Movado Group (MOV) Q2 2019 Earnings Conference Call Transcript
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Movado Group (NYSE: MOV)
Q2 2019 Earnings Conference Call
Aug. 29, 2018 9:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good morning, everyone, and welcome to Movado Group fiscal second-quarter 2019 earnings 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 -- ICR Investor Relations
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.
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Efraim Grinberg -- Chairman and Chief Executive Officer
Thank you, Rachel, and good morning, everyone. Thank you for joining Movado Group's second-quarter conference call. For the call this morning, I will discuss highlight -- the highlights of the quarter, details around the upcoming acquisition of MVMT, which we expect will close on October 1, and some of our product and marketing initiatives for the fall. Sallie will then review our financial results as well as our updated outlook.
We will then open the call up to questions. We're very pleased to report another strong quarter with sales and adjusted operating profit both up double digits. For the quarter, our sales were up 11.9% or 10.5% on a constant currency to $144.1 million from $128.8 million last year. Our gross margin was strong at 54%, and our adjusted operating profit increased 13% to $14.6 million from $12.9 million last year.
For the six months of the year, revenue increased 18.9% to $271.2 million and adjusted operating income grew to $23.5 million, a 50.6% increase. While our U.S. wholesale business declined for the quarter, we continue to expect single-digit growth for the full year, driven by new product innovation in our fashion brands in Movado. Our international markets saw double-digit growth, driven by strong performance in our licensed brands and Olivia Burton.
Last week, we added Steve Sadove to our board of directors. Steve is a valuable addition to our board with extensive experience in brand-building and retail. We're looking forward to Steve's contributions to Movado Group's board of directors. On August 15, we announced that we entered into a definitive agreement to acquire the MVMT brand, a company started just five years ago by Jake Kassan and Kramer LaPlante, two young, creative, and passionate entrepreneurs.
Since that time, Jake and Kramer have been credited with building a truly special business that is targeted in millennials. They've been widely recognized in building a brand based on a community of social media followers. MVMT has a leading role in developing great content for the digital world. I encourage you all to follow MVMT on Instagram and Facebook and to take a look at the brand's great work.
While others believe that young consumers will not be interested in the watch category, Jake and Kramer proved them wrong. In MVMT, we're acquiring a company with over 4.5 million followers on Facebook and Instagram, a brand that offers beautiful quality products at prices that are accessible to young consumers and a digital brand experience that resonates with millennials. MVMT has also a assembled a great team of employees in Playa Vista, California. In their last year, MVMT generated $71 million in revenue, and we believe that the brand has great potential to continue growing on a global basis under the Movado Group umbrella.
We expect to close the MVMT transaction around October 1, and expect it to be accretive to profits this fiscal year, before transaction costs and purchase accounting adjustments.While we're planning some wholesale distribution, MVMT will continue to do the majority of their business online through their websites. MVMT has been at the cutting edge in developing a brand focused on young consumers through social media platforms, and we believe that this addition to our portfolio will significantly accelerate our digital initiatives. Since its founding, MVMT has been profitable on an operating basis every year. Last year, MVMT generated EBITDA of 7.4% of sales.
We believe that over time, with the synergies that we expect in areas such as supply chain, logistics, and fulfillment, EBITDA margins can reach into the mid-teens. Now I'd like to spend a few minutes on our product and marketing initiatives. In Movado, our new museum classic, both on leather strap and bracelet, has performed very well. In Movado bold, we saw continued strong performance in our bold metals and in our new bold ceramics for her.
For the fall season, we will expand our offering of diamond watches for her and introduce some exciting additions to our bold sports family. We will also introduce a new segment called Movado Face to reach a younger consumer, exclusively available on movado.com. Face is the new interpretation of Movado's iconic museum dial with an entry price point of $395. Face will be supported with an exciting digital campaign.
We're also launching a new beautiful artistically inspired ad campaign under Movado's slogan, don't let numbers define you, which will be featured digitally as well as in print television -- and television. Within our licensed brands, our strong momentum continued as we invest in powerful marketing programs and develop phenomenal new product designs. We continue to collaborate closely with Tommy Hilfiger on social media -- on social media marketing programs, which is delivering very positive results. We've seen strong sell-through on both our new men's and women's products.
For the fall season, our campaign will feature Hailey Baldwin in digital and point-of-sale initiatives. In Coach, during the second quarter, we introduced our new brand collection in rose and yellow gold, which has been performing very well. We also just recently introduced our Charles and Perry families, which have a number of very creative executions. The initial response from consumers has been extremely encouraging, and we expect this program to roll out very strongly.
