Shares of Fossil (FOSL 0.34%) rose more than 4% in after-hours trading on Tuesday, after the watchmaker reported first-quarter earnings following the closing bell that beat analysts' estimates. Sales of $725 million fell short of analysts' forecasts of $732 million, though earnings per share of $0.75 clocked in significantly ahead of the consensus estimate of $0.63. Earnings, adjusted for restructuring costs, were $0.91 per share.
Revenue summary
Revenue decreased 7% year over year, driven by the negative impact of foreign currency exchange rates, and one less week in the quarter than in the previous-year's period. Excluding these factors, revenue increased 5%.
Here's a breakdown of the reported sales by region and product category versus sales on a constant currency and comparable calendar basis.
| Category |
Reported Results |
Constant Currency and |
|---|---|---|
|
Total Company |
(7%) |
5% |
|
Americas |
(4%) |
3% |
|
Europe |
(10%) |
9% |
|
Asia |
(7%) |
4% |
|
Watches |
(8%) |
3% |
|
Leathers |
(7%) |
4% |
|
Jewelry |
11% |
30% |
Source: Fossil Q1 results.
Sales drivers on a constant currency and comparable calendar basis:
- Americas: Significant growth in jewelry and an increase in leathers, while watch sales were flat.
- Europe: Increase in all product categories, led by jewelry and watches. Within the region, Germany, France, and the U.K. performed strongest.
- Asia: Increased sales across all categories, led by leathers and watches. Within the region, Japan, Australia, and India performed best.
Comparable-store sales, based on a 13-week calendar, increased 2% compared with the year-ago period. Comparable sales gains in the Americas and Europe were partially offset by a decline in Asia, while comp gains in leathers and watches were partially offset by a decline in jewelry.
Earnings summary
Earnings came in at $0.75 per share, a considerable downtick from EPS of $1.22 in the year-ago period. Excluding the currency headwinds, however, EPS clocked in at $0.88, including a restructuring charge of $0.16 per share.
The positive EPS impact of the comparable 5% sales growth and a lower share base -- which happened because the company repurchased shares -- were more than offset by higher operating expenses. Operating expenses rose because of $12.1 million in restructuring costs, a planned increased in marketing activities intended to drive long-term growth, and the impact of store and international infrastructure investments in 2014.
As to the repurchasing program, Fossil invested $115 million in the first quarter to repurchase 1.3 million shares of its stock at an average price of $88 per share. As of April 4, the company had $944 million remaining on its existing share-buyback authorization.
Gross margin decreased 180 basis points to 55.3%, driven primarily by currency headwinds. Operating margin dropped 580 basis points to 7.7%, driven primarily by the company's ratcheting up of its marketing and brand-building activities, along with a 160-basis-point impact from currency headwinds.
Looking ahead
Fossil announced second-quarter profit guidance of $0.80-0.91 EPS, ahead of the consensus of $0.69, which probably helped boost the after-hours share price.
It maintained its full-year 2015 guidance on a constant dollar basis, while updating GAAP 2015 guidance to reflect continued currency volatility.
GAAP guidance:
- Revenue in the range of a 4% decrease to a 1% increase.
- Operating margin of 11.5%-13%.
- EPS of $5.25-$6.05.
Guidance in constant dollars, excluding restructuring charges and the impact from the extra week in 2014:
- Revenue increase of 3%-7%.
- Operating margin of 15.2%-16%.
- EPS of $7.00-$7.60.
CEO Kosta Kartsotis comments said, "We remain committed to our 2015 priorities to invest in our owned brands, develop our digital capabilities and advance our initiatives in connected accessories, while continuing to drive our category leadership with our world class portfolio of licensed brands."
Fossil's likely entrance into the wearable computing space along with partners Google and Intel in the fourth quarter should prove interesting, especially in light of the huge sales that many are forecasting for the Apple (AAPL 0.35%) Watch. Only time will tell what type and degree of impact the consumer-tech behemoth's entree into this product category will have on the traditional watchmaking industry and specifically on Fossil.
Management believes that the company's nascent licensing relationships with premier luxury brands Kate Spade and Ralph Lauren will bear fruit in 2015 and beyond.
The 10-second takeaway
In all, Fossil turned in a fair quarter in what remains a challenging industry environment. The company appears to be taking the necessary steps to preserve and grow its market share, though the big wildcard in the equation for 2015 and beyond remains the impact from the Apple Watch.
