MOVADO GROUP INC MOV S
March 21, 2018 - 6:28pm EST by
UCB1868
2018 2019
Price: 32.05 EPS 0.87 0.85
Shares Out. (in M): 23 P/E 36.8 37.6
Market Cap (in $M): 747 P/FCF 11.9 12.0
Net Debt (in $M): -125 EBIT 29 28
TEV ($): 621 TEV/EBIT 21.4 22.4
Borrow Cost: Available 0-15% cost

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  • People forget how to read clocks
  • going to zero eventually

Description

Summary: Movado Group (MOV) is a $750 mil. market cap watch company that is struggling to find any growth. The company faces both short- and long-term threats to its business model. These threats include the growth of smartwatches, the emergence of new watch brands, and the decline of malls and other physical retail. MOV will likely suffer in any recession as it sells discretionary consumer goods. I believe that it is a long-term short.

Introduction: Movado Group (MOV) owns watch brands and markets watches for other brands. The company has a strong presence in the middle market of watches that retail for $200 - $1,000. Movado is highly dependent on traditional department and jewelry stores. I believe that the watch market is changing in ways that threaten Movado’s business model.

Timing This Trade

            I am not necessarily recommending an immediate short in this stock. This is, I admit, a rather boring short idea. There is no accounting fraud or insider theft or anything exciting like that. Movado Group is in no financial distress and the stock is not ridiculously expensive. Also, I make no effort to identify a specific catalyst. I decided to write a short report on this stock because I believe that the watch market is changing rapidly in ways that are detrimental to the company. Also, I think that this stock will get crushed in the next recession (whenever that occurs). In the 2008-09 recession, Movado’s sales dropped precipitously and the company became unprofitable. MOV from the mid-$30s in 2007 to under $5 in 2009. While I do not have a specific short-term price target, it is notable that MOV has moved up from $22 to $32 since August. I believe that a few weak quarters could send the stock below $20. A bullish report on MOV was published on VIC by hawaii21 in 2015.  

Time After Time: Movado’s Brands

            Movado Group sells watches under ten different brands. The firm owns four of the brands: Concord, Ebel, Olivia Burton, and the flagship Movado. Founded in Switzerland in 1881, the Movado brand is a market share leader in the category of watches that retail for $300 - $3,000. It has approximately 22% U.S. market share in that category. The brand is best known for its line of single dot Museum Watches, first introduced in 1947. Concord and Ebel watches fall into the “Luxury” category as they sell watches at retail for $1,000+. While both brands trace their histories to early 1900s, neither is among the top 15 best-selling Swiss brands. Movado does not compete with the most expensive watch brands. Olivia Burton is a young U.K. fashion brand which will be discussed later. Movado also produces watches under six licenses: Coach, HUGO BOSS, Juicy Couture, Lacoste, Tommy Hilfiger, and Scuderia Ferrari. These watches retail for $75 - $500. Licensed brands represent approximately 56% of wholesale net sales. While Movado Group sells watches in many countries, U.S. sales represent approximately 46% of total net sales. The Movado brand is a strong seller at U.S. department stores and a significant part of the company’s total gross profit.

A Brief History of Time

The current Movado Group, Inc., traces its history to the 1960s. It was founded by Cuban immigrant Gedalio “Gerry” Grinberg as North American Watch Company in 1965. Grinberg had been in the watch business in pre-Castro Cuba. He fled Cuba during the Revolution and acquired U.S. distribution for two Swiss watch brands, Piaget and Corum. Grinberg built Piaget into a successful brand in the U.S., but he wanted a brand of his own. He unsuccessfully tried to buy Movado in 1969. In 1970, acquired an obscure Swiss brand called Concord and built it into a luxury brand. Movado, meanwhile, struggled under three different owners in the ‘70s. Grinberg’s company acquired it in 1982 and quickly turned it around. The company completed its IPO in 1993. Grinberg retired in 2001 and died in 2009. He was succeeded as CEO by his son, Efraim. He and his brother Alex control Movado Group through their ownership of super-voting Class A stock. In the late-1990s and 2000s, Movado exited distribution of Piaget and Corum and built a licensing business. Movado acquired the Swiss luxury brand Ebel in 2004 and the U.K. brand Olivia Burton in 2017.

Running Out of Time

“It’s not only a crisis. We must rethink the existing business model.” – Antonio Calce, CEO of Girard Perregaux

“It’s the first time we have young people not buying watches. Time is everywhere. Why should these kids buy something for the wrists that tells them the same thing they get everywhere?” – Jean-Claude Biver of LVMH

https://www.morningstar.com/news/dow-jones/TDJNDN_201803126325/is-time-running-out-for-the-swiss-watch-industry.print.html

            Humans have invented technologies to keep track of the hours of the day for thousands of years. Sundials and water clocks existed in Egypt, Babylon, and other ancient civilizations. The first mechanical clocks appeared in Europe in the 13th century. Technological innovations in subsequent centuries made the measurement of time much more accurate. Pocket watches date to the 17th century. They began to be replaced by wristwatches on a large scale around the time of World War I. Watches dominated the market for personal timepieces for the last century or so. That dominance is in increasing peril.

            Nobody needs a watch to know the time anymore. Digital devices of all shapes and sizes provide the current time. More than two billion people own smartphones and the number rises each year. Digital representations of time have become so ubiquitous that many people may never own a watch. Millennials in the U.S. are becoming adults in a world in which watches are unnecessary. A survey of more than 600 U.S. college students in 2015 found that only 1/3 wore a watch daily and that 1/3 did not even own a watch. Younger people may never even learn how to read an analog clock. A 2014 Seattle survey found that only 35% of children aged 6-16 knew how to read a clock. A 2017 Oklahoma City survey of children aged 6-12 determined that only 1-in-10 children owned a watch and only 1-in-5 knew how to read a clock. A 2014 survey found that 1-in-7 British adults cannot read a clock. This same survey found that 37% of British parents do not think that their children need to learn how to tell time. Knowing how to read a clock may be going the way of cursive writing and memorizing phone numbers.

http://kfor.com/2017/03/12/study-4-in-5-oklahoma-city-students-cant-read-clocks/

http://seattlerefined.com/lifestyle/only-35-of-kids-in-king-county-can-read-analog-clock

http://www.dailymail.co.uk/sciencetech/article-2548115/Calling-time-traditional-clock-One-seven-Britons-tell-time-using-digital-watch.html

https://www.rjionline.org/stories/survey-most-millennials-are-interested-in-wearables-but-only-40-percent-own

The Times They Are A-Changin’: Wearables

“In the consumer electronics world, the pace of change is much faster and margins are lower. That is the way the world is. If you want to operate in that world, you have to accept that.” – Movado spokesperson (2017)

https://www.firstclasswatches.co.uk/blog/2017/06/popular-smartwatches-selling-profit-margins-stall/

“Apple has played a disruptive role in the fashion watch category.” – Ex-MOV President Ricardo Quintero (2017)

(Note: MOV announced Quintero’s separation from the company after the weak Q4FY18 earnings report.)

https://www.hodinkee.com/articles/forget-the-swiss-its-fossil-that-apple-is-threatening

The wearables market is becoming a major consumer products category. “Wearable” technology refers to electronics that are worn on the body. Smartwatches and activity trackers are wearable mini-computers that people wear on their wrists. Wearables producers include Apple, FitBit, Garmin, Xiaomi, Huawei, Fossil, Samsung, LG, and many others. IDC estimates that the wearables market will grow from 113.2 mil. shipments in 2017 to 222.3 mil. in 2021, a CAGR of 18.4%. Smartwatch shipments are expected to grow from 31.6 mil. units in 2017 to 71.5 mil. units in 2021. Fossil, which reported more than $300 mil. in smartwatch sales in 2017, has forecasted that the wearable tech market will increase from $17 bil. in 2017 to $32 bil. in 2020.

