Watch and luxury products maker Fossil (Nasdaq: FOSL ) showed yesterday that its business is anything but petrified. Not only were third-quarter results relatively strong, they also measured up well against those of competitors. Both sales and earnings surpassed company expectations, but most importantly, these results indicated that Fossil is well-positioned for future growth.
That being said, sales and earnings did decline from year-ago levels, but the declines were quite modest, given the ongoing economic climate. Sales were off 6.9%, to $381.4 million. Net income declined 3.3%, to $35.3 million, compared to $36.5 million in last year's third quarter.
The driving force behind these results was the strong performance of Fossil's retail stores. These direct sales cut out the middlemen and help boost profit margins. Direct-to-consumer sales (both from Fossil stores and Internet sales) increased 21% and now make up 24% of the company's total sales, compared to 18.5% last year. That shift helped boost gross margin to 55.3%, compared to 54.7% last year.
Fossil grew same-store sales by 6.4% during a horrible year, and also increased its number of retail outlets by over 20%. Expansion will help company sales abroad; more than half of the 208 stores the Fossil opened in 2009 are located outside the United States and should help drive future profit gains, especially if the dollar continues to weaken. Even better, the good news is expected to continue into the fourth quarter, as the company raised forward earnings expectations.
These surprise results caused the company's stock to jump over 9% and touch $32, a far cry from February and March, when shares could be had for under $12. Despite Fossil's run, the company still sells at about 16 times expected 2009 earnings, and analysts project about 16% earnings growth over the next five years, making the company look appealing.
What makes Fossil even more compelling is its performance in comparison to other retailers. While Coach (NYSE: COH ) showed a decent performance this quarter as well, its results were buoyed in part by its move into lower price points. Fellow watchmaker Movado (NYSE: MOV ) barely returned to profit in the second quarter after a difficult first quarter, and it is focusing on cutting costs rather than expanding, making Fossil look all the more robust. In a time when value providers such as Wal-Mart Stores (NYSE: WMT ) eke out just a 3.2% gain in earnings, Fossil's performance looks fantastic.
High-end retailers such as Saks (NYSE: SKS ) are still struggling, though most believe that the worst is over. Similarly, consulting firm Bain & Co., in its Luxury Goods Report from October, expects overall luxury items sales to fall 8% in 2009, but to recover by 2011 or 2012.
Fossil isn't waiting that long. While the majority of its sales still come from retailers like Nordstrom (NYSE: JWN ) , recovery in these traditional outlets will only support its growth in direct-to-consumer sales. Fossil's aggressive expansion has allowed it to evolve into a more competitive beast, one that should move up the food chain while its competitors are cutting back.
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