A Dent in Movado's Distribution

Changes are afoot at watchmaker Movado (NYSE: MOV  ) . We know about the dismal holiday season for jewelry retailers like Zale (NYSE: ZLC  ) . But manufacturers are feeling the impact as well, prompting some changes in strategy.

Movado's fourth-quarter sales were down 2.6%, showing it was clearly tough slogging. Included in the sales was a hit of $15 million related to management's decision to pare back its stable of retailers. Excluding one-time charges, sales advanced 5.2%. Yes, that is growth in a tough market for discretionary items. But it's well below the company's 13% average annualized sales growth rate for the past three years.

Earnings of $0.72 per share look impressive at first glance (up 38% from a year ago), but the gains were all in tax benefits. Factoring out the IRS effects left management with core EPS of $0.40 -- two cents below last year.

This was better than the $0.35 analysts had expected, boosting Movado's stock by more than 17% as of Thursday afternoon. Margins improved by 120 basis points, excluding the one-time negative sales impact, showing that some customers remain willing to splurge for the quality of the brand.

But the soft environment caused Movado's management to rethink its strategy, and it chose to trim 35% of its least productive retail base. You say what? A manufacturer choosing to sell products in that many fewer retail outlets? Won't that reduce the sales potential?

The number looks big -- down from 4,000 to 2,600 U.S. retail outlets. But the overall sales impact will only equate to about 2% of Movado's consolidated worldwide revenue. Management explains the strategy as an upscale evolution of the brand.

This kind of retail selectivity has worked well for other premium brands -- note the recent spat between Crocs (Nasdaq: CROX  ) and Costco (Nasdaq: COST  ) over sightings of branded shoes in the warehouse clubs. And Tommy Hilfiger has battled Wal-Mart (NYSE: WMT  ) several times over its products showing up in Sam's Clubs.

But I wonder whether Movado is also cutting ties with certain jewelers it believes may not make it through these tough times. Management won't comment on this aspect of the decision, but when the going gets tough, only the best survive. Time will tell whether this shrink-to-greatness approach will make Movado a stronger brand.

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