Fossil Group, Inc.: Does A Pullback on Weak Guidance Equal a Buying Opportunity?

Fossil (NASDAQ: FOSL  ) , the world-renowned manufacturer and retailer of watches, jewelry, handbags, apparel, and accessories, recently announced first-quarter results for fiscal 2014. Its stock reacted by making a sharp move lower. Let's break down the report and the company's outlook on the rest of the year to determine if this decline is our opportunity to buy, or if we should go with Michael Kors (NYSE: KORS  ) (one of the popular brands the company manufactures products for) instead.

Source: Fossil

Beating down the estimates
The first-quarter report was released after the market closed on May 13, and the results exceeded analysts' expectations on both the top and bottom lines. Here's an overview:

Metric Reported Expected
Earnings Per Share $1.22 $1.19
Revenue $776.50 million $773.74 million

Source: Estimize

Fossil's earnings per share increased 0.8% and revenue increased 14% compared to the same period a year ago. Here's a breakdown of the sales by segment:

Segment Q1 2013 Q1 2014 Growth
Wholesale-North America $255.2 million $272.8 million 6.9%
Wholesale-Europe $173.9 million $205.7 million 18.3%
Wholesale-Asian Pacific $86.8 million $103.5 million 19.2%
Direct to Consumer $165.0 million $194.5 million 17.9%
Total $680.9 million $776.5 million 14%

Source: Fossil

Gross profit increased 17.1% to $443.2 million and the gross margin showed strength, expanding 150 basis points to 57.1%. This growth in the margin was helped by a greater sales mix of higher margin products, lower costs associated with shipping, and more efficient distribution in international markets.

Source: Fossil's Facebook

In addition to the great financial results, Fossil noted that it repurchased one million shares of its common stock for approximately $117 million during the quarter. About $376 million remains on the company's share repurchase authorization, so it has set itself up nicely to complete this by the end of the fiscal year.

Overall, it was a great quarterly performance for Fossil and had this been it, the company's stock likely would have made a sharp move higher. However, the company then went on to discuss its outlook on the year and provided its initial guidance for the second quarter. This is where the sentiment turned negative, causing weakness in Fossil's stock.

Outlook puts a damper on the party
In the report, Fossil reaffirmed its full-year outlook, but provided downbeat guidance for the second quarter. Here's a summary of both sets of guidance:

Full-Year -- Fiscal 2014:

Metric Fossil's Guidance Analysts' Expectations
Earnings Per Share $6.90-$7.30 $7.21
Revenue $3.52 billion-$3.56 billion $3.58 billion

Source: Associated Press

Second-Quarter -- Fiscal 2014:

Metric Fossil's Guidance Analysts' Expectations
Earnings Per Share $0.90-$0.97 $1.16
Revenue $762.7 million-$773.3 million $772.9 million

Source: Associated Press

Fossil's guidance calls for earnings per share to increase 5.2%-11.3% and revenue to increase 8%-10% for the fiscal year. Earnings per share is expected to decrease 15.6%-21.7% while revenue increases 8%-9.5% in the second quarter. Both of these sets were mixed compared to analysts' expectations.

Source: Fossil's Instagram

Although the company's full-year outlook was acceptable, the second-quarter earnings per share projections were far too low for the market to handle. This was the primary driver behind Fossil's stock tumbling more than 10% in the next trading session. On the conference call, Fossil's management did not give a reason for the low expectations, but it did give a positive twist to the situation when it said that earnings are expected to "grow and accelerate" in the second half of the year.

With Fossil's earnings results and outlook in hand, I do not believe the steep decline in the stock is a buying opportunity. I think that the company's very weak second-quarter guidance will cause its stock to trade sideways over the next few months; it may even see another steep sell-off following the next earnings release. For these reasons, Foolish investors should steer clear of Fossil right now and instead take a look at a company that its management spoke very highly of in its conference call, Michael Kors.

The brand driving Fossil's growth
Michael Kors, one of the companies Fossil manufactures products for, was a main driver of growth during the first quarter; Fossil had no trouble speaking of this on its conference call. Kosta Kartsotis, Fossil's Chairman and Chief Executive Officer, said, "Michael Kors continued to be a strong driver of growth and the brand is gaining significant momentum in many of our international markets. We expect this strength to be ongoing as we continue to expand the brand's presence in our global network."

Source: Michael Kors

These are very positive comments for Michael Kors, and investors should use this information to their advantage going into the company's fourth-quarter earnings release on May 28. Here's an overview of what analysts currently expect Michael Kors to accomplish:

Metric Expected Year Ago
Earnings Per Share $0.68 $0.50
Revenue $821.28 million $597.15 million

Source: Estimize

These expectations call for earnings per share to increase 36% and revenue to increase 37.5%, propelling Michael Kors to a record-setting quarter and fiscal year.

Source: Michael Kors' Instagram

In its most recent quarterly report, which including the holiday shopping season, earnings per share increased an impressive 73.4% to $1.11 and revenue increased 59% to $1.01 billion. This was driven by a 27.8% increase in comparable-store sales, marking the 9th consecutive quarter in which Michael Kors exceeded earnings expectations and the 31st consecutive quarter of comaparable-store sales growth. It is safe to say that the company is carrying incredible momentum.

I believe that Michael Kors will exceed earnings expectations once again, allowing its stock to revisit its previous highs that it sits more than 10% below today. Needless to say, I much prefer Michael Kors over Fossil as an investment today.

The Foolish bottom line
Fossil reported strong first-quarter results, but its outlook on the second quarter was much weaker than the market had anticipate; this caused an immense weakness in the company's stock. I do not believe that the company will recover anytime soon, and would refrain from placing a new investment or adding to a current position today. I would, however, urge Foolish investors to take a deeper look into Michael Kors, as it is carrying great momentum into its fourth-quarter report and Fossil gave a positive insight into the demand for its products. 

You may not need a credit card to buy your next watch...
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.


Read/Post Comments (0) | Recommend This Article (1)

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.

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: 2961673, ~/Articles/ArticleHandler.aspx, 8/30/2014 6:11:33 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...


Advertisement