Another Accessory Maker Feels the Pain

Shares of Fossil (NASDAQ: FOSL  ) sold off more than 5% after earnings were released for last quarter. This comes after Coach (NYSE: COH  ) also had a dismal quarter, while Michael Kors Holdings  (NYSE: KORS  ) continues to excel.

Fossil's first-quarter earnings came in 8% lower year over year. In addition, retail same-store sales were down 2.4%. This was due to the decline in mall traffic putting pressure on sales. For the fiscal second quarter and full year 2014, the company guided earnings and revenue downward.

Fossil and its dominance in watches
Fossil still has a dominant position in the watch market. At one point, so did Coach -- that is, before Kors moved in and started to eat into its market share. Nonetheless, last quarter watch sales were up 17% year over year. Sales of watches were actually up by double digits in all of Fossil's regions. 

Smartwatches have not had a meaningful impact on Fossil's sales, though the risk will intensify as the price of smartwatches declines and their popularity grows. For now, Fossil continues to gain strength with its licensed branded watches. Fossil has a licensing deal with Michael Kors to sell Michael Kors-branded watches.

For Fossil, the continued success of Michael Kors isn't a bad thing. Since 2004, Fossil has been Michael Kors' exclusive watch licensee. And since 2010, Fossil has been Michael Kors' exclusive fashion-jewelry licensee.

The darling of the high-end accessory market
Michael Kors continues to take market share from Coach across the board in North America. Michael Kors' recent quarter saw revenue up as well as an expansion in the gross margin. Comparable-store sales for this quarter are expected to grow by 15% to 20%.  

Michael Kors is still early in its international expansion growth. More than 80% of sales are derived from the U.S. It plans to target Asia as part of its strategy for boosting its international presence. The company doesn't plan on slowing growth in North America either. It has slightly fewer than 300 stores in North America but plans to have 400 open in the long term.

It's no secret that if Coach is going to turn around its market share losses in North America, it'll take time. But its presence in China could help offset that in the interim. During its fiscal second quarter, Coach managed to see 25% year-over-year sales growth in the region. It plans to add 30 new stores this year, ultimately growing square footage by 25% in China. 

How shares stack up
Shares of Michael Kors are up 275% since its late 2011 IPO. The story has been all about Michael Kors for a while. Shares of Michael Kors are up 12% year to date, while Coach is down 25% and Fossil is down 15%. Michael Kors currently trades at a P/E of 24 based on next year's earnings estimates--that's well above either Coach or Fossil. 

Fossil trades at a forward P/E of 13 and Coach at 15. Michael Kors is the only one of the three that has no debt. Coach's debt is minimal, with the company having a debt-to-equity ratio of 8.8%. Fossil's debt-to-equity ratio is 47%. Coach is the only one of the three that pays a dividend, which currently yields 3.2%.

Bottom line
Michael Kors is the growth story of the industry, but shares appear to be a bit expensive. Fossil is stuck somewhere in the middle. It has the lowest forward P/E, but it remains to be seen how smartwatches will impact the company. For investors looking to gain exposure to the high-end accessory market, Coach could be worth a look. It remains a turnaround and dividend story.

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