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Movado Group (MOV): 5/13/2009- $7.61

Investment Thesis
MOV is a well recognized luxury watch and jewelry company whose shares have recently been trading at
extremely 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 a
certain debt covenant, MOV now trades at about 47% of listed book value (and tangible book value as the
company has no goodwill or other intangibles). Even given the global consumer slump, concerns about the
company’s debt situation, and the potential lasting effects of the current crisis, the fact that a company with
such a strong global brand is trading at or near liquidation value may be indicative of an irrational
mispricing. 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 rational
for monitoring this stock but recommends holding off on buying shares until some realistic catalysts
emerge. For much more detailed information on margins, valuation, and industry comparisons please refer
to the appendix.

Company Background
MOV is a US-based company that designs, markets and distributes watches and jewelry. The company was
founded 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 and
Lacoste Watches. The company also sells Movado-branded jewelry at its 29 retail boutique and 32 outlet
locations in the US. However, the company’s main revenue source is the wholesale distribution of watches
to retailers throughout the world. Traditionally, the wholesale segment has made up about 80% of revenues
and 90%+ of operating profits. In terms of geographic breakdown, in the most recent year ended January
31, 2009 (fiscal year 2009) approximately 55% of sales were to customers in the US and 45% were to
foreign customers.

Concerns/Risks
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 interest
coverage ratio (Trailing 12-month GAAP EBIT/Cash Interest Paid) above 3.50x. However, as a result
of $15.6M of non-cash charges for FY 2009, MOV’s reported interest coverage ratio dropped to only
2.45x. While none of its lenders have made any attempt to force MOV to pay off all the debt, the
company is concerned about the covenant breach and is actively looking to negotiate new facilities to
pay off the currently outstanding debt.

Debt Breakdown Q4 2009 Rate Maturity


US Revolving Credit Facility $40 LIBOR+ .5%-.875% Dec-10
Series A Notes 10 6.90% Oct-10
Senior Series A-2004 Notes 15 4.79% Oct-11
Total $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 that
its interest costs are likely to rise as a result of higher rates and that there will be some restrictions on
dividends, share buybacks and additional debt. However, the company anticipates the financial
covenants to be less onerous. This facility is expected to be complete by May 2009, but even if it is not
the company has already received commitment from Bank of America for a 3 year $50M asset backed
credit 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 also
eliminated the dividend and has stopped buying back shares in order to bolster liquidity.
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2. Lasting concerns regrinding demand for luxury goods


MOV sells watches and jewelry that range in price from $165 (Lacasote Watches) to $37,700 (Ebel
watches) aimed at wealthy and aspirational consumers. As a result of this focus, the recent pullback in
consumer spending has taken a toll on MOV’s income statement. This was especially true in Q4 2009
(typically the company’s best quarter due to holiday gift giving) when sales fell off a cliff. Year over
year sales were down 35%, with US wholesale down an amazing 60.5% and international wholesale
down 33.5%. For the full year 2009 wholesale revenue was down 17.5% and retail same stores
boutique sales were down 17.3%. The company has averaged about 56% of sales in the 2nd half of the
year but many of these sales did not materialize as a result of the rapid financial meltdown at the end of
calendar year 2008. The only bright spot was the outlet stores, which had positive comparable store
sales of 6.9%. Unfortunately for the company, higher outlet sales lead to a negative margin mix shift.

The aforementioned plunge in sales when combined with the non-cash charges led to an operating loss
in Q4 2009 and a full year net income figure of only $2.3M, down from $60.9M in FY 2008. When the
one time items are stripped out, D&A are added back, and CAPEX is subtracted from net income, the
company produced owner’s earnings (Net income+D&A-CAPEX +/- Extra Items) of $12M for FY
2009. In terms of unlevered free cash flow, the company lost $12.2M dollars but this figure was
skewed by the effect on net working capital of reclassifying all of the company’s debt as current.
Without the change the company would have been decidedly cash positive for the full year. The fact
that the company did not burn cash in an extremely difficult retail environment is actually very
important. Assuming this downturn is going to last multiple quarters it is crucial for MOV to be able to
cut costs and maintain positive cash flow in order to pay down debt and have sufficient liquidity.

