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.