Why Investors Should Consider Avoiding Movado

| About: Movado Group, (MOV)
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Summary

Movado's performance has been weak in markets where rival Fossil is doing well.

Movado expects the watch market to remain weak, raising a red flag as far as its prospects are concerned.

Movado is more vulnerable to the Apple Watch due to its limited product portfolio.

Movado Group (NYSE:MOV), the luxury and fine watches designer, has lost around 37% year-to-date on the stock market. In the third quarter of fiscal 2015, its sales were lower-than-expected due to the tightening of inventory at retailers, though the company delivered results in line with the updated guidance for the quarter. The stock suffered the second-biggest decline since 2000 after the third-quarter results. In fact, the stock has declined despite an increase in annual revenue in recent years as shown below:

MOV Chart

MOV data by YCharts

So, with the share price having declined to what they were around August 2012, is this the right time to open a new position? Let's take a look.

A closer look at the problem

Its largest brands - Coach (COH), Hugo Boss and Tommy Hilfiger - continue to do well in their largest markets, North America, Europe, and South America. However, the growth in the North American market has stagnated to a miniscule 1% over a period of nine months.

In addition, recent geopolitical issues in Hong Kong, China, and Russia are headwinds that Movado has to contend with. For example, the pro-democracy movement in Hong Kong, the 18-month-old clampdown by the Chinese government on expensive gift-giving by officials, and Russia's annexation of Crimea are events that doesn't bode well going forward.

Going forward, the company expects that Hong Kong, China, Argentina, Turkey, and Thailand will continue to pose economic challenges.

Falling behind Fossil

However, peer Fossil (NASDAQ:FOSL) has performed well in the Asian market, despite all the headwinds that Movado seems to be putting the blame on, and registered a year-over-year growth of 13%. Even in the domestic market, where Movado is struggling, Fossil registered 6% year-over-year growth.

According to Digital Luxury Group's, founder & CEO, David Sadigh:

Consumers from around the world are more and more falling in love with fine watches, especially women. The segment currently represents the largest untapped opportunity, both in Asia and the Americas.

Clearly, the problem lies with the brands of Movado -- Lacoste, Scuderia Ferrari, and Movado -- rather than the economic challenges in any region that Movado is trying to put the blame on. Fossil, as I highlighted in my recent piece, is working to expand its distribution network in Asia, besides opening retail outlets in different regions of the world.

The recovery will be tough

Movado is investing in brand building and long-term growth. However, these investments will weigh heavily on its operating profit in the near term if sales do not grow at a significant clip. In the third quarter, sales decreased around 1% year-over-year, and operating income declined to $33 million versus $34.1 million in the year-ago period. One positive takeaway was the nine-month operating income of $61.4 million, a record level in the entire history of the company for the comparable period.

Going forward, Movado expects the watch category to be growing at a slower pace than the growth of the economy, with mid-single-digit levels sales growth being lower than the company's 10% strategic growth plans. Another looming threat is from the smartwatch industry, and more so from the Apple (AAPL) Watch, the mass production of which is slated to start this month. Apple is expected to produce 18 million pieces in the next six months.

Final words

Movado might be able to beat analysts' expectations on account of share repurchases through an increased share repurchase authorization. However, the worry is regarding top line growth and the pressure on the operating margin. Fossil has a larger product portfolio as compared to Movado, so Movado is more vulnerable to the impact of Apple's Watch. In fact, Accenture's Acquity Group finds that "23 percent of consumers surveyed plan to purchase one in the next five years."

Hence, it isn't a good idea to invest in Movado, as the company is facing pressure from a number of quarters, making it a risky investment.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.