MOV - Movado Group: +26% Q2 EPS Above Consensus Secular Growth Industry

Summary

• Movado's EPS was up +26% YoY and was 50% above consensus. Revenues were up 10.5% in constant currency.
• The company has a strong balance sheet with 27% net cash [$12.77 per share] to market cap, and it is buying back stock.
• Shares are undervalued, with an ex-cash P/E of 4.8x on steady-state current-year FY2023 consensus EPS of $4.30.
• Management appears confident of holiday outlook, witnessing strong brand performance.
• Despite delivering +47% total return since our Initial Recommendation, we still see upside of 120% for this secular growth story.

Movado ( MOV ) reported strong 2Q results [ended July] for the fiscal year 2023. The company outperformed the market by a significant margin on several fronts. EPS of $1.07 per share was significantly above the consensus expectation [one analyst] of $0.71 by 50%. Q2 EPS is a 26% rise over last year's earnings of $0.85 per share.

While revenues rose 5.1%, there was a significant FX impact due to the surging US$ - in constant currency terms, revenues were actually up 10.5%. This was also ahead of consensus Wall Street expectations. International sales were a bright spot for Movado, rising +25.8% YoY on a constant currency basis. Latin America, India and Europe were particularly strong. For the quarter, gross margins expanded handsomely to 58.5%, up 190 bps from last year. As a reminder, gross margins had also increased sharply 420 bps YoY in Q1.

The company had $203 million in net cash [zero debt] as of July-end, or $12.77 per share. This amounts to 27% of the company's current stock market capitalization. During the fiscal first half, $21.5 million was spent to repurchase 587,000 shares at an average cost of about $36.63 per share, which is 6% higher than today's price. The company has $30.9 million remaining under the repurchase program as of July-end.

The stock reacted positively to the results, and has appreciated about +47% since our Initial Recommendation, during which period the Russell 2000 index is down around -12%.

We are maintaining our price target of $78 as the company did not change its FY2023 outlook due to economic, geopolitical and currency uncertainty. In fact, the company now expects operating income to be in the high end of its prior $125-$130 million range. While there are several macro risks, we still believe the projections are likely to prove conservative because management has mentioned in the earnings call that inflation is not affecting their business significantly and a slowdown from rising interest rates are already factored in their current outlook.

Movado: Global Consumer Luxury Brand

Movado Group is one of the world's premier watchmakers. They mostly produce watches tailor made for the mid-market/middle class consumer. Nothing is too luxurious and over-the-top in terms of the price tag. Although headquartered in the US, its roots in manufacturing and design go back to Switzerland. It is best known for its Museum Watch. Movado means "always in motion". The watches are known for their signature metallic dot at 12 o'clock and minimalist style. The Company was incorporated in New York in 1967, and since 1993, for 28 years, it has been a public company. Since inception, the company has had a strategy of acquisitions of watch brands along with license agreements, which have played an important role in the expansion of the Company's brand portfolio.

Record 2nd Quarter Revenues and EPS

It should be noted that last year's quarter was a record Q2 earnings quarter [despite global COVID issues], and not an easy comparison by any means! As shown in the following chart from Bloomberg, both the reported revenues and EPS for Q2 are record levels for Movado's seasonally slow second quarter, and it serves to highlight the secular growth characteristics of the industry and company, in our opinion.

Robust Luxury Goods Earnings Reaffirm Secular Growth

The luxury goods industry has continued to experience robust revenue growth as rich consumers and Emerging Market rising affluent citizens keep splurging as the world recovers from COVID-19. Recently, industry leaders such as LVMH (LVMUY), Moncler, Hermes (HESAY), etc all reported June-quarter results that were much better than investor expectations. While a global recession may lead to some slowdown in demand, it is not likely to result in a major or lasting downturn for the industry. China's property sector's massive decline may impact the appetite for luxury goods; this is a key risk factor to keep an eye on.

