Will Movado's Earnings Decline?

Implications: Management's behavior casts doubt on Movado's future earnings growth.  Here's why

Analysis:  Movado Group said it would cut about $25 million in expenses from its operating costs by eliminating about 90 jobs and consolidating some distribution, finance, administration, and procurement functions.  The company estimated that about $6 million in savings would be achieved during the remainder of the fiscal year.   

The news was favorably received by investors as the stock traded higher nearly 4% higher by the afternoon on Monday, August 11th.  In a separate announcement, Movado “reaffirmed its earnings guidance for fiscal 2009 and expects diluted earnings per share (EPS) of approximately $1.65 to $1.72” excluding one time items.  Those items would probably include the $9 million charge the company expects to incur because its consolidation program.  Realistically, that means Movado’s actual earnings could be 6%-7% lower because of the write downs, assuming the company hits its sales numbers.  That’s a big if.  

Much of Movado’s recent sales growth has come form it overseas markets, including the UK and Europe.  Those markets are showing signs of slowing which will probably decrease the company’s shipments to retailers even more than current planned in the 4th calendar quarter.  If that happens, the decline could more than offset the company’s cost savings projected for FY 2009.  

Unfortunately, the question remains about what’s going on at Movado.  The company appears to be reacting to the market rather than planning for future growth in a holistic way.  First, the company announced it was repositioning Concord brand to the ultra-high end.  Several months later, it said it was reducing the number of doors carrying its brands.  Now it’s consolidating functions and cutting staff to reduce cost. However, with 40% of the fiscal year remaining, the company only expects to achieve only 25% of the savings while absorbing most of the write off.   

I am a great believer in strategic incrementalism, but changes need to be made with in the frame work of a plan.  Regrettably, this succession of changes doesn’t appear to be part of a grander strategy, otherwise the company would be dealing with a number of key issues including the future of its retail division which has never made money and isn’t likely to anytime in the future.  

All companies reach turning points in their growth.  At each point continued success depends on the company achieving extraordinary success in one of several functional areas including product/marketing, sales/operations, and finance/control.  Having achieved about $560 million in sales, I believe Movado is at such a turning point.  Investors are gambling the company is ready for the change, but management's behavior leaves the outcome in great doubt.