Movado Group, Inc. (MOV) Q4 2020 Results - Earnings Call

Movado Group, Inc. (NYSE:MOV) Q4 2020 Results Conference Call March 26, 2020 9:00 AM ET

Company Participants

Rachel Schacter - IR, ICR

Efraim Grinberg - Chairman and CEO

Sallie DeMarsilis - CFO

Conference Call Participants

Operator

Good day, everyone, and welcome to the Movado Group, Inc. Fourth Quarter 2020 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 call over to Rachel Schacter of ICR. You may now begin.

Rachel Schacter

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 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.

Efraim Grinberg

Good morning, and welcome to Movado Group’s year-end conference call. I will keep my remarks brief and then Sallie will review our fourth quarter and full year financial results in greater detail. Since we are operating remotely, we will not be taking any questions.

We are today faced with an unprecedented global health crisis. And at this time, our principal concern is the wellbeing of our associates and partners around the world. We hope for a return to a more stable environment, as soon as possible where the massive threat to people’s health and wellbeing diminishes.

This pandemic has created a severe decline in discretionary consumer spending. As I speak to you today, all of our offices around the world with the exception of China and Hong Kong are closed, and employees are working remotely. All of our retail stores in the U.S., Canada and the United Kingdom are closed. Our warehouse in New Jersey, which is operating on a skeleton crew in order to promote the safety of our people is delivering ecommerce orders for Movado and Olivia Burton. Our European, Hong Kong and Kentucky warehouses are still open with skeleton crews.

Most of our customers have closed their stores, as have many malls around the world. We’re working on contingencies so that we can exit these unprecedented times successfully and for the long-term. Fortunately, we ended the year with a very-strong balance sheet and a strong cash position. We’re carefully managing our cash and minimizing our expenses in order to be in a strong position when we exit into a more normalized environment.

While it seems like a long time ago, a number of our brands performed very well at retail over the holiday season in very-challenging environment for the category and retail in general, including Tommy Hilfiger in Europe, India and Mexico, as well as HUGO BOSS and Lacoste in Europe and Movado within the department store channel in United States.

In our e-commerce business, Movado continued to show strong growth. MVMT faced some significant performance challenges with its current website over the holiday season. Although, we have now partially rectified these issues, we are focusing on upgrading to Salesforce’s Commerce Cloud platform this coming June. Olivia Burton and Coach, both performed well in e-commerce in China.

We have a fabulous portfolio of brands, customers and partners and a dedicated team of employees. We’re reducing costs and inventory, and reallocating our resources to the areas of the business that we believe will drive our long-term success. We have been in this business for many years and endured many downturns, and believe our powerful brands, focus on innovation and operating discipline, position us well to successfully navigate through these unprecedented times.

Before I turn the call over to Sallie to conclude the call with her remarks, I would like to thank all of you for listening and hope that all of you and your families remain safe. Sallie?

Sallie DeMarsilis

Thank you, Efraim, and good morning, everyone.

For today’s call, I will review our financial results for fiscal 2020. Before I begin, I would like to point out the special items included in our fourth quarter and full year results for fiscal 2020 and fiscal 2019. Our press release also describes these items and includes the table of GAAP and non-GAAP measures.

Movado Group acquired MVMT on October 1, 2018. Included in the annual consolidated results for fiscal 2020 was $4.6 million of pre-tax charges, primarily comprised of the amortization of intangible assets, purchase accounting adjustments and deferred compensation related to the MVMT acquisition.

After-tax, the charge equates to $3.5 million, or $0.15 per diluted share. $1 million pre-tax dollars or $800,000 after-tax of this charge was in the fourth quarter of fiscal 2020. Our consolidated GAAP results for fiscal 2019 included $14.4 million of pre-tax charges, primarily related to the integration and acquisition of MVMT. After-tax, this charge equates to $11.4 million or $0.48 per diluted share. $2.4 million pre-tax dollars or $2.5 million after-tax of this charge was recorded in the fourth quarter.

Additionally, non-operating income for fiscal 2020 included a non-cash gain associated with the remeasurement of a contingent consideration liability related to the MVMT acquisition of $15.4 million pre-tax. $1.7 million of this gains was recorded in the fourth quarter and $13.6 million of this gain was recorded in the second quarter. After tax, the full year benefit equates to $11.7 million or $0.50 per diluted share.

Movado Group acquired Olivia Burton on July 3, 2017. Included in the results for fiscal 2020 was approximately $2.8 million of non-cash amortization of the acquired intangible assets, of which approximately $700,000 was in the fourth quarter. After tax, the charge for the full year related to the acquisition equates to $2.3 million or $0.10 per diluted share. Similarly, fiscal 2019 included approximately $2.9 million of a related charge, $700,000 of which was in the fourth quarter. After tax, the charge for the full year equated to $2.4 million or $0.10 per diluted share.

Included in the consolidated results for fiscal 2019 were tax benefits of $12 million or $0.51 per diluted share related to finalizing our accounting for the impact of the 2017 Tax Act, as well as certain discreet foreign tax items. $4.4 million or $0.18 per diluted share was recorded in the fourth quarter.

