Why Investors Gave Fossil a Thumbs-Up

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Fashion accessories and watch maker Fossil (Nasdaq: FOSL  ) surprisingly saw its stock gain 16% despite projecting a dim outlook for the ongoing quarter. The company trumped on earnings, but missed the Street's revenue estimate.

While fellow Fool Seth Jayson has given us a snapshot of the numbers, I am digging deeper to see what's pushing up investor confidence.

Performance despite recession
The factor that struck me the most was Fossil's same-store sales growth across many different geographies. So, what's the trick? Fossil distributes its products under several brand names to appeal to diverse styles and budgets. A price range of $7 to $2,000-plus enables the company to address a larger market rather than just the premium or entry-level segments. This attractive product mix along with regional diversification should help the company sustain rapid top-line growth.

The company, however, provided weak guidance for 2012 primarily due to higher production and labor costs. While Fossil plans to pass on some of the higher input costs to customers through price hikes on select products, the costs may weigh on the bottom line in the near term. I feel reasonably confident about Fossil's ability to hold on to its customers despite the price hikes, which should pay off in the long term in the form of preserved margins.

Exploring new zones
Fossil also has significant expansion plans to increase its global footprint. In January, it acquired Danish watchmaker Skagen Designs, a profitable brand with global presence, to make further inroads into European markets including France, Italy, and the U.K. While the acquisition will add 13 stores to Fossil's global portfolio, the company is planning a total of 70 to 75 new store openings in 2012.

Fifty percent of the new stores will be in international markets. This seems to be for good reason, as the company grew same-store sales 21% in Asia in the most recent quarter. Close competitor Movado (NYSE: MOV  ) , which sells luxury watches such as HUGO BOSS, Tommy Hilfiger, and Lacoste, among others, also maintains a similar viewpoint. Movado has been partnering with marquee brands in China to make its presence more prominent in the country.

China is one of Movado's strongest and fastest-growing markets. But now that Fossil's China-based sales have grown 71% in the most recent quarter, it is ready to offer formidable competition.

The Foolish takeaway
The company's expansion drives along with strategic price increases lead me to believe that Fossil has a reasonable business model in place to churn more revenues and profits. The stock looks good for the long term and could be more valuable when the economy looks up.

To stay on top of Fossil's moves with clockwork precision, add the stock to your Watchlist.

Fool contributor Harsh Chauhan owns none of the stocks mentioned in the article. The Motley Fool owns shares of Fossil and Movado Group. Motley Fool newsletter services have recommended buying shares of Fossil. Motley Fool newsletter services have 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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Related Tickers

10/24/2016 4:00 PM
FOSL $29.18 Up +0.78 +2.75%
Fossil CAPS Rating: ****
MOV $22.30 Up +0.30 +1.36%
Movado Group CAPS Rating: ***