Charles and -- Charles and Perry will be supported by an extensive 360-degree marketing effort during the third and fourth quarters. In Hugo Boss, we continue to see double-digit growth with strong product assortment for men and increased -- and an increasing women's business. This fall, we will launch a new sport luxe watch for men called Trophy and a new watch for women called Premiere. We will also launch Hugo under the Hugo Boss umbrella to reach young -- a younger, more fashionable -- fashion-forward consumer.
This launch will be on a global basis with limited distribution and with a heavy focus on e-commerce with our retail partners. In Lacoste, a strong product assortment in collaboration with the powerful brand have also led to double-digit growth for the quarter. We're looking forward to the introduction during the third quarter of a revised, iconic Lacoste 12.12 in multiple colors at an entry-level $95 price point. We are also supporting our growing Lacoste kids business with a number of new product introductions.
For Scuderia Ferrari, we'll be introducing our first set -- gift set that will feature a watch and a collectible car. We are also introducing a new sport luxe family that we're all excited about, Aspire. Olivia Burton continues to perform well, and we're very pleased with this integration in Movado Group's infrastructure and global distribution. We continue to keep the global distribution aspirational and limited while continuing to introduce iconic products from the very creative Olivia Burton team.
During the second quarter, we launched the brand in China and are pleased with the initial consumer reception and sale. Olivia Burton is resonating extremely well throughout Asia, and we look at this as a significant growth opportunity. During the quarter, we introduced Olivia Burton's new artisan collection, an artistic dial designed out of paper, which has performed very well. We're also pleased with the growing presence of jewelry as part of the brand experience.
To further support the overall Olivia Burton brand experience, we're launching a flagship store in the iconic Covent Garden in London toward the end of September. Our outlet stores continue to perform very well during the second quarter, delivering strong gross margins and 7.3% comp store sales growth. During the quarter, we were able to open our first international outlet store in Ontario, Canada. Our balance sheet remains strong with over $175 million in cash and no debt -- and no debt versus $132 million last year.
I am proud of our global teams growing our business by 18.9% for the first half of the year while reducing our overall inventory. Overall, we're very pleased with the company's performance for the first half of the year. We continue to focus on delivering sustainable, profitable growth and growing our position in an omnichannel marketplace. We remain focused on executing our business plan as well as integrating MVMT into Movado Group, which we would expect will be completed during fiscal 2020.
As we complete the integration, we believe we will provide the support for MVMT to become a truly global fashion and accessories brand. I would now like to turn the call over to Sallie, and we will then be glad to answer any questions.
Sallie DeMarsilis -- Chief Financial Officer
Thank you, Efraim, and good morning, everyone. For today's call, I will begin with a review of our second-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 the first half of 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 Olivia Burton on July 3, 2017. Included in the results for the six months of fiscal 2019 was $1.5 million of noncash amortization of acquired intangible assets. After tax, the charge related to the acquisition equates to $1.2 million, or $0.05 per diluted share. Included in the consolidated results for the second quarter of fiscal 2018 were $4.5 million of pre-tax charges, primarily connected to the transaction, as well as one month of amortization of the acquired assets.
After tax, the charge related to the acquisition equates to $4.4 million, or $0.19 per diluted share, for the quarter. Our GAAP results for the second quarter of fiscal 2019 include a $1 million pre-tax charge, which equates to $846,000 after tax, or $0.04 per diluted share, in connection with expenses related to our expected acquisition of MVMT. Our GAAP results for the first six months of fiscal 2018 include a $6.4 million pre-tax charge, which equates to $4.5 million after tax, or $0.19 per diluted share, in connection with our cost savings initiative. The balance of my remarks will exclude the special items just discussed.
Now turning to our results. Continuing the momentum from the first quarter, we're very pleased with our broad-based sales growth across each of our categories, owned brands, licensed brands, and retail. Sales for the second quarter were strong, increasing $15.3 million, or 11.9%, to $144.1 million. Sales in the current quarter were unfavorably impacted by $1.1 million due to the adoption of the new revenue-recognition standard, which shifts the timing related to returns and markdowns between quarters.
Olivia Burton, which was owned for one month in the second quarter of last year, contributed to our strong performance. Excluding Olivia Burton, we were pleased with sales growth which rose mid-single digits for the second quarter. In constant dollars, total net sales increased 10.5%. By geography, international sales increased 24.5% in constant dollars, and in the U.S., sales decreased 4.6%.
