Movado Group, Inc.NYSE:MOV) first caught my attention in August 2021, but as a contrarian, I had a hard time justifying its high rating at the time. Recently, its stock price dipped below $30, rekindling my interest—a feeling that might have happened To put it mildly. Given its fruitful partnership model, the broad appeal of MOV’s brand portfolio across sectors, and the potential decline of its main competitor, it cannot be denied that MOV presents a substantial investment opportunity.
What does Movado do?
First a little about the company. Cherry-dropping pieces from its 10k:
Movado Group designs, sources, markets and distributes quality watches worldwide. Its portfolio of watch brands currently includes owned brands MOVADO, CONCORD, EBEL, OLIVIA BURTON and MVMT as well as licensed brands COACH, TOMMY HILFIGER, HUGO BOSS, LACOSTE and CALVIN KLEIN. The company is a leader in design, development, marketing, and distribution of watch brands sold in almost every major category comprising the watch industry. The company designs, sources, markets, and distributes jewelry and other accessories under most of its brands.
Also the company claims
It is highly selective in its licensing strategy and chooses to enter into long-term agreements only with powerful brands that we believe have strong positions in their respective businesses.
In summary, MOVs have two primary types of business models:
“Owned brands” where the business has full control over their sales channels and product development. This gives them more control, which in the right direction can lead to greater profit margins and scalability.
“Licensed brands” where the company is leveraging the equity and customer base of its partner brands. Sales channels will include partner stores, while design and marketing discussions will also take place between MOV and the partner marketing team. With experienced partners, this can lead to a more stable revenue stream and lower MOV’s overhead.
Advantages of MOV
Although its share prices may have fallen, MOV’s business has by no means escaped. Many MOV brands have experienced great success in recent times. The Olivia Burton acquisition of MOV boosted group sales in Great Britain, which is Burton’s strongest market. Concorde is strong in the Middle East. Ebel is a household name in Europe, as well as the Middle East. In Latin America, Movado and fashion brands are strong. Finally, Movado is the leader in Asia.
Diverse feature of its products
MOV’s brand portfolio has a differentiated regional appeal. More than just a series of buzzwords, MOV has cleverly studied various markets and positioned all its products to avoid any form of self-cannibalism. This means that no two products are in competition. This article supports the fact that diversification has also allowed MOV to build:
Regional strengths within the brand portfolio. In Europe, for example, licensed brands are stronger than Movado. Hence, despite their soft sales in the US, the licensed brands division grew by double digits in fiscal 2019 due to strong overseas sales. Tommy Hilfiger and Hugo Boss watches posted record sales for the year. Lacoste watch sales are up by double digits.
A regionally diverse portfolio allows MOV to analyze a greater range of customer types. As seen from the table above, it caters to the entire spectrum of different customers with very different spending power. This makes it easier for the company to enter new markets and capture them. Additionally, there is usually a direct relationship between marketing costs and the brand’s production costs. Generally, the cheapest handbags will cost less in the market. This may give MOV a bit more wiggle room when adapting to different market conditions. For example, demand for more affordable handbags should increase when times are tough, which would allow MOV to easily reduce large marketing expenditures on more high-end luxury products in its inventory to save even more costs for the company. Out on sale.
Partnership business model with successful brands
The company has a long-term partnership business model where it collaborates with major fashion brands. This model allows MOV to leverage on partners’ brand equity and tap into brand followers. This win-win partnership model presents a huge opportunity for growth by adding more brands to its portfolio, as well as expanding partnerships into other products such as jewellery. As shown in the figure, the company’s licensed brands have been a strong source of growth, as it has increased overall revenue despite sales of fewer owned brands.
Overall, this collaborative brand partnership model appears to be a sustainable long-term approach that can generate steady revenue and earnings growth as it works with more prominent brands.
Collapse of Key Competition: Fossil Group (FOSL)
While FOSL operates in the same licensed fashion watch business as MOV, it has seen declining sales from its licensed products in recent years. Unlike a profitable MOV with a clean balance sheet, FOSL is loss-making and has long-term debt outstanding. According to the same article, Fossil’s problems stem from its failed foray into the smartwatch segment that MOV ignored.
Since licensing agreements are dependent on sales performance, FOSL’s declining sales put many of its brand partnerships, which expire in 2023, at risk. If MOV can capture some of these licenses, it could represent a huge opportunity for everyone. For licensed partners, a stable and profitable company like MOV will mean higher and more stable returns over time. And for MOV, taking over their main competitor’s component brands would mean higher market share and pricing power.
Although it is still early and very speculative, MOV appears to be well positioned to gain market share from FOSL’s woes. Winning FOSL’s licenses in its portfolio could boost MOV’s growth and profitability, which would be a positive sign for investors.
While MOV’s brand partnership model offers significant opportunities, it also poses some risks for investors to consider.
Brand image weakness
MOV’s association with mid-tier fashion brands may dilute its image among luxury brands and more discerning collectors and consumers of goods. Working with mid-range fashion brands could portray MOV as a contractor rather than a premier luxury watchmaker, which could harm its premium position in the long run.
A decline in consumer spending
Unfortunately, the boost in consumer spending from government stimulus in 2021-2022 will moderate in 2023 as inflation picks up and people look to cut back on discretionary spending. This macro trend could significantly impact MOV sales and make 2023 results look weaker than the previous year’s peak.
To evaluate MOV across its sector, I’ll use EV/EBITDA with Alpha’s data to look for. This metric includes the company’s debt level and cash generation capacity. Any EV/EBITDA ratio below the average sector EV/EBITDA ratio suggests that the company may be undervalued relative to its peers.
Additionally, I will review the company’s annual average PE over time using data from the ROIC.ai website. Analyzing a company’s PE ratio over an extended time frame will provide insight into how investors value the company. Any PE ratio below the long-term median PE ratio suggests that the company may be undervalued relative to the market.
EV/EBITDA (TTM) across regions
Swatch Group AG (OTCPK:SWGAY) – 8.19
Fossil Group, Inc. (FOSL) – 12.48
Movado Group, Inc. (MOV) – 2.99
Industry average – 9.64
If we compare the above 4 ratios, MOV definitely has the lowest EV/EBITDA among its peers and industry average. This clearly indicates that MOV is undervalued compared to its sector and competitors.
PE throughout time
Examining the PE ratio for the period from 2008 to 2023, the median value is 9.5. Based on FY2023 EPS of US$4.20, this results in a share price of US$39.90 – a 50% potential upside.
The valuation looks reasonable as it is near the 52-week high of $39.80 after a period of significant growth in consumer demand along with the current trading model.
The recent drop in MOV’s share price can be attributed to weak guidance reflecting a spike in consumer spending. But MOV’s strong fundamentals and dividend payout will provide support for its down-trending share price.
The outcome of how their main competitor, Fossil Group, manages its business in the current business environment will have a significant potential upside impact on MOV.
However, with attractive products and a premium brand, Movado stock retains the potential for share price upside if consumer demand and spending recover in the future.
Editor’s Note: This article discusses one or more securities not traded on a major U.S. exchange. Please be aware of the risks associated with these stocks.