Watchmaker and boutique operator Movado Group
The company's net income would have ticked higher were it not for the $47.3 million cash acquisition in March of Swiss luxury watchmaker Ebel (with watches in the $1,500 to $10,000 price range). The revitalization of Ebel, including the timely hiring of supermodel Claudia Schiffer to give the product a face, swept $1.3 million out of profits.
The purchase of Ebel, Movado's first acquisition since 1983, cost slightly more than the company's free cash flow for last year. Although Ebel will depress earnings this fiscal year, it will add to them starting next year.
Ebel's strategic importance is not just about its brand alone. Last year, only 14% of Movado's sales were outside the U.S. The company's goal has been to expand into Germany, the U.K., France, and Japan. Ebel gives the company a strong international calling card to facilitate the introduction of its other brands.
Those looking for problems will notice that the recent 12% boutique same-store sales growth is less than the 18% gain in the first quarter. Since the company's highest margins come from boutiques, they -- and their growth -- are important. But when you compare results with Tiffany & Co.
Also at luxury levels are Movado's 59% gross margins (a tad better than Tiffany's 57%). Although there is twice as much debt as cash, the company's strong cash flow makes this of little concern to me.
You will also see $3,500 Ebel watches at Wal-Mart's
Selling at 15 times next fiscal year's estimated earnings, Movado is value-priced and a timely preholiday consideration worth watching.
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Fool contributor W.D. Crotty does not own stock in any of the companies mentioned and, unfortunately, does not own any Movado watches.