Digging for Deals

The health of the American consumer is a real concern to many investors. Let's take a look at two companies with well-known brands that recently reported quarterly earnings. Could providers of pricey handbags, watches, and jeans actually have some resilience in these tough times?

Chilled to the bone
Fossil (Nasdaq: FOSL  ) seems to be falling into a familiar tar pit this earnings season -- the "second-quarter outlook" morass. After all, Fossil's first-quarter profit didn't look half bad, and its yearly outlook still looks good, too, but many investors seemed to hate that second-quarter news.

Net income jumped 20.7% to $30.2 million, or $0.43 per share. Revenue increased 16.8% to $356.2 million. As was the case last quarter, international growth helped Fossil deliver a quality quarter (a weak dollar helped, too), and the company was even able to boost margins. That doesn't sound too bad in a recessionary environment, does it?

However, it looks like the stock dropped precipitously, because Fossil didn't have a very enticing second-quarter forecast. It said to expect a 12% to 14% increase in sales, and per-share earnings of $0.25, compared to earnings of $0.21 per share this time last year. That earnings forecast is below analysts' expectations, but Fossil said 2008 earnings will be above Wall Street's views, coming in between $2.16 and $2.22 per share.

It's all about conversion
True Religion (Nasdaq: TRLG  ) makes pricey jeans and has really cashed in on the idea that premium denim is the opiate of the masses. (Oddly enough, True Religion was known as Gusana Exploration until 2003 -- my Foolish colleague Seth Jayson did a great deal of digging to uncover a whopper of a story about its beginnings as a gold exploration company. Strange, but true.)

While a quick chat with my immediate cube neighbors here at Fool HQ revealed quite a bit of anecdotal bearishness here -- observations included the jeans are too expensive, not as nice as they used to be, or have been spotted at Filene's for quick clearance -- the financial results seem to show somebody's still into True Religion.

On May 2, we touched on True Religion's fourth-quarter results, which it finally released after delays due to financial restatements, and those figures did look impressive. So now True Religion has released its first-quarter results as well, and those were likewise attractive. Net income increased 32.7% to $6.9 million, or $0.29 per share. Revenue increased 47.4% to $53.4 million. That sure doesn't sound too shabby at all for an off-holiday quarter.

The dig is on
These companies have more in common than seeking to be a part of a well-dressed wardrobe. They have both had to restate financials in recent history, leaving investors to deal with delays in information, not to mention uncertainty and the concern most of us would recognize in such situations: Maybe management needs to clean up its act.

For investors who are willing to let bygones be bygones, though, it's time to look to the future. Personally, I feel less bullish about True Religion, despite the strong results. I'm nervous its premium denim brand could end up as more fad than fashion (and there's tons of competition in the premium denim space, such as powerhouse Guess (NYSE: GES  ) ), and even if it does have staying power, I'd say many worried consumers are likely to forgo the temptation to throw down a couple hundred bucks for a pair of jeans.

Fossil, which was founded in 1984, has a highly established brand and reasonably priced watches and handbags (they're not dirt cheap, but compared to say, ultra luxury brands like Rolex or Coach (NYSE: COH  ) , you'll see what I mean by reasonable), and it also has licensing arrangements with super high-end brands like Burberry and Armani, as I pointed out in this recent article. It distributes its merchandise through everyone from J.C. Penney (NYSE: JCP  ) to Nordstrom (NYSE: JWN  ) . In other words, it has exposure to all kinds of consumers.

Meanwhile, Fossil's continued drubbing by investors -- yesterday, the stock fell 8% on what didn't seem like such dire long-term news to me -- seems to present an increasingly good bargain. It trades at just 13 times forward earnings, and its PEG ratio is 0.83. In an added bonus, it has ample cash ($204.7 million) and very little debt ($3.7 million).

I'd say it's a good time to dig into Fossil and give the stock some serious consideration.  


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