The last time Movado Group (MOV) was selling this cheap was during the great recession of ’08-’09. At its low, the company was trading at a P/B ratio of 0.3x. Today, Movado is once again left for dead, with the market pricing the company at a P/B ratio of 0.5x. With a price-to-book ratio that low, the market is signaling a loss of confidence in a turnaround and a business not earning its cost of equity, therefore, destroying shareholder value.
The company also trades at a forward P/E multiple of 8x, however, with $1.92 per share in net cash on the balance sheet, Movado trades at a forward earnings multiple of 6.6x.
It would be unreasonable to expect Movado to become a growth company again. With smartwatches, wearables, and smartphones taking market share and shrinking the appeal for mechanical watches, Movado is in a tough spot. That said, the company has done well navigating turbulent waters; first, with the popularity of smartwatches, and now with the impact of COVID on its main distribution channel, which relies on wholesale partners for the majority of its sales. It would spell trouble if we had a company with shrinking revenues and deteriorating margins, but that is not the case with Movado. The company has been able to sustain growth at mid-single digits for the past 5 years (albeit helped by two acquisitions in 2017 and 2018) and average gross margins of 52%.
While not a growth company anymore, we believe there is still a market for Movado’s owned and licensed brand watches, which targets what the company calls “luxury” and “accessible luxury” markets, meaning watches in a price range between $300 to $1,300. At those price points, a watch becomes, in our opinion, more of a “fashion statement” and not a timekeeping accessory. In other words, Movado doesn’t necessarily compete with mass-market Android smartwatches or other wearables. If that were truly the case, the effects of competition would have already been seen impacting the gross margin line. The same cannot be said about Fossil Group (FOSL) for example, that targets a younger demographic and competes at lower price points. The effects of competition have severely impacted FOSL’s top and bottom line, with margins declining to low-single digits.
That’s not to say Movado is immune to the effects of COVID on the retail industry. The company still depends on its wholesale partners and its outlet stores for a significant proportion of sales. Analysts are expecting sales of $535 million for fiscal ’22, which is 23% lower from fiscal ’20 (fiscal year ends January 31st). However, management has already implemented cost restructuring efforts that should allow them to sustain margins and earnings power. At 6.6x forward earnings (excluding net cash) and a tangible book value of $21.7 per share, a speculative position in Movado could generate good returns in a portfolio.
Second half results should get better for Movado
Many retail companies have seen a rebound in sales and sequential month-to-month improvements after the trough in April. Management at Movado expects the same type of trend.
That said, there were green shoots within Movado’s business during its first half from growth in its e-commerce channel, both in its own websites and wholesale partners’ online stores. For example, during Q2, the company saw Movado.com sales up 128% from its prior-year period.
Within its wholesale channel, the company experienced strong rebounds in markets like Germany and France, with sales exceeding last year’s results. In China, Movado had a 16% increase in sales for Q2 with trends “continuing to accelerate,” as noted by management during the conference call.
Management’s focus for the rest of the year is on controlling expenses and inventories. The company cut expenses by almost $30 million in Q2, lowering estimated current-year operating expenses by $90 million. The controlled spending for Q2 allowed the company to achieve its breakeven point at quarter-end, having just a small loss of $600,000 for Q2.
Good working capital management also allowed the company to generate approximately over $14 million in operating cash flow, as inventory reductions and collections of accounts receivable contributed to cash inflows. Inventory at quarter-end was $173 million, compared to $201 million last year. Management expects to reduce the total inventory level at year-end:
And I think our teams have been really reactive and planning ahead in terms of being able to manage our inventories. And our objective is obviously to continue to bring them down by the end of the year. – Q2 call
Even though revenues were down 44% for the second quarter, gross margins held up relatively well at 51.2% compared to 54.1% in the second quarter of last year. However, margins were pressured due to product mix and higher e-commerce sales, and not from a promotional environment. With a lean inventory position, we could expect gross margins to remain stable in the coming quarters.
Accelerating the direct-to-consumer strategy
With e-commerce sales up 128% in the second quarter, we expect the momentum to build from here. E-commerce still represents a small piece of the pie for Movado, and management doesn’t break out revenues from online sales, it just discloses the following disclosure:
Although sales through the Company’s e-commerce channels have constituted a relatively small portion of its net sales historically, such sales are growing quickly, and the Company expects to continue to grow its e-commerce business in the future. – 2020 10K
That said, over the past 2 years, Movado has invested in e-commerce and its direct-to-consumer channel by acquiring Olivia Burton and MVMT, both brands with a significant online presence. As more sales transition to its digital channel, Movado should start generating operating efficiencies due to scale:
We’ve actually invested most of the cash resources that we’ve needed to invest in our digital initiatives over the last few years, so for example what we’re doing now with MVMT is rolling them onto our sales force–on our sales force cloud solution for ecommerce, and so our whole company will be on one platform. – Q1 call
Growing the direct-to-consumer channel is an important pivotal point to offset declining U.S wholesale sales while generating higher margins. Also, higher online sales give Movado access to first-party data, which could then be used to improve marketing efficiencies and align inventory with current trends. The company made changes to its leadership team, announcing the promotion of Mr. Soltani and Ms. DeMarsilis to strengthen the direct-to-consumer channel.
The Bottom Line
While cheap, an investment in Movado is not without risks. We believe the biggest risk comes from Movado’s dependence on wholesale partners and from licensed brands. The company generates approximately 56% of its revenues from its licensed brand’s portfolio, which includes brands like Coach, Tommy Hilfiger, Hugo Boss, and the recently announced Calvin Klein. There are two brands up for renewal in ’22 and ’23. Failing to reach an agreement can cause pressure to the top line.
With that said, Movado is a good company managed by a conservative executive team. At current multiples, we believe it deserves a speculative position. Just reaching a tangible book value multiple of 1x would represent a substantial upside at $21 per share. The risk/reward balance skews favorably for a positive outcome.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MOV over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.