Fossil Has Fallen After a Large Earnings Beat

Fossil (FOSL -1.43%) fell as much as 6% the release of its earnings on Nov. 5. The reported statistics far exceeded analyst expectations, leaving investors clueless as to why it has declined and continues to move lower. Even with this sell-off, the stock has run over 30% year-to-date. Let's take a look and see if this is an opportunity to buy or if we should wait for Fossil to cool down a little more to initiate a position.

Watchmaker extraordinaire
The Fossil Group designs, develops, markets, and distributes consumer fashion products and accessories worldwide; these products include watches, handbags, jewelry, and clothing. On top of its own product mix, Fossil also manufactures for many other brands, including Michael Kors, Burberry, Emporio Armani, DKNY, and Marc by Marc Jacobs. 

The results
On Nov. 5, Fossil released its third quarter report for fiscal 2013. The results far exceeded analyst expectations and looked like this:

The report showed earnings growth of 25.4% and revenue growth of 18.5% year-over-year. Gross profit rose 21.9% to $465 million as the company was able to expand its gross margin 160 basis points to 57.4%. Fossil reiterated its full-year earnings outlook and increased its sales guidance to reflect the momentum of its many brands.

And the stock falls?
With an earnings beat, revenue beat, reiterated earnings outlook, and raised sales guidance, it is hard to believe that any negativity could be derived out of this report. This would leave absolutely no reason for a decline in the stock to occur and should have resulted in a run higher. I believe the weakness in Fossil is nothing more than a buying opportunity for value investors. 

Kors leading the way
Fossil manufactures products for numerous companies, but the most important of these brands over the last few years has been Michael Kors (CPRI -3.82%). Michael Kors has reported blowout quarter after blowout quarter since going public in December of 2011. Its most recent report did not disappoint; here are a few key statistics with a year-over-year comparison:

• Earnings per share grew 44.9% to $0.71
• Revenue rose 38.9% to $740.30 million 
• Comparable-store sales rose 22.9%
• Gross profit increased 42.4% to $449.9 million
• Gross margin expanded 150 basis points to 60.8%

North American sales rose 31.2%, driven by a 21% increase in comparable-store sales and strength in the watch and accessories categories, which are manufactured by Fossil. Total sales in Europe grew 101%, due to increased brand awareness and 45% comparable-store sales growth. Finally, sales in other regions grew 64.1% and expansion plans are in place to reach untapped markets. Michael Kors' continued rise into the top global luxury brand will directly benefit Fossil. If you are not sold on Fossil's potential, then take a look at Michael Kors.

Coach cannot keep up
While success has been plentiful for Fossil's brand portfolio, Coach (TPR -2.16%)has not been able to perform to such a standard. Coach reported earnings on Oct. 22 and the results were full of negative statistics. Here is a year-over-year comparison:

• Earnings per share were flat at $0.77
• Total sales fell 1% to $1.15 billion
• Operating income declined 3% to $322 million
• Operating margin fell to 27.9% from 28.6%
• Gross profit declined 2% to $827 million
• Gross margin fell to 71.8% from 72.8%
• North American same store sales fell 6.8%

This was a horrible quarterly report for Coach and its stock reacted by falling over 7.5% at the open of trading. Coach's fiscal 2014 outlook did not help the situation, and the worst part of this is that same store sales in North America are expected to be in the high negative single digits. Coach is a troubled company and those are not the type of companies we look to invest in. I would recommend staying away from this one.

The Foolish bottom line
Fossil is a great American company with exposure in 130 countries around the world. It is a proven growth story and has recently blown past analyst estimates. The decline in the days after the report was not warranted and is a buying opportunity for value investors looking for a long-term investment. Michael Kors is another great play in this industry, so take a look and see if one of these can fill a need in your portfolio. As always Foolish investors should do their own research before making any investment decisions. 

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