Wholesale segment sales were $123.1 million, increasing 10.9% from $111 million in last year's second quarter. In constant dollars, wholesale segment sales increased 9.3%. U.S. wholesale decreased -- I'm sorry, U.S.
wholesale sales decreased 13.3% to $38.2 million, compared to $44.1 million last year. International wholesale sales increased 26.8% to $84.9 million, compared to $66.9 million in the prior year, an increase of 24.2% in constant dollars. Sales were strongest in Europe and Latin America. The company's retail business continues to be a positive contributor with sales up 18.3% from last year.
At the end of the period, we operated 43 outlet locations, compared to 40 locations last year. Gross profit was $77.8 million, or 54% of sales, compared to $66.4 million, or 51.6%, in the second quarter of last year. The 240-basis-point increase in gross margin was primarily driven by the favorable impact of channel and product mix, favorable change in foreign currency exchange rates, and the increased leveraging of fixed costs due to higher sales. Operating expenses were $63.2 million, increasing 18.2% from last year's second quarter.
The increase was primarily the result of the following: Increased marketing investment of $4.6 million to support our sales growth; a $1.4 million increase resulting from the unfavorable impact of foreign currency exchange rates; and a $3.7 million increase in other operating expenses, such as distribution costs due to increased units sold as well as the operations of the Olivia Burton brand and costs related to our three new outlet locations. Strong sales growth and the expansion in gross profit more than offset the increased operating expenses, leading to an increased operating income for the second quarter. To this end, operating income was $14.6 million, or 10.1% of sales, compared to $12.9 million, or 10% of sales, in the same year-ago period. Income tax expense of $3.9 million, or 27.1% effective tax rate, in the second quarter of fiscal 2019 compares to an income tax expense of $2.7 million, or 21.5% effective tax rate recorded in the second quarter of the prior year.
The effective tax rate for the second quarter of fiscal 2019 is higher than the expectation for the full fiscal year due to discrete treatment of changes in jurisdictional earnings. The higher tax rate in the second quarter of fiscal 2019 unfavorably impacted EPS by approximately $0.03 per diluted share. Net income in the second quarter was $10.6 million, or $0.45 per diluted share, versus net income of $9.9 million, or $0.43 per diluted share, in the year-ago period. Now looking at our year-to-date results.
Sales for the six months period ended July 31, 2018, were $271.2 million, an increase of 18.9% from fiscal 2018. On a constant-dollar basis, sales increased 15.6%. Gross profit was $145.4 million, or 53.6% of sales, as compared to $116.9 million, or 51.3% of sales, last year. The increase in the current year gross margin percent for the first six months was a result of the reasons similar to the second quarter just discussed.
For the six months ended July 31, 2018, operating income was $23.5 million, compared to $15.6 million in fiscal 2018. Net income was $19.3 million, or $0.82 per diluted share, as compared to net income of $10.2 million, or $0.44 per diluted share, in the year-ago period. Now turning to our balance sheet. Cash at quarter-end was $175.6 million, versus $162.4 million at the end of the second quarter of last year, a very strong position considering the pay down of the total amount outstanding on our revolver earlier this year.
Illustrating our strength in working capital management, despite a sales increase of $43.2 million, or 18.9%, for the first six months, accounts receivable increased only $2.3 million as compared to the same period of last year and inventory decreased $5.6 million. Year to date, we repurchased $2.1 million of stock under our $50 million share-repurchase program. The increase in our diluted shares outstanding as compared to the same period of last year is primarily the result of the impact of our increased stock price on common stock share equivalent. Capital expenditures for the first six-month period were approximately $5.1 million and depreciation and amortization expense was $6.5 million.
This included $1.5 million related to the amortization of acquired intangible assets of Olivia Burton. Before I discuss our updated outlook for the current fiscal year, I will provide some further information on our expected acquisition of MVMT. The acquisition of MVMT, which was announced earlier this month, is expected to close during our third quarter on or about October 1, 2018. MVMT had annual revenue last year of approximately $71 million.
Currently, MVMT is primarily a direct-to-consumer business, which has historically had roughly half of their sales occurring in the fourth quarter. The purchase price of the acquisition at closing is comprised of approximately $100 million, or approximately $85 million net of anticipated tax benefits, in two contingent payments that combined could total an additional $100 million based upon the brand's financial performance in the next four fiscal years. The initial purchase price will be funded through a combination of cash on hand and borrowings under our revolving credit facility. Given its direct-to-consumer model, MVMT's gross margin percentage is currently higher than our consolidated gross margin percentage, which is predominantly generated from the wholesale business.
