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Are Fossil's Watches Changing Its Time?

Zacks Equity Research

On Jul 4, 2014, we issued an updated research report on Fossil Inc (FOSL).

This global consumer fashion accessories maker and distributor reported mixed first-quarter 2014 results on May 14.

Fossil’s first quarter 2014 earnings exceeded both the Zacks Consensus Estimate as well as the company’s expectations. Revenue growth was at the higher end of the company’s expectations and managed to beat the consensus mark by a slight margin. Though first quarter results were strong, the company provided a weak guidance for the second quarter.

Earnings of $1.22 increased 10.9% year over year, driven by higher revenues, increased operating income and lower share count. Fossil’s net sales during the quarter increased 14% year over year on the back of continued growth in the watch portfolio.

The company has a solid watch portfolio and has witnessed consistently strong sales growth in its watch category, driven by Fossil, Skagen and Michael Kors brands. The Fossil brand is the key growth driver owing to its strong global distribution platform and successful innovations. In fact, the company has been delivering positive comps for the past five years driven by continued strengthening of the Fossil brand outside the U.S. Michael Kors has also gained significant momentum in many of the international markets. The company’s watch sales also received a boost from the Skagen acquisition in Apr 2012.

During the first quarter of 2014, the company launched the Emporio Armani Swiss assortment, while in Feb 2013, Fossil launched the long-awaited and exclusive collection of watches for men and women by designer Karl Lagerfeld and received a good response. The company eyes opportunities to expand its share of the global watch market by leveraging its distribution network and by adding new brands like Tory Burch in the second half of 2014.

Most recently, Fossil teamed up with Google, Inc (GOOG) to support the extension of Android operating system into wearable technology with a new operating system called Android Wear. Fossil, through this partnership, will be able to leverage Android’s popularity and Google’s technology in its watches. This partnership will also allow Fossil to bring smartwatches to its customers, shaping the fusion of fashion and technology. Android-based value watches in the emerging markets will also be a boon for the company as about half of Fossil’s revenues come from overseas markets.

While Fossil’s brands have been gaining internationally, the company is witnessing sluggish comparable store sales in the U.S. since the past few quarters due to weak traffic owing to the tough retail environment. Poor footfall in the stores has been impacting the business, especially at its full price stores. Fossil has resorted to diverse promotional activities to drive traffic. However, more than planned promotional costs are impacting profit margins. The company’s leather business also remains challenging as the category is highly competitive and promotional in the wholesale channel. These factors are expected to weigh down on second quarter results.

Fossil holds a Zacks Rank #3 (Hold).

Other Stocks to Consider

Other better-ranked apparel stocks in the retail sector include The Men’s Wearhouse, Inc. (MW) and Citi Trends, Inc. (CTRN), carrying a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on GOOG
Read the Full Research Report on CTRN
Read the Full Research Report on FOSL
Read the Full Research Report on MW

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