Movado Group, Inc.'s (MOV) Q2 2022 Results - Earnings Call
Movado Group, Inc. (NYSE:MOV) Q2 2022 Earnings Conference Call August 26, 2021 9:00 AM ET
Company Participants
Rachel Schacter - ICR, IR
Efraim Grinberg - Chairman and CEO
Sallie DeMarsilis - Executive Vice President, Chief Operating Officer and CFO
Conference Call Participants
Oliver Chen - Cowen
Operator
Good day, everyone. And welcome to the Movado Group, Inc. Second Quarter 2022 Earnings Conference Call. As a reminder, today’s call is being recorded and may not 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.
Rachel Schacter
Thank you. Good morning, everyone. With me on the call is Efraim Grinberg, Chairman and Chief Executive Officer; and Sallie DeMarsilis, Executive Vice President, Chief Operating Officer and Chief Financial Officer.
Before we get started, I would like to remind you the company’s Safe Harbor language, which I am sure you are 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.
Efraim Grinberg
Thank you, Rachel. Good morning, everyone. And welcome to Movado Group’s second quarter conference call. With me today is Sallie DeMarsilis, our Chief Operating Officer and Chief Financial Officer.
After I have had a chance to share with you the highlights of our second quarter performance, Sallie will review the financial highlights in greater detail. We would then be glad to answer any questions that you might have.
We are very pleased with our second quarter results and the momentum that we have been building over the past several quarters. Our teams have done an excellent job of executing and delivering on our plans. The second quarter represented a record in terms of both revenue and operating profit for the period.
Our sales grew by 96.4% to $173.9 million or 10.2% from pre-pandemic level - from the pre-pandemic levels of fiscal 2020. Our adjusted operating profit grew to $25.5 million versus a small loss in fiscal 2021.
Our adjusted operating margin was 14.6%, a record for the second quarter. We also continued to build on our already strong balance sheet with cash of almost $200 million and no debt, and with inventory growing just 5.7%, despite the near doubling of net sales.
Over the last 18 months our teams have made tremendous progress in driving the opportunities that we -- that we had ahead of us in a quickly evolving retail and digital marketplace. We prioritize our investments in driving performance and continuing to support our brands as the pandemic unfolded.
Over that time we delivered improving results and our last two quarters have generated record operating profits as we continue to drive efficiency in our marketing efforts, while also investing in innovation and brand building.
We have seen our e-commerce penetration continue to grow as a company and we have improved gross margins by 540 basis points in the second quarter year-over-year laying a solid foundation for continued improvement.
With 28.5% growth versus the second quarter two years ago, our U.S. business continued to gain momentum led by the very strong performance of our Movado brand, both on digital platforms and improving brick-and-mortar stores, and our Movado company stores.
We are also seeing a strong response in the United States to innovation in our Coach brand, as well as HUGO BOSS and Lacoste. Internationally despite continued COVID-related closures we still had a strong quarter led by Europe, Mexico and China versus last year and the same quarter two years ago. That performance was led by our Tommy Hilfiger brand in Europe and Mexico and the continued growth of Coach in China.
In our Movado brand, we drove outstanding results as we continue to strategically elevate the brand image. Our Movado.com business for the quarter grew by 71% over last year, including continued growth in our jewelry category. Movado.com is also selling higher price points driving up our average selling price. We continue to focus on building a direct relationship with our Movado consumer base and becoming closer to the ultimate customer.
The Movado wholesale business was also very strong for the quarter, with continued growth in our department store channel, driven by the return of consumers to brick-and-mortar shopping. We are also seeing improved performance from Movado watches in our jewelry store distribution.
On the product side, we continue to develop Movado SE and we recently introduced our SE Automatic, which starts at $1,795. In our BOLD family we see continued strength in our evolution collection and generated a very strong initial response to our new BOLD Verso both for him and for her.
