We are maintaining our Neutral recommendation on
) following appraisal of its second quarter 2012 results.
Fossil posted earnings of 93 cents per share in the second
quarter exceeding the prior-year earnings by 16.3%, driven by
double-digit sales growth in all the geographic regions. The
results also exceeded the Zacks Consensus Estimate by 19.2% and
were above management's guidance of 77-79 cents per share.
Net sales during the quarter increased 14.3% to $636.1 million,
beating the Zacks Consensus Estimate of $634 million. The
year-on-year increase was aided by a 23.2% jump in worldwide sales
of watches and gains from the Skagen acquisition. On an organic
basis, excluding sales related to Skagen-branded products, revenue
increased 13.5%, reflecting 17.1% growth in all major watch brands
and 8.2% sales growth in the leather business.
The company has a wide portfolio, which includes recognized
brand names such as Adidas, Armani Exchange, Burberry, Diesel,
DKNY, Emporio Armani, Marc by Marc Jacobs, Michele, Michael Kors,
Relic and Zodiac. The company has regularly extended its product
categories with the introduction of jewelry collections under some
of its brands. Apart from that, it has also introduced soft
accessories under its Fossil brand name.
Fossil has significant exposure to international markets, which
has been driving its long-term growth. The recent acquisition of
privately-held Nevada-based Skagen Designs, Ltd. and certain
subsidiaries in August 2012 has helped Fossil to expand its brands
in the European markets and other emerging markets of East Asia,
where Skagen has significant presence.
Despite robust watch sales, Fossil experienced a rise in costs
of watch components and labor costs resulting in weak gross
margins. Increasing currency headwinds also negatively impacted
sales and gross margins in the quarter. In addition, an uncertain
economic environment in Europe might pose a threat to the expanding
brands in European markets.
Further, a difficult macro-economic environment, reflected in
interest rate hikes, credit availability, unemployment levels, and
high household debt levels is expected to continue in the rest of
2012. The company remains exposed to unfavorable foreign currency
translations and faces the risk of import restrictions such as
antidumping or countervailing duties, and tariffs or other
restrictions due to international transactions. The weak economy
and rising costs keep us on the sidelines.
FOSSIL INC (FOSL): Free Stock Analysis Report
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