Movado Group's Latest Strong Quarter Just Wasn't Enough

Movado Group (MOV +0.02%) announced solid fiscal second-quarter 2019 results early Wednesday, detailing sustained international momentum for its core watch products, positive contributions from last year's purchase of Olivia Burton, and the acquisition of a new brand that should further spur the Swiss watchmaker's performance. Movado also raised its full-year outlook for the second time in as many quarters.

However, with shares down more than 15% in response -- albeit after an 80% rise over the past year -- it seems the market was less than pleased. Let's have a closer look, then, at what Movado accomplished to end the first half, as well as what investors should be watching as the year ticks by.

IMAGE SOURCE: MOVADO GROUP.

Movado Group results: The raw numbers

DATA SOURCE: MOVADO GROUP. *FOR THE QUARTER ENDED JULY 31, 2018. GAAP = generally accepted accounting principles. 

What happened with Movado this quarter?

• Net sales climbed 10.5% on a constant-dollar basis, and also benefited from a $1.1 million impact from the adoption of new accounting standards this fiscal year relating to the timing of markdown and return allowances.
• On an adjusted (non-GAAP) basis, which primarily excludes acquisition expenses, net income was $10.6 million, or $0.45 per diluted share, up from $9.9 million, or $0.43 per share in the same year-ago period. 
• By comparison, consensus estimates on Wall Street had predicted roughly the same adjusted earnings on lower revenue of $137.5 million.
• Subsequent to the end of the quarter, on August 15, 2018, Movado announced it has agreed to acquire MVMT, a fast-growing watch and accessory brand based in Los Angeles, for roughly $200 million -- a price comprised of a $100 million initial payment (or $85 million net of tax benefits for the transaction), and up to $100 million before taxes in future contingent payments. The purchase is expected to close around the beginning of October 2018.
• Movado repurchased 21,900 shares during the quarter, leaving $46 million remaining under its current repurchase authorization.

What management had to say

Movado chairman and CEO Efraim Grinberg stated:

We are pleased to report another strong quarter with double-digit increases in both sales and operating income combined with significant progress against the priorities we set at the start of the year. Sales growth had notable strength internationally in Europe and Latin America, as our uniquely designed timepieces and sought-after brands continue to resonate with consumers around the world. Olivia Burton, which we acquired last July, continues to perform very well, and we are extremely excited about the upcoming addition of another brand that connects with millennials, the direct-to-consumer brand, MVMT. We have an exciting product pipeline for the second half of the year and believe we are well positioned to capitalize on the upcoming holiday season. 

Looking forward

What's more -- and assuming the MVMT acquisition closes as planned -- Movado increased its full-year guidance to call for net sales of $660 million to $675 million (up from $615 million to $625 million before), and net income per share of $2.45 to $2.55 (up from $2.35 to $2.40 before).

So why the decline? For one, the market could be concerned about Movado's margins. Its bottom line this quarter technically met expectations, but those earnings also came on higher-than-expected revenue. The market doesn't always applaud when sales growth comes at the expense of profitability. 

While not unheard of, it's also somewhat unusual that Movado's increased guidance includes the impending MVMT acquisition. More often than not when such a purchase is still pending, the acquirer tends to issue guidance excluding the impact of any resulting incremental sales.

The most likely culprit, however, is Movado's meteoric rise in recent months: As of yesterday's close, shares were up 80% from this time last year and more than 50% so far in 2018, leaving many short-term-oriented investors keen to take some profits off the table.

In the end, however, this was still an impressive quarter for Movado considering the continued pressure holding back the broader watch industry. And I don't think long-term investors should waste any time fretting over the implications of today's decline.