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We reaffirm our Neutral recommendation on Fossil, Inc. (FOSL - Analyst Report) following an appraisal of its first quarter 2013 results. 

Why the Reiteration?

On May 7, Fossil reported its first quarter 2013 results. The company posted earnings growth of 16.1% driven by net sales growth of 15.5% in the quarter. Its earnings and sales also exceeded the Zacks Consensus Estimate. Fossil witnessed double-digit growth in global watch sales, mainly owing to the acquisition of the Skagen brand (acquired in April, 2012). Fossil’s jewelry business improved due to the addition of Skagen jewelry in the quarter. The strong results reflect increased sales across all geographic regions in the quarter.

However, a strong dollar reduced the company’s export sales in the reported quarter. Fossil’s sales in other categories including eyewear and leather businesses were also sluggish. The company’s gross margin and operating margin also contracted due to higher operating expenses and a negative impact from sales through distributors.

During the first quarter of 2013, the company introduced Fossil Swiss watches in Asia. In Feb 2013, Fossil launched the long-awaited and exclusive collection of watches for men and women by designer Karl Lagerfeld and received a good response. Its Emporio Armani Swiss line of watches is slated for a spring 2014 launch. Fossil is expected to present the Tory Burch watches ahead of their scheduled launch.

The continued momentum of the Fossil brand and new product launches in 2013 also led the company to raise its earnings guidance for full year 2013. The company now expects earnings in the range of $6.00 – $6.26 per share, higher than the previous expectation of $5.85 to $6.15 per share. Fossil reiterated its outlook for sales and operating margin.

Following the impressive first-quarter results, estimates largely moved upwards for 2013 and 2014. The Zacks Consensus Estimate increased 2.1% for 2013 and 1.4% for 2014 over the last 60 days.

We are encouraged by the company’s acquisition strategy, its strong liquidity position, prudent expense management and its ability to generate positive comparable store sales. The Skagen brand has boosted the company’s watch sales since its acquisition last year. Further, Fossil has established its presence in the international markets by forming alliances, acquiring internationally-based subsidiaries and licensing and developing international brands. Fossil’s acquisition of the Latin American distribution business of Florida-based Bentrani Watches, LLC in Jan, 2013 now allows Fossil to directly ship its products to 16 Latin American countries.

Other Stock to Consider

Fossil currently carries a Zacks Rank #3 (Hold). However, there are other stocks worth considering in the consumer discretionary sector including The Children (PLCE - Snapshot Report), The Gap Inc (GPS - Analyst Report) and Wet Seal Inc. (WTSL - Analyst Report), all of which hold a Zacks Rank #2 (Buy).

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