Movado Group (NYSE:MOV) is dealing with rough operating conditions at current times. Not only is the wider retail industry suffering from poor mall traffic trends and the shift towards online shopping, the watch category is undergoing tremendous changes on its own as well.
While risks are plentiful, Movado is still a very profitable business, which operates with a very strong balance sheet. This means that while challenges can undermine its current business model, they are unlikely to cause financial stress in the short to medium term. Given the value, which can be found in this case, I think that the current share price reflects a lot of bad news already.
A Look At The Business
Movado will soon be 50 years into existence, being a designer, producer and distributor of watches. The main business is the sale of license brands watches such as Coach, Tommy Hilfiger, Hugo Boss, and Lacoste, among a few others.
The company focuses on the so-called luxury, accessible luxury and moderate/fashion price ranges. This means that it does not focus on mass market watches which are priced at less than $75, nor does it focus on the exclusive segment of the market, which starts at $10,000 each.
Besides the important license brands business, which makes up half of total sales, Movado owns a few (Swiss) brands as well. This includes Concord, Ebel and the namesake Movado brand. In total, these sales make up over a third of total revenues.
The Movado brand is "traditional," just like its other owned brands, but it too has started to incorporate technology, like the rest of the industry. Two distinctive technology-based lines have been announced. While this sounds promising, the actual technological contribution is limited to basic sleep and step monitoring, as well as some agenda functions.
The vast majority of both the owned and franchised watch sales are taking place through the wholesale segment. This segment is comprised out of typical jewelry stores as well as generic retail department stores such as Macy's (NYSE:M) and Nordstrom (NYSE:JWN). These sales are complemented by the modest retail operations run by the company itself, comprised out of roughly 40 stores.
On a geographic basis, Movado generates a little over half of its sales in the US, driven by the successful license strategy in that area. Europe accounts for a fifth of sales, complemented by the activities in Asia, the EMEA region as well as Latin America.
Plenty Of Risks
There are many things, which can impact Movado's business including intense competition, the emergence of superior technological watches, as well as reliance upon large license revenue streams. Other risks include the challenges, which many of Movado's wholesale clients face, including large department stores.
Currency risks play a major role as well as with many costs being incurred in Swiss Francs, a currency which has benefited from a global flight to quality. This appreciation has hurt Movado's business as the controlled ownership by the Grinberg family could pose risks for shareholders as well.
The Opportunity Is All In The Valuation
After the introduction to Movado, and briefly having discussed the risks, which face the business, the company does not appear to be a desirable investment opportunity at first hand.
While it is very much true that the bunnies face some challenges, it provides opportunities for investors as well. Despite some of the headwinds, Movado has grown its sales to nearly $600 million in 2015. The company reported operating profits of $70 million that year, resulting in net profits of $45 million, which is equivalent to $1.90 per share.
The real opportunity in Movado's case is the very strong balance sheet. The company ended 2015 with $228 million in cash and equivalents, of which the vast majority is held overseas. This means that Movado might have to pay tax repatriation charges if it wishes to use these funds for share repurchases or dividends. With US cash holdings being small, the company engaged in borrowings of $40 million.
Following the turmoil in the retail sector, shares of Movado have recently taken a beating as well. Shares fell from levels at $30 in March to just $20 on the back of disappointing quarterly results. With 23.3 million shares outstanding, this gives Movado an equity valuation of $466 million. Following recent buybacks, Movado ended the first quarter with cash balances of $204 million and a debt load of $35 million.
This means that the net cash position of Movado comes in at $170 million. If the company would repatriate all of its cash at a 35% tax rate, net cash holdings are close to $100 million.
If we assume the worst that Movado would repatriate all of its cash at a rate of 35%, the net cash position still amounts to more than $4.00 per share. At a 0% repatriation rate, in case of a tax holiday for instance, net cash amounts to more than $7.00 a share.
This means that operating assets are valued at $13 to $16 per share, depending on the tax rate, which is applied on the repatriation of foreign cash. Were actual earnings of the operating business amounting to $1.90 per share in 2015, operating assets trade at just 7-8 times earnings.
The Current Challenges, Still Worth Holding
Alongside the release of the first quarter results, Movado cut its full year 2016 guidance. A tough retail environment, notably in watches has weighed on the operating results. The company now expects a 3-5% fall in sales for the year, as revenues are seen at $565 to $580 million.
The operating margins of 11-12% being reported in 2015 will come under pressure as well. Margins are seen close to 10% this year, with operating profits projected to come in at $55 to $60 million. The combination of margin pressure and a reduction in sales will weigh on the profitability. Earnings are seen at $1.55 to $1.70 per share, suggesting an 8-10 times forward earnings multiple for the operating assets.
So while the challenges are very real and acute, I feel that a lot of safety is built into the stock. The company remains very profitable despite its challenges, as it has a rock-solid balance sheet. Based on the midpoint of the 2016 guidance, operating assets now trade at 8-10 times earnings, depending on the potential tax rates on foreign held cash.
While all of this is pretty attractive, Movado can be a potential cigar butt as well. Shares now trade at levels similar to their book value. While this should offer some safety, it should be noted that shares have traded at a significant discount during the economic crisis. While this can theoretically reveal more "potential" to the downside, shares have already plunged from levels in the $40s in the period 2013-2014.
All in all, I tend to be slightly optimistic at these levels, looking to buy into the stock if it moves down. While there are certainly some risks out there, with regards to challenges for the long-term business model, risks are sufficiently priced into the stock in my eyes.
Disclosure: I am/we are long MOV.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.