Movado: 57% EPS Surge Leads To 40% Dividend Hike (NYSE:MOV)

Exterior Of Clothing Store With Shoes And Other Accessories Displaying In Showcase

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Movado (NYSE:MOV) reported phenomenal 4Q results for their seasonally all-important fourth quarter ended January [FY 01/2022]. Net sales jumped 15.5% to $206 million from $178 million, while adjusted EPS surged 57% to $1.32, driven by strong margins. Full year EPS was $3.94, a record high for the company which easily surpassed prior years. Growth in brick-and-mortar stores, online retail, and Movado company stores all contributed to the increase in sales. Last year-end, net cash was $203 million, or $8.62 per share. This year, net cash is up 36% YoY to $277 million, or $11.70 per share, which is fully 31% of the current market cap! For the quarter, operating income climbed by a whopping 47% YoY. Amazingly, FCF was $125 million for the full year, or $5.30 per share. This implies a trailing FCF yield of 14%. The stock reacted positively to the results, and has appreciated about +60% since our recommendation exactly one year ago in March 2021, during which period the Russell 2000 index is down.

One analyst covering the stock on Wall Street has been very conservative with his price targets with his latest price target coming to $48.00. We are, and have been, much more bullish than Wall Street estimates with our current [and unchanged] price target of $78.00, representing over 100% upside.

The company’s worldwide business rose by 12.7% in the fourth quarter, due to solid performance in key European countries, Latin America, and India. International sales increased 32.5% over the previous year, but were down 3.1% from pre-pandemic levels. In the United States, the company’s revenues climbed by 18.5% during the quarter, with double-digit growth in the company’s most important brand, Movado. Domestic sales increased by 61.1% year over year and 14.4% compared to two years earlier.

We have been bullish given the secular growth of this company and how it has been performing exceptionally well, beating expectations with strong net cash and valuations. Although Movado has faced some cyclicality in its earnings, they are seeing secular growth as a result of a booming sector. The luxury goods sector is seeing a lot of growth and valuations are improving as well, with stock prices soaring. The industry is also consolidating with acquisition taking place, just look at Louis Vuitton [LVMH] which acquired Tiffany and Co. and numerous other brands during the past decade. The revised outlook that the company provided was also favorable, and we have updated our estimates of Movado as a result of this.

The company is increasing its outlook and now expects current fiscal 01/2023 net sales in a range of approximately $780 million to $800 million, gross profit of approximately 58% of net sales, operating profit in a range of $125 to $130 million, which implies growth of 6% to 10% over the record $117.5 million reported for last year. We believe the projections are likely to prove conservative, subject to some cyclicality due to Covid, the economy, and inflation. MOV’s outlook implies current year [ending 01/2023] EPS growth to around ~$4.20. Because of these strong EPS numbers, we have revised our earnings and FCF forecasts.

According to Efraim Grinberg, CEO, “We closed out the year with exceptional fourth quarter performance, resulting in record annual net sales of $732.4 million and operating profit margin of 16.0%. We attribute our ongoing strength to the successful execution of our strategy with powerful brands, excellent craftsmanship and desirable designs. We have a deep pipeline of product innovation and recently added another iconic licensed brand to our portfolio with the launch of CALVIN KLEIN, which is experiencing strong consumer response”

40% Dividend Hike to 3.7% Yield, Accelerated Share Repurchase

The board of directors of the company has approved a 40% increase in annual dividend to $1.40 per share, representing a 3.7% annual run-rate yield. It should be pointed out that even with the large dividend hike, the $1.40 annual dividend represents only a modest 36% payout on prior year actual earnings. Given the huge net cash position [zero debt] and strong FCF, MOV has much room to further increase the payout.

MOV chart

Bloomberg

The company is also planning to execute its share repurchase plan at an accelerated pace, which should be a bullish sign for investors. As of January-end, the company had an aggregate of $52.4 million remaining under its authorized share repurchase programs. We concur with management’s decision to be more aggressive on the buyback.

Valuations and Price Target

Movado Group has great fundamentals and valuations. The company is trading at an ex-cash P/E [market cap minus net cash, divided by EPS excluding interest income after tax] of around 6.3x for the current FY01/2023e. Alongside an attractive estimated FCF yield of 10% for the FY01/2023e, the company has a robust net cash per share position of $11.70 representing 31% of the current stock price. We see much upside for this company given its strong fundamentals and attractive valuations and therefore we maintain our price target of $78.00 [adding back net cash after removing interest income after tax], representing an upside of over 100% on the stock price based on our FY01/2023 estimates.

Our $78 price target implies a cash-adjusted P/E of 16.0x [normal P/E of 18.7x reported EPS] on our current year FY 01/2023 estimates. We feel the valuation levels for Movado Group are still very conservative for a branded consumer goods firm with secular growth, given that small-cap indices are also trading at around a 22.7x forward P/E. Also, other global luxury peers trade at a premium to the broader market, and have seen stellar stock price performance over the past decade. Given that this year [ending 01/2023] is a normal year for Movado, we’re basing our estimate conservatively on current [rather than future] earnings. As a result, we’re keeping our price objective of $78.

Secular Growth Fueled by Emerging Markets

There has been a high amount of Emerging Markets [EM] growth which has fueled much of Movado’s growth during the past few years. Being a watch and luxury goods company, they have witnessed both a growing millennial population and increased purchasing power which have become the two main reasons for Movado’s strong rise and have provided tailwinds to Movado’s business in markets such as China. Consumer spending powering through to stock market gains is another reason for this positive trajectory with a lot of people becoming wealthier through this avenue during the pandemic.

Many economists are estimating a scenario of either high inflation or a recession in coming years. Inflation in the United States has been climbing for the past several months, and it is expected to worsen in the coming months as well. In the future, the company’s operating expenses will rise as a result of this. Movado’s management indicated on the earnings conference call that they will raise product pricing to offset this inflationary pressure. Most luxury goods companies, including Movado, have the ability to pass on higher prices to consumers without having much of a sales impact. A recession may impact consumer discretionary spending on luxury goods temporarily, but the secular tailwinds will prevail over the intermediate term.

Finally, MOV appears to be relatively insulated from shipping bottlenecks, given the non-bulky nature of its products which are shipped by air, not by ships.

Strong Industry Sales Momentum

According to Swiss industry data published in Bloomberg News, February witnessed strong export data. As can be seen in the following table, key markets were up with the US up 33%, China +22%, and Japan up 20%. This bodes well for Movado’s post-Christmas first and second quarters.

Chart

Bloomberg

Conclusion

If you look at the company’s 20-year historical chart, you’ll notice considerable volatility in the stock price, however we anticipate Movado will break that cycle in the next few years because of several key factors. First, despite the Covid-19 pandemic and a global recession, the company has managed to attain record revenue growth of 45% for the fiscal year just ended [FY 01/2022]. Second, the company’s increased dividend and aggressive buyback program reflects its confidence in meeting its financial targets in the coming fiscal year. Finally, EPS increased dramatically, considerably surpassing previous levels, and the company concluded the year with cash of $277 million. All of these factors support our secular growth argument for Movado.

The stock is still relatively inexpensive compared to its peers and the overall market. We still think the stock is extraordinarily cheap for a branded consumer goods company. We see over 100% upside, with likely higher dividends as well. The buybacks and large net cash position should help cushion any downside risk, in our view.

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