On the marketing front, we experienced strong response through our digital marketing programs, complemented by television advertising support to support Mother’s Day, Father’s Day and the graduation gift giving season. We will continue to support our Movado marketing efforts with increased investments during the third and fourth quarter.
In our licensed brands, we drove growth in Tommy Hilfiger, both against last year and pre-pandemic levels driven by product innovation in both jewelry and watches. Iconic watches like Parker for him and Sporty Boyfriend watches for her drove performance. For the third quarter, we will be introducing the new bolder looks for him in the Harley and Maverick families, and crystal embellishments for her in our Kennedy collection.
On the marketing front, we supported the Tommy Hilfiger brand with television in Germany for Mother’s Day and strong digital campaigns around the world.
In Coach, we experienced strong performance both in the U.S. and China with double- and triple-digit growth, respectively, versus pre-pandemic levels. Innovation across the Coach brand has been driving performance with new dial treatments, as well as crystal embellishments.
For the third quarter, we will expand our winning Arden family with line extensions, as well as expand our men’s collection with the introduction of Ken [ph], a new sport chronograph. In Coach, we have seen a strong response in China to our Chinese Valentine’s Day campaign which took place earlier this month.
In HUGO BOSS, we saw an almost 56% increase the over last year, despite a significant retail closures in Europe, our biggest market for HUGO BOSS. Our performance was driven by the expansion of our pilot family and the introduction of our Santiago family.
For the third quarter, we are excited about the introduction of our new 46 millimeter Grandmaster Carano and the expansion of our women’s assortment, with the introduction of Grand Forks and Novia.
Our Lacoste business continues to be driven by the continued success of the Lacoste brand. It is truly an iconic brand and we continue to drive performance by the development of our L.12.12 collection and our tiebreaker families. We are looking forward to introducing the new lady croc with crystal embellishments during this upcoming quarter.
During the quarter, we saw sales grow in our outlet division by 168% versus last year and 38 -- 31.8% versus pre-pandemic fiscal 2020, while improving operating margin. For the first time we are now offering styles made exclusively for our Movado company stores and we are seeing a strong initial response from consumers.
For the quarter, both Olivia Burton and MVMT exceeded their performance over last year. In MVMT we introduced new collections that we were excited about led by our new ceramic chronograph that seems to sell out as quickly as we bring it in in our ocean plastic edition, which is made from reclaimed ocean plastic and features a solar movement. Both collections are at higher price points for the MVMT brand. In the early stages of the third quarter, we are seeing a strong response to our new Raptor family in MVMT.
In Olivia Burton, we introduced our new iconic Tea Party collection and are excited to expand already -- our already successful celestial collection, which is right on trend with a renewed interest in space. During the second half, we are planning on launching our first Olivia Burton TV commercial in the U.K. complemented with a strong digital marketing effort.
As a company, we have made great progress over the last 18 months, the efforts that our teams have made in driving innovation on the product and marketing front, and controlling our expenses, while still investing in our brand building efforts have delivered strong results.
We are excited to deliver record operating margin for the quarter and we are focused on continuing to support our strategic initiatives and investments to drive growth and performance over the long-term. We believe our brands have additional runway to drive growth and we are preparing for the launch of Calvin Klein watches and jewelry in January of this fiscal year.
While markets have been reopening around the world, we remain concerned about the potential impact of new COVID-19 variants and we will continue to plan prudently. Over the last eight -- over the last few years our business model has changed, with a higher proportion of our sales coming from e-commerce and direct-to-consumer businesses. The investments that we have made in our digital efforts have provided a meaningful return and we expect to continue -- to see continued growth from this channel over the next several years.
As a company we have had a successful track record of navigating challenging times proactively and positioning ourselves to drive improvements as times improve. I could not be prouder of what our teams have accomplished during this period, set -- and setting the stage for the second half of the year in the future. During this pandemic, we have accelerated our transformation as a truly consumer driven company.
I would now like to turn the call over to Sallie.
