Brands make the market go 'round, and Fossil (FOSL +1.25%) is building up an impressive portfolio of high-end lines. The watch maker produces pieces for Michael Kors (KORS +1.11%), Tory Burch, and Armani, among others. With such a strong lineup, it's no wonder Fossil has the ability to put up such a strong quarter. The question for investors is how the company is going to sustain this good performance.
Over the last few years, Fossil has developed a pattern of pushing itself up, only to fall back a few months later. Yesterday's 16% stock increase seems to be in line with other spikes that the company has experienced recently. The difference is that Fossil has a meaningful plan this time.
Looking forward
One of Fossil's newest licensing deals is from Tory Burch, a high-end women's wear designer. Burch has been on the arms and frames of young celebrities recently, and the brand is generating a lot of interest across its range of products. The fact that Fossil tied in with Burch should tell investors something about the direction the business is taking.
The Tory Burch and Kors brands have excellent recognition in the U.S., but both still have a lot of growing room left in international markets. Kors only generates about 14% of its revenue outside of North America, but the international business is growing quickly. Last quarter, the handbag designer increased comparable-store sales by 27.3% globally, year over year.
Burch is an even newer and more American-focused brand, but its long-term potential is huge. The business is currently valued at more than $1 billion, and is rumored to be planning an IPO. Even if it doesn't manage an IPO, it may be bought out by a competitor, which would give it more exposure as well. Earlier this year, Coach (COH +2.51%) reportedly offered between $2 billion and $3 billion for the business, though the offer was turned down.
A sharp focus
The appeal of Fossil's current brand lineup is coupled with the company's renewed emphasis on running an effective business. Operating margin rose from 13.8% in the quarter last year to 15.1% this year. Management cited a better product mix and fewer liquidation sales as a reason for the increase in margin, and the company expects those conditions to continue throughout the year.
Even with today's jump, Fossil is still trading at a relative discount to other luxury retailers. Fossil stock is trading at a price-to-earnings ratio of just 21, while Kors is near 36. Coach is even cheaper, with a P/E of 15, but the business has been struggling in its core market recently.
