Description
Movado Group, designs, manufactures and distributes Movado, Concord, ESQ and Coach watches worldwide and operates Movado boutiques and company outlet stores in the U.S. The company is currently launching a line of Tommy Hilfiger watches. For the year ended January 2001, Movado reported Revenue EBIT and EPS of $321m, $34m and $1.75, respectively. Reported book value is about $14 per share.
The company has been successful in growing its core brands (Movado and Concord) and has created new brands (ESQ) and leveraged established brands into the watch category (Coach, Tommy Hilfiger). The flagship, Movado watch brand, accounts for 55-60% of revenue, Concord 7-10%, ESQ 12% and Coach 6%, while outlets, boutiques and services combine for about 14%. Including outlet, boutique and service revenues, the Movado brand accounts for about 2/3 of revenues.
The company is attempting to expand the Movado brand beyond watches through high-end boutiques, which sell Movado brand jewelry, accessories and home goods, including clocks and vases. This initiative will continue to report modest, but declining, losses until critical mass (20 stores?) is reached, but has been reporting strong comparable store sales increases (albeit on a limited number of comp stores).
The Tommy Hilfiger watch launch appears promising, although Coach has not lived up to aggressive pre-launch expectations.
The company continues to build its brands, spending over $60m on advertising during fiscal 2000. In fact, advertising has risen from 15% to 20% of revenue over the past 6 years. This brand and lifestyle focused advertising supports gross margins of about 60% and continues to build the long-term value of the brand.
Return on capital and thus free cash flow have improved considerably over the past few years reflecting the disposition of two distributed brands (Piaget and Corum) and management focus on reducing inventory intensity. Net working capital has declined from 80% of revenue to below 50% over the past 6 years. In the past 2 years, the company has used proceeds from asset sales and free cash flow to repurchase $25m of stock and to reduce debt.
Outlook
Although the current fiscal year will certainly be affected by the soft economic environment, the company expects mid-single-digit increases in revenue and earnings per share.
I will not even attempt to make a specific near-term revenue or earnings forecast, nor can I fully explain the apparent corporate brain cramp which trashed results in Q4 of the January 2000 fiscal year. However, I would suggest that the company’s historical focus on powerful advertising to build brand value and recent commitment to, and success in, improving return on invested capital will build substantial shareholder value in the long term. Although the corporate goals are higher, 5-10% revenue growth, stable to improving EBIT margins and substantial free cash flow growth does not seem unreasonable long term.
Some (hopefully useful) numbers follow:
Shares Out 11.6M
Market Capital @$15 $174M
Net Debt 31M (careful, it’s seasonal)
Options Adjustment 4M 857K < $10, excludes 666K > $20
Total Enterprise Value $209M
Trailing Revenue $321M
Trailing EBIT $ 34M
D+A $7M-7.5M
Capex $10-11M (includes 2-4 new boutiques)
Net Working Capital $146M
Net PP&E $ 33M
Book Value $160M ($14/share)
Catalyst
Merger values in the luxury goods arena cover a broad range but 1x revenue or 10x EBIT would likely be quite realistic. Such values put Movada at $23-26, including the dilutive effect of options.
I have no specific reason to believe that the controlling shareholders, the founding Grinberg family, are ready to sell; but the industry has consolidated rapidly over the last two years, and management does seem frustrated by the low valuation. In the meantime, the company share repurchases should continue.
In summary, Movado is a good brand. Movado Group is a decent company, continues to get better and is selling at an attractive price. Advertising drives sales, profits and brand equity; free cash flow further leverages value per share. I believe the current price is a significant discount to business value and that value will continue to grow meaningfully over time.
Catalyst
Catalyst
Merger values in the luxury goods arena cover a broad range but 1x revenue or 10x EBIT would likely be quite realistic. Such values put Movada at $23-26, including the dilutive effect of options.
I have no specific reason to believe that the controlling shareholders, the founding Grinberg family, are ready to sell; but the industry has consolidated rapidly over the last two years, and management does seem frustrated by the low valuation. In the meantime, the company share repurchases should continue.