Sallie DeMarsilis
Thank you, Efraim, and good morning, everyone. For today’s call I will review our financial results for the second quarter and year-to-date period of fiscal 2022 and then I will provide an update on our outlook for the year. My comments today will focus on adjusted results.
Please refer to the description of all the special items included in our results for the second quarter and year-to-date period of fiscal 2022 and fiscal 2021 in our press release issued earlier today, which also includes a reconciliation table of GAAP and non-GAAP measures. Certain comments will include comparisons to fiscal 2020 to provide additional context due to the significant impact of COVID-19 on prior year results.
Our performance for the second quarter of this fiscal year exceeded our expectations and resulted in record net sales and operating profits. The financial performance was highlighted by overall -- by continued overall strength in the United States, as well as global e-commerce sales, expansion in gross margins and operational discipline. We once again ended our quarter with a strong balance sheet and continued to focus on our strategic initiatives.
For the second quarter of fiscal 2022, sales were $173.9 million, as compared to $88.5 million last year, an increase of 96.4%. Strong consumer response to our brands and offerings coupled with partial recovery from the global pandemic led to net sales increases across our segments of owned brands, license brands and company stores, as well as across most geographies, most notably in the United States, but also seeing improvement in Europe.
U.S. net sales increased 145.9% and international net sales increased 64.4% as compared to the second quarter of last year. Total net sales increased 10.2% as compared to the pre-pandemic second quarter of fiscal 2020, with a 28.5% increase in the United States, which was partially offset by a 3.2% decrease in international sales.
Gross profit as a percent of sales was 56.6%, compared to 51.2% in the second quarter of last year. The increase in gross margin was primarily driven by favorable channel and product mix and favorable changes in foreign currency exchange rates. This was partially offset by a relative increase in spending on certain fixed costs, primarily due to the furloughing of employees and temporary salary reductions during a portion of the prior year period.
Gross margin was 250 basis points higher than the pre-pandemic second quarter of fiscal 2020. This was primarily due to favorable channel and product mix, as well as favorable changes in foreign currency exchange rate.
Operating expenses were $73 million, as compared to $45.9 million for the same period of last year. The increase was driven by higher marketing expenses and performance based compensation, as well as general operating expenses to directly support the significant increase in sales, while continuing to be disciplined and operating expenditures. A reminder operating expenses of last year also included the benefit of furloughing employees and temporary salary reductions, which did not reoccur this year.
Compared to the pre-pandemic second quarter of fiscal 2020, operating expenses declined by $2.1 million, primarily due to the corporate initiatives and restructuring program, which was executed to reduce such expenses and this was -- but this was partially offset by performance based compensation. As a percent of sales, operating expenses for the quarter decreased to 42% from 51.9% in the second quarter of last year and 47.6% in the pre-pandemic second quarter of the year before.
Expansion in gross margin and controlled spending in the second quarter drove a $26.1 million increase in operating income to $25.5 million. This compares to a $600,000 loss in the second quarter of fiscal 2021. Operating income for the second quarter of fiscal 2022 more than doubled the operating income of the pre-pandemic second quarter of fiscal 2020, which was $10.3 million.
We recorded income tax expense of $5.5 million in the second quarter of fiscal 2022, as compared to a benefit of $600,000 in the second quarter of fiscal 2021.
Net income in the second quarter was $20.1 million or $0.85 per diluted share, as compared to a net loss of $1.7 million or $0.07 per diluted share in the year ago period. This also compared to net income of $8.3 million or $0.36 per diluted share in fiscal 2020.
Now turning to our year-to-date results, sales for the six months period ending July 31, 2021, were $308.7 million, as compared to $158.2 million last year. Total net sales increased 1.4% as compared to the pre-pandemic six month period of fiscal 2020, with a 20.1% increase in the United States, partially offset by an 11.8% decrease in international sales.
