Fossil Group A Fashion Hit In Accessories And Growth
The Fossil store on Manhattan's Fifth Avenue was filling up one late summer morning.
Shoppers were scoping out the new fall lineup of watches, jewelry, handbags and other accessories that recently hit the shelves.
The new Georgia women's watch collection featuring oversized faces and thin straps -- at prices from about $75 to $115 -- was a big draw, as were the new Olive bracelet watches priced at $95 to $115.
Maritza Bringas was first in the line at checkout buying a Georgia watch with a white face and stainless steel strap. Bringas is a big fan of Fossil. It was the fifth Fossil watch she's bought in the past 10 years.
"For day to day, I really like the cost and benefits of Fossil watches," said Bringas, a visitor from Mexico.
Judging from its growth prospects,Fossil Group ( FOSL ) has plenty of loyal customers like Bringas. The fashion watch and accessories designer and retailer has seen its profits grow by double digits since 2010.
And if Wall Street is on target, that trend will continue. Analysts surveyed by Thomson Reuters see full-year 2013 earnings rising 16% to $6.30 a share. They expect a 14% rise in 2014 and the same in 2015.
Appeal And Designer Deals
Fossil, an achievable luxury brand known for simplicity and quality construction, makes watches sold under its namesake label and has licensing agreements with hot brands such asMichael Kors ( KORS ), Burberry and Armani.
Fossil is in the very attractive moderately priced watch sector and has the best brands in the market, says Citi Research analyst Oliver Chen.
"It's the best-in-class player in the mid-tier watch category, thanks to their strong brand portfolio and their focus on compelling product design," said Telsey Advisory Group analyst David Wu. "They really helped create and establish demand for entry-level fashion watches through their product innovation and eye-catching designs."
That message came across clearly in the second quarter. Earnings leapt 24% from a year earlier to $1.15 a share vs. the Street's view for 93 cents. Fossil has logged double-digit profit gains in all but one of the past seven quarters. Revenue popped 11% to $706 million, over forecasts for $691.2 million.
The results really turned heads on Wall Street. Fossil's stock shot up 18% on Aug. 6, the day the company reported results, making it one of the big stock movers of the day.
"People were afraid they would not meet expectations and they ended up beating them on strong sales and margins. That's unique," Chen said.
Shares have settled back since, though they are up 22% for the year to date, through early Tuesday afternoon.
Chen adds that there's continued investor interest in owning accessories companies over apparel companies because it's a much higher-margin branded business with more global exposure.
Fossil's Own Brand Shines
Fossil's uptick in sales was driven by a 15% gain in its global watch portfolio vs. a year earlier. It saw double-digit increases from many brands, with double-digit gains in its own Fossil and Skagen brands and its licensed portfolio. Overall jewelry sales jumped 25%.
Fossil acquired watchmaker Skagen Designs in 2012. The brand saw a strong mid-teen increase in sales in the second quarter.
In addition to watches, Fossil's products include handbags, small leather goods and jewelry.
"The brand was up solidly, led by a 14% increase in watches. Jewelry was also up double digits in all geographies due to our new global assortment and easier comparisons from last year. Our leathers business was down for the quarter, mostly due to handbags," Fossil CEO Kosta Kartsotis said on the company's Q2 conference call with analysts. "We believe that the fall assortments that are being delivered to the stores now will reverse this trend."
Fossil sells and distributes its products in more than 450 company-owned-and-operated retail stores and through international e-commerce websites and its U.S. website. They are also sold to department stores, specialty retail stores, and specialty watch and jewelry stores in the U.S. and about 130 countries.
Fossil got a strong reception in Europe, where second-quarter wholesale sales popped 16% to $171 million. The growth was fueled by strength in Germany and the United Kingdom.
Asia-Pacific wholesale sales were also strong at a 14% gain to $96 million. The region benefited from strong watch sales in China, Japan and India, Wu says.
Wholesale sales in North America rose 4%. Results were negatively impacted by this year's earlier Easter, which Fossil estimates shifted $15 million in sales from the second quarter into the first quarter.
The company also saw its second-quarter gross margin rise an impressive 190 basis points to 57.9%. Fossil is benefiting from favorable consumer trends in the fashion watch category, where there's not a lot of strong competition, says Chen.
People see watches as an important part of their wardrobes, he says, and they often buy multiple watches for different occasions.
"Watches are important on the fashion runway," adds Chen. "There's a multi-year trend in watches. And they have strong global appeal because there are minimal size issues and watch fashion trends are more global vs. apparel."
Fossil has made sure to keep coming up with new offerings to wow consumers.
In February, it announced a licensing pact with designer brand Tory Burch to develop watches for the sportswear company. It plans to launch them ahead of the 2014 Christmas holiday.
"Fossil continues to introduce strong new brands whether it's Skagen or most recently Tory Burch, which will debut in late 2014," Wu said. "Through its scale, Fossil has the ability to quickly identify emerging trends and adapt its new products accordingly."
Making The Goods
Fossil benefits from owning most of its supply chain, which lets the company design faster and manage its inventories better, adds Chen.
More than 61% of Fossil's non-Swiss-made watch production was assembled through wholly owned or majority-owned factories in 2012. This "vertical integration" allows for better flow of communication, consistent quality, product design protection and improved supply chain speed, according to a company filing with the SEC. But it still lets Fossil use non-owned production facilities for their unique capabilities and to cover production needs beyond internal capacities.
Watchers expect Fossil to keep up its momentum. And sales should stay strong, Wu says.
"Fossil has the ability to sustain a double-digit annual sales pace over the next five years, thanks to the outperformance of Asia-Pacific," he said. "Fossil should benefit from the burgeoning middle-class population in China, which remains a highly underpenetrated market."
Chen sees China as a "huge growth opportunity" for Fossil, given the power of the brand and its strong business in Japan and Korea. And he sees more growth coming from India in the future.
Wu expects Fossil's business in Europe to also maintain a low-double-digit annual sales pace over the next five years.
And the U.S. should still see high-single-digit to low-double-digit sales gains for the foreseeable future, he adds, aided by new designs and ongoing product innovation.