As a percentage of sales, MVMT's higher gross margin, however, is more than offset by the operating expenses of the brand, which are also higher than ours on a consolidated basis. Although there are more than a few contributors to the higher operating spend, the largest component is MVMT's investment in customer acquisition and marketing costs. MVMT's operating margin percentage was mid-single digits for calendar year 2017. For the first half of each of calendar years 2016 and '17, MVMT's operating margin was roughly breakeven.
And this year, we expect MVMT's operating spend in the fourth quarter to be relatively high as a percentage of sales as the brands will not yet leverage Movado Group's infrastructure. The integration into Movado Group's infrastructure and systems, which the company believes would be completed in fiscal 2020, will not only allow MVMT to expand globally and into select wholesale channels, but it will also give the brand scale and synergies, which provide an opportunity to improve profit margin contribution of the brand to Movado Group going forward. Excluding purchase accounting adjustments, we expect MVMT to be slightly accretive to profit for the four months it will be consolidated into fiscal 2019. Now on to our outlook.
We are updating our outlook for fiscal 2019 to reflect the performance of the first half of the year and assuming the acquisition closes on October 1, 2018, the addition of four months of MVMT brand into the company's operations, excluding transaction-related costs and the amortization of acquisition accounting adjustments. 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 filing. For fiscal 2019, the company now anticipates that net sales will be in a range of $660 million to $675 million and operating income will be approximately $75 million to $77 million.
The company anticipates net income in fiscal 2019 to be approximately $58 million to $59.7 million, or $2.45 to $2.55 per diluted share, reflecting a 22% anticipated effective tax rate. Capital expenditures for fiscal 2019 are estimated to be approximately $12 million. We expect to incur a total of approximately $10 million pre-tax for the fiscal year related to transaction costs for the MVMT acquisition. Additionally, there will be noncash amortization of acquisition accounting adjustments also impacting the last four months of this fiscal year.
The outlook we have provided assumes no unusual items for fiscal 2019 and, therefore, excludes the approximate $10 million pre-tax charge in fiscal 2019 for the MVMT acquisition as well as the noncash amortization of acquisition accounting adjustments for both MVMT as well as Olivia Burton. With that, I would now like to call -- open the call up for questions.
Questions and Answers:
Operator
Thank you, ma'am. [Operator instructions] We will now take the first question from Oliver Chen from Cowen and Company. Please go ahead.
Oliver Chen -- Cowen & Company -- Analyst
Hi. Thank you. Solid results. The U.S.
wholesale business, what fills your enthusiasm in terms of what you're seeing in this channel and what we should look to as catalyst? And you've also done a lot of interesting M&A. would love your thoughts on frameworks there going forward.
Efraim Grinberg -- Chairman and Chief Executive Officer
Sure. So on the first -- first part, we're seeing improved sell-through trends, particularly in the specialty store and department store channel. But we also have, and as I think I mentioned in my comments, a lot of innovation and newness that we've gotten very good response to from our retailers and we'll be rolling out during the third quarter and fourth quarter, supported by well-integrated digital marketing campaigns. So we're -- we see that business really improving in the second half of the year.
And one of the interesting things is probably that the fashion business has -- in the U.S. particularly, has been impacted by brands like MVMT direct -- and their direct-to-consumer initiatives, and so we're really enthusiastic about being able to acquire such an exciting brand. The -- from an M&A perspective, last year, we did -- we completed Olivia Burton, which was a very strong brand in the U.K., and we're now expanding that globally. And with MVMT, we believe we have a perfect complement to that brand as well with a strong domestic presence and an ability to expand that, both in brick-and-mortar channels as well as through global expansion.
So I think for the time being I would say that we're really satisfied with the two companies, one that we acquired a year ago, one we're in the process of acquiring now, and we'll be really focused on the integration, expansion, and growth of those companies.
Oliver Chen -- Cowen & Company -- Analyst
Very helpful. And last question, we're getting incoming regarding tariffs. Is that a concern to your business model and what are strategies around that? And any thoughts around what you're seeing with product cost trends and/or transportation trends, if that's sensitive to how you're thinking about pricing and margins? Thank you.
Efraim Grinberg -- Chairman and Chief Executive Officer
So, so far, watches have not been included in tariff -- in tariff categories. That could be a potential for the future. We are looking at different ways to hope to be able to mitigate that if that were to occur. But certainly, in the short to medium term, if they were to occur, that would be a threat to the overall margins.
But for the time being, it does not appear that the fashion watch or watch category are included in those categories.
Oliver Chen -- Cowen & Company -- Analyst
And on the -- just on the product cost side with labor or your supply chains, is it a stable outlook in terms of what you're expecting with your cost of goods sold?