The question going forward is what the lasting impact of the current crisis will be on MOV’s long term
sales and margins. After being somewhat blindsided at the end of FY 2009, the company has taken
certain measures to attempt to right size expenses for the anticipated continued lackluster demand for
watches and jewelry. In FY 2009 the company initiated some cost saving measures that the company
has guided will reduce operating expenses by $50-60M in FY 2010 and beyond. These measures
include inventory reduction, reduced staffing, and decreased marketing expense. When these initiatives
were first announced on the Q3 conference call, the management team indicated that it believed the
company could eventually achieve a 15% operating margin as a result of cost cutting. To put that into
context, the average operating margin from FY 2005-2009 was 7.6% and the FY 2009 operating
margin was only .7%. While the recent circumstances make a 15% operating margin look very
optimistic, the company has started cutting costs and expects the majority of the savings to be
recognized in the second half of 2010. Accordingly, the company expects to lose as much as a $1 per
share over the first half of the year but achieve a small profit for the full year (excluding one time
items) as a result of cost savings and retailers restocking for the holiday season. Investors should be
aware that a prolonged recession in the US and abroad may limit the amount of restocking and should
not base an investment decision on the potential for a second half recovery.

3. Lackluster Retail and US Margins


FY 2008 FY 2009 5 YR AVG
Segment Operating Margin Profit Margin Profit Margin Margin
US ($18.1) -5.5% ($31.3) -12.3% -2.5%
International 68.8 29.7% 34.7 16.9% 25.3%
Total $50.7 9.1% $3.4 0.7% 7.6%

Operating Margin FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 5 YR AVG


Wholesale 9.6% 11.0% 10.8% 10.8% 2.3% 8.9%
Retail 2.7% 6.7% 4.8% 0.6% -5.9% 1.8%
Total 8.4% 10.2% 9.8% 9.1% 0.7% 7.6%
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The two above tables highlight the main concerns regarding MOV’s overall strategy. The first table
illustrates the discrepancy in margins between the US division, which includes the retail stores, and the
international division, which only consists of wholesale operations. The company does not break down
ad spending between the US and international divisions, but the sense an investor gets from listening to
conference calls and reading company filings is that the company’s profligate use of celebrity
endorsements and expensive advertising impacts the US margins to meaningful degree. The second
table shows that the retail margins for the boutiques and outlet stores have been slightly positive to
negative over the last five years and have dragged down the company wide operating margin.
According to management the stores are profitable on a “four wall basis” but when the advertising
required to support those locations is added the margins shrink meaningfully. The retail locations also
require a significant amount of capital expenditures to maintain and grow the store base. In FY 2009
the company spent $22.7M on CAPEX and has averaged over $20M over the past 5 years. Prudently,
in response to the slowdown in sales management has indicated that it expects CAPEX to be no more
than $10M in FY 2010.

The most important thing for investors to consider is whether or not the retail strategy is working at all.
The CAPEX and advertising required to support and promote the retail base drag down earnings, free
cash flow and margins. The retail margins also appear to be the main driver of the US segment’s feeble
operating margins. While the outlets seem to be performing well as consumers become more cost
conscious, the boutiques have been hit hard by the consumer retrenchment. The outlets also provide a
way for the company to get rid of discontinued inventory at higher margins than in liquidation.
Accordingly, the outlet strategy seems to make sense on multiple fronts. However, the troubles of the
boutiques versus the outlets are one reason an activist shareholder could be interested in MOV. Based
on the recent data and the expectation that consumer spending might not get back to 2007-2008 levels
for years, there could be an opportunity to eliminate stores and decrease marketing spending
substantially to improve margins. As of the filing of the 10-K, MOV had about $85.7M in total lease
obligations, with more than 25% of the total obligation owed more than 5 years from now. There is no
way to know exactly what ability MOV has to get out of these leases so while it may be prudent to exit
some of these leases there is no question lease terminations could be costly. At a very minimum the
data indicates that the company would be well served to limit the number of new store openings until
the retail margins can be improved. It is worth noting that the retail strategy could benefit from more
scale, but with only about 60 stores focused on very high end consumer it seems unlikely that the
company will be able to achieve economies of scale without building more stores than the market can
legitimately support.