The introduction of the Apple Watch and other smartwatches has permanently changed the watch industry. Smartwatches accounted for an estimated 20% of watch sales in Q4 2017. While smartwatches (of a sort) have been around for decades, the industry exploded when the Apple Watch was released in April, 2015. The initial reviews of the Apple Watch were somewhat mixed. Nonetheless, IDC estimated 11.6 mil. Apple Watches shipped in year one. Apple, with its infinite cash and engineering talent, has continued to build the business. In 2017, Tim Cook announced that Apple had surpassed Rolex (founded in 1905) as the best-selling watch brand in the world. The Apple Watch Series 3 was released in September, 2017. It looks like a success. Estimates suggest that Apple shipped 17 – 18 mil. Apple Watches in 2017. IDC estimates that the Apple Watch outsold all Swiss watch brands combined in Q4 ’17.

Movado Group has a very small business in smartwatches. The firm does not employ engineers or have its own operating system. It produces smartwatches under its Movado, Hugo Boss, and Tommy Hilfiger brands. These watches use Google’s Android Wear operating system. Movado admits that its smartwatch business is tiny. CEO Efraim Grinberg barely mentioned it on the most recent earnings call. It will be difficult to Movado’s Android watches to attract much attention as they must compete with thousands of watches with similar functions and prices. The typical Android watch competes directly with Movado in the $200 - $400 price range. Smartwatches in the higher-end, $1,000+ category are now available from many luxury watchmakers, including Breitling, TAG Heuer, Montblanc, and Louis Vuitton. Movado does not break out its sales of smartwatches in its financials.

            There are indications that Android Wear smartwatches are in trouble. Movado, Fossil, and many others sell smartwatches built on the Google Android Wear operating system and Qualcomm Snapdragon processors. A lot of critics have slammed both Google and Qualcomm for releasing flawed products and failing to improve them. Neither Google nor Qualcomm has released anything of note in the smartwatch space in the last two years. The result is that Android Wear has fallen behind competitors with proprietary operating systems, such as Apple, Garmin, and Samsung. In March, 2018, Google announced that Android Wear would be renamed Wear OS. This name is suspiciously close to that of Apple’s operating system, watchOS. Many industry analysts view this rebranding as a sign of desperation. While Google can match Apple in resources, the wearables market has proven to be brutal to anybody that falls behind. Microsoft, Intel, and Nike are just three of the large companies that have exited the space.

https://www.forbes.com/sites/jeanbaptiste/2018/03/17/google-renames-android-wear-as-wear-os-in-desperate-move-to-revive-dying-smartwatch-platform/2/#2467922264ac

https://arstechnica.com/gadgets/2018/02/android-wear-is-getting-killed-and-its-all-qualcomms-fault/

https://www.idc.com/getdoc.jsp?containerId=prUS43408517

http://fortune.com/2018/02/20/apple-watch-sales-smartwatch/

Closing Time

The watch market is large and extremely competitive. Approximately 1.2 bil. watches are sold each year. More than half of them are inexpensive watches made in China. There are thousands of watch brands. The luxury watch market is estimated at about $60 bil. / year. Vendors include LVMH, Richemont, Timex, Swatch, Fossil, Kering, Seiko, and many others. Swatch, the biggest watchmaker, reported 2017 revenues of US$7.84 billion. It is roughly 14x the size of Movado Group. It owns 18 brands and several production companies. Fossil is also larger than Movado with nearly $2.8 bil. in 2017 sales.  Movado does have some strengths, notably its prime shelf space at Nordstrom, Macy’s, and other department stores. It is common to see prominent ads for Movado watches in Macy’s and other stores. There is concern that the stores may not exist much longer.

Movado is highly dependent on traditional retail. Markups in the watch business are notoriously high. Movado and similar watchmakers report gross margins of 50+%. Department and jewelry stores also do very well with watches. Retail gross margins on mid-priced and luxury watches are also 50+%. Movado brand watches are sold at mass market jewelry stores, such as the various Signet Jewelers stores, and at department stores, such as Macy’s, Bloomingdale’s, and Nordstrom. Movado also operates 40 outlet stores which account for approximately 10% of net sales. Ebel and Concord watches are available at high-end jewelry stores. Movado’s licensed brands are available at thousands of retailers. Macy’s is Movado’s largest wholesale account. It is a big retailer of Movado brand watches and of Movado’s licensed brands (Coach, Lacoste, etc.). Movado is largely dependent on brick-and-mortar retailers.

Movado’s traditional department and jewelry store strategy is in trouble. The company does have an online business, but it is very small. Most of its sales are generated through the sort of middle market, mall-based retailers that are getting killed by Amazon. Its most important customer, Macy’s, has closed more than 120 stores since 2015 and will likely close many more. Signet Jewelers, another key Movado retailer, is closing more than 200 stores this year amid management turnover and a sexual harassment scandal. Movado is losing shelf space as stores close. It is also losing watch customers to stores that may not even sell old-fashioned watches. Smartwatches are sold at retailers ranging from Best Buy to OfficeMax to cell phone stores. Apple sells millions of its smartwatches at its more than 500 Apple Stores. Many stores that sell smartwatches report gross margins well below those of department and jewelry stores. Best Buy, for example, reports gross margins below 25%. Movado has a serious problem if people stop going to stores that sell Movado watches at full price.

 Good Timing

The watch industry has been disrupted by some new brands in recent years. A few watchmakers have used e-commerce and social media to build their brands. One of these is a Swedish watch brand called Daniel Wellington. The company was founded by millennial entrepreneur Filip Tysander in 2011. He has successfully used Instagram influencers and social media marketing to gain a following among consumers in their 20s and 30s. Daniel Wellington’s minimalist watches retail for $150 - $250 and are sold online and in traditional retailers ranging from Bloomingdale’s to Wal-Mart. Daniel Wellington is also in the process of opening as many as 300 retail stores (including at least 100 in China) under its own name. The company, once named the fastest-growing in Europe by Inc., now generates more than $250 mil. in annual sales.   

MVMT (“movement”) is another very young watch company that was built online. It was founded by two 22-year old college dropouts, Jake Kassan and Kramer LaPlante, in 2013. The California firm was originally funded through a crowdsourcing campaign. MVMT attracted a following in the 18-34 demographic through social media marketing. Its watches and sunglasses are priced at $150 or less but have good margins as MVMT cuts out the middlemen and sells online only. In an interview, LaPlante said that, “The big watch conglomerates are struggling to do what we do, especially with Millennials…We’re hitting the Millennial market through social media that’s hard for outdated brands to be relevant…” LaPlante also said that MVMT abandoned plans to sell its watches in stores like Macy’s and Nordstrom because retail is “dying”. Privately-held MVMT reportedly had about $90 mil. in sales in 2017.

