Investors in Movado Group (NYSE:MOV) were not happy at all with the company's recently released second quarter earnings report.
Second quarter results fell quite a bit short compared to consensus estimates which created a disappointment while the company stuck to its full year forecast which provided little comfort to investors.
Given the strong balance sheet, the solid but volatile historical growth and appealing valuation, I might be inclined to be a bit more optimistic at current levels and pick up a few shares.
Highlights For The Quarter
At the end of August, Movado reported its second quarter results which were not very good. The company posted sales of $143.6 million, a 3.8% increase compared to the year before. While topline sales grew, they still fell way short compared to consensus estimates at $153 million.
Despite the modest increase in sales, net earnings were down a bit on flattish operating earnings and a slightly higher tax bill. Reported net earnings came in at $12.2 million, a 2.4% decline versus last year.
Amidst a rather flattish share count, earnings came in at $0.47 per share which was a penny less compared to last year. Reported earnings came in quite short compared to consensus estimates at $0.53 per share.
Looking Into The Quarter
CEO Efraim Grinberg was pleased with what he called a ¨solid¨ quarter in a challenging retail climate.
Overall reported sales growth slowed down to 3.8% on an annual basis which compared an overall 6.5% reported growth for the first half of the year. Overall reported gross margins came in at 54.0% of sales, down 10 basis points compared to last year. Overall operating margins came in at 12.0% of sales which was down by 30 basis points as operating expenses rose on a higher payroll and adverse currency movements.
As discussed before net earnings were down a bit from last year when the company recorded a $1 million tax benefit which translates into a roughly $0.04 per share benefit to earnings.
A Reiteration Of The Guidance
For the entire fiscal year, Movado anticipates sales to rise by some 10.7% to $640 million.
Operating earnings are seen up by 19% to $90 million with net earnings seen at around $63.5 million which should translate into earnings of $2.44 per share.
The full year earnings guidance came in just two cents below analysts consensus estimates despite the second quarter earnings shortfall.
Appealing Valuation, Strong Balance Sheet
At the end of the quarter, Movado held some $170 million in cash and equivalents while it does not have any debt outstanding, allowing it to enjoy a very healthy financial position. Important to consider for companies operating in the watch sector and the wider retail sector at large is of course the inventory position which came in at $195 million. The 7% reported growth in inventories outpaced revenue growth, causing some worries among investors.
At around $37 per share, following the recent sell-off, equity in Movado is now valued at roughly $950 million given that the business has some 25.7 million shares outstanding. Subtracting the net cash holdings, operating assets are valued at around $780 million.
This values operating assets of the business at 1.2 times anticipated annual sales and roughly 12-13 times anticipated earnings.
Mixed History Of Growth
Over the past decade, Movado is anticipated to grow its business by some 50% from little above $400 million in 2005 to an anticipated $640 million in sales this year, growing sales at roughly 4-5% per annum.
That being said, the growth path has been less smooth than it appears at first sight with sales falling by a third between 2008 and 2011 when the recession hit the market for luxury products hard.
After posting some moderate losses during the recession, earnings have recovered rather quickly. The company managed to keep the outstanding share base rather stable over this time period, as the strong balance sheet avoided dilution of the shareholder base during and after the recession. Shares on their turn peaked at $35 in 2007 ahead of the recession, to fall to just $5 amidst the crisis.
Shares did show a meaningful recovery to $48 at the end of 2013, yet shares have fallen by about a quarter to current levels at $37 per share as investors were not pleased with the results over the past week.
Final Implications For (Potential) Investors
The investment case for Movado is a bit tricky. On the one hand the company enjoys a relatively solid performance so far this year amidst a steady market for high-end luxury, and a difficult retail environment at large.
Yet its fortunes are very much tied to the long term trends in the global high-end of the fashion industry which certainly has been enjoying a few good years in a row now.
As such the company has posted steady revenue growth in recent years, although sales do have the potential to fall steeply during recessions. While the high end market remains relatively healthy, investors have been disappointed quite badly with the very modest increase in sales for the second quarter. In that light I find the reiteration of the full year guidance quite comforting, although risks might be building towards the downside.
Much of the disappointment has been factored in with shares essentially falling by 15% from $44 to $37 after the earnings release. After backing out the net cash holdings of the firm, the drop in the operating business valuation came down to 20% which appears to be a bit of an overreaction.
Consequently, shares now trade at just 12 times anticipated earnings this year amidst a rock-solid balance sheet. While the current times are relatively good operating conditions for the business, this is quite appealing given the history of through-the-cycle growth. At these levels and subsequent potential further short term dips I might be inclined to pick up a few shares.
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