The smartwatch has become quite a phenomenon over the last few years. Giant technology companies like Apple Inc. (AAPL, Financial) and Samsung Electronics Co. Ltd. (XSWX:005930, Financial) have been at the forefront in disrupting the watch market.
The rise of the smartwatch has forced traditional watchmakers to evolve by adapting their luxury watches to the latest tech trends. Although there are consumers who cling to the glitter, complexity and finesse of a good old chronometer, the pressure created by the emergence of the smartwatch over the last five years cannot be ignored. In fact, traditional watch brands have struggled to maintain steady growth in some segments of the market.
The high-end luxury watch brands have mostly retained their positions. The other end of the chain, however, is rapidly losing its footing to the trendy new smartwatches. The general view in the market now is: If you cannot afford a premium luxury watch, then you are better off with a smartwatch because it not only provides the time, but also everal features like heart-rate and blood sugar monitoring.
And now, even some of the most notable publicly listed luxury watch companies are beginning to feel the impact of the smartwatch. Shares of giant luxury brands company Capri Holdings Ltd. (CPRI, Financial) have failed to recover fully following their plunge late last year. Capri Holdings was formed following Michael Kors' acquisition of Italian fashion brand Versace. And based on this data from Statista, Michael Kors (now Capri Holdings) revenues have stagnated since 2015, rising only marginally in 2016, then declining in 2017 before last year’s recovery, which took the top line slightly above 2016 numbers. And this chart by GuruFocus shows the level of impact the slowdown has had on Capri's net income over the past three years.
Chart: Michael Kors/Capri Holdings revenues have been relatively flat over the last four years.
According to reports, the company’s fashion watches have been declining faster than its smartwatches are growing, leading to a net decline in unit sales. The challenge is that Michael Kors has built its brand around luxury fashion watches. By expanding into smartwatches, it is entering new territory, which is dominated by technology giants like Apple, Samsung Electronics Ltd. and Sony Corp. (SNE, Financial).
This makes markets in North America and Asia challenging for the traditional watchmaker. But some companies, like Franck Muller Watches and Tag Hauer, could strike it big in the European markets because consumers there are still seemingly strongly attached to fashion watches. How long that lasts remains to be seen.
The disruption has caused nearly every traditional watchmaker to embrace the smartwatch by diversifying their product lines. Movado Group Inc. (MOV, Financial) is one example of a pure-play traditional watch manufacturer that is expanding into smartwatches. The company’s shares have failed to make any significant gains since falling late last year and now trade at a price-earnings ratio of just 13.66.
Shares of Movado have plunged over the last seven months despite strong improvement in revenue and earnings in the most recent fiscal year. Generally, the company's stock price has struggled since 2014. There was a short-term bull-trend between 2017 and 2018, which was driven by Movado's partnership with Alphabet Inc. (GOOG)(GOOGL)'s Android, announced in 2017, to launch a series of smartwatches. But the initial excitement seems to have ended as demonstrated by last year's stock price plunge.
Also, while Movado's most recent quarterly results for the period ending January 2019 blew away analyst expectations on earnings, with 67 cents earnings per share versus Street estimates of 54 cents, analysts now expect a slowdown in earnings and revenue. This could be the reason the company's shares have failed to recover in 2019 along with the rest of the market.
There is now wide expectation that the luxury watch market will continue to slow, which could lead to a series of mergers and acquisitions. Technology giants could acquire renowned watch brands to develop smartwatches. This could work perfectly because while traditional watchmakers have established themselves in the watch market, most of them do not command the same respect in smart devices.
As such, merging with a top smart device manufacturer or acquiring a disruptive smartwatch maker could be the key to maintaining their leadership status in the market. As noted earlier, Michael Kors has been trying to bridge the gap between its smartwatch sales and luxury fashion watch sales without much success.
In summary, the watch market has evolved and traditional watchmakers like Michael Kors and Movado have now made it clear that the smartwatch market cannot be ignored. As investors look to add luxury fashion watchmakers to their portfolios, they should do so with caution.
Disclosure: I have no positions in the stocks mentioned.
