IDEX Online Research: Movado Core Operations in Good Shape

After sorting through a large number of unusual financial items in Movado’s third quarter (ended October) results, the bottom line is that the company posted solid performance. However, due to the number of unusual items – from top line sales right down through the tax line, it was difficult to see what the company’s actual results were, based on core operations.

 
The table below summarizes reported versus “normalized” results for Movado.

Highlights of Movado’s fiscal third quarter performance for the period ended October 2006 were as follows:

• Sales – Total reported revenues rose by 17.3 percent, including the benefit of about $12.1 million of discontinued merchandise. Without the discontinued merchandise, total corporate revenues rose by 8.7 percent, moderately below the company’s goal of 10-11 percent sales gains.
• Luxury watches – Ebel, Concord – Concord continues to restructure; the “new” Concord will be unveiled at Basel in 2007. Sell-through of Ebel watches is strong; in addition, new Ebel launches are doing well. However, because of the restructuring at Concord, core sales were down, though management said Concord remains profitable. At Ebel, sales were down due to comparisons against last year’s sell-in of this new brand. Without the discontinued product – mostly Concord goods – sales in Movado’s luxury watch category were down double digit levels in the third quarter.
• Accessible luxury watches – Movado, ESQ – Sales in this group were up 16.3 percent in the quarter. New products are driving Movado brand watches, while ESQ’s new diamond fashion watches are sparking demand.
• Movado retail – Sales were up 0.4 percent in Movado’s retail network of 60 stores – 30 Movado Boutiques (now 31 units with the opening of a new store in Los Angeles recently) and 30 Movado Outlet stores.
• Movado Boutiques posted a total sales gain of 1.3 percent, with a same-store sales gain of 0.5 percent. Several factors hurt sales gains, including tough comparisons against last year, late receipt of goods, and a focus on gross margin improvement coupled with higher retail prices which had a negative impact on demand.
• Movado Outlets posted a sales decline of 0.2 percent, with a same-store sales decline of 5.6 percent. It suffered from the same negative factors that also affected the Movado Boutiques.
• Licensed brands – Sales in Movado’s licensed brands division rose by a sharp 47 percent in the third quarter.
• Coach watch demand was driven by new products.
• Tommy Hilfiger continues to generate solid growth.
• Hugo Boss is very strong due largely because it is still in the roll-out phase of its business. New advertising for Hugo Boss watches is planned in Asia and Europe; this should help boost long term demand in these markets.
• Juicy Couture introduced new watches accompanied by heavy advertising in the third quarter.
• LaCoste will be taken over by Movado in February 2007. However, management has already begun developing new product to be marketed under the LaCoste name; this new line will be introduced in Basel in 2007.
• Domestic wholesale sales were up nearly 23 percent while international wholesale sales were up about 11 percent. Roughly 20 percent of Movado’s wholesale sales are in international markets.

• Gross margin – Movado reported a gross margin of 58.9 percent, down from last year’s 60.8 percent. However, if discontinued merchandise is eliminated, its gross margin for the third quarter would have risen to 63.5 percent. Three factors are driving gross margins: 1) inherently higher gross margins in the Boutique stores; 2) higher margins in jewelry, which is becoming a greater portion of the company’s sales mix in its stores; and, 3) higher margins on new watch introductions.

• Operating costs – Movado reported an operating cost ratio of 47.0 percent this year versus 47.4 percent last year. Aside from the usual rising expense categories – payroll and retail expansion – the company had help from foreign currency translation ($2.2 million), but this was offset by an increased reserve ($6.0 million) for bad debt. Management was not as forthcoming with an explanation about the increase in its bad debt reserve, but it appeared that the increased reserve was not related to any single customer, but rather due to possible under-reserving in the past.

• Taxes – The company took a tax credit in the third quarter; as a result, net after-tax profits were higher than pretax profits. It appears that the company will report a tax rate of 5 percent for the current fiscal year, down dramatically from last year’s 25 percent tax rate. The reduced tax rate relates to the increased utilization of the net-operating-loss carry forwards that came with the acquisition of Ebel last year.

• Outlook – Management had three relevant comments about the outlook for Movado:

• Management says the Boutiques should be profitable next year (FYE January 2008), but acknowledges that they are not yet approaching break-even this year. As a result, IDEX Online Research believes that it will be difficult for these stores to be profitable next year, since they are still suffering from lack of scale. Years ago, Movado management had said that the Boutique division would be profitable in the range of 22-23 stores. As the division has growth, management’s projections of profitability have moved further out; it now appears that profits could come with 32-33 stores.
• Management is waiting for a softer economy in order to make further acquisitions. When the economy softens, bargains become available.
• Holiday sales are going “OK” so far, but it is too early to tell how the season will end.