One of the cheapest stocks in our Acquirer’s Multiple, All Investable – Stock Screener is Movado Group Inc (NYSE:MOV).

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Movado Group Inc (Movado) designs, sources, markets and distributes luxury watches. The company operates in both wholesale and retail segments throughout the U.S. and internationally. It has international operations in Europe, the Middle East and Asia. Its portfolio of brands includes Coach Watches, Concord, Ebel, ESQ Movado, Scuderia Ferrari Watches, HUGO BOSS Watches, Juicy Couture Watches, Lacoste Watches, Movado and Tommy Hilfiger Watches.

A quick look at the company’s share price over the past twelve months shows the stock has fallen 16% to $23.25 which is 27% off its 52 week high.

(Source: Google Finance)

Latest Results

Movado has had a tough run lately due mainly to a difficult retail environment and disruption in its traditional luxury watch revenues caused by the introduction of smartwatches. The company recently released its Q4 and Fiscal Year 2017 results for the periods ended January 31, 2017.

Most noticeable was the 7.1% decrease in net sales to $552.8 million compared to $594.9 million in fiscal 2016. Net sales on a constant dollar basis decreased 6.0% compared to fiscal 2016. Also noticeable was the 22% reduction in net income to $35.1 million, or $1.51 per diluted share, for fiscal 2017 compared to net income of $45.1 million, or $1.90 per diluted share, for the previous corresponding period (pcp). While the company’s net profit margin has decreased slightly in the most recent fiscal year Movado still maintains healthy gross and operating margins of 53% and 10% respectively.

During Movado’s latest earnings call Chairman and Chief Executive Officer Efraim Grinberg stated, “We delivered a solid year despite a very difficult retail market especially in the United States. While we recognized early on that the retail environment would be challenging in both brick-and-mortar and in the watch category, the trend accelerated throughout the year especially in the fourth quarter. Even in this environment, we delivered sales within the range of our outlook and operating earnings towards the high end of our outlook.”

Smartwatches expected to reach a total value of $17.8 billion dollars in 2020

What has become clear is the impact that smartwatch technology is having on traditional luxury watch revenues.

According to a 2016 report by IDC, “Worldwide Smartwatch Market Will See Modest Growth in 2016 Before Swelling to 50 Million Units in 2020”.

IDC categorizes smartwatches as those that can run third party applications. Examples include Apple’s Watch, Samsung’s Gear S3, Motorola’s Moto 360, and Pebble’s Watch. Smartwatches are part of IDC’s larger category of Smart Wearable devices, which also include smart glasses and certain wristbands. IDC expects total smart wearable volumes to reach 21.5 million units shipped in 2016. By volume, smartwatches account for the largest part of the category, and are expected to reach a total value of $17.8 billion dollars in 2020.

Movado has demonstrated it is making necessary strategic changes to compete in the smartwatch space. The company’s President Ricardo Quintero said, “We are confident with our strategic approach to this emerging smartwatch category and early results confirm that this category is relevant but technology has not caught pace with what consumers are looking for. We believe that Apple has played a disruptive role in the fashion watch category and with the [company’s] second generation of Android Wear powered by the new Qualcomm Snapdragon Wear Processor, we will begin to enter the fully connected smartwatch space.”

Movado Goes Hi-Tech with Movado Connect

With sales in traditional luxury watch sales declining, the fastest growing segment in the watch market is now smartwatches. As part of its push into the smartwatch space Movado recently announced its partnership with Google in launching a new smartwatch collection called Movado Connect.

Regarding the partnership with Google, Efraim Grinberg said, “The launch of Movado Connect marks another new milestone in Movado’s longstanding history of creativity and innovation in watch design. We are very proud of our collaboration with Google and for the opportunity to provide our customers with an incredibly designed timepiece, powered by the latest, cutting-edge technology platform.  Movado Connect, with our proprietary edge-to-edge crystal design, is iconically Movado.”

This collaboration showcases each company’s respective expertise in building brand-relevant hardware and software capabilities in the connected category. Movado Connect features five unique customizable dials designed and inspired by Movado’s iconic Museum dial that empower the wearer to tailor their experience through multiple expressions of Movado’s innovative approach to design. Each dial design also includes 3-4 customizable elements including features such as a wide array of complications, backgrounds, and watch hands creating a multitude of possibilities for consumers to create the look they desire.

With access to thousands of apps, including Android PayTM, these new watches meet the demands of today’s digital age with an updated user interface optimized for round screens, an ‘always-on’ display, improved fitness tracking, iOS and AndroidTM compatibility and the powerful Google Assistant for performing tasks and getting answers, directions, and timely reminders.

“We are thrilled to partner with Movado, a longtime leader and one of the most iconic brands in the watch industry,” said David Singleton, Vice President of Android Engineering at Google. “With our combined expertise in watchmaking, design and software, we are able to create a beautiful yet functional timepiece that helps people live their everyday lives.”

Movado’s partnership with Google positions the company squarely in the growing smartwatch space.

Movado.com

What’s also become clear is the move by consumers away from traditional retail outlets and towards purchases on smartphones and online. In response to these changes Ricardo Quintero said, “The fourth quarter proved to be challenging for retail in general and particularly for the U.S. department store channel and mall-based retailers. The rise of online appears to be an accelerating trend that continues to grow double-digits and although only represents 15% of the U.S. watch category as tracked by NPD, it has had a significant effect on retailer brick-and-mortar traffic and it’s sales results. We are fully committed in our investments in digital and are very pleased with the multiple initiatives underway.”

The good news is that Movado.com was the company’s fastest growing business unit with double-digit increases and the company’s digital advertising and social media footprint continues to grow and gain traction. Movado is continuing to shift resources into digital to capture the many opportunities that exist on a global basis, including shifting a larger percentage of its marketing expenses to digital marketing.

Movado has stated that it will be making significant increases in its digital media investment this year with close to fifty percent of its total media budget being spent on its digital and e-commerce business.

Cost Saving Initiatives

In addition to adding smartwatch technology to its range and increasing its digital and e-commerce footprint the company has also made the difficult decision to implement a number of cost saving initiatives to overcome the current challenges facing the U.S. fashion watch category and its traditional retail channels.

Regarding the cost saving initiatives Efraim Grinberg said, “Given the very difficult holiday season for a number of our major retail partners in the U.S. and an increased focus on inventory management with declining store traffic, we have decided to execute a cost reduction plan for Movado Group.”

Movado has already started cutting a number of positions in the U.S. and is in the process of executing a

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