This Watch Maker Profits from Time Abroad

Is Fossil's international growth enough to offset its recent domestic slip?

Jan 19, 2014 at 7:59AM

Fossil (NASDAQ:FOSL) had a relatively successful 2013 fiscal year as its share price gained roughly 68% from April to November, but it recently took a downturn when it reported a slight decline in same-store sales for its third quarter. With increasing competition from rival watch maker Movado (NYSE:MOV) what is Fossil doing to maintain growth?

Trouble at home
During its most recent quarter, Fossil reported that net income and net sales increased by 17% and 18%, respectively, to $90 million and $810 million. This growth was primarily driven by the FOSSIL and SKAGEN brands, which reported sales increases of 13% and 29%, respectively. Overall North American wholesale sales increased 18% to $301 million, which was driven primarily by watches and jewelry.

Despite these positive numbers, Fossil revealed that domestic same-store sales decreased as a result of weak retail traffic. According to CFO Dennis Secor, "weak traffic and a highly promotional environment continued to affect our U.S. business." Full-priced stores have experienced lower same-store sales growth than the company's outlet stores which have been improving via increased promotions, but these stores offer slimmer margins.

While there are U.S. troubles, Fossil's international business has made up for its domestic slips.

Across the ocean
Fossil's primary areas of international growth are in Europe and Asia.

In Europe, the company reported sales increases of 20% in established markets like the U.K. and Germany, as well as newer markets like Russia and the Middle East, in its retail and wholesale business. This growth can be attributed to FOSSIL, SKAGEN, and smaller watch brands that all experienced double-digit sales increases. European wholesale sales increased 28% with watches, jewelry, and leather products all recording double-digit gains.

The Asian business posted a constant-currency gain of 20% driven by Japan, Korea, and new expansions in China. Fossil's presence in China grew 50% during the third quarter after the company opened a store in Hong Kong. The store, located at Causeway Bay, will hopefully introduce the FOSSIL brand to new consumers and tourists in the high traffic area.

Overall global sales was driven by a 20% increase in the company's watch portfolio primarily in the FOSSIL and SKAGEN brands.

The recent success of Fossil's international business helped gross margin increase 160 basis points to 57.4% despite domestic declines.

FOSL Gross Profit Margin (Quarterly) Chart

FOSL Gross Profit Margin (Quarterly) data by YCharts

Fossil has had a consistently high gross margin due to its high-end products. Movado's gross margin recently decreased year-over-year from 56.4% to 53.4%. This is a result of the company's repositioning of its Coach (NYSE:COH) brand watches, the launch of Scuderia Ferrari watches, and unfavorable currency exchange rates. The Coach repositioning has allowed Movado to expand into 300 new stores and grown the company's global distribution. Coach brand watches have experienced 25% growth in sales at retail thanks to new packaging and strong print and digital advertisement.

Final Foolish thoughts
Fossil's recent domestic same-store sales decline is a stumble but the company has hope with its consistent sales and revenue growth. The company has identified the industry's highly promotional environment as a cause of its low same-store sales.  If Fossil increases promotion like Movado did, margins might decline slightly but it could help the company regain its domestic footing. The company also has reliable long-term growth overseas in emerging markets. With popular brands and continued international growth I think that Fossil will continue driving investor value in the future.   

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Ben Popkin has no position in any stocks mentioned. The Motley Fool recommends Coach and Fossil. The Motley Fool owns shares of Coach. 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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