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Fossil to Acquire Skagen

Zacks Equity Research

To expand its portfolio, Fossil, Inc. (NasdaqGS:FOSL - News) has agreed to purchase the privately held Nevada-based Skagen Designs, Ltd. and some of its partners for approximately $225 million in cash and 150,000 Fossil shares. The total value paid by Fossil would be approximately $236.8 million.

Skagen Designs is an international company engaged in the manufacture and marketing of contemporary Danish design accessories including watches, jewelry, sunglasses and clocks.

As per the deal, Skagen may get an additional 100,000 Fossil shares, if Skagen products surpass certain revenue targets. Further, the acquisition is expected to close by February, 2012, subject to regulatory consent.

The acquisition is thus expected to enhance Fossil’s portfolio with Skagen’s unique designs and ample potential as a lifestyle brand. On the other hand, Skagen will also be benefited by Fossil’s ever increasing opportunities to grow and expand.

Skagen has company-owned retail stores in Denmark, Germany, U.K. and Hong Kong and sells products in 75 markets globally, whereas the watchmaker Fossil has licensing agreements with designer brands such as Michael Kors, Marc by Marc Jacobs, Burberry, Emporio Armani, and Karl Lagerfeld. Further, Fossil supplies its products to wholesale customers like Nordstrom Inc. (NYSE:JWN - News), Target Corp. (NYSE:TGT - News) and Wal-Mart Stores Inc. (NYSE:WMT - News).

Although Fossil is associated with a host of designer brands and also generates double-digit sales, the company’s high production costs weigh on its margins and in turn its earnings growth.

Earlier in November, 2011, Fossil reported flat third-quarter 2011 adjusted earnings of $1.00 per share compared with the prior-year, but lagged the Zacks Consensus Estimate by 3 cents.

Fossil’s earnings were driven by double-digit sales growth across its major brands, product categories, and geographies, and a double-digit comparable store sales increase. Furthermore, continuous innovation in the assortments, implementation of growth strategies and efficient utilization of the global distribution infrastructure led to its solid performance in the quarter.

The strong sales growth thus led to the increase in the company’s full-year 2011 guidance in a range of $4.50 to $4.53 from $4.44 to $4.50 expected previously. However, for the fourth quarter of 2011, Fossil  reduced its earnings guidance to a range of $1.75 to $1.78 per share, owing to strengthening of dollar over the last quarter.

We are encouraged by Fossil’s in-house team of dedicated designers and product specialists who help steer the company ahead by following emerging lifestyles and fashion trends to bring innovative and unique products to its customers.

However, stiff competition from Guess? Inc. (NYSE:GES - News) and difficult macroeconomic conditions are matters of concern. Thus, we currently retain a Zacks #4 Rank on the stock, which translates into a short-term Sell rating. On a long-term basis, we provide a Neutral recommendation on the stock.

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