Overall, this earnings season has generally been favorable, but a few surprises have nevertheless hit investors for a loop. Earlier this month, Movado Group (NYSE:MOV) shocked shareholders by pushing down its guidance for both its third-quarter results and its full-year outlook, and the stock plunged more than 30% in a single day in response. Given somewhat lackluster performance in its previous quarter, Movado came into Tuesday morning's third-quarter report with a lot of questions unanswered about its future.
Although the actual report basically confirmed the guidance that Movado gave a couple of weeks ago, the watchmaker does nevertheless have some reasons for optimism in the long run. Let's look at how Movado did this quarter and whether better times could be around the corner.
Movado runs down
Movado's growth motors stopped running during the third quarter, with declines both in revenue and in net income. Sales eased downward by 0.6% to $188.6 million, with Movado blaming declines in its luxury brand segment as well as the performance of some of its licensed brands for the overall decline. On the earnings front, net income slid about 3.5% to $22.2 million, coming out to $0.87 per share.
Looking more closely at the numbers, Movado has faced a tougher time in the luxury market recently. Gross margins fell by four-tenths of a percentage point to 53%, reflecting the impact of the strong U.S. dollar on its foreign-currency revenue but also a change in the balance of its product sales toward less profitable items. The weak performance led to a slight drop in performance-based compensation, which helped to offset some of the hit to operating income, but a rise in Movado's effective tax rate also helped send overall earnings lower.
Nevertheless, Movado remains optimistic about its future prospects. As COO Rick Cote noted, "We remain confident in our ability to drive sustainable profitable growth for next year and the long-term. Our brands are performing well in the marketplace, and given what we are seeing in the strength of our brands, we would expect to continue to outperform the watch category at retail."
Will Movado wind itself up again?
Movado also confirmed its earlier guidance for the full fiscal year, continuing to assert its reduced expectations for 1% to 2% revenue growth. Movado still believes that earnings for the year will be roughly in line with the current consensus of between $1.80 and $1.85 per share.
More encouragingly, though, Movado announced that it would double the size of its share repurchase program. Originally, Movado had allocated $50 million toward buybacks, and as of the end of October, the company had spent almost $24 million of that amount. But with the recent weakness in the share price, Movado's management saw an opportunity to capitalize on the hopefully temporary slump, and so the company's board of directors raised its authorization to $100 million for use between now and early 2016.
Investors appeared to respond to the buyback announcement more than anything else, as shares of Movado moved up by about 1.25% in premarket trading after the earnings announcement Tuesday. Yet the bigger question is whether the sluggishness for the luxury watchmaker's sales will continue into the key holiday season. Interestingly, though, Movado's revenue typically drops during its fiscal fourth quarter, presumably because buyers under its supply contracts have already stocked up on their inventory in advance of the holiday shopping rush. Nevertheless, what Movado sees throughout the rest of 2014 will play a big role in how willing its customers are to keep buying from the watchmaker in the future.
Movado finds itself at an interesting point, with its long outperformance in the luxury end of the retail sector showing some signs of cracking. Yet with its lucrative premium partnerships still in place and with plenty of opportunities for long-term growth both in its North American market and overseas, Movado's recent decline could well turn out to be the buying opportunity that both the company itself and smart investors will use to their advantage.
Dan Caplinger owns shares of Apple. The Motley Fool has recommended Apple and Movado and owns shares of Apple. 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.