Our GAAP results for both fiscal 2020 and fiscal 2019 include a $300,000 pre-tax benefit, which equates to $200,000 after tax or $0.01 per diluted share in connection with the change in estimates of the remaining accrual for fiscal 2018 cost savings initiatives. For fiscal 2019, this benefit occurred in the fourth quarter.

The balance of my remarks will exclude the special items just disused.

Now, turning to our results. For the fourth quarter of fiscal 2020, sales were $191 million, an $8.4 million or 4.2% decrease from the fourth quarter of fiscal 2019. In constant dollars, these sales decreased 3.8%. The decrease in overall sales was driven by a decline in our owned brand. This decrease was partially offset by strength in our licensed brand business and our retail outlet stores, which increased 10.8% and 15.8%, respectively over last year’s fourth quarter. To this end, sales were down 14.6% in the U.S., and in constant dollars increased 8.5% internationally.

Sales in our watch and accessories brand segment were $158.5 million, as compared to sales of $171.3 million for the same period of last year. In constant dollars, these sales decreased 7.1%.

By geography, the U.S. watch and accessories brand business decreased 24.7% to $59.3 million compared to $78.8 million last year. This decrease was primarily driven by our owned brand, with a large impact being from e-commerce sales of the MVMT plan, which was adversely impacted by the website performance issues as Efraim cited.

The international watch and accessories brand business increased 7.2% to $99.2 million as compared to $92.5 million in the prior year. In constant dollars, international sales increased 7.9% with our strongest sales growth being in Europe and the Middle East.

For the quarter, the Company’s retail business was up 15.8% from last year. At the end of the quarter, we operated 47 outlet locations, including two Canadian stores as compared to 44 locations last year.

Gross profit was $100.6 million, or 52.7% of sales compared to $111.1 million or 55.7% in the fourth quarter of last year. The 300 basis-point decrease in gross margins was primarily driven by the unfavorable impact of channel and product mix, unfavorable change in foreign currency exchange rate, additional special U.S. tariffs and the impact of fixed costs on lower sales.

Operating expenses were $92.3 million, increasing 1.3% from last year’s fourth quarter. This increase was primarily due to approximately $5.6 million of operating costs, related to recent business initiatives for future growth, including our joint ventures in Spain and Australia, and our newest company retail outlet locations, offset by a decrease in performance-based compensation.

Lower sales and an increase in operating expenses drove a decline in operating income to $8.3 million, compared to $19.9 million in the year-ago period. Income tax expense was $4.5 million, compared to $3.9 million in the same period of last year. Net income in the fourth quarter of fiscal 2020 was $3.5 million, or $0.15 per diluted share versus net income of $15.9 million or $0.67 per diluted share in the fourth quarter of fiscal 2019.

Looking at the results for the full year ended January 31, 2020. Sales were $701 million, an increase of 3.1% from fiscal 2019. On a constant dollar basis, sales increased 4.9%. Gross profit was $375 million or 53.5% sales, as compared to $369.9 million, or 54.4% of sales last year. The decrease in those margin was primarily driven by the same items as for the fourth quarter. Operating income was $50 million, or 7.1% of sales, compared to $79.2 million, or 11.7% of sales in fiscal 2019.

Income tax expense was $13 million, compared to $15.6 million for last year. And our effective tax rate was 26.4% for fiscal 2020, compared to a 19.9% effective tax rate last year. The effective tax rate was higher than last year and higher than expected, due to the limitation of a portion of the foreign tax credits related to the GILTI tax, as a result of the mix of our jurisdictional earnings.

Net income was $36.5 million compared to net income of $63.1 million in the prior year. Diluted earnings per share decreased to $1.57 per share in the current fiscal year, compared to $2.67 per share last year.

Now, turning to our balance sheet. During the fourth quarter of fiscal 2020, we generated $76.6 million of operating cash flow, and our cash at year-end was $185.9 million as compared to $189.9 million last year. Accounts receivables were down $5.6 million, as compared to the same period of last year and inventory was up $6.1 million or 3.7% from the prior year.

For the year, we repurchased approximately $4.2 million of stock under our $50 million share repurchase program. Capital expenditures for the year were $12.7 million. Depreciation and amortization expense was $16.4 million, which included $5.7 million related to the amortization of acquired intangible assets of MVMT and Olivia Burton.

In light of the increasing uncertainty regarding the evolving COVID-19 pandemic, we’re not providing any financial outlook at this time. We are however, implementing strategic cost reductions across all functional areas, as well as reducing our capital expenditures. Although, we have a strong balance sheet to reserve financial flexibility and to increase our cash position, the Company has since drawn down an additional $30 million on our credit facility. We have also decided to discontinue our regular quarterly dividend with an expectation to resume a dividend when business conditions warranted, as well as to suspend our share repurchase program until further notice.

With the strength of our balance sheet and the support and focus of our entire management team, we believe we have the ability to navigate these challenging times. Efraim and I both feel communication to you is important, but at the same time we are taking the necessary precautions and working remotely. As such, we will not be taking any questions this morning. I hope that you and your loved ones are staying well.

Question-and-Answer Session

End of Q&A

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.