Margin and Expense Comparison


MOV MOV FOSL BUL UHR
(Data from most recent filings) FY 2009 5 YR Avg. 5 YR Avg. 5 YR Avg. 5 YR Avg.
Gross Margin 62.4% 60.7% 51.9% 64.2% 80.4%
Operating Margin 0.7% 7.6% 12.2% 14.5% 19.3%
Net Income Margin 0.5% 6.5% 8.1% 12.1% 15.4%
ROE 0.5% 9.3% 16.5% 17.0% 15.7%
SG&A Margin 61.7% 53.1% 39.7% 48.7% 29.8%
Marketing/Ad Expense % 17.4% 16.0% 7.0% 11.5% 15.7%
Lease Expense % 3.8% 3.1% 3.3% 5.6% 6.3%

This table simultaneously illustrates a major concern and major opportunity for MOV for the future.
Assuming the world will eventually get out of its current economic malaise, addressing the
discrepancy when it comes to important return metrics between MOV and its competitors could
increase shareholder value significantly. As indicated above, before the dramatic reduction in sales the
management team at MOV suggested that it believed the company could achieve a 15% operating
margin by reducing costs. With just a brief glance at the table it looks as though the company has a lot
of work to do in order to accomplish that goal. However, a closer look at the percentage of sales that
MOV spends on advertising and marketing each year fleshes out what appears to be the main reason
for operating and net income margins that lag those of the rest of the group. The data shows that MOV
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spends significantly more (as a % of revenue) on marketing than FOSL and BUL and even though
MOV only spends slightly more than UHR, UHR’s other SG&A cost structure is so low in comparison
the company can afford to spend money on ads. In 2008, MOV spent $80.3M on marketing. If the
company had spent the same 11.5% of revenue on marketing as BUL has over the past 5 years, MOV’s
operating margin would have been 520 basis points higher. As previously mentioned a lot of this
marketing spending is supporting a retail strategy that has not been particularly successful (at least not
on a profitability basis) and continues to drag down both the US segment’s and the company-wide
operating margin. MOV is not a new brand that is coming to the market and trying to unseat incumbent
competitors through the use of advertising. Therefore, the opportunity for the future is for management
to cut advertising in a manner that protects the brand name and image but also allows the company to
improve its margins.

Valuation
1. Balance Sheet Analysis
Graham Net-Net Calculation* FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 Current
Market Cap $468.12 $464.82 $748.20 $660.07 $229.12 $212.04
Current Assets-Total Liabilities 226.2 230.2 273.6 336.2 275.0
Market Cap % of CA-TL 206.9% 201.9% 273.5% 196.3% 83.3% 67.5%

Liquidation Value* FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 Current


Cash $63.8 $123.6 $133.0 $169.6 $86.6
75% of A/R 78.5 82.4 83.6 70.7 57.5
50% of Inventory^ 92.8 99.3 96.7 102.6 114.5
Liquidation Asset Value $235.1 $305.3 $313.2 $342.9 $258.6
Total Liabilities 160.5 228.2 199.2 183.1 165.1
Net Liquidation Value $74.6 $77.1 $114.0 $159.8 $93.5
Market Cap % of NLV 627.29% 602.68% 656.32% 413.12% 245.11% 198.65%
*Prior data is based on year end closing price
^Inventory is valued by the company at the lower of cost or market value

The preceding table presents the compelling value that MOV’s shares trade at in a very simple manner.
Specifically, the current market cap encompasses only 68% of the company’s current assets minus total
liabilities. Therefore, MOV just about qualifies as a net-net as defined by Ben Graham. This valuation
does not take into account the value of the company’s manufacturing facilities or the value of the brand
created through years of marketing and advertising. Perceptive investors of course would argue that in
the current demand environment for luxury goods inventory (which is about 64% finished goods) may
not be worth 100 cents on the dollar. Accordingly, it is useful to calculate a conservative liquidation
value for the company. Thus, based on very conservative estimates for accounts receivable and
inventory, the stock is trading at about 2x liquidation value. However, MOV does not look like a
candidate for liquidation and it was profitable during a very tough FY 2009. It is rare to see a company
with the brand strength of MOV trading at such a large discount to tangible book, net current assets
and not much more than a draconian liquidation value.