Barriers to entry in the watch business have fallen. The success of Daniel Wellington has attracted many imitators. It is now possible to launch a watch brand without significant financial backing. Watches can be mass produced in China at low cost. In 2014, three twenty-something Germans launched a brand called Kapten & Son. Its minimalist watches are very similar to those of Daniel Wellington in both style and price. Kapten & Son achieved quick success in Europe and has already expanded to Asia, North America, and Australia. It recently replaced Daniel Wellington at Nordstrom stores. Filippo Loretti is another new watch brand. Its watches are marketed as Italian luxury watches, but they sell for less than $400. Filippo Loretti, like MVMT, sells online only to eliminate markups. It was founded in 2014 by two brothers from Lithuania who raised more than $6 mil. in Kickstarter campaigns. The traditional methods of watch sales are changing. The new brands may be expanding the market, but they are also taking market share from both traditional watch companies and each other.

https://www.forbes.com/sites/petertaylor/2017/02/16/how-two-millennial-college-dropouts-started-the-worlds-fastest-growing-watch-brand/#248a09ae419f

Too Little, Too Late? Olivia Burton

            Movado bought one of the hip new watch brands in 2017. In July, 2017, Movado announced that it acquired a U.K. watch and fashion brand called Olivia Burton. Movado paid GBP60 mil. (approximately US$80 mil.) in cash and stated that that deal would be immediately accretive to earnings (excluding acquisition costs). It used its overseas cash to fund the deal. Movado did not release Olivia Burton’s financials, but it is likely that it paid well over 20x earnings. Olivia Burton produces jewelry and fashion watches for women that sell at retail for $100 - $300. It has shown strong growth in a weak market. GfK reports that the market for watches priced under GBP500 in the U.K. dropped nearly 13% in 2016 and then another 9.7% in the first half of 2017. Olivia Burton’s sales increased 64% in the 12 months ending 3/31/17 and were expected to grow by a similar percentage (to approximately GBP25 mil.) in the 12 months ending 3/31/18.

Olivia Burton fits a niche that Movado has struggled to fill. It is Movado’s first (owned) fashion brand. The London-based firm was founded in 2011 by Lesa Bennett and Jemma Fennings. They have said that they managed Olivia Burton with a marketing budget of “zero”. Like Daniel Wellington, Olivia Burton attracted customers through Instagram and other social media. The brand is less international than other brands as much of its sales are generated through traditional U.K. retailers. Its watches became available at Nordstrom stores in the U.S. in 2016. Bennett and Fennings were looking for financing when they decided to sell to Movado Group. They said that they decided to sell because Movado has the infrastructure to build the brand.

            The success of Olivia Burton demonstrates the competitive threat to Movado. A new brand can come out of nowhere and gain attention. Movado is primarily a seller of old brands. Thus, the Olivia Burton acquisition was probably a necessary one. In an interview on the deal, Grinberg admired Olivia Burton’s approach to ecommerce and social media. He stated that, “…Olivia Burton brings a level of engagement and creativity with their consumer that is spectacular.” Further, Grinberg admitted that, “The main issue in the U.S. is that there has been a dramatic switch from people shopping in malls to shopping online…The U.S. has too many malls and too many stores. Until that consolidates, there will be a reduction in traffic.” Bennett and Fennings now manage Olivia Burton for Movado. They have expressed their desire to turn it into a global brand. It is notable, however, that they took cash in the deal. Movado would have a problem if they decided to leave. Olivia Burton needs new styles to maintain sales as it, like other fashion brands, releases four product lines per year.

http://www.watchpro.com/movado-president-describes-values-olivia-burton-60-million/

https://www.businesswire.com/news/home/20170705005119/en/Movado-Group-Acquires-Olivia-Burton
The Second Hand

“There are many sources for grey market watches: Authorized retailers who want to get rid of slow-selling models, country distributors, or even the brands themselves.” – Anonymous watchmaker exec (2017)

https://www.reuters.com/article/us-swiss-watches-grey-market/gray-market-has-become-a-necessary-evil-for-luxury-watchmakers-idUSKBN17E2E8

Luxury watch brands are being sold in a growing “grey market”. “Grey market” refers to watches that are sold by unauthorized dealers at significant discounts. New luxury watches are widely available in the grey market. These sellers (quietly) buy slow-moving watches in bulk from authorized sellers and offer them at substantial discounts. Authorized dealers have also been known to buy watches wholesale and immediately flip them to the grey market for a quick profit. A few of the best-known grey market watch sites are Chrono24.com, Jomashop.com, and Authenticwatches.com. Discounts on these sites are normally in the range of 30-40%. I looked at one Movado watch model, the Ebel Brasilia Mini, on several sites. The retail price of this watch at ebel.com and authorized jewelry stores is $5,300. I found many grey market sellers of this watch at prices around $3,700, a discount of 30%. It is likely that the grey market is better than no market at all for watchmakers. It is also likely that these sites undercut Movado’s brands and the margins of traditional retail and jewelry store sellers. While the watchmakers complain about the grey market, they have been unable to stop it. The watchmakers know that if they prevent authorized retailers from selling into the grey market, then the retailers will demand the ability to match online discounts. One analyst estimates that the grey market for $5,000+ watches has doubled to 20% of the total market in just the past few years.

            The watch industry has been permanently changed by the internet. Movado sells its watches at its own ecommerce sites at full-price. It also tries to keep its authorized dealers from advertising discounts online. This, of course, does not prevent eBay, Amazon, Overstock, etc., from advertising both new and used watches at deep discounts. Watches are perfect for ecommerce as they are small, durable, easy to ship, and have high margins. I did a search for “Movado” on eBay are got more than 13,000 results. The sellers range from grey market businesses to individual watch collectors and owners. The listings range from pre-owned watches that cost a few dollars to new watches that cost thousands. eBay lists dozens of new men’s Movado 1881 automatic watches at prices ranging from $500 - $800. These watches sell for approximately $1,200 - $1,500 at Movado.com, Macys.com, and Nordstrom.com. Overstock and Amazon also list these watches at deep discounts. Movado is dependent on its authorized retailers to protect its margins and finance new product lines. The market, though, demands access to cheaper product.

https://www.ft.com/content/4a4fc942-582d-11e7-80b6-9bfa4c1f83d2

https://www.forbes.com/sites/arieladams/2018/03/02/the-swiss-luxury-watch-industry-is-dismantling-business-ops-in-america-its-most-important-market/#66b1219c69f3

Hard Times

            Movado’s history suggests that it may run into trouble in a significant recession. It is impossible to predict the timing and severity of recessions. Still, it is worth remembering that Movado Group is a company that sells discretionary consumer goods. Its stock price and financial results crashed in the 2008-09 financial crisis. Its stock price fell nearly 87% from a high of $35.40 in March, 2007, to a low of $4.65 in March, 2009. The stock price followed the financials results as sales plummeted over 32% from FY2008 to FY2010 and the company became unprofitable. Note that Movado uses a January fiscal year. Look at the ugly trends in these summary financials from the period:

 

FY2007

FY2008

FY2009

FY2010

FY2011

FY2012

Net sales

$532.90

$559.60

$460.90

$378.40

$382.20

$468.10

Operating inc.

$52.30

$50.80

$3.40

($36.40)

($12.10)

$33.60

EPS

$1.87

$2.23

$0.09

($2.23)

($1.91)

$1.27

 

Time Is Money

            Movado Group has not been a growing business. Current sales are no higher than they were in FY2007! Net sales fell 7.1% in FY2017 from FY2016. Sales have bounced around the $500 - $600 mil. / year range since FY2013 (calendar 2012). On the Q4FY17 conference call, CEO Efraim Grinberg said, “…The watch category has been impacted by the decreased traffic to our retail partners, combined with the introduction of wearables.” MOV, despite profitability and significant cash, has traded at P/E ratios as low as 10x in recent years. Industry data suggests that (calendar) 2017 was likely better for the watch business than 2016. The Olivia Burton deal provides some incremental revenues to MOV, but likely not enough to have a major impact.

            MOV has limited sell-side coverage. It is only covered by three firms. There are only two EPS estimates for FY2019 and only one for FY2020. The analysts expect growth in the low single digits for the foreseeable future. The consensus FY2019 estimates are EPS of $1.95 on $571.0 mil. in sales. The sole FY2020 estimate is EPS of $2.15 on $578.0 mil. in sales. My estimates are lower as I expect slight sales declines in FY2019 and FY2020. I anticipate much bigger declines in any recession. MOV has announced expense cuts as it reduces traditional marketing. While these cuts may help the bottom line, they may also hurt sales. My model:

 

(in $1000s)

FY2016

FY2017

Q1 FY18

Q2 FY18

Q3 FY18

Q4 FY18E

FY2018E

Net sales

$594,923

$552,752

$99,265

$128,781

$190,693

$130,000

$548,739

Cost of sales

277,993

257,935

50,128

62,655

86,623

63,700

263,106

Gross profit

316,930

294,817

49,137

66,126

104,070

66,300

285,633

SG&A

246,823

240,836

52,785

57,809

78,885

58,000

247,479

Operating income

70,107

53,981

(3,648)

8,317

25,185

8,300

38,154

Other expense

0

(1,282)

0

0

0

0

0

Interest expense

(1,109)

(1,464)

(356)

(390)

(445)

(400)

(1,591)

Interest income

127

219

122

129

110

100

461

Pre-tax income

69,125

51,454

(3,882)

8,056

24,850

8,000

37,024

Taxes

23,360

16,315

277

2,574

7,490

2,560

12,901

Net income

45,765

35,139

(4,159)

5,482

17,360

5,440

24,123

 Less: noncontrolling

671

78

0

0

0

0

0

Net income to MOV

$45,094

$35,061

($4,159)

$5,482

$17,360

$5,440

$24,123

               

Diluted shares

23,774

23,070

23,075

23,218

23,273

23,300

23,217

EPS

$1.90

$1.52

-$0.18

$0.24

$0.75

$0.23

$1.04

               
 

Q1 FY19E

Q2 FY19E

Q3 FY19E

Q4 FY19E

FY2019E

FY2020E

 

Net sales

$100,000

$130,000

$190,000

$125,000

$545,000

$515,000

 

Cost of sales

49,000

63,700

93,100

61,250

267,050

252,350

 

Gross profit

51,000

66,300

96,900

63,750

277,950

262,650

 

SG&A

50,000

58,000

85,000

56,000

249,000

235,000

 

Operating income

1,000

8,300

11,900

7,750

28,950

27,650

 

Interest expense

(500)

(500)

(500)

(500)

(2,000)

(2,000)

 

Interest income

150

150

150

150

600

600

 

Pre-tax income

650

7,950

11,550

7,400

27,550

26,250

 

Taxes

182

2,226

3,234

2,072

7,714

7,088

 

Net income

$468

$5,724

$8,316

$5,328

$19,836

$19,163

 
               

Diluted shares

22,700

22,700

22,700

22,700

22,700

22,500

 

EPS

$0.02

$0.25

$0.37

$0.23

$0.87

$0.85

 

 

Time is Short: Risk to Short Thesis

·         Movado Group could be an acquisition candidate. LVMH or another watch / luxury brand may want to buy Movado. Any sale of the company would have to be supported by the Grinberg family. The Grinberg brothers, both in their 50s, have shown no inclination to sell. I do not think that Movado is an especially desirable acquisition candidate due to its significant licensing and lack of growth.

·         A strong economy boosts the watch market. Movado sells discretionary consumer goods and tends to follow the business cycle. It may do well if economic growth accelerates. Another possibility is that the next recession is mild enough that Movado suffers limited pain.

·         Growth in Asia and other international markets. Movado has been less dependent on China and other emerging markets than many other watch and luxury brands. This is both good and bad. There is potential growth in these areas.

·         Olivia Burton takes off in the U.S. The brand is little-known outside of the U.K. It is now available in the U.S. at Nordstrom and Bloomingdale’s. There is upside potential if Movado can have success with it in the U.S. and elsewhere.

·         Wearables are nothing but a fad and we all go back to old-fashioned watches. Will the Apple Watch turn into the next Google Glass? I doubt it…but “Black Mirror” is scary.

·         Movado’s smartwatches make up for slowness in traditional watches. I see Movado’s entry in the smartwatch business as more defensive than anything else. Most smartwatch consumers buy from Apple, Samsung, etc. Movado smartwatches are probably just cannibalizing other Movado watches.

·         Movado will benefit from the corporate tax cut. The firm has been reporting tax rates in 32-34% range, so its U.S. taxes will decline.

·         Movado has a solid balance sheet with approximately $5.40 / share in net cash. Most of the cash is held outside of the U.S., so the new tax law could allow for repatriation. MOV pays a small dividend ($0.13 / quarter) and has authorized a $50 mil. stock buyback plan. MOV has not been aggressive in buybacks as it repurchased only $1.3 mil. in stock on this plan through the end of Q3FY18.

·         This stock is illiquid. While the short interest is < 1 mil. shares and the stock is easy to borrow, the average daily volume is so low that the days to cover is about 14.

 

Out of Time

            Movado Group may not be able to adapt to the changing markets for watches and wearables. This is a company that relies on retail shelf space in an industry in which retail shelf space is losing importance. The internet allows everybody to have infinite shelf space. Somebody has probably launched a new watch brand in the time that it took me to write this report. The high margins on mid-priced and luxury watches are ripe for disruption. This is not a short that I necessarily expect to work in the next month or next year. I think, though, that MOV is worth a look for anyone who wants a relatively low-risk short that may work in the next recession.

 

Legal Disclaimer: This research report expresses my research opinions, which I have based upon certain facts, all of which are based upon publicly available information. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward-looking statements, expectations, and projections. You should assume these types of statements, expectations, and projections may turn out to be incorrect. This is not investment advice nor should it be construed as such. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. The author has a position in this stock and may trade this stock.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

recession; smartwatch growth; competition; people forget how to read clocks

    sort by    

    Description

    Summary: Movado Group (MOV) is a $750 mil. market cap watch company that is struggling to find any growth. The company faces both short- and long-term threats to its business model. These threats include the growth of smartwatches, the emergence of new watch brands, and the decline of malls and other physical retail. MOV will likely suffer in any recession as it sells discretionary consumer goods. I believe that it is a long-term short.

