Movado-Olivia Burton Deal Looks Good On Paper
- Movado makes an interesting purchase with the acquisition of Olivia Burton.
- The bolt-on deal looks nice on paper, adds to growth potential and allows Movado to connect to younger customers.
- I like the deal, even if Movado still has a lot to prove, including the challenge to continue to motivate Olivia's management team.
Movado Group (NYSE:MOV) is using a portion of its fat cash position to grow the business, as it's acquiring the Olivia Burton brand, a popular watch and jewelry brand in the UK. The deal is welcomed by investors despite the relatively steep sales multiple, though it's not really that steep given the growth of the business. This deal brings growth and, more importantly, a connection to a younger generation of customers. This is much needed as it could act as a platform for Movado to revive its core business again.
I like the deal, although the company still has a lot to prove. While the valuation for Movado remains very modest, shares have risen 25% from the recent bottom already. That makes me a buyer in the low $20s as the wider retail landscape has many opportunities at this point in time.
Movado has acquired Olivia Burton, a rapidly growing fashion watch and jewelry brand, in a deal that values the company at 60 million pounds in cash. The company was only founded in 2011, focused on watches at first and has added a jewelry line as of last year.
The fashion and vintage-inspired business has grown rapidly, and is in great demand as collections are released every two months at a acceptable prices. Olivia Burton's products are found at retailers such as John Lewis, Argento, and Selfridges. While these names might not ring a bell to all investors, it also has a concession at Topshop's flagship location in London. It products can now be found in Nordstrom as well.
The deal does not come cheap, but the growth is impressive. Revenues were up 64% in the 12 months leading up to March of this year, when they came in at 15 million pounds. This revenue number is expected to grow to 25 million pounds this year, for a 2.4x forward sales multiple.
With the deal, Movaldo aims to grow its e-commerce operations and boost its sales profile. More importantly, it endeavors to learn more about, and gain more traction with, aspirational and millennial customers.
A Great Deal, if You Manage the Asset Well
Movado has been struggling for a while as the company has not grown revenues at all over the past decade. In 2017, sales fell some 7% to $553 million, as deleveraging resulted in net earnings being down some $10 million to a little over $35 million, still equivalent to $1.51 per share.
The 23.3 million shares outstanding at this point in time are valued at $25 per share, for a $580 million equity valuation. This overstates the valuation of the operating assets as the company operates with a net cash position of $203 million, which implies that operating assets are valued at $377 million. This is equivalent to just 0.7x sales and 11x earnings.
This multiple is not very realistic and will increase a bit as Movado sees continued pressure on its business this year, with first-quarter revenues being down some 13%. Despite the poor guidance, sales are still seen at $515-$530 million, while earnings are seen at $1.40-$1.55 per share.
In that light, the latest deal looks expensive, although the 2.4x forward sales multiple remains very manageable given the explosive growth trajectory, certainly not if growth can continue and Movado is able to learn best practices to revive its core business as well. While the company has not laid out the assumption underlying the deal, the company expects that the deal will be accretive to earnings per share this year.
Despite the real struggles Movado is facing, the company has a margin of safety thanks to its strong net cash position, which is equivalent to $9 per share ahead of the deal when the stock is trading in the mid-$20s. This net cash position of +$200 million will come under pressure as the deal involves a cash payment of roughly $78 million based on current exchange rates. But it brings real revenue and, more importantly, revenue growth. The key to value creation is the longevity of the growth pace at Olivia Burton and whether Movado can learn from the company and recover its core business.
The market reaction tells us a lot, with shares trading with gains of 3% at this moment, equivalent to a $18 million increase in the market value on the back of a $78 million deal. The goal now is to integrate the best practices of Olivia while not disturbing the brand and its management talent too much, to the point which they take their money and run. For now I give Movado the benefit of the doubt, but I'm not necessarily buying after shares have already inched higher from $20 to $25 in recent weeks.
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