Strong Swiss Watch Export Data

Demand for Swiss watches remained solid in July. Exports of Swiss watches rose +8.3% YoY, with total sales of CHF 2.1 billion, according to the Federation of the Swiss Watch Industry. Key end markets saw robust growth. Sales to the USA were up 13.5%, China was up 18.4%, and the UK was up 11.8% YoY. Japan was the only key market which was down fractionally. This newly released data is sourced from Bloomberg Intelligence news articles written by industry analyst Deborah Aitken, and are based on official and publicly available Swiss Government data releases.

In the following chart, the sharp rebound in sales to China is quite evident, and interestingly, Chinese sales closely matched that of the USA. Given the stress the overall Chinese economy is now facing, it remains to be seen if sales to China can sustain at this high level. Some moderation in Chinese sales appears likely.

Swiss watch orders to key end-markets like the USA, China, and European countries like the UK, Germany and France all saw healthy growth for the month of July. Importantly, the growth was strong not only versus 2021, but also versus 2020. This negates, or certainly mitigates, any data fluctuations due to COVID. This will bode well for Movado, a company that also has a hub of manufacturing and exports coming in from the Swiss region.

Leading luxury goods firms found it easier in 2021 to pass on increasing gold costs to watch and jeweler purchasers than did other low and mid-priced brands. This appears to be the case YTD in 2022 as well. Movado is a mid-priced brand that has been able to pass on inflationary pressure to its customers with relative ease, as is evidenced by higher gross margins. This demonstrates that Movado is more efficient than its competitors.

Valuations and Price Target

The fundamentals and valuations of Movado Group are excellent. For the current FY01/2023e, the company's ex-cash P/E [market cap minus net cash, divided by EPS excluding interest income after-tax] is 4.8x. The company's net cash per share position is strong, at $12.77, accounting for 27% of the current stock price. Given the company's solid fundamentals and favorable valuations, we retain our price target of $78.00 [adding back net cash after eliminating interest income after tax], which represents a stock price upside of over 120% based on our FY2023 forecasts.

On our current year FY2023 forecasts, our $78 price target indicates a cash-adjusted P/E of 15x [normal P/E of 18.1x on reported EPS]. We believe these valuation levels, at a discount to the broader market, are very reasonable for a global consumer branded stock in a secular growth industry.

Other global luxury rivals, on the other hand, trade at a premium to the broader market and have had fantastic stock price performance over the last decade. We're basing our forecast conservatively on current [rather than future] earnings because this year [ending 01/2023] is a normal year for Movado. As a result, we're maintaining our $78 price target.

Quarterly Dividend and Share Repurchase Program

The company has paid a cash dividend of $0.35 [$1.40 annualized] for each share which gives the yield of 4.1% and the payout of only 33% as compared to estimates for FY2023. Given the huge net cash position and strong FCF, MOV has much room to further increase the payout in the future.

During the fiscal first half, $21.5 million was spent to repurchase 587,000 shares at an average cost of about $36.63 per share, which is 6% higher than today's stock price. This repurchase amounts to a further 2.8% capital return to shareholders during just the first half of the year. The company has $30.9 million remaining available under the repurchase program as of July-end.

Recession and Inflation Risks

The purchase of luxury discretionary items such as watches is obviously cyclical, and consumers can defer and cancel such purchases. We would view Movado as a soft cyclical operating in a secular growth industry, which should mitigate and recession risks. Strong demand for luxury goods globally from rising aspirational consumers in Emerging Markets should reduce economic risks and lead to growth over time.

Since Movado's products are mid to high price points, we do not see much risk of inflation or supply chain bottlenecks. So far, they have been able to pass on price increases. Luxury goods pricing continues to rise over time.

Conclusion - Top Buy Idea, Favorable risk-reward

After several years of erratic and sluggish results going back one decade, Movado has finally found some strong sustained growth momentum. The company has enormous tailwinds from the desire of consumers all over the world, especially in Emerging Markets, to buy branded luxury goods. Given the exceptional second-quarter results, which were far ahead of consensus projections, and positive outlook and unchanged guidance for the rest of the year, we continue to see this company withstanding economic and inflation challenges. With a strong balance sheet with lots of net cash, a robust dividend supplemented by buybacks, the downside risk appears to be mitigated, and the overall risk-reward is quite favorable, in our opinion. Movado remains one of our top buy-and-hold stock picks.

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