    Introduction: Movado Group (MOV) owns watch brands and markets watches for other brands. The company has a strong presence in the middle market of watches that retail for $200 - $1,000. Movado is highly dependent on traditional department and jewelry stores. I believe that the watch market is changing in ways that threaten Movado’s business model.

    Timing This Trade

                I am not necessarily recommending an immediate short in this stock. This is, I admit, a rather boring short idea. There is no accounting fraud or insider theft or anything exciting like that. Movado Group is in no financial distress and the stock is not ridiculously expensive. Also, I make no effort to identify a specific catalyst. I decided to write a short report on this stock because I believe that the watch market is changing rapidly in ways that are detrimental to the company. Also, I think that this stock will get crushed in the next recession (whenever that occurs). In the 2008-09 recession, Movado’s sales dropped precipitously and the company became unprofitable. MOV from the mid-$30s in 2007 to under $5 in 2009. While I do not have a specific short-term price target, it is notable that MOV has moved up from $22 to $32 since August. I believe that a few weak quarters could send the stock below $20. A bullish report on MOV was published on VIC by hawaii21 in 2015.  

    Time After Time: Movado’s Brands

                Movado Group sells watches under ten different brands. The firm owns four of the brands: Concord, Ebel, Olivia Burton, and the flagship Movado. Founded in Switzerland in 1881, the Movado brand is a market share leader in the category of watches that retail for $300 - $3,000. It has approximately 22% U.S. market share in that category. The brand is best known for its line of single dot Museum Watches, first introduced in 1947. Concord and Ebel watches fall into the “Luxury” category as they sell watches at retail for $1,000+. While both brands trace their histories to early 1900s, neither is among the top 15 best-selling Swiss brands. Movado does not compete with the most expensive watch brands. Olivia Burton is a young U.K. fashion brand which will be discussed later. Movado also produces watches under six licenses: Coach, HUGO BOSS, Juicy Couture, Lacoste, Tommy Hilfiger, and Scuderia Ferrari. These watches retail for $75 - $500. Licensed brands represent approximately 56% of wholesale net sales. While Movado Group sells watches in many countries, U.S. sales represent approximately 46% of total net sales. The Movado brand is a strong seller at U.S. department stores and a significant part of the company’s total gross profit.

    A Brief History of Time

    The current Movado Group, Inc., traces its history to the 1960s. It was founded by Cuban immigrant Gedalio “Gerry” Grinberg as North American Watch Company in 1965. Grinberg had been in the watch business in pre-Castro Cuba. He fled Cuba during the Revolution and acquired U.S. distribution for two Swiss watch brands, Piaget and Corum. Grinberg built Piaget into a successful brand in the U.S., but he wanted a brand of his own. He unsuccessfully tried to buy Movado in 1969. In 1970, acquired an obscure Swiss brand called Concord and built it into a luxury brand. Movado, meanwhile, struggled under three different owners in the ‘70s. Grinberg’s company acquired it in 1982 and quickly turned it around. The company completed its IPO in 1993. Grinberg retired in 2001 and died in 2009. He was succeeded as CEO by his son, Efraim. He and his brother Alex control Movado Group through their ownership of super-voting Class A stock. In the late-1990s and 2000s, Movado exited distribution of Piaget and Corum and built a licensing business. Movado acquired the Swiss luxury brand Ebel in 2004 and the U.K. brand Olivia Burton in 2017.

    Running Out of Time

    “It’s not only a crisis. We must rethink the existing business model.” – Antonio Calce, CEO of Girard Perregaux

    “It’s the first time we have young people not buying watches. Time is everywhere. Why should these kids buy something for the wrists that tells them the same thing they get everywhere?” – Jean-Claude Biver of LVMH

    https://www.morningstar.com/news/dow-jones/TDJNDN_201803126325/is-time-running-out-for-the-swiss-watch-industry.print.html

                Humans have invented technologies to keep track of the hours of the day for thousands of years. Sundials and water clocks existed in Egypt, Babylon, and other ancient civilizations. The first mechanical clocks appeared in Europe in the 13th century. Technological innovations in subsequent centuries made the measurement of time much more accurate. Pocket watches date to the 17th century. They began to be replaced by wristwatches on a large scale around the time of World War I. Watches dominated the market for personal timepieces for the last century or so. That dominance is in increasing peril.

                Nobody needs a watch to know the time anymore. Digital devices of all shapes and sizes provide the current time. More than two billion people own smartphones and the number rises each year. Digital representations of time have become so ubiquitous that many people may never own a watch. Millennials in the U.S. are becoming adults in a world in which watches are unnecessary. A survey of more than 600 U.S. college students in 2015 found that only 1/3 wore a watch daily and that 1/3 did not even own a watch. Younger people may never even learn how to read an analog clock. A 2014 Seattle survey found that only 35% of children aged 6-16 knew how to read a clock. A 2017 Oklahoma City survey of children aged 6-12 determined that only 1-in-10 children owned a watch and only 1-in-5 knew how to read a clock. A 2014 survey found that 1-in-7 British adults cannot read a clock. This same survey found that 37% of British parents do not think that their children need to learn how to tell time. Knowing how to read a clock may be going the way of cursive writing and memorizing phone numbers.

    http://kfor.com/2017/03/12/study-4-in-5-oklahoma-city-students-cant-read-clocks/

    http://seattlerefined.com/lifestyle/only-35-of-kids-in-king-county-can-read-analog-clock

    http://www.dailymail.co.uk/sciencetech/article-2548115/Calling-time-traditional-clock-One-seven-Britons-tell-time-using-digital-watch.html

    https://www.rjionline.org/stories/survey-most-millennials-are-interested-in-wearables-but-only-40-percent-own

    The Times They Are A-Changin’: Wearables

    “In the consumer electronics world, the pace of change is much faster and margins are lower. That is the way the world is. If you want to operate in that world, you have to accept that.” – Movado spokesperson (2017)

    https://www.firstclasswatches.co.uk/blog/2017/06/popular-smartwatches-selling-profit-margins-stall/

    “Apple has played a disruptive role in the fashion watch category.” – Ex-MOV President Ricardo Quintero (2017)

    (Note: MOV announced Quintero’s separation from the company after the weak Q4FY18 earnings report.)

    https://www.hodinkee.com/articles/forget-the-swiss-its-fossil-that-apple-is-threatening

    The wearables market is becoming a major consumer products category. “Wearable” technology refers to electronics that are worn on the body. Smartwatches and activity trackers are wearable mini-computers that people wear on their wrists. Wearables producers include Apple, FitBit, Garmin, Xiaomi, Huawei, Fossil, Samsung, LG, and many others. IDC estimates that the wearables market will grow from 113.2 mil. shipments in 2017 to 222.3 mil. in 2021, a CAGR of 18.4%. Smartwatch shipments are expected to grow from 31.6 mil. units in 2017 to 71.5 mil. units in 2021. Fossil, which reported more than $300 mil. in smartwatch sales in 2017, has forecasted that the wearable tech market will increase from $17 bil. in 2017 to $32 bil. in 2020.