Gross profit was $172.7 million or 55.9% of sales, as compared to $80.8 million or 51% of sales last year. The increase in gross margin rate for the first six months was due to favorable channel and product mix, favorable changes in foreign currency exchange rates and leverage on certain fixed costs. Gross margin was 190 basis points higher than the pre-pandemic for six months of fiscal 2020.
For the first six months ended July 31, 2021, operating income was $39.6 million, compared to an operating loss of $18.2 million in fiscal 2021. Total operating income was $22.1 million higher than the pre-pandemic six months period of fiscal 2020. As a percentage of net sales, operating income was 12.8% in the first half of fiscal 2022, as compared to 5.7% in the first half of fiscal 2020.
Net income was $30.2 million or $1.27 per diluted share, as compared to a net loss of $14.7 million or a loss of $0.63 per diluted share in the year ago period, a net income of $13.9 million or $0.60 per diluted share for the first six months of fiscal 2020.
Now turning to our balance sheet. Cash at the end of the first quarter was $199.7 million, an increase of almost $30 million over last year, while also paying down $48.3 million of debt during that same period. Accounts receivable was $89.7 million, up $29.6 million from the same period of last year primarily due to the increase in sales.
Inventory at the end of the quarter was up $9.9 million or 5.7% above the same period of last year, while sales nearly doubled.
Capital expenditures for the six-month period were $1.8 million, and depreciation and amortization expense were $6.3 million. That included $1.5 million related to the amortization of the acquired intangible assets of both Olivia Burton and MVMT.
The company is increasing its annual outlook and currently expects fiscal 2022 net sales to be in a range of approximately $680 million to $695 million, gross profit of approximately 55.5% to 56% of net sales, operating profit in a range of 13% to 13.5% of net sales and diluted earnings per share of approximately $2.75 to $2.90. Assuming no changes to the current tax laws, we anticipate a 25% effective tax rate. This updated outlook does not contemplate significant additional COVID-19 related retail closures, which can adversely impact results.
I’d now like to open the call up for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Oliver Chen with Cowen. You may proceed with your question.
Oliver Chen
Hi. Good morning. The quarter had such nice momentum. To us that the guidance could have some conservatism, could you speak to your rationale and thoughts and what’s underlying some of the assumptions and the guidance? And also Sallie, will channel and product mix continue to be helpful to gross margins and how long might that be true? Thank you.
Efraim Grinberg
So -- yeah. So, I think, we are obviously in the first half of the year comping against markets that were virtually completely closed and so I think the comparisons are obviously a lot easier in the first half of the year.
We are seeing good momentum in our sell-throughs around the world. So we are excited and but still cautiously optimistic about the second half, because we do still believe that there are the effects of the pandemic around the world and but we still see really strong momentum behind the business.
I will take a little bit on the gross margins also and then turn it over to Sallie. The one thing that we have been able to do is also on the gross margin side. We see that our brands have pricing power and so we have been able to raise gross margins on the pricing side and we believe that will have a continued impact during the second half as well. But I will let Sallie talk about the mix.
Sallie DeMarsilis
Yeah. And so, all of our outlook does reflect the continuation of the strength of the channel and product, both the growth of direct-to-consumer, whether it’s in our stores or online and also the strength of the U.S., where we know Movado is a very important brand has a very strong gross margin without the royalty’s and so forth to our license source. So it is -- we do expect it to continue, you see that it’s kind of leveled off based on our outlook for the period that remains for this year.
Oliver Chen
Okay. And Efraim, could you help us understand geographically stronger markets and less strong markets and also we are seeing like a return of -- a good return of consumers to stores. What’s your view on the department store channel and the stores that you sell to, what’s happening with traffic and is it really sustainable?
Efraim Grinberg
Okay. So I will answer both of those. Geographically, our strongest region has been, which is really nice to see because we had a few challenging years has been the United States, where we have seen strong -- really strong momentum over two years ago and it’s the combination now of sustained performance on digital channels, but with the return of brick-and-mortar being incremental. So we have seen really good performance on that side.
