We reaffirm our Neutral recommendation on
) following an appraisal of its fourth quarter 2012 results.
Why the Reiteration?
Fossil reported in-line fourth quarter 2012 earnings of $2.27
per share, which exceeded the year-ago earnings by 21.4%, driven
by top-line growth, positive comparable store sales and improved
Fossil's net sales during the quarter increased 14.1% to
$947.7 million, exceeding the Zacks Consensus Estimate of $933
million. Net sales, on a constant currency basis, increased
14.8%, driven by growth in all the regions, owing to the third
consecutive quarter of double-digit growth in global watch sales
and favorable comparable store sales. Fossil's watch sales grew
mainly owing to the acquisition of the Skagen brand (acquired in
April, 2012). Fossil's jewelry business improved, while sales in
other categories including eye-wear and leather businesses
declined in the quarter.
Despite currency headwinds, gross margin expanded 80 basis
points to 56.9% as the company managed to grow its outlet
channel, improve pricing across certain businesses, increase
production efficiencies and achieve favorable product mix.
Operating margin also expanded 60 basis points to 21.6% in the
quarter, despite higher operating expenses.
Overall, we are encouraged by the company's acquisition
strategy, its strong liquidity position, prudent expense
management and its ability to generate positive comparable store
The acquisition of the Skagen brand has been adding strength
across the North American watch business and has resulted in
significant improvement in the Asia-Pacific wholesale business,
offsetting the weaknesses of the European business. In Feb 2013,
the company signed an exclusive global licensing agreement with
designer Tory Burch for watches, which are expected to be
launched worldwide in late 2014. Fossil's 2011 partnership with
designer Karl Lagerfeld is expected to lead to the launch of an
exclusive collection of watches for men and women in the first
quarter of 2013.
Further, Fossil has penetrated the international markets by
forming alliances, acquiring internationally-based subsidiaries
and licensing and developing international brands. Fossil's
acquisition of the Latin American distribution business of
Florida-based Bentrani Watches, LLC in Jan, 2013 helped the
former to gain from Bentrani's exposure in 16 Latin American
However, currency headwinds and a difficult macro-economic
environment, reflected in interest rate hikes, credit
availability, unemployment levels, and high household debt levels
is expected to continue in 2013. In addition, the company needs
to respond to changing fashion trends and consumer preferences to
remain competitive and to keep up its brand image. The company
also faces the risk of import restrictions such as antidumping or
countervailing duties and tariffs or other restrictions due to
Other Stock to Consider
Fossil currently carries a Zacks Rank #4 (Sell). However,
there are other stocks worth considering in the consumer
discretionary sector including
Michael Kors Holding Ltd.
). While Michael Kors carries a Zacks Rank #1 (Strong Buy), Pvh
and Hanesbrands hold a Zacks Rank #2 (Buy).
FOSSIL INC (FOSL): Free Stock Analysis Report
HANESBRANDS INC (HBI): Free Stock Analysis
PVH CORP (PVH): Free Stock Analysis Report
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