Fossil (NASDAQ:FOSL) is one of those companies that's a bit hard to place. The company has a good brand and historically its financials are OK, but there's not much of a moat in watches. Yesterday, Fossil reported its first-quarter results; those results, along with year-over-year comparisons, are captured in our Fool by Numbers.
Overall, the quarter wasn't spectacular, but it was slightly better than expected. The best news was that the company's sales increased by 13.6%, though part of that gain is due to an extra week of sales in this year's quarter. Without the extra week the sales gain was closer to 7%. Either way, it's an improvement over the meager 2% sales gain last quarter. On the bottom line, the decline in earnings to $0.14 per share isn't quite as bad as it initially appears, because last year's results include a repatriation of cash from overseas operations. Backing this one-time item out, earnings per share were $0.19 last year instead of the $0.32 reported.
The biggest and most obvious item I see in the company's earnings report is its inventory growth, which at 29.8% far outpaced the company's sales gains. Sequentially there was a slight build-up in inventory versus last quarter, and Fossil stated on its conference call that it intends to work the inventory balances down throughout the year. The other item to keep an eye on is the company's short-term debt. Fossil still has ample cash on its balance sheet, but the company has been tapping its credit line to fund its working capital needs and share repurchases.
Fossil relies on its international operations for approximately 45% of its sales. Overall, the company's international operations are performing well and growing. The company is also seeing growth from watches that it sells under other brand names such as Adidas, Burberry, and Armani (a strategy also used by rival Movado Group (NYSE:MOV)). Fossil also rolled out jewelry offerings in its European stores and will roll out similar goods in the U.S. in the third quarter. It's an interesting growth strategy and one to watch, but not one that should be a threat to Tiffany & Co (NYSE:TIF) or Blue Nile (NASDAQ:NILE).
I'm not terribly impressed with the company's performance, but there's no denying that Fossil's shares were cheap and that the company's guidance was positive in respect to earnings and inventory. That combination is likely to cause an increase in share price. Still, if you're considering Fossil, pay close attention to the company's inventory and short-term debt balances going forward.
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Nathan Parmelee owns shares in Blue Nile, but has no financial interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
