of collaboration across the company.
Now I would like to review some of our products and marketing highlights for our brands for the holiday selling season. In our largest brand, Movado, we introduced our new Movado Face collection exclusively available on our website. With strong content and a digital marketing program, we are excited about its prospects for the holiday season. In our smart watch arena, our Movado Connect continues to perform very well and we recently introduced a leather strap style. We have also introduced a new Museum Classic on a mesh bracelet that has quickly become a bestseller for Movado.
For the holidays, we are launching a number of new models featuring Diamonds for Her. On the marketing front in addition to our digital and print advertising campaigns, we are introducing a new Movado television commercial that will be aired in New York and Los Angeles.
During the quarter, we opened our first Olivia Burton boutique in the historic Covent Garden. We held a special launch event entitled The Dream Garden with a great deal of fanfare. We are very pleased with the initial performance of the boutique and are enthusiastic about the holiday selling season. Olivia Burton is known for its feminine designs and its storytelling marketing messages.
For the holidays, we introduced unique collections that will be heavily featured in our digital campaigns, Celestial and Snow Globe. We launched our holiday campaign in New York last week with a dream bus interpretation of our London Dream Garden. Throughout the holiday season, there will be eight double-decker buses decked out in Olivia Burton messaging in New York City. Olivia Burton will also be supported by a strong digital campaign, Out of Home, and an XM Radio buy to further support the brand and build brand awareness.
We are excited about the prospects for our Coach watches for this holiday season. The Perry and Charles collections continue to perform very well for the brand and continue to drive sales increases at retail.
Tommy Hilfiger is performing extremely well, especially in the Americas and in Europe with double-digit growth in the third quarter. Tommy’s strong social media initiatives and strong brand ambassadors, such as Hailey Baldwin, have made the brand even more relevant. Our new Ari and Avery collections are truly resonating with consumers.
In Hugo Boss, we continue to drive strong results in Europe and are excited by the introduction of the new Trophy collections in both three-hand and chronograph executions. We also began the launch of our new Hugo brand during the third quarter in limited global distribution and are excited about its prospects for the holiday season.
In Lacoste, we have seen double-digit growth driven by the re-launch of our iconic Lacoste 1212 collection modeled after the original Polo design and a strong digital campaign in key European markets.
In our outlet stores, we saw sales growth driven by new doors, including our first international location in Ontario, Canada while maintaining strong margins. While traffic is decreased, this has been offset by increased conversion rates.
Overall, we are continuing to operate in an evolving retail landscape, facing currency headwinds and volatility in certain markets driven by events such as Brexit in the U.K., political issues in Latin America, and softening economies in the Middle East. As a company, we remain intently focused on executing against our plan with positive results. We have made strategic investments including the acquisitions of Olivia Burton and MVMT to help drive both long term top line and bottom line growth. On the digital front, we have made progress and have exciting plans for this holiday season and next year. We are driving innovation throughout our company in product design and marketing across our brands.
I would now like to turn the call over to Sallie to review our financial results in greater detail.
Thank you Efraim, and good morning everyone. For today’s call, I will begin with a review of our third quarter financial results and balance sheet and then discuss our outlook. Before I begin, I would like to point out the special items included in our results for fiscal 2019 and fiscal 2018. Our press release also describes these items and includes a table of GAAP and non-GAAP measures.
Movado Group acquired the MVMT brand on October 1, 2018. Included in the year-to-date consolidated results for fiscal 2019 was $11.9 million of pre-tax charges primarily connected with the integration and acquisition, $10.9 million of which was recorded in the third quarter. Approximately $140,000 of the $10.9 million impacted gross margin and the remainder impacted operating expenses. After tax, the third quarter charge equates to $8.1 million or $0.34 per diluted share.
Our GAAP results for the third quarter and year-to-date period of fiscal 2019 include a tax benefit of $7.6 million or $0.32 per diluted share related to a change in the estimated impact of the 2007 Tax Act as well as certain discrete foreign tax items.
Movado Group acquired Olivia Burton on July 3, 2017. Included in the results for the first nine months of fiscal 2019 was $2.2 million of non-cash amortization of the acquired intangible assets, of which approximately $700,000 was in the third quarter. After tax, the year-to-date charge related to the acquisition equates to $1.8 million or $0.08 per diluted share. Included in the year-to-date consolidated results for fiscal 2018 was $5.9 million of pre-tax charges primarily connected to the acquisition, of which $1.4 million was recorded in the third quarter. After tax, the charge related to the Olivia Burton acquisition equates to $5.5 million or $0.24 per diluted share for the year-to-date period last year. Our GAAP results for the first nine months of fiscal 2018 included a $13.4 million pre-tax charge which equates to $10.3 million after tax, or $0.44 per diluted share in connection with our cost savings initiatives.
The balance of my remarks will exclude the special items just discussed.