2. EPV Analysis
For a company like MOV that saw sales rise during the boom period from 2005-2007, it is important to
calculate a normalized EBIT figure that excludes what may have been unsustainable sales levels.
Accordingly, assuming normalized sales of $425M, a 60% gross margin, 4.3% lease expense margin,
18% ad margin, and a total SG&A margin of 62.5%, the EPV analysis included in the appendix
produces a normalized EBIT figure of $24.4M. As a frame of reference, MOV produced an average of
$37.9M in EBIT between FY 2005-2009 with a 7.6% operating margin. The $24.4 figure implies only
a 5.7% margin, which is significantly below the company’s goal to get to 15% operating margins after
the cost cutting initiatives are complete.
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EPV Sensitivity Analysis


Normalized EBIT $24.4
Cost of Capital EPV Market Cap Premium/(Discount)
9% $270.83 $185.68 145.9%
10% $243.75 $185.68 131.3%
11% $221.59 $185.68 119.3%
12% $203.13 $185.68 109.3%

The table above shows the EPV of MOV based on a range of cost of capitals. Even with a cost of
capital of 12% the EPV is still above the current market cap. Accordingly, based on a very conservative
estimate of run-rate EBIT the stock appears to be trading at a discount to intrinsic value.

3. Other Value Metrics


Movado MOV Fossil Bulgari Swatch
MOV 5 YR Avg. FOSL BUL UHR
TEV/Sales 0.42x 1.07x 0.63x 1.35x 1.41x
P/E Ratio* 12.03x 16.13x 8.60x 13.97x 10.40x
TEV/EBITDA
* 5.14x 8.73x 3.90x 9.01x 5.83x
Price Book 0.53x 1.57x 1.43x 1.39x 1.60x
*FY 2009 EBITDA and EPS for MOV exclude one time charges; including the one time charges makes the P/E ratio jump to over 90x
and TEV/EBITDA jump to 8.7x

This table shows the current trading multiples of MOV compared to its 5 year averages and to those of
three of its competitors: Fossil, Bulgari and Swatch Group. While one time charges and depressed
earnings make shares of MOV look comparatively expensive on an earnings basis, when it comes to
P/BV and TEV/Sales MOV trades at a fraction of the competitor’s multiples and its 5 year averages.
Of course given the current uncertainty regarding the debt situation and demand for MOV’s products,
it is not a surprise to see that the shares are depressed. However, the current level seems to be pricing
in a situation in which the company struggles to be profitable and will not be able to avoid burning
cash for the indefinite future.

In summary, based on the above valuation metrics it appears that a conservative estimate for the
intrinsic value of MOV is between $220 (lower end EPV) and $275M (Current Assets-Total
Liabilities). From there a value investor should look for at least a 33% margin of safety, implying that
shares become very compelling trading from $6 to $7.50. However, it is important to remember (so as
to not get too bearish or conservative) that TBV/Share is $16.35 and if shares ever traded at just
tangible book again the stock would have close to doubled.

Insider Ownership
MOV’s shares are still controlled by the founding Grinberg family. As the table below shows, major
insiders own over 25% of the shares but own a majority of the Class A shares that have 10x the vote of the
common shares. As a result these insiders control about 80% of voting shares. While there has not been a
lot of insider buying (or selling) recently, the fact that insiders own so many shares means that is it very
likely the company will do what it can to create value for shareholders. It should also be mentioned that
despite the recent passing of founder Gerry Grinberg, MOV has an experienced management team that has
operated in tough environments before. The CEO Efraim Grinberg has been with the company since 1980,
was the Present from 1990 to 2001, and has been CEO ever since.
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Insider Ownership
Name Position Total Shares % Total Date
Efraim Grinberg CEO 1867.9 7.70% 4/21/2008
Richard Cote COO/EVP 425.5 1.70% 4/21/2008
Alexander Grinberg/Miriam Phalin Owner 3993.9 16.40% 4/21/2008
Gerry Grinberg (Recently Deceased) Founder 459.1 1.89% 4/21/2008

Conclusion
Shares of MOV were obviously much more attractive when they hit a low of $4.65. At that level the stock
was trading at .28x tangible book value, 41% of net current assets and only 121% of conservative
liquidation value. In hindsight, based on any estimate of balance sheet value or EPV, shares were very
cheap irrespective of the numerous issues and concerns highlighted above. After the recent run up in price
it is a little more difficult to reconcile the risks with the cheap valuation. In trying to make that assessment
investors should remember a few key aspects that distinguish MOV from other companies that qualify as
net-nets. First, the company has a well known brand and reputation for impeccable quality that leads to
brand loyalty. While this is difficult to measure on a quantitative basis, the facts that MOV’s products
resonate with consumers and that it would be very hard for another company to emerge and replicate the
company’s brand name without significant advertising and capital expenditures is very valuable.

