The jewelry industry is feeling contraction at all levels of the supply pipeline. While retailers have been reporting disappointing sales, many suppliers’ sales are downright dismal. Retailers have put off restocking goods, and they are waiting until the last minute before re-ordering. Thus, the slowdown at retail is magnified at the supplier level.

 

Movado, which has both wholesale and retail operations, experienced the same trends which are affecting the jewelry industry: wholesale sales have been much weaker than retail sales. For the third fiscal quarter, adjusted sales comparisons are as follows:

 

• Retail sales – Total retail sales in the company’s 61 stores were down 13 percent in the third quarter. Same-store sales fell by nearly 8 percent. (Retail sales were 17 percent of corporate revenues in the most recent fiscal year.)

• Wholesale sales – Total wholesale sales down 21 percent (adjusted) in the third period. (Wholesale sales were 83 percent of corporate revenues in the most recent year.)

• Total corporate sales were down by about 20 percent in the third quarter (adjusted).

Movado recently reported financial results for its third fiscal quarter ended October 2008. Unfortunately, its reported results were distorted by significant liquidation sales last year. Our numbers compare the company’s quarter-to-quarter results without last year’s liquidation sales, so that comparisons are on an apples-to-apples basis. They are different from results reported in the broad media, but they are much more meaningful to help the jewelry industry understand what’s happening at various levels in the supply chain.

 

The table below summarizes results, based on the elimination of last year’s liquidation sales, unless noted by an asterisk *.

 

 The following are financial highlights from Movado’s third fiscal quarter.

 

• Excluding last year’s liquidation sales, revenues for the third quarter were down 19.6 percent. Including last year’s liquidation sales, reported revenues were down 24.6 percent.

• Sales in Movado’s wholesale segment were down 21.1 percent, excluding last year’s liquidation sales. Wholesale sales of $117.5 million represented just over 86 percent of the company’s third quarter sales. The balance of revenues came from its 61 retail stores.

• Sales in the luxury watch category – brands including Ebel and Concord, as well as some watches branded Movado – were down 29 percent (adjusted) in the quarter. Sales of luxury brands were down broadly across all geographic areas.

• Sales in the accessible luxury watch category – mostly Movado brands – were down 35 percent, mostly due to weak demand in the U.S. market.

• Sales among licensed watch brands – ESQ, Coach, Hugo Boss, Jiicy Couture, LaCoste and Tommy Hilfiger – were up just over 8 percent due to growth in international markets.

• When segmenting sales by geographic area, wholesale sales fell by about 32 percent in the U.S. market, excluding liquidation sales. Most of the decline came in the luxury watch category where sales were off by 60 percent. Sales in the accessible luxury category fell by 38 percent, while sales of licensed brands were relatively flat.

• Wholesale sales in international markets were down just over 7 percent, excluding liquidation sales last year. Luxury brand sales fell by 22 percent; likewise, accessible luxury brand sales fell by 22 percent. Sales of licensed brands were up.

• Sales in Movado’s retail division fell by 13 percent. At the end of the quarter, there were 29 Movado Boutiques and 32 Movado Outlets, for a total of 61 stores, down from 62 last year. In the past year, a net of two Movado Boutiques have closed and one Movado Boutique has opened.
  
  Same-store sales in Movado’s retail division were down about 8 percent. Same-store sales in the Outlet stores were up slightly, while same-store sales in the company’s Boutique stores were down notably.

• Management did comment that sales of the company’s highest-end exclusive watches held up, but this category is only a small portion of total sales. Further, while demand for these exclusive watches was strong, sales were constrained by the lack of Swiss mechanical movements.

• On a reported basis, it appeared that Movado’s gross margin rose in this year’s third quarter. However, after low-margin liquidation sales are eliminated from last year’s financial results, the “apples-to-apples” gross margin comparison shows that this year’s gross margin fell by 120 basis points to 63.5 percent from last year’s 64.7 percent. The decline in the gross margin was primarily related to changes in the sales mix between higher-margin and lower-margin categories of watches.

• Movado’s operating costs were 52.7 percent of sales this year, up dramatically from last year’s 45.2 percent. Most of the unfavorable variation was caused by weak sales which were not sufficient to leverage relatively fixed overhead costs. However, management took several steps to help offset cost increases, including a reduction in discretionary spending for consulting and other outside services; lower payroll related to a reduced headcount; and some reduction in the accrual for bonuses. However, an increase in marketing costs as well as one-time severance payments hurt operating expenses in the quarter.

• Management said that marketing expenses would be “down” in the range of 15 percent of sales for this year’s fourth quarter and into next year. For the past three years (2005, 2006, and 2007), marketing expenses have been 16.1 percent, 14.9 percent, and 15.1 percent respectively. So, we really don’t see much change. However, our notes from the prior decade indicate that Movado’s marketing costs were near 20 percent of sales at one time.

• Movado reiterated its commitment to remain an exhibitor at the all-important Basel show in Switzerland. However, Chairman Efraim Grinberg said fewer employees would attend the show in 2009.  

• It appears that management is reacting appropriately to the downturn in demand. It has developed a unified brand strategy, it has closed 1,400 low-volume unprofitable retailers in the U.S. market and it has implemented broad sweeping cost-cutting programs. Further, smart companies use recessionary periods to plan for the inevitable rebound. Our sense is that Movado is one of the smart companies. We’ll see how results stack up in calendar 2010.