Overview: Eminence Capital's 1Q14 positions (Part 2 of 9)
Eminence Capital and Fossil Group
Recent 13Gs filed with the U.S. Securities and Exchange Commission (or SEC) noted that Ricky Sandler’s Eminence Capital boosted its positions in Fossil Group (FOSL) and Allscripts Healthcare Solutions (MDRX). According to its 1Q14 13F, Eminence initiated new positions in Cadence Design Systems (CDNS), McDonald’s Corp. (MCD), Restoration Hardware Holding (RH), and Ralph Lauren Corp. (RL). It sold shares in Advance Auto Parts Inc. (AAP) and Monster Beverage Corp. (MNST).
Eminence Capital filed a 13G earlier this month with the SEC that showed the fund increased its stake in Fossil Group (FOSL) to 5.1% with 2,703,524 shares. Eminence’s 13F filed last month revealed that the fund owned 1,851,259 shares in Fossil at the end of 1Q14.
Fossil Group is a global design, marketing, and distribution company that specializes in consumer fashion accessories. Its principal offerings include an extensive line of men’s and women’s fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, soft accessories, and clothing. In the watch and jewelry product categories, the company has a diverse portfolio of globally recognized owned and licensed brand names including Fossil, Skagen, DKNY, Diesel, Burberry, Micheal Kors, Relic and Zodiac.
The products are distributed globally through various distribution channels, including wholesale in countries where Fossil has a physical presence, direct to the consumer through retail stores and commercial websites and through third-party distributors in countries where it doesn’t have a physical presence, and through its Fossil.com website. Its wholesale customer base includes, among others, Dillard’s, JCPenney, Kohl’s, Macy’s, Neiman Marcus, Nordstrom, Saks Fifth Avenue, Target, and Walmart. Fossil’s network of company-owned stores included 121 retail stores located in premier retail sites and 121 outlet stores located in major outlet malls in the United States, and 212 retail stores and 88 outlet stores in select international markets as of April 5, 2014.
Fossil sees double digit growth in sales for fiscal 2013 but, retail same-store sales decline
The company’s revenue grew 14% to $3.26 billion in 2013 representing sales growth across each of its global wholesale and direct to consumer businesses. Retail same-store sales for the 4Q13 declined 1.3% as same stores sales increases in Europe and Asia Pacific were more than offset by a decrease in North America, largely driven by significant traffic declines. Sales were strongest in jewelry and watches while leathers performed below the company’s overall same store sales result. Global watch sales made the most significant contribution, increasing $371.6 million or 17.4%, in fiscal year 2013. Its jewelry product category also contributed favorably to the fiscal year net sales growth, increasing $47.2 million, or 26%. Gross margin increased slightly and benefited from a greater sales mix of higher margin watch and jewelry products, growth in international markets, and direct distribution in Latin America, Spain, and Portugal as a result of acquisitions during fiscal year 2013. The company said it in expanded in key newer markets, like China, where its business grew more than 50% for the year.
Why did shares fall after the first quarter earnings announcement?
Shares fell after the latest first quarter results as earnings came below analyst estimates and Fossil provided a weaker second-quarter guidance. The company reported net income of $66.3 million for the 1Q14, compared to $72.2 million for the 1Q13 due to higher tax rate, increased interest expense, and lower non-operating income.
Worldwide net sales increased 14% to $776.5 million. Fossil said each of its core businesses experienced growth with the multi-brand global watch portfolio increasing 17%. Fossil and Skagen branded products growing 5% and 2%, respectively. The Fossil brand growth was led by a double-digit increase in watches and modest growth in jewelry while sales in leather category were relatively flat compared to the year ago quarter. Global retail comparable store sales fell 2.4%, the third consecutive quarter of decline as increases in Europe and Asia Pacific were more than offset by a decrease in North America, which was largely driven by mall traffic declines. Direct to consumer net sales for the 1Q14 increased 18%, or $29.4 million as a result of store expansion.
The company provided a weak guidance for fiscal year 2014, and said it expects earnings of $6.90–$7.30 per share and sales growth of 8%–10%. The management said on the earnings call that, “This year we plan to increase our investments to enhance Fossil brand awareness and further cultivate the emotional connection that customers have with the brand. By expanding our print media campaigns and our digital and social media presence, we expect to drive more traffic into our stores and enjoy a better conversion in unit sales.”
Fossil to boost sales with new launches, partners with Google for opportunities in wearable technology
Sales of licensed watch products accounted for 47.7% of Fossil’s consolidated net sales for fiscal year 2013. The company said the Micheal Kors brand product sales, including jewelry, accounted for 22.4% of its consolidated net sales for fiscal year 2013. On the first quarter earnings call, the management said, “Michael Kors continued to be a strong driver of growth and the brand is gaining significant momentum in many of our international markets.” The call also highlighted the point that the license with the brand is up for renewal in 2015.
In February, 2013, the company announced an exclusive global licensing agreement with Tory Burch for watches, which are expected to launch worldwide in late 2014. It said in its annual filing that it anticipates launching Emporio Armani Swiss made watches in the 1Q14. The company said in its May earnings call that, “we launched our Emporio Armani Swiss assortment at the Basel fair to very favorable reviews. We also remain on track to launch Tory Burch in the fall with a unique assortment of Swiss made watches to a targeted global distribution.”
At a January, 2014 event, Fossil cited Euromonitor International data and noted in its presentation that “from 2008 to 2013, the watch business grew at 5.1% and has been projected to grow at 5.9% for the next five years.” It added that during the same period “our CAGR has been 15.7%, three times what the watch growth industry has been and it’s actually estimated to be larger.”
In March, the company said it is working together with Google (GOOG) supporting the extension of Android into wearables with Android Wear. As part of the launch, Google also announced the release of a Developer Preview of Android Wear, helping them build rich wearable experiences for its existing Android apps.
Drives shareholder value with buybacks
The company has been creating shareholder value via repurchases. For fiscal 2013, the company invested $574.8 million to repurchase 5.3 million shares of its common stock at an average share price of $109. During the first quarter, Fossil invested $117 million to repurchase one million shares at an average price of $117 per share. As of April 5, 2014, the company said it had $376 million remaining on its share repurchase authorization.
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