Secondly, while Q4 2009 was very tough, the company has taken meaningful steps to make sure its cost
structure is aligned with current sales expectations. This includes cutting marketing spending, CAPEX,
staffing and inventories in order to improve cash flow and liquidity. If the company is able to remain cash
flow positive and does not burn cash then even in a very difficult operating environment, MOV can grow
book value through retained earnings. Finally, while the recent covenant breach is certainly an issue, it does
not appear to be life threatening. The company’s interest costs will certainly go up if and when the new
facility is agreed upon and the company may be precluded from buying back stock, paying dividends or
adding more debt. However, in this environment protecting cash is a major positive and the lack of excess
capital may prevent the company from expanding the retail base too rapidly or looking into dubious
acquisitions. The management team seems focused on getting this refinancing done and then moving full
steam ahead with cost cutting.

In conclusion, despite the relatively compelling valuation and indications that the management team
understands the difficult environment in which the company is operating, the uncertainty regarding the
credit facility and the recent run-up in the price have made shares less attractive. While there have been
some tentative signs of a reversal or deceleration of very negative economic trends in the US, the truth is
that monthly data can be very misleading and the recent Euro Zone report that highlighted deflation and
huge drops in industrial production do not bode well for spending on luxury goods. When this potential for
a prolonged and perhaps worsening consumer spending slump is combined with the fact that the shares
now trade above the conservative intrinsic value (with margin of safety) of $6-$7.50, it appears that another
opportunity to purchase shares could be at hand as a result of the recent pullback . Therefore, the
recommendation is to monitor the stock and look to get more bullish based on any or multiple of the
following catalysts:

(A) The debt facility situation is resolved and the company has some form of multi-year financing in place
(B) Shares continue to pull back from the recent run they have had and return to a more distressed
valuation
(C) An activist hedge fund or well known value investor takes a large stake in the company with the goal
of persuading the management to create a long term cost structure that leads to higher margins
(D) The global economic picture begins to get more bright, the risk of a long slump abates, and shares of
MOV have not appreciated meaningfully
(E) The company is able to cut expenses (and especially advertising costs) in a way that boosts margins
even as the company experiences year on year sales declines
(F) The company reinstates the dividend or implements a new stock buyback program
(G) Grinberg family members begin accumulating shares in the open market
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Appendix: The above analysis is just a summary of the most pertinent information on MOV and its
competitors. The point of the appendix is to add other relevant data that should be beneficial in making an
investment decision.

A. Returns & Margins

Return Metrics FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 5 Yr Average


Gross Margin 59.71% 60.80% 60.61% 60.17% 62.41% 60.74%
Operating Margin 8.38% 10.19% 9.83% 9.08% 0.74% 7.64%
Net Income Margin 6.30% 5.65% 9.40% 10.88% 0.51% 6.55%
ROE 8.93% 8.33% 14.31% 14.48% 0.54% 9.32%

B. Growth Metrics

Growth Metrics FY 2005 FY 2006 FY 2007 FY 2008 FY 2009


Revenue 26.9% 12.4% 13.2% 5.0% -17.6%
SG&A 30.0% 10.8% 13.6% 5.7% -0.6%
Operating Income 0.9% 36.8% 9.2% -3.1% -93.3%
Net Income 15.3% 0.8% 88.3% 21.6% -96.1%

C. Segment Breakdown

Segment Breakdown
Sales FY 2007 % Total FY 2008 % Total FY 2009 % Total
Wholesale $445.7 83.6% $466.4 83.4% $371.3 80.6%
Retail 87.2 16.4% 93.1 16.6% 89.5 19.4%
Total $532.9 100% $559.5 100% $460.8 100%

Operating Profit FY 2007 % Total FY 2008 % Total FY 2009 % Total


Wholesale $48.1 92.0% $50.2 98.8% $8.7 255.9%
Retail 4.2 8.0% 0.6 1.2% (5.3) -155.9%
Total $52.3 100% $50.8 100% $3.4 100%

Operating Margin FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 5 YR AVG


Wholesale 9.6% 11.0% 10.8% 10.8% 2.3% 8.9%
Retail 2.7% 6.7% 4.8% 0.6% -5.9% 1.8%
Total 8.4% 10.2% 9.8% 9.1% 0.7% 7.6%

