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Fossil Group Inc.(FOSL - Analyst Report) reported second-quarter 2013 adjusted earnings of $1.15 per share which beat the Zacks Consensus Estimate of 93 cents by 23.6%. Earnings also topped the year-ago earnings of 92 cents per share by 25.0% and also surpassed management’s guidance range of 89 cents-94 cents.

Double-digit sales growth and gross margin expansion aided by several operational initiatives taken up by the company boosted earnings in the quarter. The shift of some marketing expenses to the third quarter added a huge 8 cents to the earnings growth.

Quarter in Detail

Fossil’s net sales during the quarter increased 11.0% year over year to $706.2 million, exceeding the Zacks Consensus Estimate of $691 million. Net sales increased across all geographic regions. The company witnessed double-digit growth in watch and jewelry categories. Strong sales of core brands like FOSSIL(R) and SKAGEN(R) also boosted sales during the quarter. However, sales in other categories including eyewear and leather businesses declined in the quarter. Unfavorable exchange rates reduced the company’s export sales by $2.3 million in the reported quarter.

Gross margin inflated 190 bps to 57.9% driven by improved liquidation strategy, positive pricing, booming retail business and strategic acquisitions. Operating income went up by 21.4% to $106.9 million from the prior-year quarter. Operating margin inflated 130 basis points (bps) to 15.1% backed by higher sales and solid gross margins in the quarter.

Segment Details

Net sales from the North American wholesale segment increased 4.2% on a constant currency basis to $260.7 million, primarily driven by robust sales gain in the watch portfolio and jewelry. However, lower shipments of leather and eyewear partially offset the results.

Net sales in Europe grew 15.0% year over year on a constant currency basis to $170.7 million, driven by increases in watch sales and jewelry categories. However, reduced shipments in the leather and eyewear businesses offset the sales increase. Strong sales in Germany and the U.K. as well as in the company's third-party distributor markets boosted sales during the quarter. On the other hand, France experienced a significant decline in sales owing to ongoing macroeconomic headwinds.

Net sales in the Asia-Pacific segment increased 17.7% on a constant currency basis to $96.2 million, driven by increases in the company’s watch sales. China, Japan and India contributed significantly to the sales gain during the period.

Net sales in Direct-to-Consumer segment grew 16.1% year over year on a constant currency basis to $178.6 million, primarily attributable to global retail store sales growth. Growth in watches and a modest increase in the leather business also fueled the sales increase, along with higher sales from the company's repositioned jewelry products.

Other Financial Updates

During the second quarter, Fossil bought back 1.7 million shares at a total cost of $169 million. As of Jun 29, 2013, Fossil had $843 million left under its share repurchase plan.

Guidance

Fossil raised its earnings guidance for full year 2013. The company now expects earnings in the range of $6.15 – $6.35 per share, higher than the previous expectation of $6.00 – $6.26 per share. Fossil expects sales to increase in the range of 11.0% to 12.0% higher than the previously announced estimate of a range of 10% to 11%. Operating margin is likely to be in the range of 16.75% to 17.25% slightly up from the previously-announced range of 16.5% to 17.0% for 2013. The increased guidance reflects continued momentum of the Fossil brand and new product launches in 2013.

For third-quarter 2013, Fossil expects sales to increase approximately 12.5% to 13.5%. The company expects earnings in the range of $1.30 to $1.37 per share and operating margin in the range of 15.0% to 15.5%.

Other Stocks to Consider

Fossil carries a Zacks Rank #3 (Hold). Other diversified retail wholesalers worth considering include Express Inc. (EXPR - Snapshot Report), Gap Inc. (GPS - Analyst Report), and Abercrombie & Fitch Company (ANF - Analyst Report)).  All these companies carry a Zacks Rank # 2(Buy).

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