As of October 31, 2018, the company’s two operating segments, wholesale and retail, are now referred to as watch and accessories brands and company stores respectively. The company’s watch and accessory brand segment included our owned brands and licensed brands, and the company store segment includes the company’s retail outlet locations.
Now turning to our results, for the third quarter of fiscal 2019 sales were $208.9 million, an $18.3 million or 9.6% increase from the third quarter of fiscal 2018. The fiscal 2019 results include the addition of MVMT for one month of the quarter. Excluding the impact of MVMT, sales grew 7% over last year. The increase in overall sales was driven by strength across our owned and licensed brands as well as our company stores. To this end, sales were up 10% in the U.S. and in constant dollars increased 10.1% internationally.
Sales in our watch and accessories brand segment were $189.4 million as compared to sales of $172.3 million for the same period of last year. In constant dollars, these sales increased 10.4% driven by a sales increase in both our licensed brands and owned brand categories. By geography, the U.S. watch and accessories brand business increased 11.5% to $75 million compared to $67.3 million last year. This increase was driven by both our licensed and owned brands.
The international watch and accessories brand business increased 8.9% to $114.3 million compared to $105 million last year. In constant dollars, international sales increased 9.7% with our strongest sales growth being in Europe and Asia.
Sales from the company stores business increased approximately $1.2 million or 6.5% compared to last year. At the end of the quarter, we operated 44 outlet locations, including one Canadian store, as compared to 41 locations last year.
Gross profit was $113.5 million or 54.3% of sales compared to $104.7 million or 54.9% of sales in the third quarter of last year. The decrease in gross margin percent was primarily driven by unfavorable impact of channel and product mix and the unfavorable change in foreign currency exchange rates. This was partially offset by leverage on certain fixed costs.
Operating expenses were $77.8 million, increasing 9.4% from last year’s third quarter. This was predominantly driven by a $6.5 million increase in marketing investments. This was to appropriately support our business initiatives and brand awareness, including our newest brand, MVMT. Our higher sales partially offset by an increase in operating expenses drove an operating income increase of $2.1 million or $35.7 million compared to $33.6 million in the year-ago period.
Income tax expense of $7.8 million or 21.8% effective tax rate in the third quarter of fiscal 2019 compares to an income tax expense of $9 million or 27.1% effective tax rate recorded in the third quarter of the prior year.
Net income in the third quarter was $27.9 million or $1.18 per diluted share. This compares to net income of $24.3 million or $1.04 per diluted share in the year-ago period.
Looking at the nine period ended October 31, 2018, we saw positive performances across key metrics with increased sales, expansion in gross profit margin, and significant growth in EPS. Sales were $480.2 million, an increase of 14.7% from fiscal 2018. On a constant dollar basis, sales increased 13.1%. Gross profit was $258.9 million or 53.9% of sales as compared to $221.6 million or 52.9% of sales last year. The increase in gross margin percent for the year-to-date period was primarily driven by the favorable impact of channel and product mix, favorable change in foreign currency exchange rates, and leverage on certain fixed costs.
For the nine months ended October 31, 2018, operating income was $59.2 million compared to $49.2 million in fiscal 2018. Net income was $47.3 million or $2.00 per diluted share as compared to net income of $34.5 million or $1.48 per diluted share in the year ago period.
Now turning to our balance sheet, our cash at the end of the third quarter of fiscal 2019 was $142.7 million versus $155.5 million at the end of the same period of fiscal 2018. As you are aware, during the third quarter we acquired the MVMT brand using cash on hand. At quarter end, we had borrowed the equivalent of approximately $50 million on our revolver. During the third quarter, we have favorably amended and extended our global facility and are currently paying a 1% interest rate on these borrowed funds in Switzerland.
Accounts receivable were down $6.8 million as compared to the same period of last year. Inventory at the end of the quarter was $183.5 million, a $13.7 million or 8% increase from the prior year. This was predominantly due to the inventory acquired from MVMT.
Year to date, we repurchased approximately $3.9 million of stock under our $50 million share repurchase program. Capital expenditures for the nine-month period were $8.2 million. Including $2.4 million related to the amortization of acquired intangible assets of MVMT and Olivia Burton, depreciation and amortization expense was $9.9 million.
Before I discuss our outlook for the balance of this fiscal year, I will provide some further information on our acquisition of MVMT. To date, we incurred approximately $11.9 million of charges related to the integration and acquisition of our newest brand. This amount includes transaction costs and accounting adjustments associated with the purchase of MVMT as well as costs associated in terminating the contractual rights of third party MVMT distributors in certain international markets, where our preference is to leverage our international infrastructure and expertise. Excluding any charges to terminate additional international MVMT distributors, we expect to incur approximately $2 million pre-tax of additional charges for the remainder of this fiscal year related to the acquisition. Excluding these charges and purchase accounting adjustments, we continue to expect MVMT to be slightly accretive to profit for the four months that the brand will be consolidated into fiscal 2019.