D. Timing of Sales

Sales Timing FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 5 YR AVG


1st Half of FY 41.3% 43.1% 42.1% 43.0% 50.1% 43.9%
2nd Half of FY 58.7% 56.9% 57.9% 57.0% 49.9% 56.1%
Total 100% 100% 100% 100% 100%

E. Geographic Breakdown
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Geographic Breakdown FY 2007 % Total FY 2008 % Total FY 2009 % Total


US $366.7 68.8% $328.2 58.7% $255.3 55.4%
International 166.2 31.2% 231.3 41.3% 205.5 44.6%
Total $532.9 100% $559.5 100% $460.8 100%

FY 2005 FY 2006 FY 2007


Segment Operating Margin Profit Margin Profit Margin Profit Margin
US $0.3 0.1% $10.1 3.1% $7.7 2.1%
International 34.7 26.6% 37.9 26.3% 44.6 26.8%
Total $35.0 8.4% $48.0 10.2% $52.3 9.8%

FY 2008 FY 2009 5 YR AVG


Segment Operating Margin Profit Margin Profit Margin Margin
US ($18.1) -5.5% ($31.3) -12.3% -2.5%
International 68.8 29.7% 34.7 16.9% 25.3%
Total $50.7 9.1% $3.4 0.7% 7.6%

F. Owner’s Earning and Unlevered FCF

Owner's Earnings FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 Current


Net Income $26.4 $26.6 $50.1 $60.9 $2.3
D&A 12.6 12.4 12.9 14.7 17.5
CapEx 14.9 16.4 20.2 27.4 22.7
Extraordinary Non-Cash (0.6) 2.6 1.0 (11.0) (14.9)
Total $24.7 $20.0 $41.8 $59.2 $12.0
Owner's EPS $0.98 $0.79 $1.62 $2.27 $0.49
Price to Owner's EPS 18.95x 23.24x 17.90x 11.15x 19.02x 17.60x

Unlevered Free Cash Flow FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 Current
EBIT (Excl Extra. Non Cash) $35.7 $45.4 $51.4 $61.8 $18.3
Taxes 6.7 18.3 2.9 (9.5) 0.7
CapEx 14.9 16.4 20.2 27.4 22.7
Change in Working Cap* (58.6) (8.6) (7.4) (4.6) (24.6)
D&A 12.6 12.4 12.9 14.7 17.5
FCF ($31.9) $14.5 $33.8 $54.0 ($12.2)
Price to FCF N/A 32.06x 22.14x 12.22x N/A N/A
*The majority of the increase in working cap in FY 2009 has to do with reclassifying all debt as short term

G. Inventory

Inventory Breakdown* FY 2008 % Total FY 2009 % Total


Finished Goods $117.0 57.05% $146.1 63.83%
Components 76.2 37.15% 81.4 35.56%
WIP 11.9 5.80% 1.4 0.61%
Total $205.1 100% $228.9 100%
*Inventory is valued at the lower of cost or market

H. EPV Analysis

EPV Analysis
Normalized EBIT Calculation:
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Average Sales 2004-2008 $488.6


Conservative Normalized Sales $425

Average Gross Margins 2004-2008 60.7%


Conservative Gross Margin 60.0%

Implied Gross Profit $255

Average Lease Expense 3.1%


Conservative Lease % Estimate 4.3%
Lease Cost Estimate $18.1

Average Marketing Expense 16.0%


Conservative Ad % Estimate 18.0%
Marketing/Ad Estimate $76.5

Total SG&A % Average 53.1%


Conservative SG&A % Estimate 62.5%
Preliminary Total SG&A Estimate $265.63
Less: Leases Expense (18.1)
Less: Ad Expense (76.5)
Subtotal Other SG&A $171.06
Less: Staffing/Inventory Reductions (35.0)
Total Other SG&A $136.1

Implied Gross Profit $255.0


Total Estimated SG&A $230.6
Estimated EBIT $24.4
Implied EBIT Margin 5.7%
5 YR Average EBIT Margin 7.6%

I. Company Valuation Comparison

Average Multiple Movado Fossil Bulgari Swatch


TEV/Sales MOV FOSL BUL UHR
2004 1.13x 1.98x 2.97x 2.31x
2005 1.11x 1.51x 3.20x 2.23x
2006 1.23x 1.20x 3.21x 2.82x
2007 1.43x 1.73x 3.29x 3.56x
2008 0.43x 1.16x 2.05x 2.16x
Current 0.42x 0.63x 1.35x 1.41x
2004-2008 Average 1.07x 1.52x 2.94x 2.62x

