This article originally appeared as part of ongoing coverage in our premium Motley Fool Hidden Gems service…we hope you enjoy this complimentary peek!
Luxury watchmaker Movado Group (NYSE:MOV) reported its fiscal second-quarter earnings Tuesday morning, and investors were disappointed with the company's sluggish growth, sending shares plunging more than 5% in pre-market trading. Despite its attempts to put a positive spin on the quarter, Movado's results only raise the level of concern among those following the luxury retail sector that the best times for the industry -- and the stocks of the companies within it -- might well have come and gone.
How Movado Group fared in Q2
Overall, Movado posted revenue growth of 3.8% in the second quarter, pushing net sales to $143.6 million. Yet that figure fell well short of the $153 million that most investors had expected to see. Similarly, earnings of $0.47 per share actually represented a decline from year-ago levels on a GAAP basis, and even after adjusting for a one-time tax gain last year, net income gains of just 6% didn't come close to producing the $0.54 in earnings per share that shareholders had predicted.
Looking more deeply into the numbers, gross margins eased downward slightly to 54% from 54.1% a year ago, with a strong dollar hurting the profitability of Movado's sales internationally. Operating expenses also climbed, with a rise of 4.6% coming largely from higher payroll costs and expenses from a major trade show. Higher effective tax rates of almost 29% also ate into Movado's profits.
Nevertheless, Movado executives pointed to the quarter as a continuation of favorable long-term trends for the business. CEO Efraim Grinberg noted that both of the company's main segments helped support growth, with the Movado brand seeing solid demand and Movado's licensing arrangements with partners like Coach (NYSE:COH), Hugo Boss, and Lacoste also fostering greater sales. COO Rick Cote also expressed optimism about the quarter, pointing to market-share gains in both the Movado and licensed brands while also seeing better sales and profits from its outlet-store segment. Balance sheet strength also gives Movado some flexibility in its future corporate strategy. Much of the release pointed to the recent hire of company President Ricardo Quintero and its potential impact on the company. Quintero has a history of working with luxury cosmetics brand Estee Lauder as well as more mainstream high-value brands like Pepsi and Procter & Gamble, and Movado hopes that Quintero's influence will dovetail well with its initiatives to invest in expansion in Asia and Latin America as well as Movado's existing network of stores around the world.
Putting the quarter into context
Despite the positive sentiment from company management, Movado's fiscal second-quarter results represent the luxury watchmaker's second straight quarter with some troubling characteristics. Last quarter, Movado also fell short on sales estimates, although revenue growth of nearly 10% wasn't as sluggish as this quarter's results.
Just as it did last quarter, though, Movado once again repeated its guidance for the full year. The watchmaker expects to see a 10.7% jump in net sales and a roughly 18% rise in earnings per share for fiscal 2015. With two straight quarters of subpar results, Movado will need to wind itself up to finish the year on a strong note if it wants to meet its own expectations.
In the end, Movado's success will rely on its ability to stay ahead of the competition. Cote noted the fact that Movado faces "a cautious global retail environment," and so far, Movado has only been able to sustain even its latest modest growth levels by outpacing its competitors in sales volumes through its various retail sales channels. As the key holiday season approaches, Movado is vulnerable to an overall slowdown in luxury retail generally or to company-specific challenges that could take away part of its competitive advantage. For now, Movado appears confident that it can meet that challenge successfully, but the big drop in the stock Tuesday morning shows that shareholders aren't nearly as comfortable with Movado's future prospects.
Dan Caplinger owns shares of Apple. The Motley Fool recommends Coach, PepsiCo, Apple, and Procter & Gamble. The Motley Fool owns shares of Coach, Apple, and PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.