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Fossil Inc. (FOSL - Analyst Report) is scheduled to report third quarter 2013 earnings after the market closes on Nov 5, 2013. Last quarter, Fossil posted a positive surprise of 23.6%. Let’s see how things are shaping up for this announcement.

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: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +1.45%. 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. 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 +1.45% makes us confident of an earnings beat on Nov 5.

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 third quarter.

Fossil has been witnessing double-digit growth in global watch sales after the acquisition of the Skagen brand in Apr, 2012. Following the Skagen launch, the brand boosted the company’s watch sales. In Feb 2013, Fossil launched the long-awaited and exclusive collection of watches for men and women by designer Karl Lagerfeld and received good response. During the first quarter of 2013, the company introduced Fossil Swiss watches in Asia. Its Emporio Armani Swiss and Tory Burch lines of watches are slated for a 2014 launch.

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 third quarter.

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%.

During its second quarter conference call, Fossil also raised its guidance for earnings, sales and operating margin for full year 2013. The increased guidance reflects continued momentum of the Fossil brand and new product launches in 2013.

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:

Best Buy Inc. (BBY - Analyst Report), with an Earnings ESP of +27.27% and a Zacks Rank #1 (Strong Buy).

Kroger Co (KR - Analyst Report), with an Earnings ESP of +1.89% and a Zacks Rank #3.

Michael Kors Holding Ltd. (KORS - Analyst Report), with an Earnings ESP of +7.46% and a Zacks Rank #3.

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