The Inoculated Investor
Movado Group (MOV): 5/13/2009- $7.61Investment Thesis
MOV is a well recognized luxury watch and jewelry company whose shares have recently been trading atextremely depressed levels. From a 52 week high of $26.17 in late September 2008, shares of MOV plunged all the way down to a 52 week low of $4.65. However, they have recently rebounded to around$7.60 per share. As a result of declining demand for luxury items all over the world and a recent breach of acertain debt covenant, MOV now trades at about 47% of listed book value (and tangible book value as thecompany has no goodwill or other intangibles). Even given the global consumer slump, concerns about thecompany’s debt situation, and the potential lasting effects of the current crisis, the fact that a company withsuch a strong global brand is trading at or near liquidation value may be indicative of an irrationalmispricing. The following analysis is an intentionally brief summary of the risk and potential rewards of buying shares of MOV at the current levels. The conclusion at the end of the analysis provides the rationalfor monitoring this stock but recommends holding off on buying shares until some realistic catalystsemerge. For much more detailed information on margins, valuation, and industry comparisons please refer to the appendix.
MOV is a US-based company that designs, markets and distributes watches and jewelry. The company wasfounded in 1967 and has a portfolio of 9 watch brands (including licensing agreements): Movado, Ebel,Concord, Coach Watches, HUGO BOSS Watches, Tommy Hilfiger Watches, Juicy Couture Watches andLacoste Watches. The company also sells Movado-branded jewelry at its 29 retail boutique and 32 outletlocations in the US. However, the company’s main revenue source is the wholesale distribution of watchesto retailers throughout the world. Traditionally, the wholesale segment has made up about 80% of revenuesand 90%+ of operating profits. In terms of geographic breakdown, in the most recent year ended January31, 2009 (fiscal year 2009) approximately 55% of sales were to customers in the US and 45% were toforeign customers.
1.Debt covenant breach
Movado has $65M of total debt on its balance sheet, all of which is now classified as current due to the breach of an interest coverage ratio covenant upon reporting full year fiscal 2009 earnings.Specifically, all three of MOV’s debt facilities/instruments require the company to maintain an interestcoverage ratio (Trailing 12-month GAAP EBIT/Cash Interest Paid) above 3.50x. However, as a resultof $15.6M of non-cash charges for FY 2009, MOV’s reported interest coverage ratio dropped to only2.45x. While none of its lenders have made any attempt to force MOV to pay off all the debt, thecompany is concerned about the covenant breach and is actively looking to negotiate new facilities to pay off the currently outstanding debt.
Debt BreakdownQ4 2009RateMaturity
US Revolving Credit Facility$40LIBOR+ .5%-.875%Dec-10Series A Notes106.90%Oct-10Senior Series A-2004 Notes154.79%Oct-11Total$65
According to the recently filed 10-K, MOV is in the process of trying to obtain a new $110M, 3 year asset-backed facility to be used to retire all $65M of the current debt. The company has indicated thatits interest costs are likely to rise as a result of higher rates and that there will be some restrictions ondividends, share buybacks and additional debt. However, the company anticipates the financialcovenants to be less onerous. This facility is expected to be complete by May 2009, but even if it is notthe company has already received commitment from Bank of America for a 3 year $50M asset backedcredit facility. It should be noted that the company also has $86.6M in cash ($20M+ in net cash) on the balance sheet that could also potentially be used to pay off some of the debt. The company alsoeliminated the dividend and has stopped buying back shares in order to bolster liquidity.