Now onto our outlook, our outlook is based on the current retail environment and global economy and assumes currency rates consistent with recent levels. Our results may be materially affected by many factors such as changes in global economic conditions and customer spending, fluctuations in foreign currency exchange rates, and various other causes referenced in our 10-K and 10-Q filings.
For fiscal 2019, we are reiterating our previously provided outlook. We continue to anticipate that sales will be in a range of $660 million to $675 million and operating income will be approximately $75 million to $77 million. We expect net income in fiscal 2019 to be approximately $58 million to $59.7 million or $2.45 to $2.55 per diluted share. This reflects a 22% effective tax rate. Capital expenditures for fiscal 2019 are estimated to be approximately $10 million.
The outlook we have provided assumes no unusual items for fiscal 2019 and therefore excludes the charges in fiscal 2019 for the MVMT acquisition, the non-cash amortization of the acquisition accounting adjustments for Olivia Burton, and the tax benefits related to changes in estimates of the impact of the 2017 Tax Act, as well as certain discrete foreign tax items.
With that, I would now like to open the call up for questions.
Our first question, we’ll hear from Oliver Chen with Cowen & Company.
Hi, thank you. Good morning, nice quarter. Our question is about the U.S. wholesale segment. What are your thoughts on how that performed, and also, are we in a phase where this can be sustainably positive or do you expect volatility or different kinds of planning on the U.S. wholesale side?
Another question was just related to MVMT and Olivia Burton. How are you thinking about shared services versus responsibilities at each brand? Would love your thoughts on the evolution of that framework as you continue to make interesting M&A purchases. Thank you.
Sure, thank you, Oliver. On the first part of the question, we are seeing growth especially in our fashion watch category, our .licensed brands in the U.S., but off of a lower base, so we still believe that that is going to continue and we have a lot of exciting product and marketing, particularly in our Coach and Tommy Hilfiger brands, as well as in Lacoste and Hugo Boss, so I think that those represent a nice opportunity in the U.S. Movado continues to hold the largest market share within the $300 to $3,000 price category and we believe that there certainly are increased opportunities, especially on the digital front as it relates to Movado, and we’re seeing that.
With regards to the second question, we believe that the opportunity for us to be able to leverage our infrastructure, especially on the MVMT acquisition, is significant but will take a lot of work, so as I said in my comments, we would expect to start beginning to reap some of those benefits in the second half of next year. We still are completely running both Olivia Burton from London in its Shoreditch headquarters, which we’ve actually expanded since we’ve acquired the company, and MVMT will continue to be run in Los Angeles by its founders and its management team. We’ve been very, very impressed with the team that they have built over the last several years and are excited to have them on board, just like we were really excited to have the Olivia Burton team on board as well.
Thank you. On the U.S. wholesale side, how are you feeling about inventories relative to sales? The gross margin line in terms of the product mix, what’s happening with the Movado brand and how should we expect the gross margin to trend? Will that continue to be a headwind with product and channel mix? I’d love your thoughts on how we should model that.
I think the mix issue was probably marginal at best, so it’s still a very small percentage that we’re talking about in terms of gross margin. Our gross margin for the year is up, I believe 100 basis points, so we’re pleased with that. We also had some currency headwinds in the third quarter, which in the first half of the year we had currency benefit. On the Movado side, I think there are some channel issues, and we’ve talked about those in the past, as mall-based retailers are not performing at the same level that they had been; but we believe that the digital opportunities are significant and those actually are significantly accretive to gross margin.
Okay, and lastly, could you speak to us about the watch industry? As we look at our longer term models, how are you feeling about industry growth and what’s sustainable? You had a really nice organic like-for-like number this quarter. On a long term basis, what should be realistic for top line growth, and also, can you leverage SG&A? Would love any thoughts there, thank you.
We have made two significant investments for our future, those being Olivia Burton and MVMT, so we believe in the category and we believe that to engage with younger consumers is really important to the future, so through those two acquisitions we’re able to do that and able to benefit then into our other brands as well from the learnings. I think that on the expense side, we will be able to ultimately leverage expense infrastructure, but that, as I said earlier, will take some time as we are able to combine some logistics and supply chain and fulfillment capabilities, but that doesn’t happen overnight. MVMT does have a higher marketing investment than we do traditionally, but we believe that we’ll be able to leverage that as well down the road.
Thank you. Happy holidays.
Okay, thank you.
Thanks Oliver, you too.
At this time, there are no further questions. I would like to turn the call back over to management for any additional or closing remarks.
Okay, I’d like to thank you all for participating on our call today and wish everybody a happy holiday over the next few weeks. Thank you very much.
That will conclude today’s call. We thank you for your participation.