Is Fossil Ready for a Great Holiday Season?

As shoppers have started opening up their wallets and U.S. consumer spending ticked up in September, retailers are in merriment. Most of the luxury retailers, which were facing lower demand for their products, are witnessing higher customer traffic as the holiday season comes knocking. Moreover, other markets such as Europe are also improving. As a result, retailers like Michael Kors (NYSE: KORS  ) and Fossil (NASDAQ: FOSL  ) are having a festive time.

Michael Kors' second-quarter results topped the Street's expectations. Its revenue jumped 39% to $740 million over last year, driven by increased demand for its premium products. Sales in North America surged 31% as consumers flocked into its stores, resulting in same-store sales growth of 21%. In fact, European sales grew by more than 100% as customers started spending on high-end products.

Similarly, Fossil had a great third quarter as evidenced by its results, which far exceeded analysts' expectations. One of the obvious reasons for its solid performance was that it makes watches and accessories for Michael Kors. Hence, Kors' higher sales helped Fossil's revenue grow.

Delving deeper
Sales for the quarter jumped 18% to $810.4 million over the same period last year. One of the major reasons behind the revenue increase was a new store expansion. Fossil has added 75 new stores in total over the last year, which led to higher revenue.

Moreover, sales of watches and jewelry were higher as the company launched new products by Karl Lagerfeld in the first quarter. The retailer introduced Fossil Swiss in Asia, which helped watch sales grow as well. Moreover, the Skagen brand, acquired last year, has been a key driver of Fossil's revenue.

Fossil's higher revenue was as a result of a sales shift which was supposed to be in the fourth quarter. The company's margins widened as it sold higher-margin products, offset by promotional expenses.

Point of concern
Although the watch retailer had a great quarter, it provided a lackluster outlook that disappointed investors. The company estimates its earnings for the fourth quarter will be between $2.26 and $2.46 per share, and revenue growth will be between 6% and 8%. However, analysts had expected an earnings guidance of $2.60 per share along with a sales increase of 10%.

The guidance was affected by concerns over weakness in North America, which led to a decline of 0.5% in same-store sales for the quarter. However, demand in other markets such as Europe and Asia has been increasing with revenue growth of 23% and 13%, respectively, over last year's third quarter.

Also, Fossil is taking a number of measures to boost demand in the U.S., especially for the holiday season. It has been expanding into new categories in jewelry and plans to focus on handbags since it experienced higher sales in both of these segments.

The retailer will be expanding its leather line of products next year, along with the launch of Tory Burch, which will help in attracting more customers.

On the other hand, rival Movado Group (NYSE: MOV  ) has no such product launches in the cards. Movado caters to a niche market, selling only high-end products, whereas Fossil sells a wide variety of watches, including the high-end ones.

In terms of returns for investors, Fossil takes the cake. Fossil's stock price has appreciated a whopping 758% in the last five years, whereas Movado's stock price has increased by 201% in comparison.

Additionally, Movado's last quarter witnessed shrinking margins versus Fossil's margin expansion. Hence, Fossil has performed better than its competitor and is expected to grow even more with its new product introductions.

Fossil will also be redesigning its store concept. Moreover, the watch manufacturer plans to focus on its international footprint by expanding in Japan, Australia, and Korea. Revenue from China grew 50%, and the company's expansion in Hong Kong will drive even more customers into Fossil's stores.

The takeaway
Although demand in the U.S. is a cause of concern for Fossil, its efforts might help it to overcome these difficulties. Its expansion plans and new product introductions will help the company grow. Moreover, the growing popularity of Michael Kors' watches will drive Fossil's revenue. The retailer has been strengthening its position with each passing day and is well positioned for a strong holidayg season. Hence, investing in this company should prove to be rewarding.

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