    The introduction of the Apple Watch and other smartwatches has permanently changed the watch industry. Smartwatches accounted for an estimated 20% of watch sales in Q4 2017. While smartwatches (of a sort) have been around for decades, the industry exploded when the Apple Watch was released in April, 2015. The initial reviews of the Apple Watch were somewhat mixed. Nonetheless, IDC estimated 11.6 mil. Apple Watches shipped in year one. Apple, with its infinite cash and engineering talent, has continued to build the business. In 2017, Tim Cook announced that Apple had surpassed Rolex (founded in 1905) as the best-selling watch brand in the world. The Apple Watch Series 3 was released in September, 2017. It looks like a success. Estimates suggest that Apple shipped 17 – 18 mil. Apple Watches in 2017. IDC estimates that the Apple Watch outsold all Swiss watch brands combined in Q4 ’17.

    Movado Group has a very small business in smartwatches. The firm does not employ engineers or have its own operating system. It produces smartwatches under its Movado, Hugo Boss, and Tommy Hilfiger brands. These watches use Google’s Android Wear operating system. Movado admits that its smartwatch business is tiny. CEO Efraim Grinberg barely mentioned it on the most recent earnings call. It will be difficult to Movado’s Android watches to attract much attention as they must compete with thousands of watches with similar functions and prices. The typical Android watch competes directly with Movado in the $200 - $400 price range. Smartwatches in the higher-end, $1,000+ category are now available from many luxury watchmakers, including Breitling, TAG Heuer, Montblanc, and Louis Vuitton. Movado does not break out its sales of smartwatches in its financials.

                There are indications that Android Wear smartwatches are in trouble. Movado, Fossil, and many others sell smartwatches built on the Google Android Wear operating system and Qualcomm Snapdragon processors. A lot of critics have slammed both Google and Qualcomm for releasing flawed products and failing to improve them. Neither Google nor Qualcomm has released anything of note in the smartwatch space in the last two years. The result is that Android Wear has fallen behind competitors with proprietary operating systems, such as Apple, Garmin, and Samsung. In March, 2018, Google announced that Android Wear would be renamed Wear OS. This name is suspiciously close to that of Apple’s operating system, watchOS. Many industry analysts view this rebranding as a sign of desperation. While Google can match Apple in resources, the wearables market has proven to be brutal to anybody that falls behind. Microsoft, Intel, and Nike are just three of the large companies that have exited the space.

    https://www.forbes.com/sites/jeanbaptiste/2018/03/17/google-renames-android-wear-as-wear-os-in-desperate-move-to-revive-dying-smartwatch-platform/2/#2467922264ac

    https://arstechnica.com/gadgets/2018/02/android-wear-is-getting-killed-and-its-all-qualcomms-fault/

    https://www.idc.com/getdoc.jsp?containerId=prUS43408517

    http://fortune.com/2018/02/20/apple-watch-sales-smartwatch/

    Closing Time

    The watch market is large and extremely competitive. Approximately 1.2 bil. watches are sold each year. More than half of them are inexpensive watches made in China. There are thousands of watch brands. The luxury watch market is estimated at about $60 bil. / year. Vendors include LVMH, Richemont, Timex, Swatch, Fossil, Kering, Seiko, and many others. Swatch, the biggest watchmaker, reported 2017 revenues of US$7.84 billion. It is roughly 14x the size of Movado Group. It owns 18 brands and several production companies. Fossil is also larger than Movado with nearly $2.8 bil. in 2017 sales.  Movado does have some strengths, notably its prime shelf space at Nordstrom, Macy’s, and other department stores. It is common to see prominent ads for Movado watches in Macy’s and other stores. There is concern that the stores may not exist much longer.

    Movado is highly dependent on traditional retail. Markups in the watch business are notoriously high. Movado and similar watchmakers report gross margins of 50+%. Department and jewelry stores also do very well with watches. Retail gross margins on mid-priced and luxury watches are also 50+%. Movado brand watches are sold at mass market jewelry stores, such as the various Signet Jewelers stores, and at department stores, such as Macy’s, Bloomingdale’s, and Nordstrom. Movado also operates 40 outlet stores which account for approximately 10% of net sales. Ebel and Concord watches are available at high-end jewelry stores. Movado’s licensed brands are available at thousands of retailers. Macy’s is Movado’s largest wholesale account. It is a big retailer of Movado brand watches and of Movado’s licensed brands (Coach, Lacoste, etc.). Movado is largely dependent on brick-and-mortar retailers.

    Movado’s traditional department and jewelry store strategy is in trouble. The company does have an online business, but it is very small. Most of its sales are generated through the sort of middle market, mall-based retailers that are getting killed by Amazon. Its most important customer, Macy’s, has closed more than 120 stores since 2015 and will likely close many more. Signet Jewelers, another key Movado retailer, is closing more than 200 stores this year amid management turnover and a sexual harassment scandal. Movado is losing shelf space as stores close. It is also losing watch customers to stores that may not even sell old-fashioned watches. Smartwatches are sold at retailers ranging from Best Buy to OfficeMax to cell phone stores. Apple sells millions of its smartwatches at its more than 500 Apple Stores. Many stores that sell smartwatches report gross margins well below those of department and jewelry stores. Best Buy, for example, reports gross margins below 25%. Movado has a serious problem if people stop going to stores that sell Movado watches at full price.

     Good Timing

    The watch industry has been disrupted by some new brands in recent years. A few watchmakers have used e-commerce and social media to build their brands. One of these is a Swedish watch brand called Daniel Wellington. The company was founded by millennial entrepreneur Filip Tysander in 2011. He has successfully used Instagram influencers and social media marketing to gain a following among consumers in their 20s and 30s. Daniel Wellington’s minimalist watches retail for $150 - $250 and are sold online and in traditional retailers ranging from Bloomingdale’s to Wal-Mart. Daniel Wellington is also in the process of opening as many as 300 retail stores (including at least 100 in China) under its own name. The company, once named the fastest-growing in Europe by Inc., now generates more than $250 mil. in annual sales.   

    MVMT (“movement”) is another very young watch company that was built online. It was founded by two 22-year old college dropouts, Jake Kassan and Kramer LaPlante, in 2013. The California firm was originally funded through a crowdsourcing campaign. MVMT attracted a following in the 18-34 demographic through social media marketing. Its watches and sunglasses are priced at $150 or less but have good margins as MVMT cuts out the middlemen and sells online only. In an interview, LaPlante said that, “The big watch conglomerates are struggling to do what we do, especially with Millennials…We’re hitting the Millennial market through social media that’s hard for outdated brands to be relevant…” LaPlante also said that MVMT abandoned plans to sell its watches in stores like Macy’s and Nordstrom because retail is “dying”. Privately-held MVMT reportedly had about $90 mil. in sales in 2017.

