3/1/2011
By Brian Sozzi, Research Analyst

Fueled primarily by the rapid ascent in stock prices and the insatiable thirst for luxury goods by the affluent in China, those companies catering to a wealthier clientele enjoyed a bang up holiday selling season.  Coach (COH) did not letdown its players, aka shareholders, as inventory re-stocking at major wholesale accounts, traffic and ticket gains at retail stores, and an expanding piece of the Chinese luxury goods pie led to strong financials.  Tiffany & Co. (TIF) started the fourth quarter well, and we expect to learn of very solid results later this month.  However, there is a small-cap luxury centric stock amongst the formidable stable of larger-cap peers that has not partaken in the fruits of the upper-income consumption boom.  That name is watchmaker Movado Group (MOV), a company that chopped off its money bleeding network of retail stores last year.

Nowadays the company is in the precarious position of having struck out on extending the brand's reach via a retail store presence, leaving it predominantly a wholesaler whose financials are at the whims of others based on fashion trends and open to buy commitments.  This somewhat limited distribution model is unwelcome news amidst a bout of serious inflation in the items Movado sources to make its watches, such as labor, diamonds, gold, silver, and platinum.  The unfortunate set of circumstances is compounded by Movado's manufacturing structure, where it does not have long-term supply commitments and relies on third parties to produce product to a great extent.  So not only is Movado's cost to produce a watch increasing (materials plus labor), it's against a backdrop of a strategy to introduce lower priced watch lines (such as the Bold) to attract new consumers to the brand.

Since achieving a 52-week high back on December 9, Movado shares have lost 18% of their value, underperforming the S&P Retail Index (flat), Tiffany & Co. (-1.6%), and Coach (-5.2%).  I believe the relative performance speaks volumes to Movado's distribution challenges, spotty execution on product design, and a cost base that may rise appreciably given structural considerations and the prolific increase in sourcing costs.  The valuation on Movado supports my bearish view on the stock.  Movado changes hands on a P/E multiple of 38.2x estimated consensus FY12 EPS, or 12.7x EV/EBITDA, aggressive by any stretch of the imagination (relative and absolute).

Movado Fun Facts

* In addition to the namesake Movado line, distributes watches under licenses for Hugo Boss, Coach, Lacoste, and Juicy Couture.
* Still operates its outlet store business and a flagship boutique in New York City.
* Was significantly impacted by independent jewelry closures following the horrid holiday selling season of 2008.
* Recently re-launched website, introducing the ability to buy products online.  However, the buying function is limited to select collections.
* Late to the ballgame in recognizing rubber watch strap craze, which continues to be a dominant theme at retail.
* In addition to swinging and missing on retail stores, has failed to extend the brand to jewelry. 

Brian Sozzi
Wall Street Strategies

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