Fossil, Inc ( FOSL ) started the
year 2013 on a strong note. It reported first quarter 2013 adjusted
earnings of $1.08 per share, which exceeded the year-ago earnings
of 93 cents per share by 16.1%. The results also exceeded
management's guidance range of 93-98 cents per share and topped the
Zacks Consensus Estimate of 97 cents by 11.3%. The year-over-year
upside was driven by top-line growth, positive comparable store
sales and improved margins.
Quarter in Detail
Fossil's net sales during the quarter increased 15.5% to $680.9
million, exceeding the Zacks Consensus Estimate of $655 million.
Net sales increased across all geographic regions. Fossil witnessed
fourth consecutive double-digit quarter of growth in global watch
sales, mainly owing to the acquisition of the Skagen brand
(acquired in April, 2012). Fossil's jewelry business improved,
while sales in other categories including eyewear and leather
businesses declined in the quarter. Currency translation also
reduced sales by $1.4 million in the reported quarter. On a
constant currency basis, net sales increased 15.7% to $682.3
Gross margin contracted 20 basis points to 55.6% due to currency
headwinds and a negative impact from a larger mix of sales through
distributors. This was partially offset by favorable product mix,
growth in outlet channels and improved margins in global full price
retail stores. Operating margin also declined 20 basis points to
13.9% in the quarter due to higher operating expenses.
Net sales from the North America wholesale segment increased
13.3% on a constant currency basis to $254.9 million, primarily
driven by robust watch sales, including sales of Skagen-related
products. The segment also experienced decline in leather and
eyewear businesses due to lower shipments.
Net sales in Europe grew 13.5% year over year on a constant
currency basis to $173.5 million, driven by increases in watch
sales mainly with the addition of the Skagen brand. However,
reduced shipments in the leather and eyewear businesses offset the
Net sales in the Asia-Pacific segment increased 15.3% on a
constant currency basis to $88.4 million, driven by increases in
the company's watch sales. Skagen-branded products contributed $3.0
million to net sales.
Direct-to-Consumer segment net sales grew 22.7% year over year
on a constant currency basis to $165.5 million, primarily
attributable to strong comparable store sales and increase in the
average number of company-owned stores in the quarter. Growth in
watches and a modest increase in the leather business also fueled
the sales increase, along with higher sales from the company's
repositioned jewelry products.
Fossil has raised its earnings guidance for full year 2013. The
company now expects earnings in the range of $6.00 - $6.26 per
share, higher than the previous expectation of $5.85 to $6.15 per
share. Fossil reiterated its outlook for sales and operating
margin. The company expects sales to increase in the range of 10%
to 11%. Operating margin is likely to be in the range of 16.5% to
17.0% for 2013.
For second quarter 2013, Fossil expects sales to increase
approximately 8% to 9%, including the negative impact of shift in
shipments. The company expects earnings in the range of 89 to 94
cents per share and operating margin in the range of 11.5% to 12.0%
in the second quarter.
We are impressed with Fossil's acquisition of Skagen, which
boosted the Asia Pacific wholesale business and added strength
across the North American watch business. It also overshadowed the
weaknesses of the European business. Fossil has also been
experiencing back-to-back increases in comparable store sales. The
company is also cash rich and rewards its shareholders through
share buybacks. However, higher labor costs, currency fluctuations
and uncertainties in Europe continue to remain headwinds. Fossil
holds a Zacks Rank #4 (Sell).
Other stocks worth considering in the consumer discretionary
sector are Joe's Jeans Inc ( JOEZ ),
Hanesbrands Inc ( HBI ) and VF
Corp ( VFC
), each of them carrying a Zacks Rank #2 (Buy).FOSSIL INC (FOSL): Free Stock Analysis ReportHANESBRANDS INC (HBI): Free Stock Analysis
ReportJOES JEANS INC (JOEZ): Free Stock Analysis
ReportV F CORP (VFC): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment