Movado Investment Thesis

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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

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

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

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%

(Data from most recent filings)

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

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

413.12%

245.11%

Current Assets-Total Liabilities

Market Cap % of NLV 627.29% 602.68% 656.32% *Prior data is based on year end closing price ^Inventory is valued by the company at the lower of cost or market value

198.65%

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

MOV

5 YR Avg.

FOSL

BUL

Swatch UHR

TEV/Sales

0.42x

1.07x

0.63x

1.35x

1.41x

P/E Ratio* TEV/EBITDA *

12.03x

16.13x

8.60x

13.97x

10.40x

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 Efraim Grinberg Richard Cote Alexander Grinberg/Miriam Phalin Gerry Grinberg (Recently Deceased)

Position

Total Shares

% Total

Date

CEO

1867.9

7.70%

4/21/2008

COO/EVP

425.5

1.70%

4/21/2008

Owner

3993.9

16.40%

4/21/2008

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

$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%

FY 2007

% Total

FY 2008

% Total

FY 2009

% Total

$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%

Wholesale

Operating Profit Wholesale

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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FY 2007

% Total

FY 2008

% Total

FY 2009

% Total

$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%

US

FY 2005 Segment Operating Margin

Profit

US International Total

FY 2006 Margin

Profit

$0.3

0.1%

34.7

26.6%

$35.0

8.4%

FY 2008

FY 2007 Margin

Profit

$10.1

3.1%

$7.7

2.1%

37.9

26.3%

44.6

26.8%

$48.0

10.2%

$52.3

9.8%

FY 2009

Margin

5 YR AVG

Segment Operating Margin

Profit

Margin

Profit

Margin

US

($18.1)

-5.5%

($31.3)

-12.3%

Margin -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

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*

(24.6)

(58.6)

(8.6)

(7.4)

(4.6)

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 *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

$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%

100%

$228.9

100%

Finished Goods

Total $205.1 *Inventory is valued at the lower of cost or market

H. EPV Analysis EPV Analysis Normalized EBIT Calculation:

Current

N/A

The Inoculated Investor

Average Sales 2004-2008

http://inoculatedinvestor.blogspot.com/

$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 Preliminary Total SG&A Estimate Less: Leases Expense

62.5% $265.63 (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

TEV/Sales

MOV

FOSL

BUL

Swatch 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

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

P/E Ratio

The Inoculated Investor

http://inoculatedinvestor.blogspot.com/

Current

90.34x

8.60x

13.97x

10.40x

2004-2008 Average

16.13x

21.33x

22.17x

15.40x

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

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

TEV/EBITDA

Price Book

J.

Company Margin & Expense Comparison Movado

Fossil

Bulgari

Gross Margin

MOV

FOSL

BUL

Swatch 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%

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

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%

Operating Margin

Net Income Margin

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%

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%

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%

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%

SG&A Margin

Ad Expense

Lease Expense