On March 29, I
made a bullish case for
, stating that the watchmaker is an inexpensive way to capitalize on the growing market for luxury goods. On
the following evening, Jim Cramer pounded the table on Movado; the "Cramer effect" seemed to last three trading days as the shares jumped 12% from their March 30 close through Tuesday, before dipping Wednesday.
On Thursday, the stock tumbled 5.2% to $22.42 on heavy volume after Movado posted weaker-than-expected quarterly sales.
As Jim often says, the time to buy the stocks he recommends is a few days later, when the stock comes back in after its initial jump. Patient investors now have the chance to get into Movado, and I believe they will be rewarded over the next 12 months.
Earnings and Margins
Movado reported fourth-quarter sales of $126.1 million and earnings of 38 cents per share (11 cents on a GAAP basis). That compared with First Call consensus estimates of $129.1 million in sales and 36 cents in earnings.
The lighter-than-expected sales figure was mostly due to weakness in its international wholesale business -- particularly the Concord brand and how it performed in the Middle East. No specific reason was given for Concord's Middle East woes other than that the midprice luxury category has been difficult (while the top level and entry level are growing). Movado is in the early stages of re-engineering the Concord brand.
For fiscal 2007 (ending in January), Movado expects revenue in the $513.3 million to $522.7 million range and EPS of $1.35 to $1.39 including one-time items, which would represent earnings growth of 14% to 18%. Still, its guidance is slightly lower than the current consensus of $524.8 million in sales and EPS of $1.41.
According to my model, Movado should earn $1.39 per share in fiscal 2007, at the top of its guided range. I believe Movado management could be conservative in its estimates. As I mentioned in the first article, this is a company that knows how to market and sell luxury brands.
On the basis of Thursday's closing price of $22.42 and assuming 2007 earnings of $1.39, the stock is trading at 16 times forward earnings, well below its peers. The same is true if you use the midrange guidance figure of $1.37.
Movado's gross margin in 2006 was 60.8%, up from 59.7% in 2005. Operating margin increased to 10.2% from 8.4%. Management expects gross margin to be flat in 2007 because of the costs related to the Concord brand. However, margins should increase if sales ramp up like I believe they will. Management also said it expects operating margins to be in the mid-teens over the next several years.
In order for Movado to remain a growth story, sales must be the key driver. This is not an expense-cutting story. The company guided for operating expenses to grow 8% to 10% in 2007, a slightly lower range than sales projection.
On the earnings conference call, management was quite conservative when discussing the opportunity in China. I'm not sure if that opportunity will fully materialize in the next quarter or so, but I do believe that sometime this year Movado will begin to see results from the Asian nation.
China's growing middle class loves to emulate Americans. And one thing that Americans love is their "bling." The Movado brand offers an entry-level price and eye-catching designs that should capture a good chunk of the Chinese market for luxury watches.
The new Hugo Boss license is expected to generate roughly $10 million in revenue this year. I would not be shocked if that number comes in higher. Hugo Boss is a well-known global brand that embodies trend-setting fashion. The label saw sales grow 12% in the recently reported quarter. Movado should be able to capitalize on the popularity of the brand and turn it into a profitable business in its first year.
Movado will launch Juicy Couture watches in the fall. Juicy is a fast-growing upscale brand that fits well into Movado's portfolio. The company will also introduce Lacoste brand watches next spring.
Several of Movado's other brands showed excellent sales in the fourth quarter. ESQ, Tommy Hilfiger and Coach all saw double-digit gains, while Ebel's sales rose over 40% and was a profitable line for the first time in years.
Movado boutiques should help financial performance as well. The company plans to add three more stores this year, and that should bring the business unit into the black for the first time. Any increase in sales at the boutiques has potential to boost the bottom line even more, as margins are higher at the company-owned stores.
Nothing in the earnings release or conference call changed my thesis on the stock. With shares coming off of the "Mad Money" spike, investors with at least a 12-month time frame have another opportunity to get into Movado.
In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.
Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86,87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;
to send him an email.