IDEX Online Research: Movado Sees “Light at the End of the Tunnel”September 17, 09
Movado president and CEO Efraim Grinberg made two important comments in his address to investors relating to the second fiscal quarter ended July 2009: “We are beginning to see some stability in the market, particularly in the U.S. …” and “We are beginning to see more consistent orders from many of our retail customers in the U.S., after significant de-stocking late last year and early this year.”
Like most jewelry and watch suppliers, Movado’s revenues in the second quarter were quite weak – down 31 percent. Retail merchants are not re-stocking, but rather they are letting their store inventories run down in order to maintain an inventory level commensurate with the current lower sales trends which have characterized the industry for the past year or more. As a result, producers like Movado have seen their sales fall by multiples compared to retailers. As industry analyst Chaim Even-Zohar puts it: a one-time fall in sales at retail translates to a four-time sales decline up in the distribution pipeline.
Despite weak sales, there’s something that sets Movado apart from most other industry suppliers: Movado posted a profit in the second fiscal quarter. While the after-tax profit was just one-sixteenth of last year’s levels, it was a profit: $0.5 million versus $8.1 million in the prior year’s second quarter. Excluding one-time charges and credits, the company’s after-tax profit from “normal” operations was $1.4 million versus $9.8 million in the three-month July 2008 period. Further, its retail store division posted an operating profit that was 249 percent above last year’s levels.
The table below summarizes Movado’s financial performance for the second fiscal quarter ended July 2009.
Second Quarter Highlights
Here are some highlights from the second quarter ended July 2009:
- While the company noted that sales appear to have stabilized in the U.S., demand remains much weaker in its European markets. Because the recession began later in Europe, it is no surprise that this region of the world is still mired in an economic downturn.
- Management noted that while consumers continue to rein in their discretionary spending, there were some “bright spots” of demand:
- Demand was solid for new products such as new Movado Sub Sea Collection of watches with retail price points between $795 and $995.
- Demand was stronger for goods at more “accessible” price points within all brands. This means that demand is stronger for watches at the lower-end price ranges for its brands. This trend is no surprise: lower-end jewelers are posted better, less-weak results than upper end retailers.
- The company highlighted two new watch collections that are being launched for this fall; it also mentioned new jewelry collections that will appear in its retail stores:
- A watch collection by artist Kenny Scharf, with six different designs, will be sold predominately in the Movado Boutiques.
- A new Pinnacle Collection with the Movado brand features an automatic movement, a natural rubber strap and a sapphire bezel. The collection ranges in price from $3,000 to $5,000.
- New jewelry collections will be introduced this fall in the company’s Movado Boutique stores.
Here’s the point: Movado recognizes that, despite the recessionary environment, you’ve got to give consumers a reason to come into your store. New products are a great reason to create excitement with your customer base. Clearly, Movado is betting that new watch and jewelry collections in its company stores will attract customers, since new products are heavily weighted toward introduction in its own retail units.
- Management did not provide much detail about the operation of its retail stores. However, it did say that it was increasing the mix of its own branded goods, including a greater mix of watches and proprietary jewelry collections. In short, much of the merchandise will be unique and exclusive to its retail stores.
- Movado’s retail sales in its company-owned stores declined by about 11 percent in the quarter, with the Movado Boutique units down by almost 20 percent and outlet sales down by a more moderate 6 percent. At the end of the quarter, the company operated 27 boutique units and 31 outlet stores.
- Operating profits in its 58-store division were $841,000, up 249 percent from last year’s $241,000. The company has been focusing producing profits in its retail division; clearly, it was successful, despite the tough economy in the second quarter.
- Earlier this spring, Movado began rebranding its ESQ watches to “ESQ by Movado” in order to provide watches at an entry level price point with a strong association to the Movado brand for its retailers. Initial results appear “promising,” according to management.
- Sales remain weak for Movado’s two very high end brands: Ebel and Concord. Management looks for a recovery for those brands in 2010.
- Sales in the company’s wholesale division were down 35 percent, with U.S. wholesale sales down 31 percent. This reflects the “stability” and encouraging trends that management mentioned in its conference call.
- The following table summarizes revenues and operating profits by operating divisions:
Source: Corporate Reports
- The company’s gross margin was 58.7 percent in the July quarter, down modestly from last year’s 64.1 percent. Price-based promotional activity ate into margins this year.
- Movado’s pretax margin was 1.1 percent of sales, down dramatically from last year’s 8.4 percent of sales. This is no surprise: the company’s gross margin fell and its operating cost ratio including interest expense rose. Further, it had less interest income, since its cash balance declined from $84.5 million last year to about $47.5 million this year.
- Balance sheet ratios seem reasonable, given the lower sales level and overall decline in business activity. Inventories are slightly higher, but not at a worrisome level.
- The company is on track to reduce operating costs by $50-60 million this year, in line with its stated goal. Its capital expenditure budget is about $10 million this year versus $23 million in the prior year. Management’s goal is to preserve cash.
- The company’s outlook for the current fiscal year is reasonably optimistic, and in our opinion, realistic:
- Sales for the full year are expected to be down by a high single digit level. Management is expecting sales trends to continue to improve in the third and fourth quarters.
- The company’s gross margin is likely to be in the 60 percent range.
- Profits will likely be about five times last year’s levels. Before anyone jumps for joy, it is important to understand that last year’s earnings were severely depressed. Further, while this year’s earnings will be up from the prior year, they will still be well below historic trend levels. But it is important to note that the trends are positive.