Fossil May Be More Valuable Than Meets the Eye

Fossil (NASDAQ: FOSL  )  lost 10% of its valuation after it released first-quarter earnings that met expectations, as higher costs had an effect on investor sentiment. Nonetheless, in looking at Fossil and its 22% stock-price loss over the last six months, investors fail to realize that in comparison with other luxury retailers like Ralph Lauren (NYSE: RL  ) , Fossil evidences value. And perhaps potential acquirers such as Apple (NASDAQ: AAPL  )  and its competitor Google (NASDAQ: GOOG  )   (NASDAQ: GOOGL  )  also see Fossil's value.

Fossil's valuation remains attractive
With nearly $3.4 billion in trailing-12-month revenue, Fossil is a rather large global retailer that sells not only watches, but other fashionable clothing and accessories as well. With that said, 75% of its sales come from watches. With a continued focus on innovation and strong direct-to-consumer sales, the company has seen five years of solid growth. Moreover, Fossil expects 9% revenue growth in 2014.

In comparison, analysts expect Ralph Lauren, which also falls under the category of luxury retailer, to grow just 7% this year. Therefore, Fossil is growing faster, but at 12 times next year's earnings, Fossil is significantly cheaper than Ralph Lauren at 15 times future earnings. However, for those who seek a good investment, Fossil's growth in combination with its favorable valuation is a rather strong sign of investor value.

Big tech gets serious about wearables and fashion
With that said, Fossil might not only be a company of value for retail investors, it may also be an intriguing opportunity for technology giants, specifically, Google. Earlier this year, Fossil and Google entered into a partnership to develop and grow wearable devices.

Specifically, a watch is expected to be in play. However, with the launch of Google Glass, Fossil is also believed to be a leading candidate for combining its brand with Google's operating system, much like the way in which mobile phone developers have used Android. Essentially, this is a market for Fossil that is yet to be tapped, one that could command much of the $60 billion global watch market.

In addition, it's worth noting that Fossil controlled just $2.5 billion of that $60 billion market last year. This means that the possibilities of a Google partnership are seemingly endless, which could spark further growth for Fossil. However, another aspect of this topic is the rate at which Apple has essentially stolen top-talent executives from luxury retailers around the world.

Investors may know of Burberry's former CEO, Angela Ahrendts, taking a position at Apple as its senior vice president of retail and online stores. However, there have also been hires of top Nike FuelBand designer Ben Shaffer and fashion house Yves Saint Laurent's former CEO Paul Deneve. Hence, Apple has pulled together many of the most creative retail minds of the last several decades. Chances are that it's aiming to penetrate more than just the $60 billion watch market, which could spark its next phase of growth.

With that said, Apple has the retail talent but Google has a head start with its Glass wearable product and its partnership with Fossil, which implies watches, more glasses, and perhaps more sophisticated wearables.

Final thoughts
By all accounts, it appears as if big tech competition in fashion and wearables is preparing to reach a new level in the coming years. Apparently, Apple is aiming at the high-end, which follows its strategy with premium pricing for iPhones, iPads, and Macs, while Google likely hopes to dominate by quantity and further building on its philosophy of having people consume Google products in many different ways.

Fossil is a great start for Google with the partnership. However, in looking at Fossil's valuation and its presence in the watch market, the company might be interesting to Google or technology companies as a whole as they are becoming increasingly interested in fashion. Nonetheless, Fossil remains attractive regardless of big tech. However, in looking at the actions of Silicon Valley's elite, Fossil might have a new industry arising in wearables that is unaccounted for in its investment outlook, which thus creates even more value.

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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