We continue to see strong performance in Europe. So Europe for us was ahead in the -- versus two years ago in the second quarter, despite the fact that most of the markets had a lot of retail closures during the period, and again, really strong digital and e-commerce sales in Europe. We see some continued challenges in Latin America, but better performance than last year and then we have seen really strong performance in China versus last year and two years ago.
So geographically it’s -- it seems pretty good and we like having you know North America as having -- the United States having strong momentum behind it, because it’s where we make our highest gross margins as well.
So -- and then your second part of your question was on the department stores and we have seen performance really improve in brick-and-mortar, and we are looking at that also against two years ago in the United States and especially in the department store channel, but we are seeing improved performance now versus where the trends had been in our mall based jewelry stores as well.
So I think consumers have had a desire to return to stores and that growth has been purely incremental to the business. So our strategy to focus on the omnichannel marketplace and continue to support our brands with innovation and strong marketing has really begun to pay dividends.
Oliver Chen
Okay. Efraim and one of the things from your prepared remarks is Movado brand and pricing and average unit retail. What’s happening there like the magnitude of the increases? And also I think you need to balance that with offering the consumer a strong value. So how are you doing that?
Efraim Grinberg
So about two years ago, we really embarked on a strategy to make Movado more aspirational. It had always been aspirational. But really to go back to our roots and focus on building higher price points, but offering fantastic value. And we have done that through design, through innovation, through greater benefits that we design into the product and the consumer sees that and they pay for it.
So products like the BOLD Verso at our high -- are at higher price points for the BOLD collection. ESG is at higher price points for our Movado core collection and we have seen strong momentum behind those products, because while they are higher price points, they offer truly excellent value to the consumer.
Oliver Chen
Okay. The cash balance is really attractive and you are managing your balance sheet well, so could you refresh us on should your shareholder return strategy and what you are thinking with respect to capital structure?
Efraim Grinberg
So I will take the first stab at that and then turn over to Sallie. So we did reinstitute at the beginning of this year a dividend and we are pleased with that, and obviously, as we continue to build cash, that’s a possible use of cash. And then we also reinstituted a share buyback program and we did buyback almost $10 million I think of stock in the second quarter. And so, I will let Sallie and we still have availability under that stock buyback program.
Sallie DeMarsilis
I think you have covered it other than the regular working capital running the business, being able to get the right inventory in the right places and so forth. So that covers it Oliver.
Oliver Chen
Okay. And finally, supply chain has been a big topic, also inventory availability and inflationary pressures. Will you have enough inventory or holiday inventory constraining you and/or what’s happening to your supply base and supply chain? I know you have a flexible approach to this?
Efraim Grinberg
So, I think our team has just done and I called it several times, I think, in my comments, have just done an excellent job across the Board as we have had to flex down last year for COVID and then flexing our resources back up and our suppliers back up.
We seem to be in pretty good shape in terms of product availability, costing and where it all really comes down to strong planning on their side. And so we feel pretty comfortable right now that we will have the right amount of inventory to get through the end of the year.
Sallie DeMarsilis
Yeah. I think I would add to that. We are definitely placing strategic purchases as we need to and our team really has great visibility into recognizing any potential shortages and being able to take the step to mitigate that.
Oliver Chen
Thank you. Best regards.
Efraim Grinberg
Okay.
Sallie DeMarsilis
Thanks.
Efraim Grinberg
Thanks very much, Oliver.
Operator
Ladies and gentlemen, we have reached the end of today’s question-and-answer session. I would like to turn this call back over to Mr. Efraim Grinberg for closing remarks.
Efraim Grinberg
Okay. I’d like to thank all of you for participating on our call today and wish everybody a great end to the summer and we look forward to rejoining you for our third quarter conference call. Thank you very much.
Operator
Thank you for joining us today. This concludes today’s conference. You may disconnect your lines at this time.
