Fossil's Risky Wristwatch

Fossil (Nasdaq: FOSL  ) plans to not go the way of the dinosaurs. The watch maker will soon debut a snazzy new time keeper with Internet capabilities called "Wrist Net" -- a collaboration with Microsoft (Nasdaq: MSFT  ) that's been in the works since the beginning of 2003.

The Wrist Net will use MSN Direct to generate news, stock quotes, sports scores, and personal messages. Fossil's new line of technology-enhanced watches also includes a Wrist PDA that, after many delays, is scheduled for release this spring.

Amazon.com (Nasdaq: AMZN  ) is already taking orders for Wrist Net, but the real question for investors is: Will technology-infused watches sell long term or be a fleeting fad?

Going by initial sales figures would be a mistake, however. These devices are sure to get smaller and more user friendly in the coming years, which is likely to pump up sales volume. If this is the case, Fossil is well positioned to be a market leader.

Despite Fossil's potential to grow sales from this exciting new venture, though, the company's cash flow statement reveals trouble. For the three quarters ending Oct. 4th, 2003, free cash flow was in the red by $13.5 million, way down from Q3 2002's positive free cash flow of $15.8 million.

The reasons for this cash flow nosedive? The first is a 44% increase (to $24 million) in year-to-date capital expenditures related to software implementation and construction on a European distribution center.

The second, much bigger worry, is the $65 million in cash outflows because of poor working capital management. The Q3 Foolish Flow Ratio at 2.75 says it all. Even worse, that Ratio has been steadily increasing since its 1999 level of 1.83. That means that the company's becoming increasingly more inefficient with its working capital. We'd prefer to see a Flowie below 1.25, and ideally below 1.00.

Although it's easy to get caught up in the latest Next Big Thing, making the leap to investing in it is an altogether different concern. Before making the leap, take a dig into the company's financials.

Curious to hear what others are saying about Fossil's nifty new technology? Will it make or break the watch maker's bottom line? Talk it out on the Fossil discussion board . Or let Matt Thurmond know your thoughts at Bomber5222@aol.com .