Average Multiple Movado Fossil Bulgari Swatch


P/E Ratio
2004 16.98x 24.91x N/A 20.47x
2005 17.40x 18.14x 26.96x 18.22x
2006 19.65x 19.84x 24.70x 17.60x
2007 17.45x 28.32x 23.31x 16.12x
2008 9.16x 15.44x 13.71x 9.65x
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Current 90.34x 8.60x 13.97x 10.40x


2004-2008 Average 16.13x 21.33x 22.17x 15.40x

TEV/EBITDA
2004 8.66x 11.66x 14.56x 10.97x
2005 9.23x 9.10x 16.68x 10.61x
2006 9.16x 9.43x 16.17x 12.82x
2007 10.95x 13.62x 16.52x 14.73x
2008 5.63x 7.42x 11.05x 8.48x
Current 8.90x 3.90x 9.01x 5.83x
2004-2008 Average 8.73x 10.25x 15.00x 11.52x

Price Book
2004 1.43x 4.01x N/A 2.43x
2005 1.49x 3.01x 4.57x 2.44x
2006 1.74x 2.48x 4.39x 2.99x
2007 2.09x 3.63x 4.56x 3.07x
2008 1.10x 2.52x 2.62x 1.48x
Current 0.53x 1.43x 1.39x 1.60x
2004-2008 Average 1.57x 3.13x 4.04x 2.48x

J. Company Margin & Expense Comparison

Movado Fossil Bulgari Swatch


Gross Margin MOV FOSL BUL UHR
2004 59.7% 52.5% 63.6% 81.3%
2005 60.8% 51.3% 65.0% 78.5%
2006 60.6% 50.2% 64.2% 79.9%
2007 60.2% 51.8% 64.1% 80.8%
2008 62.4% 53.8% 64.3% 81.4%
2004-2008 Average 60.7% 51.9% 64.2% 80.4%

Operating Margin
2004 8.4% 13.7% 16.0% 16.4%
2005 10.2% 10.4% 15.5% 17.4%
2006 9.8% 10.2% 15.6% 20.2%
2007 9.1% 13.0% 15.1% 21.9%
2008 0.7% 13.6% 10.3% 20.4%
2004-2008 Average 7.6% 12.2% 14.5% 19.3%
Movado Fossil Bulgari Swatch
Net Income Margin
2004 6.3% 9.4% 13.1% 12.7%
2005 5.6% 7.3% 12.7% 14.3%
2006 9.4% 6.4% 13.3% 17.2%
2007 10.9% 8.6% 13.8% 17.9%
2008 0.5% 8.7% 7.7% 14.7%
2004-2008 Average 6.5% 8.1% 12.1% 15.4%

ROE
The Inoculated Investor http://inoculatedinvestor.blogspot.com/

2004 8.9% 18.9% 17.9% 12.2%


2005 8.3% 14.4% 17.7% 13.9%
2006 14.3% 13.7% 19.0% 17.3%
2007 14.5% 17.9% 20.0% 19.7%
2008 0.5% 17.5% 10.4% 15.5%
2004-2008 Average 9.3% 16.5% 17.0% 15.7%

SG&A Margin
2004 51.3% 38.8% 47.6% 32.2%
2005 50.6% 40.9% 49.4% 30.6%
2006 50.8% 40.0% 48.6% 29.3%
2007 51.1% 38.8% 49.0% 28.3%
2008 61.7% 40.1% 49.0% 28.8%
2004-2008 Average 53.1% 39.7% 48.7% 29.8%

Ad Expense
2004 16.2% 7.7% 11.6% 15.6%
2005 16.1% 7.9% 12.7% 15.5%
2006 14.9% 7.0% 11.2% 15.6%
2007 15.4% 6.2% 11.0% 15.4%
2008 17.4% 6.1% 11.3% 16.3%
2004-2008 Average 16.0% 7.0% 11.5% 15.7%

Lease Expense
2004 3.0% 3.1% 4.8% 6.2%
2005 2.8% 3.0% 4.8% 5.8%
2006 2.7% 3.1% 5.5% 6.1%
2007 3.0% 3.2% 5.8% 6.4%
2008 3.8% 4.0% 7.1% 7.0%
2004-2008 Average 3.1% 3.3% 5.6% 6.3%