It seems that consumer-fashion company Fossil (NASDAQ:FOSL) can do no right in the eyes of analysts and investors. Despite racking up impressive revenue growth and strong profitability for several quarters, particularly in the emerging markets, Fossil's share price performance has badly lagged the broader market over the past year. Things got even worse when the company released its first-quarter earnings.

Fossil's most recent report confirmed once again that the company is growing across product categories and geographies and is handily holding off competition from companies like Coach (NYSE:TPR). And yet, shares of Fossil collapsed after the report, all because the company disappointed analysts with its current-quarter outlook.

Analysts have typically been quick to cut their price targets on Fossil, but there's little the company can do to manage analyst expectations. Wall Street once again held excessively optimistic projections for Fossil. All Fossil has done for several quarters and continues to do is effectively generate solid growth and create value for shareholders. That's why Foolish investors shouldn't succumb to the panic and sell Fossil.

Wall Street's trash can be your treasure
On the surface, there's absolutely nothing wrong with Fossil from a fundamentals perspective. Revenue grew 14%, while sales increased in all business segments, including 13% wholesale growth and 18% growth in direct-to-consumer sales. Among product categories, Fossil continues to excel in its core watches line, which grew revenue by 17%. Watches are critically important for Fossil and comprise 77% of total sales.

Things look great for Fossil across the world. Sales in Asia Pacific jumped 19% year over year; but even so, there's plenty of opportunity for future growth as well. That's because the company's Asia Pacific segment comprises just 13% of its total sales. So future emerging market penetration will likely keep boosting Fossil for years to come.

Earnings per share increased only modestly year over year, mostly due to the company's growth initiatives. Clearly, the emerging markets present a great opportunity for Fossil, and the company obviously has to invest to build out its business there to support growth.

To some degree the flat earnings were due to factors outside of Fossil's core operations. In the comparable period last year, Fossil benefited from a $10 million non-cash valuation gain related to its Spanish joint venture. Interest expenses increased in the first quarter, reflecting the slight uptick in rates over the past year. From a purely operational standpoint, Fossil is still registering strong growth. To that end, operating profits rose 11% year over year. That means that Fossil is still executing on the things that matter.

Fossil isn't getting enough credit
Despite its strong performance and prospects for future growth, shares of Fossil trade for just 14 times forward earnings. In comparison to Coach, it's clear that Fossil is not deserving of such a low earnings multiple. Coach also trades for 14 times forward earnings even though it reported a 5% decline in sales in the most recent quarter. Coach is quickly losing momentum in North America, where sales fell 18%. Its initiatives to build out its domestic women's bag and accessories business have not paid off.

Some might argue that Fossil's current-quarter outlook is reason for the sell-off, but that doesn't seem logical. Fossil's forecast missed analyst estimates, but that has much more to do with analysts being overzealous in their own expectations. Fossil management sees the company generating at least 8% revenue growth and about $0.93 per share in profits. Analysts expected higher earnings, but Fossil has been very clear that its profit growth may be restrained somewhat by the company's continued investment in new markets, especially in Asia.

Don't bail on Fossil
Fossil is a highly profitable company that enjoys a solid brand connection with consumers. As opposed to Coach, which is suffering from declining sales, Fossil keeps growing quarter after quarter. It's true that the company's profits are seeing bumps in the road, but that's because Fossil is investing aggressively to expand in the emerging markets. This will likely pay off over the long term. With a modest valuation and great prospects for future growth, there's simply no reason to sell Fossil.


Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Coach and Fossil. The Motley Fool owns shares of Coach. Try any of our Foolish newsletter services free for 30 days. 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.