    Barriers to entry in the watch business have fallen. The success of Daniel Wellington has attracted many imitators. It is now possible to launch a watch brand without significant financial backing. Watches can be mass produced in China at low cost. In 2014, three twenty-something Germans launched a brand called Kapten & Son. Its minimalist watches are very similar to those of Daniel Wellington in both style and price. Kapten & Son achieved quick success in Europe and has already expanded to Asia, North America, and Australia. It recently replaced Daniel Wellington at Nordstrom stores. Filippo Loretti is another new watch brand. Its watches are marketed as Italian luxury watches, but they sell for less than $400. Filippo Loretti, like MVMT, sells online only to eliminate markups. It was founded in 2014 by two brothers from Lithuania who raised more than $6 mil. in Kickstarter campaigns. The traditional methods of watch sales are changing. The new brands may be expanding the market, but they are also taking market share from both traditional watch companies and each other.

    https://www.forbes.com/sites/petertaylor/2017/02/16/how-two-millennial-college-dropouts-started-the-worlds-fastest-growing-watch-brand/#248a09ae419f

    Too Little, Too Late? Olivia Burton

                Movado bought one of the hip new watch brands in 2017. In July, 2017, Movado announced that it acquired a U.K. watch and fashion brand called Olivia Burton. Movado paid GBP60 mil. (approximately US$80 mil.) in cash and stated that that deal would be immediately accretive to earnings (excluding acquisition costs). It used its overseas cash to fund the deal. Movado did not release Olivia Burton’s financials, but it is likely that it paid well over 20x earnings. Olivia Burton produces jewelry and fashion watches for women that sell at retail for $100 - $300. It has shown strong growth in a weak market. GfK reports that the market for watches priced under GBP500 in the U.K. dropped nearly 13% in 2016 and then another 9.7% in the first half of 2017. Olivia Burton’s sales increased 64% in the 12 months ending 3/31/17 and were expected to grow by a similar percentage (to approximately GBP25 mil.) in the 12 months ending 3/31/18.

    Olivia Burton fits a niche that Movado has struggled to fill. It is Movado’s first (owned) fashion brand. The London-based firm was founded in 2011 by Lesa Bennett and Jemma Fennings. They have said that they managed Olivia Burton with a marketing budget of “zero”. Like Daniel Wellington, Olivia Burton attracted customers through Instagram and other social media. The brand is less international than other brands as much of its sales are generated through traditional U.K. retailers. Its watches became available at Nordstrom stores in the U.S. in 2016. Bennett and Fennings were looking for financing when they decided to sell to Movado Group. They said that they decided to sell because Movado has the infrastructure to build the brand.

                The success of Olivia Burton demonstrates the competitive threat to Movado. A new brand can come out of nowhere and gain attention. Movado is primarily a seller of old brands. Thus, the Olivia Burton acquisition was probably a necessary one. In an interview on the deal, Grinberg admired Olivia Burton’s approach to ecommerce and social media. He stated that, “…Olivia Burton brings a level of engagement and creativity with their consumer that is spectacular.” Further, Grinberg admitted that, “The main issue in the U.S. is that there has been a dramatic switch from people shopping in malls to shopping online…The U.S. has too many malls and too many stores. Until that consolidates, there will be a reduction in traffic.” Bennett and Fennings now manage Olivia Burton for Movado. They have expressed their desire to turn it into a global brand. It is notable, however, that they took cash in the deal. Movado would have a problem if they decided to leave. Olivia Burton needs new styles to maintain sales as it, like other fashion brands, releases four product lines per year.

    http://www.watchpro.com/movado-president-describes-values-olivia-burton-60-million/

    https://www.businesswire.com/news/home/20170705005119/en/Movado-Group-Acquires-Olivia-Burton
    The Second Hand

    “There are many sources for grey market watches: Authorized retailers who want to get rid of slow-selling models, country distributors, or even the brands themselves.” – Anonymous watchmaker exec (2017)

    https://www.reuters.com/article/us-swiss-watches-grey-market/gray-market-has-become-a-necessary-evil-for-luxury-watchmakers-idUSKBN17E2E8

    Luxury watch brands are being sold in a growing “grey market”. “Grey market” refers to watches that are sold by unauthorized dealers at significant discounts. New luxury watches are widely available in the grey market. These sellers (quietly) buy slow-moving watches in bulk from authorized sellers and offer them at substantial discounts. Authorized dealers have also been known to buy watches wholesale and immediately flip them to the grey market for a quick profit. A few of the best-known grey market watch sites are Chrono24.com, Jomashop.com, and Authenticwatches.com. Discounts on these sites are normally in the range of 30-40%. I looked at one Movado watch model, the Ebel Brasilia Mini, on several sites. The retail price of this watch at ebel.com and authorized jewelry stores is $5,300. I found many grey market sellers of this watch at prices around $3,700, a discount of 30%. It is likely that the grey market is better than no market at all for watchmakers. It is also likely that these sites undercut Movado’s brands and the margins of traditional retail and jewelry store sellers. While the watchmakers complain about the grey market, they have been unable to stop it. The watchmakers know that if they prevent authorized retailers from selling into the grey market, then the retailers will demand the ability to match online discounts. One analyst estimates that the grey market for $5,000+ watches has doubled to 20% of the total market in just the past few years.

                The watch industry has been permanently changed by the internet. Movado sells its watches at its own ecommerce sites at full-price. It also tries to keep its authorized dealers from advertising discounts online. This, of course, does not prevent eBay, Amazon, Overstock, etc., from advertising both new and used watches at deep discounts. Watches are perfect for ecommerce as they are small, durable, easy to ship, and have high margins. I did a search for “Movado” on eBay are got more than 13,000 results. The sellers range from grey market businesses to individual watch collectors and owners. The listings range from pre-owned watches that cost a few dollars to new watches that cost thousands. eBay lists dozens of new men’s Movado 1881 automatic watches at prices ranging from $500 - $800. These watches sell for approximately $1,200 - $1,500 at Movado.com, Macys.com, and Nordstrom.com. Overstock and Amazon also list these watches at deep discounts. Movado is dependent on its authorized retailers to protect its margins and finance new product lines. The market, though, demands access to cheaper product.

    https://www.ft.com/content/4a4fc942-582d-11e7-80b6-9bfa4c1f83d2

    https://www.forbes.com/sites/arieladams/2018/03/02/the-swiss-luxury-watch-industry-is-dismantling-business-ops-in-america-its-most-important-market/#66b1219c69f3

    Hard Times

                Movado’s history suggests that it may run into trouble in a significant recession. It is impossible to predict the timing and severity of recessions. Still, it is worth remembering that Movado Group is a company that sells discretionary consumer goods. Its stock price and financial results crashed in the 2008-09 financial crisis. Its stock price fell nearly 87% from a high of $35.40 in March, 2007, to a low of $4.65 in March, 2009. The stock price followed the financials results as sales plummeted over 32% from FY2008 to FY2010 and the company became unprofitable. Note that Movado uses a January fiscal year. Look at the ugly trends in these summary financials from the period:

     

    FY2007

    FY2008

    FY2009

    FY2010

    FY2011

    FY2012

    Net sales

    $532.90

    $559.60

    $460.90

    $378.40

    $382.20

    $468.10

    Operating inc.

