Fossil Beats Estimates

Zacks

Fossil Inc. (FOSL) reported second quarter 2012 earnings of 92 cents per share, which exceeded both the year-ago earnings of 80 cents by 15% and the Zacks Consensus Estimate of 78 cents by 17.9%.

Growth in wholesale sales across all the geographies boosted the earnings.

Revenue Details

Fossil’s net sales during the quarter increased 14.3% to $636.1 million, beating the Zacks Consensus Revenue Estimate of $634 million. The year-on-year increase was aided by a 23.2% jump in worldwide sales of watches. 

On a constant currency basis, sales increased 18.1%, reflecting 17.1% sales growth in all major watch brands and 8.2% sales growth in the leather business.

Excluding the sales related to Skagen-branded products, which was acquired in April 2, 2012, the company reported net sales growth of 13.5%

Segment Details

Net sales from the North America wholesale segment increased 18.2% on a constant currency basis, primarily driven by increase in the watch and jewelry sales volumes and leather business. Further, the company experienced sales growth in U.S. and in the company's subsidiaries in Canada and Mexico.

Shipments to third party distributors in Canada and Mexico also contributed to the sales growth in the quarter. Excluding the sales related to Skagen-branded products, the segment reported net sales growth of 14.7%

Wholesale net sales in Europe grew 14.0% year over year on a constant currency basis. The increase came on the back of increased watch shipments. 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. Excluding the sales related to Skagen-branded products, the segment reported net sales growth of 7.5%

Net wholesale sales in the Asia-Pacific segment increased 27.2% on a constant currency basis, driven by increases in the company’s watch sales. South Korea, Japan and Chinese markets’ sales contributed favorably to the segment. Excluding the sales related to Skagen-branded products, the segment reported net sales growth of 24.6%.

Direct-to-Consumer segment’s net sales grew 17.7% year over year on a constant currency basis, primarily due to profits in the comparable store sales and increase in the average number of company-owned stores in the quarter.

Margins

Fossil’s gross margin in the quarter remained flat at 56.0%. Gross margin was positively affected by higher sales of watch products and positive pricing of certain watch businesses. However, foreign currency and an increase in factory labor costs negatively impacted the margin, thus neutralizing the positive effects.

Operating margin declined 170 bps to 13.8% in the second quarter of 2012 due to lower operating expense leverage as well as foreign currency translation.

Other Financial Update

The company had cash, cash equivalents and securities of $139.0 million as of June 30, 2012 as compared with $260.7 million as of March 31, 2012.

Since the end of year-ago quarter, the company repurchased approximately 2.5 million shares of its common stock for $233.7 million The company had authorized a $750 million buyback program in August 2010. The company has now completed the repurchase of approximately 7.5 million of shares worth $568.3 million.

Guidance

For the third quarter of 2012, Fossil expects net sales to increase approximately 11%. On a constant currency basis, the company expects net sales to increase 15%.

For the fourth quarter, the company expects net sales to increase 16%. On a constant currency basis, it is expected to increase by 18%.

Earnings for the third quarter are expected in the range of $1.15 – $1.17 per share. The Zacks Estimate is pegged at $1.36. For fiscal year 2012, Fossil expects earnings per share in a range of $5.29 to $5.34.  Zacks Consensus Estimate projects earnings of $5.28 for the full year.

Zacks Rank

Fossil Inc. currently have a Zacks #4 Rank (short-term Sell rating). The company faces stiff competition from Guess? Inc. (GES).

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