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Improve Your Portfolio by Adding This Watchmaker

By Pratik Thacker – Mar 11, 2014 at 1:00AM

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Growing demand for watches, an expansion into new regions, and new product launches should help this retailer grow.

Demand for watches is getting stronger, as proven by the Cowen Consumer Tracking Survey. Results showed that 38% of people surveyed bought a minimum of one watch during the last year. In fact, it brought some interesting facts into the limelight. For instance, out of the people who wear watches, 29% of them have at least three watches for regular use. Hence, it is clear that the watch industry is having a gala time and so are retailers.

One of the leading watch retailers benefiting from this uptrend is Fossil (FOSL -2.21%), which recently posted great fourth-quarter numbers, sending its stock price north.

Into the numbers
Revenue surged to approximately $1.1 billion, a jump of 11.4% over last year. Driving the higher revenue was rising watch and jewelry sales, which were partly offset by lower sales of leather products. Leather sales declined slightly, mainly because of fewer launches of leather products. However, customers went gaga over Fossil's innovative and fancy watches and jewelry. Its direct-to-consumer segment also performed well, with sales growing by 8.7% over last year, clocking $280 million.

Driven by higher revenue, the company's earnings increased 18% to $2.68 per share. Despite increased levels of promotions, the gross margin expanded to 57.4%. This expansion was helped by sales of higher-margin products and greater international sales.

One of Fossil's key growth drivers is its licensing to Michael Kors Holdings (CPRI 0.18%). It manufactures watches for Kors, which has been witnessing strong growth. Demand for Michael Kors' products has been surging, resulting in great performance by the luxury retailer. This, in turn, is driving Fossil's revenue north.

For example, Kors recently reported quarter was a blockbuster one, as the top and bottom lines jumped 59% and 77%, respectively. In fact, Kors crossed $1 billion in sales for the first time. This growth in sales is helping Fossil to increase its revenue. Moreover, Kors' bright outlook gives investors reason to believe in this watchmaker.

Another reason why Fossil's revenue increased was the 18 new stores added during the quarter. These stores will further help the company to boost sales in the coming months.

Additionally, the Texas-based watchmaker has been actively innovating and introducing new designs to resonate with customers. In fact, its launch of the Tory Burch collection should attract more customers.

Fossil is also eyeing an expansion in key markets in order to increase its revenue further. Its expansion in China has been quite fruitful, as its business grew by 50% in the region. Moreover, extending the reach of the Skagen brand should generate additional revenue from the region.

A possible threat
Although Fossil has been able to attract customers and drive its revenue higher, it faces competition from Movado Group (MOV -14.54%), marketer and distributor of fine watches. Despite being small, it registered revenue growth of 18% in its third- quarter results, clocking $189.7 million. The luxury watch retailer has been making many efforts to lure customers. For example, it has boosted its advertising efforts. Movado has been promoting its products through ads on television and in fashion magazines.

Moreover, it has been introducing new collections such as Scuderia Ferrari watches, which have been doing well. The company has also added new collections to the existing brands, such as Bold bangles to the Movado Bold range and new products to the ESQ One collection. These products attract affluent customers and might pose a threat to Fossil's sales.

However, with a five-year stock price appreciation of 863%, Fossil has been able to outperform Movado (462%). Also, Fossil's licensing to Kors has been one of the key contributors to its growth.

Final Foolish thoughts
After its solid quarter, Fossil is a good bet for the future. Its innovative designs at a price point of $85 to $255, new products such as the Tory Burch collection, and an expansion into new regions should continue to benefit the retailer. Moreover, demand for watches has been increasing, according to the Cowen Consumer Tracking Survey. Hence, this watchmaker deserves an investment.

Pratik Thacker has no position in any stocks mentioned. The Motley Fool recommends Fossil and Michael Kors Holdings. The Motley Fool owns shares of Michael Kors Holdings. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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