Movado (MOV) – Is Fossil’s little cousin worth an investment ?
Movado is the second US-based company specializing in watches (see my previous posts on Fossil part 1 and part 2). The company has a quite interesting history. Cuban Refugee Gerry Grinberg founded the company in the 1960ties basically as a Swiss Watch importer. Later on they actually acquired the rights to the Movado brand with the iconic Museum Watch.
They own two other Swiss brands, Ebel and Concorde. In parallel to Fossil they also started to license Fashion brands like Thommy Hilfinger, Hugo Boss, Lacoste and others. The share of licensed brands is similar to Fossil at around 50%. However, Modavo’s own brands are clearly more expensive than Fossil’s, themselves they claim that around 40% of sales are “luxury” watches above 1000 USD.
A quick comparison to Fossil:
|Operating margin 10y avg||6,2%||14,8%|
|Operating margin 3y avg||11,2%||16,8%|
|ROE 10y avg||5,1%||23,1%|
|ROE 3y avg||12,1%||33,0%|
It is pretty easy to see that Fossil is bigger, has been more profitable and looks even cheaper than Movado. One interesting question is: Why is this the case ? One would think that selling more luxury watches should be the better business. But this is a comment from the FY 2010 annual report which surprised me:
Net sales in the licensed brand category were above prior year by $1.7 million. The increase in licensed brand sales was primarily driven by the slight recovery over the prior year’s sales that were negatively
affected by the downturn in the U.S. economy. The licensed brand category has favorable pricing when compared to the luxury and the accessible luxury categories, making the licensed brand category watches more attractive to consumers who are tightly managing their spending.
So in an economic downturn as in 2008/2009, the cheaper branded watches were much more stable than the more expensive ones. This is also the reason why Fossil didn’t really slow down a lot in the 2008/2009 recession, whereas Movado booked significant losses. I assume that there are also some economies of scale with regard to the distribution and advertisement of branded watches. Fossil sells more than 6 times in value and it looks like that there are some economies of scale.
So it’s not surprising that Fossil over the long-term performed much better than Movado which we can easily see in the chart:
So is there anything why Movado could be more interesting than Fossil ?
Well, there is one thing and it is capital allocation / Share buy backs.
Efraim Grinberg, Chairman and Chief Executive Officer, stated, “The share buyback program was initially established with the principal intent of offsetting share dilution related to equity grants. Although that objective remains, we also believe that the current share price offers the Company the ability to purchase shares at an attractive price which will benefit our long-term shareholders. We remain confident in our brands and our business model, and our ability to deliver sustainable profitable growth going forward.”
Movado clearly buys back shares more “strategically” than Fossil. They also made a relatively big share buy back in 2008 and not much in between. However, as we can see above,
However we can also see that good capital allocation with regard to buy backs does not automatically lead to superior returns. Fossil clearly was less smart in buying back shares but still performed better over the long run.
A summary of Pros and Cons:
+ Family owned/run (25%)
+ CEO has also 4%
+ higher up in the price range than Fossil
+ Core brand Movado “better” than Fossil, two “real” Swiss brands with Ebel and Concord
+ less covered from analysts
+ cheaper (net cash) on EV basis than Fossil
+ “strategic buy backs”, both now and in 2008/2009
+ licensed brands better diversified than fossil
– less steady profits in the past, less profitable than Fossil
– cheaper branded watches more stable in recession than luxury watches
– issues with Swiss franc exchange rate (“Swiss made”)
– also missed “Wearables trend” completely
– “super voting” share class of founder (10x votes)
– high Salaries of CEO and other officers
– regular issuance of options
– potential competitive disadvantage due to lower size
Stand-alone, Movado does look interesting. The company seems to be well run and has good products. Compared with larger competitor Fossil however, I would argue that Fossil is the much better business. So if one wants to invest into this area of branded fashion watches, then Fossil would clearly be the first choice in my opinion.
Game changer? “Fossil Group, Inc. Reports Third Quarter Fiscal 2015 Results and Enters Into Definitive Agreement to Acquire Misfit, Inc.” (CNN) at least a price changer 😉
hard to say. Or “Panic buy” ? I will need to update the Fossil case soon.
Just one Question: Who carries still a watch in the <30 Generation ?
Quick answer: In those markets which matter most (Asia) A LOT. Personally, I do think that especially with more expensive watches, it is the same as with expensive red wine or wiskey: This is an “acquired taste”.
I looked at the stock in the past.
Movado subcontracts manufacturing and concentrates on the retail and wholesale operations.
So first weakness is the sourcing of movements for the high-end brands – in the end, they are forced to take what is there, which probably explains (to me) why the Ebel brand is losing a bit of cachet. All the competitors have now in-house movement manufacturing.
I looked at the shares around a year ago. I thought that normalised FCF was $40m.
Total real liquid current assets must be around $250m – the inventory value if going to the wall of Tommy Hilfiger watches is probably very limited.
If I take out the debts, that gives $100m.
Market cap being around $600, it sells for around this cash position and 12x normalised FCF.
To me this is hardly a bargain unless they can monetise their top brand: Ebel.
Richemont sells for 4x sales so how much is the value of Ebel in this? Probably not more than 2.5x I would say given the lack of control of production.
And first how much does Ebel turn over? I struggle to see above $150m – I cannot find this number. If someone has it… So maybe the asset has a value up to $300m, half the market cap.
So to me the key upside remains cashing out on the key brand and returning the money to shareholders. I have no idea of the likelihood nor the timing so I stayed out.
PS: I like your blog – keep up the good work.
Thanks for the comment. Personally,i don’t think that Ebel plays in the league ofCartier (Richemont). The problem is that branding costs money and Ebel is an “in between” brand. So assuming a Richemont multiple is maybe a little bit to optimistic. I don’t think that Ebel actually sells 150 mn USD.I gussless than 100 mn.
I currently own Movado and owned Fossil in the past. I think Movado is the better of the two going forward, and I also think you are mischaracterizing Fossil’s success. Fossil’s profitability had too much relied on the unsustainable Michael Kors deal, which managed to do extremely well during the recession and only accelerated coming out of the recession. Even as someone who owned Fossil shares in 2009, I would attribute their success with Kors as more luck than skill (not that I minded at the time). But you live by a big deal and you die by it, and unless Fossil can pull another rabbit out of a hat, I’m not so sure it’s the better business. Your chart above is mostly confirmation of this since Fossil shares had performed mostly inline with Movado for many years, and only started outperforming in 2009 when Michael Kors accelerated and eventually became almost a quarter of Fossil’s sales (and I believe an even larger percent of profits).
Also, Movado is just cheaper. If it traded with Fossil’s ev/fcf multiple (which itself might be too low) it would be worth $37 per share. Although I do wonder about the corporate governance. I have a distaste for dual share classes, but management I think has done relatively well with minority holders here.
well, Michael Kors was clearly a big deal for Fossil, but I do think that overall Fossil is the better company. Working capital managment is better at Fossil as well. But this is something for the next post….
as always thank you for your great work!
I am looking forward to hear your oppinion on swatch and the hayak family. (will there be any?)
I will look at Swatch next……