Watchmaker Fossil's (Nasdaq: FOSL ) holiday season was far worse than expected -- and so is its outlook for 2006.
The company expects fourth-quarter revenue (for the quarter ended Dec. 31) to come in at $324 million, up 2% year over year but falling far short of the company's $343 million guidance. Worse yet is the $0.28-to-$0.31-per-share earnings estimate, well below the $0.48-per-share guidance (and short of the $0.47 earned in the same quarter in 2004).
One warning sign from the third quarter is now flashing red. Inventories have been on a tear, while sales have not. Last quarter, inventories ballooned 25.5% on a measly 9% rise in sales. The company is guiding investors to expect year-end 2005 inventories 30% to 40% above the prior year's level. Ouch!
Fossil has a dubious spin on its inventory dilemma. After acknowledging a need to return to "more healthy stock levels" and predicting that bloated inventories will harm gross profit margins, Fossil still expects that its inventory woes won't hurt 2006 diluted earnings per share. Really? Call me crazy, but I suspect that it will take some deep discounts to get customers to carry that merchandise away -- especially since they've already passed it up.
The company's namesake Fossil watches are its core weakness. Domestic sales fell 17% in the fourth quarter, while lower-than-expected sales growth in Europe and Asia is a concern, too. Nonetheless, the company is surprisingly optimistic. First-quarter sales are expected to jump 9%. Full-year diluted earnings per share, bolstered by share repurchases that have lowered the number of shares outstanding, are forecast to come in at $1.05 a share. That's up from the $0.87 to $0.90 a share expected for 2005 (minus one-time benefits), but down from the $1.22 earned in 2004.
A three-month chart of the stock shows that the shares have risen more than 40% since they hit a two-year low last October. Share purchases by the company's CEO and the announcement of a partnership with Wal-Mart (NYSE: WMT ) for watches under the retailer's George brand helped boost the shares. But the stock surge is already over; Fossil shares have lost a quarter of their value in early trading today.
Fossil does have a strong balance sheet. Last quarter, the company had $73.2 million in net cash (cash minus total debt). But as readers have learned by watching Motley Fool Stock Advisor pick Gap's (NYSE: GPS ) shares, a great balance sheet and well-known brands are not necessarily the ticket to a quick turnaround.
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