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Fossil Inc. (FOSL - Analyst Report) is scheduled to report second quarter 2013 earnings before the opening bell on Aug 6, 2013. Last quarter, Fossil posted a positive surprise of 11.3%. We expect the company to beat expectations in the second quarter too.

Why a Likely Positive Surprise?

Our proven model shows that Fossil is likely to beat earnings because it has the right combination of two key ingredients.

Positive Zacks ESP: The expected surprise prediction or ESP (Read: Zacks Earnings ESP: A Better Method), which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +2.13%. This is meaningful and a leading indicator of a likely positive earnings surprise for the shares.

Zacks Rank #3 (Hold): Fossil carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1, #2 and #3 have a significantly higher chance of beating earnings estimates. The Sell-rated stocks (#4 and #5) should never be considered going into an earnings announcement. 

The combination of Fossil’s Zacks Rank #3 (Hold) and a positive ESP of +2.13% makes us confident of an earnings beat on Aug 6.

What is Driving the Better-than-Expected Earnings?

We believe that the company’s strong watch sales, prudent expense management and its ability to generate positive comparable store sales are expected to drive earnings results in the second quarter.

Fossil has been witnessing double-digit growth in global watch sales after the acquisition of the Skagen brand in Apr, 2012. After introducing Skagen brand, the company has introduced Fossil Swiss watches in Asia and launched the long-awaited and exclusive collection of watches for men and women by designer Karl Lagerfeld, which received a good response.

The company also introduced Skagen jewelry in the first quarter, which added to the company’s sales. We expect all the new products launches and brand extensions to boost watch sales further in the second quarter.

Fossil also has a history of delivering positive comparable store sales driven by continued strengthening of the Fossil brand. We remain impressed with the performance of the Fossil brand and continue to expect solid comp growth in the second quarter.

Other Stocks to Consider

Here are some other companies in the retail sector that can be considered as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Citi Trends Inc (CTRN - Analyst Report), Earnings ESP of +2.33% and a Zacks Rank #2 (Buy).

Gap Inc. (GPS - Analyst Report), Earnings ESP of +1.70% and a Zacks Rank #2.

Spartan Stores Inc. (SPTN - Snapshot Report), Earnings ESP of +2.04% and a Zacks Rank #2.

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