Are These Watchmakers Worth Your Time...And Your Money?

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The watchmaking business is getting back to growth mode, after retrenching during the financial crisis.  Despite the ubiquity of clocks on smartphones, watches are one piece of jewelry that both sexes can use to make a fashion statement.  More importantly, the business is consolidating with a few firms controlling much of the industry, including Movado (NYSE: MOV) and Fossil (NASDAQ: FOSL).

Swiss-made, Sort Of

Founded in 1961 as a watch distributor, Movado primarily serves the luxury and accessible luxury markets through its Concord, Ebel, and Movado brands.  However, since everyone can’t afford luxury prices, the company has been moving into the less expensive, licensed category over the past few years.  It currently manufactures watches for a variety of well-known apparel brands, including Hugo Boss, Tommy Hilfiger, and Juicy Couture.

Movado’s sales have slipped over the past five years, as customers have opted for chic licensed brands, rather than flashy watches with gold and precious gems.  However, the company’s operating margin has steadily improved since 2010, partly due to the closure of its money-losing boutique stores.  The wholesale market now accounts for 90% of total sales, with Movado's 33 domestic outlet stores accounting for the balance.  The outlet stores are profitable for the company to operate, due to the lower occupancy costs at outlet malls versus traditional malls, and the stores are a good place to unload excess inventory.

In FY2012, Movado has reported better results, with increases in sales and operating income of 10.5% and 71.9%, respectively, versus the prior-year period.  The company utilizes a completely outsourced business model, with Swiss contractors manufacturing Movado’s luxury brands and Asian contractors manufacturing the rest of its products.  Despite weakness in Europe, its second largest customer base, the company’s international segment continues to produce the vast majority of Movado’s profits due to a customer preference for higher-priced products.  With a strong balance sheet and new licensees coming on board, including Ferrari in FY2014, Movado is well positioned for the future.

More Than Just Watches

Founded in 1984 as a designer of fashionable watches, Fossil has transformed into a vintage-inspired, lifestyle brand that sells products in 120 countries.  In addition to watches, the company sells jewelry, handbags, leather goods, and clothing.  Fossil markets a few watch models in the quasi-luxury category, but it primarily sells proprietary and licensed watches at average prices between $85 and $600.

While Movado has moved away from the retail market, Fossil has embraced it and has tripled its global store base over the past five years.  The larger store base is a primary reason for the company’s 79% increase in sales over the past four fiscal years.  Despite the retail segment’s lower operating margin, the stores provide an important face to the customer as Fossil continues to build a diversified apparel brand.

In FY2013, Fossil has reported a 10% increase in sales, while operating income has slipped by 4.6%.  The company has been hurt by its European operation, where lower apparel sales led to a 15% drop in segment profits during the period.  In addition, Fossil has been negatively impacted by its drive to expand its store base, with 71 stores opened or acquired over the past year.  Despite the near term profit impact, Fossil also has a good balance sheet and is building a strong brand for the long term.

Get some diversification

Given that both watch manufacturers trade for premium valuations, with P/E multiples over 20, how else could investors participate in the sector?  One good way would be to look at the diversified jewelry retailers that sell a broad range of watches and other inventory at various price points.  Since size is a major factor in retail profitability, investors should look at the biggest specialty retailer in the industry, Signet Jewelers (NYSE: SIG).

With 1,800 stores in the U.S., almost everyone has probably visited one of Signet’s stores, which include the Jared and Kay chains for the upscale and mass markets, respectively.  Signet also has a smaller base of stores in the U.K., although the segment is chronically unprofitable.  After raising its operating efficiency over the past couple of years, the company is looking to grow again and recently purchased the Ultra chain of 100 stores.

In FY2012, Signet has reported increases in sales and operating income of 3.1% and 11.1%, respectively, compared to the prior-year period.  Domestic comparable store sales rose 1.2%, as rising sales at value-priced Kay’s stores offset weak sales at Jared’s.  Similar to the trends witnessed by the watch manufacturers, Signet is seeing customers continue to buy jewelry, but opt for lower priced products. 

The Bottom Line

People have been wearing jewelry for thousands of years and they will continue to do so long after we are gone.  While jewelry might be a girl’s best friend, the jewelry stocks will provide more value over the long run and Signet might be the right gem for your portfolio.

rghanley owns shares of Movado. The Motley Fool recommends Fossil. The Motley Fool owns shares of Fossil and Movado Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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