Fossil Watch

Fossil men's watches. Source: Fossil.

Despite beating analysts' earnings expectations for four straight quarters, 2014 hasn't been humming along like clockwork for watchmaker Fossil (NASDAQ:FOSL). This fashion-forward retailer saw its shares fall roughly 10% after first-quarter results failed to impress and 7% immediately following a lackluster second quarter. For the year, Fossil's shares are down 14% versus a gain of 9.9% for the S&P 500.

Investors have come to expect something more than single-digit revenue growth from Fossil, a company that aims to spread its high-quality brands all over the world. But consumer demand has been lukewarm thus far in 2014.

Heading into Fossil's third-quarter earnings on Tuesday, Nov. 11, here are three things investors should focus on in the report.

1. How are Fossil's finances?
In the second quarter, Fossil met expectations for revenue and delivered a positive surprise of 2.08% on the bottom line. The watch and jewelry categories were the key drivers, while leather-related products showed "positive signs" of acceleration, according to management. Leathers are a relatively new and unproven category, particularly when compared with its watch brands, which generate 75% of the company's sales.

For Fossil to impress investors on Tuesday, it needs to show balanced growth across a wide swath of licensed brands, gain traction in leathers, and boost same-store sales. Here's what Wall Street analysts are expecting the company to report on the top and bottom line for the third period:

Analyst EPS Estimate

$1.82

Change From Year-Ago EPS

15.19%

Revenue Estimate

$879 million

Change From Year-Ago Revenue

8.50%

Source: Yahoo! Finance.

Expected revenue growth of 8.5% and earnings-per-share growth of 15.19% are not lofty expectations for Fossil. This is a company that's averaged 16% revenue growth and 27% earnings-per-share growth over the past five years. But shoppers have been fickle, particularly in Fossil's core American market, and there is some cause for concern that smart watches could cast a shadow over traditional watchmakers, considering the recent debut of the much-hyped Apple Watch device.

2. Speaking of Apple Watch ...
It will be interesting to see what Fossil's management team has to say about the Apple's upcoming cutting-edge device during Tuesday's conference call. As expected, Apple Watch received plenty of praise for its design and functionality. And because it's Apple, there's good reason to believe it will have an audience that stretches beyond tech geeks.

Shares of Fossil slumped roughly 10% in September following the announcement, which took place toward the beginning of the month. But one analyst, Omar Saad at ISI Group, believes the whole smartwatch category is potentially "overblown" and "illegitimate." Further, Saad thinks Fossil has nothing to worry about. Since his 32-page report titled "Smartwatch Flop" came out, Fossil shares have climbed 11% in just over a month.

Finally, for those who missed it, Fossil announced a high-tech alliance in mid-September that could lead to the development of a Fossil-branded and Intel-powered wrist computer of its own. It would probably run on Android software, given Fossil's partnership with Google that was announced back in March.

During last period's conference call, Fossil management alluded to the budding smartwatch market, noting that "new products might affect the market" heading into its third quarter. Should Fossil investors view this as a cause for concern or an opportunity? We should have a bit more insight on Tuesday afternoon.

3. ... And back to the business
Just because Apple Watch has caused Fossil's stock to go on a roller-coaster ride lately, let's not allow futuristic watches to overshadow the core business. Smartwatches are more of an "experiment" for the company -- one to keep an eye on, but not something that will be a game changer overnight.

So, where were we? Ah, yes, back to the nuts and bolts of watchmaking.

From a brand perspective, Fossil-branded goods were up 4% in the second-quarter, while its Skagen brand increased 12%. Multibrand watches, many of which are portrayed in the following slide, were up 12% as well.

Fossil Brands

Source: Fossil ICR XChange presentation on Jan. 13, 2014.

It would be good to see the core Fossil products pace a little higher, since this is such a significant portion of the business. During the second quarter, there was some indication that price-cutting was required, which kept wholesale growth modest at 2% and cut into gross profit margins.

Also, if we rewind for a moment to 2013, it's important to note that the third quarter came in stronger than the second quarter from a sales perspective. Revenue growth went from 11% year over year in the summer months to 18.4% year over year for the third quarter. As always, seasonality is critical, so it would be reassuring to see Fossil picking up some steam as we head into the all-important fourth quarter.

Foolish takeaway
Over time, Fossil has successfully gone from a watchmaker with a singular focus to a company that customers view as a "lifestyle brand." It's also a valuable partner for other respected names, such as Burberry, Michael Kors, and Tory Burch.

These are marquee brands to associate with. Plus, Fossil's busy tapping into key geographies such as Asia, where the watch market is massive -- and growing. If everything starts clicking in unison, this could be a great Foolish stock to own for the long haul.

Isaac Pino, CPA, has no position in any stocks mentioned. The Motley Fool recommends Apple, Fossil, Google (A and C shares), and Michael Kors Holdings and owns shares of Apple, Google (A and C shares), and Michael Kors Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.