Fossil Stays Neutral

Zacks

We maintained our Neutral rating on Fossil, Inc. (FOSL) following appraisal of fourth quarter and full year 2011 results.

Fossil posted earnings of $1.87 per share in the fourth quarter exceeding the prior-year earnings of $1.46 per share, driven by double-digit sales growth and lower share count. The results also exceeded the Zacks Consensus Estimate of $1.77 per share.

Worldwide net sales climbed 18.5% to $830.8 million in the quarter, reflecting strong sales momentum in all its segments. On a constant currency basis, worldwide net sales soared 18.8% during the quarter, primarily resulting from increases in watch sales and the company’s leather business.

We are optimistic about the company’s portfolio which has many recognized brand names such as Adidas, Armani Exchange, Burberry, Diesel, DKNY, Emporio Armani, Marc, Michele, Michael Kors, Relic and Zodiac. The company has extended its product categories of existing brands with the introduction of jewelry collections under some of its brands and has introduced soft accessories under its Fossil brand name.

Fossil has a significant exposure in the international markets which has been driving its long-term growth strategy. The company has penetrated the international markets by forming and acquiring subsidiaries operating outside US. The acquisition of privately held Nevada-based Skagen Designs, Ltd. early April 2012 is expected to help Fossil to expand its brands in the markets of Europe and other emerging markets of East Asia, where Skagen has significant presence. We believe that expansion in international markets will boost company’s growth over the long term.

However, the company is generating weak margins due to a rise in production costs. In addition, inflation in costs of watch components and labor costs throughout the year, along with increases in sales to off-price retailers impacts the margins of the company. Fossil continues to expect the prices to continue to rise into 2012.

Further, the company faced a difficult macro-economic environment in 2011, and expects the same to persist in 2012. The company’s customers remain sensitive to macroeconomic factors including interest rate hikes, credit availability, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn the company’s growth and profitability.

Fossil faces the risk of import restrictions such as antidumping or countervailing duties, tariffs or other restrictions, as most of its products are manufactured overseas. The weak economy and the rising costs keep us on the sidelines.

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