Balanced View on Fossil Group - Analyst Blog

On Mar 24, 2014, we issued an updated research report on Fossil Group Inc FOSL. This global consumer fashion accessories maker and distributor recently reported mixed fourth-quarter 2013 results on Feb 12.

Fossil reported fourth quarter 2013 earnings of $2.68 per share, which beat the Zacks Consensus Estimate by 8.9%. In fact, Fossil has been delivering positive earnings surprises over the last two years.

Earnings also increased 7% year over year from $2.51 per share and surpassed management's guidance range of $2.26-$2.46 per share. Higher revenues and operating income and lower share count boosted earnings in the quarter, partially offset by increased interest expense and a higher tax rate. On a constant currency basis, Fossil's net sales during the quarter increased 11.4% year over year to $1.062 billion. Sales exceeded the Zacks Consensus Estimate and management's expectation of a 6%-8% increase on the back of continued growth in the watch portfolio, driven by the Fossil and Skagen brands.

Strong top-line growth driven by double-digit increase in global watch sales has been the company's strength over the years. Product innovation and continued momentum of the Fossil brand also added to growth. The company is also keen on improving its jewelry and leather businesses in order to further boost sales.

Fossil has a solid watch portfolio and has witnessed strong sales growth owing to its strong global distribution platform and successful innovations. The company has also regularly acquired and developed new brands and inked licensing agreements to suit customer preference and lifestyle.

Most recently, Fossil teamed up with Google, Inc GOOG to support the extension of Android operating system into wearable technology with a new operating system called Android Wear. Fossil, through this partnership, will be able to leverage Android's popularity and Google's technology in its watches. This partnership will also allow Fossil to bring smartwatches to its customers, shaping the fusion of fashion and technology. Android-based value watches in the emerging markets will also be a boon for the company as about half of Fossil's revenues come from overseas.

Following the acquisition of privately-held Nevada-based Skagen Designs, Ltd. and its certain subsidiaries in Aug 2012, the company's watch sales received a boost. In 2013, Fossil launched the long-awaited and exclusive collection of watches for men and women by designer Karl Lagerfeld and introduced Fossil Swiss watches in Asia. The company expects to add new brands like Tory Burch in the second half of 2014.

The company targets further expansion of the Fossil brand in 2014 and intends to develop exciting new watch and jewelry designs, improve leather assortment and focus on increasing brand awareness.

Fossil has a significant presence in international markets and has department stores in over 120 countries worldwide. Fossil is progressing steadily in newer markets as well as in existing markets like Japan, Australia and Korea.

While Fossil has been delivering positive comparable store sales for the past 5 years driven by continued strengthening of the Fossil brand outside the U.S., the company is witnessing sluggish comparable store sales in the U.S. since the past few quarters due to weak traffic owing to the tough retail environment. The company is therefore resorting to promotional techniques to drive traffic. Though the company is trying to limit promotional activity, increased competition and a difficult consumer spending environment force it to resort to aggressive promotions.

Fossil holds a Zacks Rank #3 (Hold).

Key Picks from the Sector

Some better-ranked stocks in the retail sector include Foot Locker, Inc. FL and The Kroger Co. KR, both of them carrying a Zacks Rank #2 (Buy).