    $52.30

    $50.80

    $3.40

    ($36.40)

    ($12.10)

    $33.60

    EPS

    $1.87

    $2.23

    $0.09

    ($2.23)

    ($1.91)

    $1.27

     

    Time Is Money

                Movado Group has not been a growing business. Current sales are no higher than they were in FY2007! Net sales fell 7.1% in FY2017 from FY2016. Sales have bounced around the $500 - $600 mil. / year range since FY2013 (calendar 2012). On the Q4FY17 conference call, CEO Efraim Grinberg said, “…The watch category has been impacted by the decreased traffic to our retail partners, combined with the introduction of wearables.” MOV, despite profitability and significant cash, has traded at P/E ratios as low as 10x in recent years. Industry data suggests that (calendar) 2017 was likely better for the watch business than 2016. The Olivia Burton deal provides some incremental revenues to MOV, but likely not enough to have a major impact.

                MOV has limited sell-side coverage. It is only covered by three firms. There are only two EPS estimates for FY2019 and only one for FY2020. The analysts expect growth in the low single digits for the foreseeable future. The consensus FY2019 estimates are EPS of $1.95 on $571.0 mil. in sales. The sole FY2020 estimate is EPS of $2.15 on $578.0 mil. in sales. My estimates are lower as I expect slight sales declines in FY2019 and FY2020. I anticipate much bigger declines in any recession. MOV has announced expense cuts as it reduces traditional marketing. While these cuts may help the bottom line, they may also hurt sales. My model:

     

    (in $1000s)

    FY2016

    FY2017

    Q1 FY18

    Q2 FY18

    Q3 FY18

    Q4 FY18E

    FY2018E

    Net sales

    $594,923

    $552,752

    $99,265

    $128,781

    $190,693

    $130,000

    $548,739

    Cost of sales

    277,993

    257,935

    50,128

    62,655

    86,623

    63,700

    263,106

    Gross profit

    316,930

    294,817

    49,137

    66,126

    104,070

    66,300

    285,633

    SG&A

    246,823

    240,836

    52,785

    57,809

    78,885

    58,000

    247,479

    Operating income

    70,107

    53,981

    (3,648)

    8,317

    25,185

    8,300

    38,154

    Other expense

    0

    (1,282)

    0

    0

    0

    0

    0

    Interest expense

    (1,109)

    (1,464)

    (356)

    (390)

    (445)

    (400)

    (1,591)

    Interest income

    127

    219

    122

    129

    110

    100

    461

    Pre-tax income

    69,125

    51,454

    (3,882)

    8,056

    24,850

    8,000

    37,024

    Taxes

    23,360

    16,315

    277

    2,574

    7,490

    2,560

    12,901

    Net income

    45,765

    35,139

    (4,159)

    5,482

    17,360

    5,440

    24,123

     Less: noncontrolling

    671

    78

    0

    0

    0

    0

    0

    Net income to MOV

    $45,094

    $35,061

    ($4,159)

    $5,482

    $17,360

    $5,440

    $24,123

                   

    Diluted shares

    23,774

    23,070

    23,075

    23,218

    23,273

    23,300

    23,217

    EPS

    $1.90

    $1.52

    -$0.18

    $0.24

    $0.75

    $0.23

    $1.04

                   
     

    Q1 FY19E

    Q2 FY19E

    Q3 FY19E

    Q4 FY19E

    FY2019E

    FY2020E

     

    Net sales

    $100,000

    $130,000

    $190,000

    $125,000

    $545,000

    $515,000

     

    Cost of sales

    49,000

    63,700

    93,100

    61,250

    267,050

    252,350

     

    Gross profit

    51,000

    66,300

    96,900

    63,750

    277,950

    262,650

     

    SG&A

    50,000

    58,000

    85,000

    56,000

    249,000

    235,000

     

    Operating income

    1,000

    8,300

    11,900

    7,750

    28,950

    27,650

     

    Interest expense

    (500)

    (500)

    (500)

    (500)

    (2,000)

    (2,000)

     

    Interest income

    150

    150

    150

    150

    600

    600

     

    Pre-tax income

    650

    7,950

    11,550

    7,400

    27,550

    26,250

     

    Taxes

    182

    2,226

    3,234

    2,072

    7,714

    7,088

     

    Net income

    $468

    $5,724

    $8,316

    $5,328

    $19,836

    $19,163

     
                   

    Diluted shares

    22,700

    22,700

    22,700

    22,700

    22,700

    22,500

     

    EPS

    $0.02

    $0.25

    $0.37

    $0.23

    $0.87

    $0.85

     

     

    Time is Short: Risk to Short Thesis

    ·         Movado Group could be an acquisition candidate. LVMH or another watch / luxury brand may want to buy Movado. Any sale of the company would have to be supported by the Grinberg family. The Grinberg brothers, both in their 50s, have shown no inclination to sell. I do not think that Movado is an especially desirable acquisition candidate due to its significant licensing and lack of growth.

    ·         A strong economy boosts the watch market. Movado sells discretionary consumer goods and tends to follow the business cycle. It may do well if economic growth accelerates. Another possibility is that the next recession is mild enough that Movado suffers limited pain.

    ·         Growth in Asia and other international markets. Movado has been less dependent on China and other emerging markets than many other watch and luxury brands. This is both good and bad. There is potential growth in these areas.

    ·         Olivia Burton takes off in the U.S. The brand is little-known outside of the U.K. It is now available in the U.S. at Nordstrom and Bloomingdale’s. There is upside potential if Movado can have success with it in the U.S. and elsewhere.

    ·         Wearables are nothing but a fad and we all go back to old-fashioned watches. Will the Apple Watch turn into the next Google Glass? I doubt it…but “Black Mirror” is scary.

    ·         Movado’s smartwatches make up for slowness in traditional watches. I see Movado’s entry in the smartwatch business as more defensive than anything else. Most smartwatch consumers buy from Apple, Samsung, etc. Movado smartwatches are probably just cannibalizing other Movado watches.

    ·         Movado will benefit from the corporate tax cut. The firm has been reporting tax rates in 32-34% range, so its U.S. taxes will decline.

    ·         Movado has a solid balance sheet with approximately $5.40 / share in net cash. Most of the cash is held outside of the U.S., so the new tax law could allow for repatriation. MOV pays a small dividend ($0.13 / quarter) and has authorized a $50 mil. stock buyback plan. MOV has not been aggressive in buybacks as it repurchased only $1.3 mil. in stock on this plan through the end of Q3FY18.

    ·         This stock is illiquid. While the short interest is < 1 mil. shares and the stock is easy to borrow, the average daily volume is so low that the days to cover is about 14.

     

    Out of Time

                Movado Group may not be able to adapt to the changing markets for watches and wearables. This is a company that relies on retail shelf space in an industry in which retail shelf space is losing importance. The internet allows everybody to have infinite shelf space. Somebody has probably launched a new watch brand in the time that it took me to write this report. The high margins on mid-priced and luxury watches are ripe for disruption. This is not a short that I necessarily expect to work in the next month or next year. I think, though, that MOV is worth a look for anyone who wants a relatively low-risk short that may work in the next recession.

     

    Legal Disclaimer: This research report expresses my research opinions, which I have based upon certain facts, all of which are based upon publicly available information. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward-looking statements, expectations, and projections. You should assume these types of statements, expectations, and projections may turn out to be incorrect. This is not investment advice nor should it be construed as such. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. The author has a position in this stock and may trade this stock.

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    recession; smartwatch growth; competition; people forget how to read clocks

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