The challenging retail environment seems to be taking a toll on all retailers, but luxury product retailers in particular are taking a hit. Consumer unwillingness to spend has hampered the results of many. Weak mall traffic has also been an important factor in dwindling demand.
Luxury watch-maker Movado (MOV, Financial) is one retailer that has fallen prey to this situation. Its second quarter results highlighted the same. The numbers were below analysts’ expectations, enabling its share price to fall.
The not-so-good quarter
Revenue surged 3.8% over last year, clocking in at $143.6 million. The top line was quite below the estimate of $153.3 million. One of the key reasons for the increase in sales was improvement in business efficiency. However, the increase was not up to the mark. Factors such as a tough retail environment and lower advertising efforts played an important role.
In addition, higher costs resulted in shrinking margins and a lower bottom line. Earnings dropped slightly to $0.47 per share from $0.48 per share in the prior year. Expenses related Baselworld Watch's Jewellery Show weighed on the bottom line. Nonetheless, this was partially offset by lower marketing expenses during the quarter.
Some positives
One of Movado's biggest strengths is its dominance in the premium watch market, especially in the $500 to $1,500 price range. Exclusive designs in this price bracket drive affluent customers to its products. On the other hand, Fossil (FOSL, Financial) provides watches at various price points, including points attractive to middle class customers. Fossil’s watches range from as low as $100 to as much as $2,000.
Another key strength is its premium licensing brands, which drive customers to its stores. The introduction of new products such as Movado Bold has been quite fruitful for the company.
The watch retailer has ramped up its expansion efforts, which should add to its growth. It has also made some changes in its product mix in order to meet the demand of local customers. These efforts should prove to be beneficial for the company. Further, it reaffirmed its guidance for the year, despite earnings misses in the first two quarters of the year. It now expects sales to rise 10.7% to $640 million and earnings to register at $2.44 per share.
The greatest threat
The biggest potential threat for Movado is the shift of customer preference to smartwatches, which might result in lower demand for luxury watches. In fact, with the expected launch of Apple’s (AAPL, Financial) Watch this month, luxury shoppers are expected to be lured to a new and innovative accessory. This could result in dwindling sales for Movado. However, the new Apple Watch is estimated to be about $300, which is not in the price range that Movado caters to.
The final thought
Although the new Apple Watch launch is something to be worried about, it is difficult to say how the Movado’s sales will be affected. A poor quarter makes this company an unattractive stock; on the other hand, Movado’s strengths and a bright outlook should not be ignored. Therefore, it is better to stay on the sidelines and wait for the right time to invest.
