Look Out for Fossil

Back in August, fashion accessories and watch maker Fossil (Nasdaq: FOSL  ) clocked second-quarter numbers that in many ways looked very impressive. Revenues jumped 35%, although earnings per share stayed flat as a result of an increase in tax rates. The stock market, however, sent its shares down as much as 26%, as Fossil said it expected higher input and labor costs to weigh on its margins in the coming quarters. The fact that the stock has lost 40% of its value in the past two months makes me want to look at the stock from a value-investing standpoint.

Fossil ticks on
Fossil stands tall with brand awareness, and market penetration for the Texas-based watchmaker is on the rise. In its just-concluded quarter, Fossil's comparable-store sales surged 22% globally. Watch sales in general have been on a high, with a 32% jump tied to all of its major watch brands recording double-digit sales growth. Its leather business has also gained traction, with sales growing by more than 30%. With the holiday season around the corner, shareholders have to hope that Fossil will see this trend continue and have higher sales figures toward the close of the year.

Fossil recently spun off its Meta Watch project, which helps produce smart watches, into a private, stand-alone company. This segment may have been a good revenue gainer for Fossil, as smart watches have recently come into the limelight, but management saw the segment as outside of its core skill zone. It may have ended up lying dormant if it had remained within Fossil.

What's the price?
Having seen its operational performance, let us see how the market has priced Fossil given the recent stock decline.

Company

Trailing P/E

Forward P/E

PEG

Fossil 19.7 17.3 1.0
Guess? (NYSE: GES  ) 9.6 8.2 0.7
Coach (NYSE: COH  ) 17.8 15.2 1.2
Movado (NYSE: MOV  ) NM 16.2 NM
Perry Ellis (Nasdaq: PERY  ) 8.9 7.3 0.6
Tiffany (NYSE: TIF  ) 19.3 15.4 1.1

Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful due to negative earnings.

Compared to its peers, Fossil is slightly on the expensive side with a P/E of almost 20. However, the company has the potential to unlock value. Fossil has seen strong sales growth in the past few quarters, and I expect this trend to continue. Although rising input prices may affect the bottom line, I expect top-line growth to somewhat offset this effect. Plus, the stock has lost a lot of value after hitting an all-time high back in July.

Although the stock has lost some of its sheen, the company's sales growth cannot be totally discounted. It is a stock worth keeping a close eye on. To do so, and stay ahead of other investors, click here to add Fossil to your personalized stock watchlist.

Fool contributor Shubh Datta doesn't own any shares in the companies mentioned above. The Motley Fool owns shares of Guess?, Fossil, Movado Group, and Coach. Motley Fool newsletter services have recommended buying shares of Fossil and Coach, as well as writing covered calls on Guess?. A separate newsletter has recommended shorting Fossil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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