Efraim Grinberg -- Chairman and Chief Executive Officer
We've -- so our teams have done an excellent job over time on our supply chain initiatives. And as you can see by improving margins -- gross margins as a company, we will also be able to get leverage on our overall supply chain with the addition of MVMT into our hold. So we hope to be able to leverage that for both their benefit and our benefit at the same time. So I think -- certainly, there are still opportunities for us on the supply side.
Oliver Chen -- Cowen & Company -- Analyst
Thank you. Best regards.
Sallie DeMarsilis -- Chief Financial Officer
Thanks, Oliver.
Oliver Chen -- Cowen & Company -- Analyst
Thank you, Oliver.
Operator
[Operator instructions] We will now take our next question from Frank Camma from Sidoti. Please go ahead.
Frank Camma -- Sidoti & Company -- Analyst
Good morning, guys. You -- thanks for the additional detail on MVMT. I think you mentioned that the EBITDA margin, you expect basically to sort of double over time. And given their direct-to-consumer, does that mean you expect their acquisition cost to decline over time, can you first address that? Because that sounds like a big [Inaudible].
Efraim Grinberg -- Chairman and Chief Executive Officer
So I'll spend a little bit on that, and then -- we believe that within our infrastructure, both on the supply chain side, fulfillment side, we can get a lot of leverage over time. So that will improve overall margins. We also believe that we have -- while it still will not be the majority of the business, have an opportunity for a nice wholesale business around the world and especially internationally, where that will be able to leverage the marketing cost and customer acquisition cost overall. So if you, today, surveyed a large portion of millennial consumers in the United States, they have a fairly significant brand awareness of the MVMT brand, and we believe that we can leverage that in brick-and-mortar distribution as well while still maintaining a predominantly direct-to-consumer model.
Frank Camma -- Sidoti & Company -- Analyst
It sounds like they already have a fairly high gross profit, but it also sounds like you think, given your scale, you could get even better sourcing. Is that a fair assessment over time? Is that what you're saying?
Efraim Grinberg -- Chairman and Chief Executive Officer
So we think they are important supply chain synergies, distribution synergies, meaning on the fulfillment side of the business, that we can leverage on a global basis. And if you -- go ahead, Frank.
Frank Camma -- Sidoti & Company -- Analyst
No. I was just going to say, like on the fulfillment side, isn't it a little different? Because -- are they doing a lot of individual shipments to customers, I assume. So -- but you still think you can leverage that through your supply chain.
Efraim Grinberg -- Chairman and Chief Executive Officer
We think with our systems and the company's capabilities, we can leverage that. MVMT has grown very quickly from a very -- company that was just started five years ago. So they don't have the systems, the infrastructure that they would normally have it to scale at this size. They would be adding those.
So rather than them adding those, we were able to leverage ours.
Frank Camma -- Sidoti & Company -- Analyst
OK. That's fair. And then moving on to sort of the base business. Obviously, U.S.
wholesale continues to trend down, not too shocking. But how about -- retail comps has been pretty favorable recently. I mean, what are you hearing from your partners for the holiday season? Any confidence vis-à-vis last year? Can you sort of comment on that? What you're getting through the channel?
Efraim Grinberg -- Chairman and Chief Executive Officer
Well, I think I commented that in the previous question that we have a number of new programs and product innovation that our customers are very excited about. So that's why we feel fairly confident that we'll see growth in the second half of the year on U.S. wholesale business, and we believe that the sell-through trends will justify that as well.
Frank Camma -- Sidoti & Company -- Analyst
OK. Fair enough. Thank you.
Sallie DeMarsilis -- Chief Financial Officer
Thanks, Frank.
Operator
There are no further questions. I would like to turn the conference back to management for any additional or closing remarks. Apologies, we do have a question with --
Efraim Grinberg -- Chairman and Chief Executive Officer
Sure.
Operator
It appears they have stepped away. I will now turn it back to yourself for any additional or closing remarks. Thanks.
Efraim Grinberg -- Chairman and Chief Executive Officer
OK. Well, I'd like to thank all of you, again, for participating with us today, and we look forward to the second half of the year and being able to report our third-quarter results to you as well. Thank you.
Operator
[Operator signoff]
Duration: 34 minutes
Call Participants:
Rachel Schacter -- ICR Investor Relations
Efraim Grinberg -- Chairman and Chief Executive Officer
Sallie DeMarsilis -- Chief Financial Officer
Oliver Chen -- Cowen & Company -- Analyst
Frank Camma -- Sidoti & Company -- Analyst
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