Time’s Up for Movado: Overvaluation Exposed

Luxury watchmaker Movado Group (MOV) stock is getting crushed today down more than 18% in afternoon trading after releasing preliminary results for their fiscal fourth quarter. The quarter ended January of this year went worse than analysts had expected as the company foresees losses of 28 to 32 cents per share on sales of just $378 mln. Consensus analysts’ estimates called for a loss of 25 cents on $385 mln in sales, in the important quarterly report that includes holiday shopping. This sort of downward guidance would make any investor second guess a stock, particularly one that had appreciated 120% coming into the day.

As you can see from our ratings history chart, we have had an Overvalued stance on Movado for some time as we believed the run up in price was not justified by underlying fundamentals. Movado is dealing with a number of headwinds including the shuttering of some of their retailers, and those that are still in business are keeping strict inventory controls. This means that in order to compete Movado Group is forced to deeply discount their wares in order to keep inventory moving, as consumers often look to cheaper alternatives such as those made by rival Fossil (FOSL).

The results were bad enough that the company made this comment in their announcement that COO Rick Cote will also take on the role as company President,

“Clearly our results have not been satisfactory over the past year and I believe now is the time to realign our management responsibilities to ensure that the company returns to long-term profitable growth.”

For the full year, excluding one-time events, the company expects to lose $11.9 mln to $12.9 mln or 48-53 cents per share. Management’s outlook for the year ahead was slightly better but still does not inspire confidence. They expect a loss of $5 mln to $10 mln but that estimate incorporates sales growth of around 10% to $15% from last year’s dismal performance. In order to accomplish the modest rebound in sales (fell by 18% this year), management will increase their marketing and advertising budget additionally they will increase investment in their core brands.

We are maintaining our Overvalued stance on Movado because we think it is clear that times will remain tough for at least another year. General economic improvement has boosted jewelry and watch makers quite a bit, but we are skeptical that the results actually warrant such a valuation. Based on the current fundamentals, which include rapidly declining sales and widening losses, we would not consider an upgrade unless fundamentals show marketed improvement in the coming months or the stock declines into the mid-single digits.

Time’s Up for Movado: Overvaluation Exposed

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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