(IDEX Online) - If you still think of Movado as a watch manufacturer, you need to change the way you view this company.

 

Movado has clearly made the shift from watch manufacturing (with roots in the former North American Watch Company from the 1960s) to a producer of fashionable fine jewelry primarily worn on the wrists of men and women. And, we almost forgot, Movado’s fine jewelry allows you to check the time.

 

Like most jewelry producers, Movado’s sales recovered in 2010, and its operating loss was smaller. In part, the company’s fortunes were boosted by an economic recovery. In part, company management has begun a major repositioning of its brands to more closely reflect the needs and wants of its consumer market, with significant success almost immediately.

 

First, The Numbers

For the full year, corporate revenues rose by a strong 14.1% (excluding unusual items) to $382 million. Movado’s wholesale jewelry (watches) sales – $329 million – were up nearly 12% during the fiscal year ended January 2011. Movado’s U.S. wholesale customers include specialty jewelers such as Sterling and Helzberg as well as department stores such as Macy’s and J.C. Penney. Its overseas wholesale customers include El Cortes Ingles in Spain and Galeries Lafayette in France, among others.

 

In the U.S., Movado operates outlet stores, which posted disappointing – flat – sales in 2010 of about $53 million. However, there was much upheaval in the retail division related to the closing of its 30-plus Boutique stores, so perhaps the under-performance of the outlet stores will be an anomaly.

 

The following graph illustrates Movado’s revenues for the past five years. These figures exclude discontinued wholesale and retail operations such as the 26 Movado Boutique units which were closed mid-2010 (and generated less that $30 million in annual revenues). After bottoming in calendar 2009 (FYE January 2010), the company’s revenues from continuing operations have begun to recover, as the graph illustrates.  

 

 

 

The following graph summarizes Movado’s losses from continuing operations (blue bars) as well as total losses, including discontinued operations (red bars).

 

 

While wholesale revenues were up and wholesale operating losses diminished, the company’s retail sales were nearly flat, with moderately lower operating earnings for the year. The table below summarizes the company’s sales and operating profits for the fiscal year ended January 2011 by operating segment.

 

 

 

 

Overall corporate sales in the fourth fiscal quarter ended January 2011 (November and December 2010, January 2011) rose by 24.5% (excluding unusual items) over the same period a year ago. In the wholesale division, every brand – company-owned and licensed – posted a double-digit sales gain in the quarterly period.

 

Movado: The Jeweler

As we were reading management’s discussion and analysis of the company’s annual results, and as we were listening to the company’s conference call with Wall Street investors, we were stuck by how comments by Movado’s management echoed those of other jewelry executives in the industry. There was little discussion about Movado’s manufacturing operations, other than the fact that the company is exiting in-house production of mechanical movements. The entire focus was on the consumer market and how new, exciting fashionable products were fueling, as Movado Chairman Efrim Grinberg declared, “a re-invigoration of the [Movado] brand.”

 

Here are some of management’s comments about its 2010 performance and the outlook for 2011.

 

·        Overall, Movado appears to be marketing its products toward a younger, more fashionable consumer. In our opinion, this strategy alone is enough to confirm that Movado is selling jewelry. Why? Young consumers are among the least likely to buy a watch. They check the time on their computers, their iPods, their iPads, their mobile phones, and any other electronic gadgets they own. They really don’t need one more timepiece to tell them that they are running late in this over-scheduled, harried world.

And yet, Movado Bold, the newly introduced fashion watch with retail price points generally in the $300-500 range, posted dramatic sales gains in the 2010 holiday selling period. Who bought Movado Bold watches? Generally, they were younger consumers seeking fashion jewelry for their wrists.

Were those young consumers interested in checking the time? We’re not sure, since the Movado Bold watch takes its roots from the company’s Movado Museum watch which has no numbers on it, and only one dot at the 12 o’clock mark. In short, if you have a very vivid imagination, you can almost tell time on a Movado Bold watch. Despite this, they sold like hotcakes at Christmas.

Clearly, Movado Bold jewelry (watches), like many of the company’s other new products, are really fashionable fine jewelry, not watches, in our opinion.

·        Movado seems to be having more success with lower-priced merchandise. For example, the Movado Bold watches, which generally retail for under $500, are below the typical range for a Movado branded watch, which are usually priced between $500 and $1,500. This trend reflects demand across the jewelry industry: sales are generally stronger for lower-priced jewelry.

Management noted that demand for its Ebel watches has been strongest in the $1,500 to $3,000 range; this brand has watches which sell for as much as $10,000.

·        Management said it is accelerating the development of new fashionable watches. This is the same refrain we’ve heard from jewelers: if you want to get customers into your store, you’ve got to have a continuing stream of new fashionable products.

 

·        Like jewelers, Movado has learned that by melting gold product, the company can recover some of its costs from discontinued watch products. Management said they embarked on a program to melt $13 million (at cost) of gold watches which will yield about $11 million in cash from the sale of the gold to refiners. That sounds much like what we are hearing from many jewelry producers, too.

 

·        The following table summarizes Movado’s key brands and 2010 sales trends for those individual brands.

 

 

·        During 2010, Movado spent about 15.4% ($58.9 million) of revenues ($382.2 million) on advertising and marketing. This level is about flat with 2009’s 15.6% ($54.4 million) of revenues, but below 2008’s 18.5% ($78.9 million) of revenues ($425.9 million) that year. This is a divergence from retail jewelers who typically spend 4% of revenues on marketing, but below other luxury goods producers who typically spend up to 20% or more of revenues on marketing.

 

·        Movado’s gross profit margin remains just under 50%, though management hopes to boost it to near 60% over the next couple of years. At this higher level, Movado’s gross margin would be nearer other luxury goods producers’ gross margin levels.

 

·        Movado’s wholesale order backlog has built nicely: it had about $32.1 million of unfilled orders at the end of March 2011, up strongly from $25.9 million of unfilled orders at the end of March 2010.

 

·        Movado’s retail division is still lagging, in our view. In mid-2010, the company closed all but one of its money-losing Movado Boutiques (approximately 26 units generating under $30 million in annual revenues), but continues to operate 33 Movado Outlet stores and one Movado Boutique Flagship store in New York City. For the year, Movado Outlet revenues were flat at $53.1 million, and operating profits declined to $8.7 million from $11.3 million in the prior year.

However, that’s a huge turnaround from the drag that the Movado Boutiques had produced. In 2009, the last full year of results for the Movado Boutiques, revenues were about $28.7 million and losses were nearly $15 million from the Boutiques. Clearly, the Outlet stores are capable of producing a profit. We also note that sales per Outlet store fell from about $1.7 million in 2009 to about $1.5 million each in calendar 2010. In part, this is because of two new stores which were opened during the year. We expect to see sales per store rise in 2011. Management did not give any guidance about the prospects for new Outlet retail units.

Our sense is that Movado is better at producing jewelry for consumers’ wrists than at running retail stores.

 

·        As a result of strong financial performance in 2010, the company has reinstated its cash dividend to stockholders. It suspended its cash dividend in 2008 during the early part of the recession.

 

·        For 2011, management is forecasting that corporate revenues – from wholesale and retail operations – will be up 11% to 13%. After two years of losses, management expects that the company will post a profit in 2011.