Movado Group designs, sources, and sells watches through various brands, including Movado, Concord, Ebel, MVMT, and Olivia Burton. The company also owns retail stores and operates ecommerce channels to sell its watches.
A significant portion of Movado’s revenues comes from licensed brands such as Calvin Klein, Coach, Hugo Boss, Lacoste, and Tommy Hilfiger.
Long-Term Financials Show Modest Growth
Over the past two decades, Movado has shown modest revenue growth with a compound annual growth rate (CAGR) of 3.6% from FY2004 to FY2024. This growth has been both organic and supplemented by acquisitions, including Olivia Burton in 2017 and MVMT in 2018.
However, margins have fluctuated with sales trends, and the current trailing operating margin stands at 7.1%, down from 16.1% in FY2023 due to lower sales.
Is the Current Weakness Temporary?
Revenues saw a significant decline in FY2024. Historical turbulence has been caused by the introduction of the Apple Watch in FY2017 and the pandemic. The current downturn is attributed to a challenging retail environment.
However, industry insights suggest the watch market grew by 14.7% from 2022 to 2023, driven by non-luxury watches, which should favor Movado’s brands.
Some of Movado’s brands face scrutiny from watch enthusiasts. The Movado brand, for example, faces criticism for its luxury positioning with quartz movements and uninspired designs. Other brands in the portfolio face similar critiques, possibly contributing to the revenue decline.
Movado’s FY2025 outlook forecasts sales of $700-710 million, with a 4.8% growth midpoint. The company plans to spend $25 million on incremental marketing, primarily affecting the second half of FY2025. This increased marketing expenditure is expected to aid sales but will also significantly impact profitability.
Licensed Brands’ License Expirations Are a Moderate Risk
Licensed brands, which accounted for 53.9% of Movado’s total sales in FY2024, rely on licenses from globally recognizable brands. The expiration and renegotiation of these licenses pose a significant risk.
- Coach brand license: Expires on June 30, 2025. Given the long-standing partnership since 1999, significant changes are unlikely.
- Tommy Hilfiger license: Expires at the end of 2024, with a potential five-year extension. Movado plans to submit a new business plan in the first half of FY2025.
- Hugo Boss and Calvin Klein licenses: Both expire at the end of 2026, with possible five-year extensions.
- Lacoste license: Expires at the end of 2031.
While the long-standing relationships with these licensors reduce immediate risk, declining sales could prompt licensors to explore other partnerships.
The Strong Balance Sheet Needs Use
Movado’s balance sheet reveals $225.8 million in cash and short-term investments, nearly 40% of the company’s current market cap.
The company could leverage this strong cash position for special dividends, faster share buybacks, or new acquisitions. As of Q1, the company had $16.8 million remaining under a share repurchase program.
Valuation: Cheaper for a Reason
Movado’s stock currently trades at a forward P/E of 20.2, with earnings expected to be pressured by higher marketing expenses in FY2025. A discounted cash flow (DCF) model suggests a fair value estimate of $21.09, 17% below the current stock price.
This valuation reflects the company’s weak underlying performance despite a strong balance sheet.
The Main Upside Risk
Improving sales could significantly enhance Movado’s investment appeal. The company’s higher marketing spend could boost brand equity, potentially leading to better sales performance.
However, insiders sold nearly $969,000 worth of stock in late 2023, suggesting that a turnaround might not be imminent.
Takeaway
Movado’s brands appear to be underperforming in the watch market, with revenues declining in FY2024 and early FY2025. The company’s sales outlook for FY2025 is tied to increased marketing spend, which significantly impacts profitability. License expirations also pose a moderate risk.
Despite a strong balance sheet, the current valuation seems unattractive, suggesting that investors should approach with caution.
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Dean is a freelance content writer who contributes to various Digital Media Companies and independent websites all over the world. He has over 20 years of financial industry experience, so it’s safe to say he’s well informed.
