) reported first quarter 2012 earnings of 93 cents per share, which
exceeded both the year-ago earnings of 86 cents and the Zacks
Consensus Estimate of 92 cents per share. The results in the
quarter also outperformed management's guidance of 90-92 cents per
The earnings in the quarter was benefited by the foreign
currency gains and due to a favorable increase related to a lower
outstanding share count as a result of the company's ongoing stock
Worldwide net sales of Fossil during the quarter grew 9.8% to
$589.5 million. However, sales lagged the Zacks Consensus Revenue
Estimate of $618 million. The company also missed the management's
expectations of a 15% growth in sales in the quarter.
The increase from the prior year quarter reflects double-digit
sales growth across all of the company's operating segments. On a
constant currency basis, sales increased 11.1%, reflecting strong
double-digit sales growth of 13.7% in all major watch brands and a
growth of 15.8% in the leather business.
However, the company suffered from a 25.6% decline in eyewear
sales and a 4.8% decrease in the company's jewelry category. Net
sales of Fossil branded products also expanded 5.4% in the first
quarter of 2012.
Net sales from the
wholesale segment increased 9.3% on a constant currency basis,
primarily driven by increase in the watch and jewelry sales
volumes, partially offset by a decline in eyewear sales. Further,
the company experienced sales growth in U.S. and in the company's
subsidiaries in Canada and Mexico. Shipments to third party
distributors, located primarily in South America also contributed
to the sales growth in the quarter.
Wholesale net sales in
grew 4.7% year over year on a constant currency basis, on the back
of increases in watch shipments and in the leather business. Sales
to third party distributors contributed to the sales growth,
whereas the repositioning of the Fossil branded jewelry business
negatively impacted the jewelry sales volumes.
Net wholesale sales in the
segment increased 18.8% on a constant currency basis, driven by
increases in the company's watch and leather sales.
segment net sales grew 18.7% year over year on a constant currency
basis, primarily due to profits in the comparable store sales and
an increase in the average number of company-owned stores in the
quarter. The company's e-commerce business also gained momentum in
Fossil's gross margin in the quarter contracted 40 basis points
(bps) to 55.8% in the reported quarter. The downswing in gross
profit margin was partially driven by increase in factory labor and
certain component costs and a higher sales percentage to third
party distributors, offset by increases in the sales mix of higher
margin watch products, Direct to consumer sales and Asia Pacific
wholesale sales. Foreign currency changes also resulted in the
decline in margins by 20 bps.
Operating margin also declined 310 bps to 14.1% in the first
quarter 2012 on the back of a decrease in gross profit margin and
operating expense leverage.
Other Financial Update
The company had cash, cash equivalents and securities of $260.7
million at the end of March 31, 2012 as compared to $287.7 million
at the end of December 31, 2011.
The company repurchased approximately 2.4 million shares for
$235.6 million of its common stock in the first quarter, under the
company's $750 million buyback authorization announced in August
2010. With this, the company has completed the repurchase of
approximately 6.8 million of shares worth 509.4 million under the
authorization, till date.
For the second quarter of 2012, Fossil expects net sales to
increase approximately 16%. On a constant currency basis, the
company expects net sales to increase 19% in the next quarter. The
sales increase estimate includes 6% sales growth from the
acquisition of Nevada-based Skagen Designs, Ltd. which was acquired
For the second quarter of 2012, Fossil expects earnings in the
range of 77 - 79 cents per share, including Skagen. Skagen will
benefit the company with earnings of 3 cents per share, while it
will negatively impact with the transaction-related costs of
approximately 7 cents in the second quarter.
For fiscal year 2012, the company expects net sales to increase
approximately 16%. On a constant currency basis, net sales will
increase approximately 18%, including the 5% sales contribution
from the acquisition of Skagen.
For fiscal year 2012, Fossil expects earnings per share in a
range of $5.30 to $5.40, lower than the previous guidance of $5.40
- $5.50 per share. Including in the current earnings guidance is
the earnings per share benefit of 22 cents related to Skagen
operational activities, partially offset by transaction and other
transition costs of 15 cents per share.
We are encouraged by Fossil's in-house team of dedicated
designers and product specialists who help steer the company ahead
by following emerging lifestyle and fashion trends to bring
innovative and unique products to its customers. However, stiff
) and difficult macroeconomic conditions in Europe are matters of
Nevertheless, we are encouraged by the continued strength in
watch sales and the integration of Skagen Designs, Ltd., which is
expected to drive sales and earnings in 2012.
The company currently retains a Zacks #2 Rank (short-term Buy
rating) on Fossil shares. On a long-term basis, we provide a
Neutral recommendation on the stock.
FOSSIL INC (FOSL): Free Stock Analysis Report
GUESS INC (GES): Free Stock Analysis Report
To read this article on Zacks.com click here.