Why Fossil Can Keep On Ticking

Fossil (NASDAQ: FOSL  ) has been on a good run this year as shares have appreciated almost 40%. Making watches for luxury fashion brands such as Armani, Tory Burch, and Michael Kors (NYSE: KORS  ) has helped Fossil record good sales growth. Moreover, Fossil's products are priced at different price points, so the company is not just restricted to affluent customers.

A mixed quarter
Fossil's growth continued in its third quarter as revenue grew 18% year-over-year to $810.4 million, which exceeded consensus estimates. Revenue growth was fueled by double-digit growth in the watch and jewelry categories, along with strong sales of the Fossil and Skagen brands. Performance across all geographic regions was encouraging.

On the back of positive pricing, a booming retail business, and strategic acquisitions, Fossil's operating income increased 25% from the prior-year quarter. The company's diluted earnings per share increased 25% to $1.58. Despite beating expectations, Fossil shares fell 6% after the earnings release as its outlook was not up to the mark .

Fossil expects fourth-quarter earnings between $2.26 per share and $2.46 per share, and revenue growth of 6% to 8%. These numbers were lower than analysts' expectations of $2.60 per share and a revenue increase of 10%. However, Fossil could improve in the future, as the company has a lot of opportunity in emerging markets.

A look at the opportunity
The Asia-Pacific region is estimated to account for around 31.2% of the global market for luxury jewelry and watches. This is expected to be the fastest growing region in the world over the five years from 2012-2017, with spending growing by $31.9 billion.

This strength also reflects in Fossil's third-quarter results, where the Asia-Pacific region had the highest jump in sales of 12.9% with China, India and Japan being the major drivers. As a supplier to heavyweights like Armani, Kors, etc, the company stands to gain from their expansion plans as well.

Fossil has licenses to sell watches under labels including Burberry, Marc Jacobs, and Michael Kors. Michael Kors purses and ready-to-wear clothing can cost hundreds or thousands of dollars, and thus these products are beyond reach for most. Fossil-produced watches can cost as little as $120, which makes its offerings more reasonable for an emerging market middle class and could lead to better sales.

The luxury timepiece business may be in for lot of surprises going forward. The possible introduction of smart-watches from major players like Apple, Sony, and Samsung could lead to fierce competition in the segment.

Competition is also heating up as arch rival Movado (NYSE: MOV  ) , licensed to sell Coach branded watches, has plans to come up with a more expansive portfolio of watches. Movado's licensed brands include Coach, Tommy Hilfiger, Hugo Boss, and Lacoste. These have grown sales by 50% in fiscal 2012 and fiscal 2013, making up 45% of revenue in fiscal 2013 .

At the moment, Coach's watches are positioned for direct competition with Michael Kors. Going forward, one can expect Coach to expand its price points in order to offer more competition to Kors, which could be a boon for Movado .

Michael Kors watches may already be losing their charm. Earlier this year, Fossil's sales in the U.S. wholesale channel rose a solid 11%. However, comps at Fossil stores were flat from a year earlier, the first time in 20 quarters that comps didn't rise. It could be a matter of concern if sales of Kors watches are really losing steam. Macy's, a major seller of Michael Kors watches, didn't single out watches as a category of strength for the July quarter, and this happened for the first time in several quarters.

However, Michael Kors' expansion in Asia could help Fossil gain more traction in that region. Kors also has plans to expand its footprint in other regions, such as Europe. The company will be opening 40 stores in these areas in fiscal 2014, while 100-125 stores are planned for China going forward .

Fossil has done well so far in 2013, but its outlook for the current quarter put a damper on things. Looking at the long run, the company still looks positioned for growth in markets such as Asia. Its diversified product portfolio, which spans different price points, is impressive. This is why the company has done well despite shaky consumer sentiment, and could also perform well in the future.

Is Fossil a Foolish growth favorite?
Tired of watching your stocks creep up year after year at a glacial pace? Motley Fool co-founder David Gardner, founder of the No. 1 growth stock newsletter in the world, has developed a unique strategy for uncovering truly wealth-changing stock picks. And he wants to share it, along with a few of his favorite growth stock superstars, WITH YOU! It's a special 100% FREE report called "6 Picks for Ultimate Growth." So stop settling for index-hugging gains... and click HERE for instant access to a whole new game plan of stock picks to help power your portfolio.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2736986, ~/Articles/ArticleHandler.aspx, 9/28/2016 10:31:16 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,245.07 16.77 0.09%
S&P 500 2,160.17 0.24 0.01%
NASD 5,305.28 -0.43 -0.01%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/28/2016 10:15 AM
FOSL $28.74 Down -0.01 -0.03%
Fossil CAPS Rating: ****
KORS $48.16 Down -0.01 -0.02%
Michael Kors Holdi… CAPS Rating: ****
MOV $21.57 Up +0.13 +0.61%
Movado Group CAPS Rating: ***