Movado Could Be an Undervalued Play on Luxury Goods

The Movado Group (NYSE: MOV  ) can be (and has been) the kind of company a fundamentals-based investor would love. Operating in both wholesale and retail, the watchmaker manufacturers for a wide array of brands beyond its namesake and sells them all over the world to many different target markets. Movado has solid margins, a sparkling balance sheet, and a history of delivering stellar returns to shareholders. In its most recent earnings report, the company outperformed the Street's expectations on both the top and bottom lines. A lackluster forward guidance figure, though, kept investors and analysts from rallying on the just-ended quarter's successes. Still, as a long term holding, Movado offers plenty beyond the glitz and glamour of its timepieces.

Earnings recap
Though it has been around for decades and is an icon in the watch world, Movado is still growing at an impressive clip. Sales grew nearly 19% in the company's fiscal 2014 third quarter to just under $190 million. Movado and its licensed brands led the growth, along with two recently added lines -- Coach-branded watches (a reintroduction, actually) and Scuderia Ferrari. Adjusted operating income grew even more at 22%.

Gross margin contracted to 53.4% from 56.4%, mainly because of product mix and exchange rates. Historically, Movado management had proved quite adept at achieving healthy margins, which can be especially helpful during times of cautious consumer spending behavior.

On the bottom line, the company achieved its best year-over-year gains with an EPS of $0.89 per share. In the year-ago quarter, the company earned an adjusted $0.67 per share.

Wall Street was expecting a few cents less on revenue of about $184 million.

Ultimately, though, shares declined as management delivered full-year guidance of $1.90 per share -- 4 cents under estimates. The company may be sacrificing some profitability with its lower-priced brands (Coach and Ferrari, among others) aimed at expanding the customer base. These are lower-margin goods but should still provide healthy growth to the company in the foreseeable future.

Timeless?
Movado is unarguably one of the biggest brands in the watch world. Management has acted conservatively through the financial crisis onward, and has aided in delivering more than 300% in capital appreciation. Its portfolio of brands continues to grow and reach new audiences, helping it in an area that competitor Tiffany (NYSE: TIF  ) has done little in. Tiffany earns higher sales per square foot (one of the highest of any business), but in a way it limits itself from not exploring other markets.

From a financial perspective, Movado has opportunity to grow both the top and bottom lines substantially in the coming years. Gross margin can be brought back up to historical levels and significantly increase both profitability and cash flow.

At 18 times forward earnings, Movado is a good bit cheaper than Tiffany (20.8 times earnings) and far less than other luxury-goods brands, such as Michael Kors (23 times earnings). Movado may not grow like Kors, but its valuation comes in under the industry average, especially considering the potential for margin expansion and top-line growth. Investors should take a close look at this classic timepiece business.

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