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Movado's Time Will Come

By Will Ashworth

Tickers in this Article: MOV, COH, LIZ, ZLC, M, JWN

People love watches. I have a friend who has a different watch for every mood and occasion - he's a jeweler's dream customer. For some men, watch buying is as addictive as shoe buying is for women. Regrettably, I'm not one of them. My parents bought me a gorgeous Raymond Weil watch for a milestone birthday a few years back, and it only comes out of the box for funerals and weddings. I like my scratched-up Swatch for everyday use.

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Fortunately for the watch industry, my friend and others just like him are the target customers - not me. Several years ago I did buy stock in New Jersey-based Movado Group (NYSE:MOV), makers of watch brands like Concord, Ebel and Movado. I did very well, selling near its high in September 2007. I needed the cash and the economy was starting to weaken, so we parted ways.

Is It Time To Buy Once More?
Not if you buy stocks based on what's happening today. Watches, like many things right now, are unnecessary and extravagant. That's life, and the Grinberg family (Movado's founder) is dealing with this reality. In early August, the company announced plans to streamline the business, leading to $25 million in annualized cost savings. Cuts will include 6% of the full-time workforce or 10% of the company's payroll expense.

In this fiscal year, Movado will realize $6 million of those savings and will take a $9 million pre-tax charge to complete the plan. The company believes the step is necessary to make it more competitive in the future - lean and mean if you will. It has made no changes in earnings per share (EPS) guidance for 2009. However, Movado will announce second quarter earnings September 4, and we'll know more then. That's not an easy move for a company accustomed to delivering good news.

A Few More Details
Movado began as the North American Watch Corporation in 1967, acquiring the Piaget and Corum watch distributorships in the United States. It sold them in 1999 and 2000 to focus on its own brands. Through acquisitions and license agreements, it has grown to become one of the watch industry's players. In 1970 it bought Concord watches, in 1983 it acquired most of the assets of Movado watches, and then the big buy came in 2004 when it bought Ebel, the luxury watch brand.

In addition, Movado makes watches for Coach (NYSE:COH), Hugo Boss, Liz Claiborne's (NYSE:LIZ) Juicy Couture brand, Tommy Hilfiger and Lacoste. (Read about how certain sectors can make investors money depending on the trend in Demographic Trends And The Implications For Investment.)

With two operating segments, wholesale and retail, Movado has its own boutiques and outlet stores, as well as selling wholesale to customers that include Zales (NYSE:ZLC), Macy's (NYSE:M), Nordstrom (NYSE:JWN) and independent jewelers. It competes in every category of the watch market with the exception of the mass market, which includes watches selling for less than $55 retail. Its Concord brand sells for $10,000 and up, Ebel between $1,500 and $10,000 and Movado runs anywhere from $500 to $1,500. Its licensed brands run the gamut between $55 and $500.

The Business Is Just Fine
While sales in the first quarter were essentially flat at $101.4 million and down 2.6% if you exclude foreign exchange gains, gross margins and operating profit margins in 2008 were as high as they've been in the last seven years. Since 2004, sales have grown from $330.2 million to $559.6 million in fiscal 2008, and operating income rose from $34.8 million to $50.8 million at the same time. Long-term debt is at the lowest levels since fiscal 2005, and its book value per share is up 53.7% in the last four years alone. Cash flow from operations in the last two years is $151.4 million - more than the four previous years combined. (For a better understanding, read Everything You Need To Know About Earnings.)

2009 will be the first year in eight with no dividend increase. Movado's slide presentation for Q1 earnings suggested it had great brands, a track record of growth, a solid balance sheet and strong cash flow generation. I couldn't agree more.

Bottom Line
I know Movado well. If it needs to cut staff, it's not doing so for a one-time bump in earnings. Management is extremely conservative and constantly seeks ways to make Movado a better company. Proof positive is the reduction in the number of doors to which it sells its Movado brand, moving from 4,000 down to 2,600 so it can focus on the most productive stores in its wholesale network. While costing sales in the short term, the end result will be higher sales and higher margins. I'd bet my Raymond Weil on it.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

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