Good day. Welcome to the Movado Group, Inc. Fiscal Second 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. 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 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. And good morning and welcome to Movado Group's second quarter conference call. I'll begin with a review of our second quarter performance and then share with you some of the brand highlights for the quarter and discuss our ongoing strategic initiatives and investments for the year. Sallie will then review our financial results and updated outlook. And then we would be glad to answer any questions that you may have. For the quarter, sales grew by 9.5% to $157.8 million or 11% on a constant currency basis. Excluding the addition of MVMT, which we acquired in the third quarter of last year, sales grew by 2.5% on a constant currency basis. Our gross margin for the quarter remained strong at 54.1% despite significant currency headwinds. Adjusted operating income for the quarter was $10.3 million versus $14.6 million in the same period last year. The decline in operating income reflected our previously discussed brand building investments, currency impact, and the ongoing integration of MVMT into Movado Group. As we have previously discussed, MVMT currently makes the majority of its profits during the fourth quarter of the year. During the quarter, we revalued the estimated contingency payments for MVMT to reflect our current growth projections for the brand. The reevaluation contributed $0.44 per share in GAAP earnings for the quarter and is excluded from our adjusted results. We continue to expect MVMT to contribute ongoing sales and profit growth and we remain excited about its long-term prospects. We also continue to maintain a very strong balance sheet with almost $135 million in cash. We recognize that we are operating in an increasingly challenging environment for our category and our wholesale partners and a global market made even more volatile by ongoing tensions and changes in trade policy. There is…

Thank you, Efraim, and good morning, everyone. For today's call, I'll 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 2020 and fiscal 2019. Our press release also describes these items and includes a table of GAAP to non-GAAP measure. Movado Group acquired MVMT on October 1, 2018. Included in the six months of fiscal 2020 was $2.6 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 $2 million or $0.08 per diluted share. $1.1 million pre-tax dollars or $900,000 after tax of this charge was in the second quarter of fiscal 2020. Our GAAP results for the second quarter of last year include $1 million pre-tax charge, which equates to $800,000 after-tax or $0.04 per diluted share. This is in connection with the pre-acquisition expenses related to MVMT. Additionally, non-operating income included a non-cash gain associated with the re-measurement of the contingent consideration liability related to the MVMT acquisition up $13.6 million in the second quarter of fiscal 2020. After-tax this benefit equates to $10.4 million or $0.44 per diluted share. As you recall, the purchase consideration for MVMT included two contingent payments that will be determined by the brand's future financial performance through fiscal 2023. These future contingent payments will be re-measured periodically to estimated fair value and we expect to recognize gains or losses as the case may be, based upon estimates and assumptions of the achievement of certain brand revenue and EBITDA performance hurdles, as well as changes in discount rates volatilities and other key…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Oliver Chen with Cowen and Company. Please proceed with your question.

Hi. Thank you. Good morning. Regarding your comments, what's driving the reduced level of visibility across retail and wholesale? And what are your thoughts on what you're seeing with the U.S. retail versus globally in terms of trends within geographies as well as channels? Thank you.

Sure. So, obviously you have a lot of volatility going on especially with brick-and-mortar channels, but also with e-commerce channels globally around the world, a lot of it having to do with global trade tensions. People -- you're getting a lot of commentary about slowing economies in Europe and then also the challenges of Brexit. So U.K. retail sales have been highly challenged over the last number of months. So, I think you have that combination of many different factors all converging at the same time. That reduces the visibility and the predictability of what you see out there for the future.

And what are your thoughts on the U.S. wholesale channel as well? And Sallie when you zoom out the inventory growth relative to revenue growth, does your change in guidance have implications for having too much inventory now?

So I think we still see the U.S. especially the mall-based jewelry channel is being challenged. We are seeing -- we have seen as we rolled out some significant marketing programs in the spring, some strong results from those marketing programs and that's what's encouraging to continue to make those investments. For the fall, I'll let Sallie address our inventory.

So yes the inventory levels are higher this second quarter than, obviously, the year before. We're very comfortable with our inventory levels. A lot of it has to do with the new businesses that have joined our team and then the timing of purchases. So we expect to be on track with those inventory levels at the close of the year.

Okay. And tariffs are a very relevant topic given the dynamism of them and the impact to the consumer as well as earnings. What percentage of your portfolio is most exposed to tariffs? And how are you strategizing in your scenario planning about how to really execute on this happening?

Sure. Sure. So I think it's very early on in the process. So it will just take effect on September 1st. They do affect our U.S. fashion watch business predominantly, and we will take certain actions in terms of pricing initiatives, in terms of working with our suppliers and some will have an effect to gross profits. So definitely have an impact I believe on U.S. business. Obviously they don't affect our international businesses. But -- so it affects our licensed brands in the U.S. and our MVMT business in the U.S. as well as smartwatch.

Okay. And Efraim you called in your prepared remarks also just generally speaking to the watch category being very competitive and you also called our smartwatches. Those have been factors for a while, but is there something incrementally different about the trends that you're seeing in the nature of the competition or even e-commerce and the circular economy that changes your perspective on the environment?

I think we're seeing the trends that we've seen in the past number of years continue. And we're seeing our sales able to grow in this environment, which I think is really a testament to our team and our initiatives and our investments. So we are, obviously, in a declining market, gaining market share and that is a sign that our investments are paying off but it's getting more -- it's more expensive to maintain that excitement and we will continue to do that because we believe it's the right thing to do to support our business and generally in the past it's always helped us come out stronger out of these type of cycles.

Okay. And our last question is the revaluation on the MVMT deal was interesting. From a modeling perspective like what underlied? Why that was done? And how does it compare to your thoughts on the MVMT business relative to the time, at which you acquired the business?

So I'll start with the first part and then -- the last part and then let Sallie talk a little bit about the revaluation. So we're still seeing that MVMT will add both sales in -- growth in sales and profits for the future and in the short-term and the medium-term and the long-term. It’s just that this is a transaction that was staged over three to four-year period of time in terms of an earn-out, and it will not achieve that level of growth, and we believe and that can change. So but it's still going to be growing really nicely for us and we're really excited about the acquisition, the learnings that we've gotten from an e-commerce perspective and the content perspective and really how to talk to consumers today has added to a lot of strength to the company. And we're excited about the wholesale rollout in the U.S. and globally.

And then, Efraim, actually touched on the lot of points related to the calculation in his comments just a moment ago. The earn-out payment to happens, so there's two payouts one at the end of the average of the first two years, and one at the average of the second two years, so over the next four years' time. And it's an estimate where you're going to be looking at the forecast of that business from a global perspective both wholesale and direct-to-consumer based up on top line, sales growth as well as EBITDA as defined by the agreement. So it's a very complicated process. And annually, periodically we will have to be looking at that calculation and adjusting it. So this is the first adjustment happened to be a fairly large one based upon the other things happening globally with our category, but you would expect that we would continue to be fine-tuning this up through the end of the earn-out period, which is at the end of fiscal 2023.

Thank you very much. Best of luck.

Okay. Thanks, Oliver.

Thank you. And I'd like to thank everybody for listening today and for being on our call and we look forward to talking to you at the end of our third quarter. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.