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Fossil's 3Q Mixed, View Revised

FOSL GES

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Fossil Inc. (FOSL - Analyst Report) reported third quarter 2012 earnings of $1.28 per share, which exceeded both the year-ago earnings by 17.4% and the Zacks Consensus Estimate by 9.4%. The results also exceeded management’s guidance range of $1.15–$1.17 per share. The upswing in results was driven by top-line growth, improved margins and prudent expense management.

Quarter in Detail

Fossil’s net sales during the quarter increased 6.4% to $684.2 million, driven by strong global watch sales and improved leather businesses. The jewelry and eye-wear businesses partially offset the sales growth. Net sales lagged the Zacks Consensus Estimate of $715 million. The acquisition of Skagen brand also fueled sales growth.

Excluding the sales related to Skagen-branded products, which was acquired in April 2, 2012, the company reported net sales growth of 5.9%.

Fossil’s gross margin in the quarter contracted 10 basis points (bps) to 55.8% in the quarter, mainly due to foreign currency headwinds. Operating margin declined 200 bps to 16.5% in the third quarter of 2012 due to foreign currency translation as well as higher operating expenses.

Segment Details

Net sales from the North America wholesale segment increased 5.6% to $254.0 million on a constant currency basis, primarily driven by robust watch sales, including sales of Skagen-related products. The segment also experienced increases in jewelry business, despite a decline in global jewelry line, owing to the rollout of the Michael Kors jewelry line.

Wholesale net sales in Europe declined 8.3% year over year on a constant currency basis to $163.5 million, largely due to a decline in the company's jewelry business and reduced leather shipments, partially offset by a slight increase in watch sales.

Net wholesale sales in the Asia-Pacific segment increased 24.2% to $97.6 million on a constant currency basis, driven by increases in the company’s watch sales. Skagen-branded products contributed $1.7 million to net sales.

Direct-to-Consumer segment net sales grew 16.3% year over year on a constant currency basis to $169.1 million, primarily attributable to strong comparable store sales and increase in the average number of company-owned stores in the quarter.

Other Financial Update

The company had cash, cash equivalents and securities of $149 million as of September 20, 2012 compared with $139.0 million as of June 30, 2012.

Since the end of the year-ago quarter, the company repurchased approximately 3.1 million shares of its common stock for $262.8 million The company had authorized a $750 million buyback program in August 2010. The company has now completed the repurchase of approximately 8.5 million of shares worth $646.4 million.

Guidance

For the fourth quarter of 2012, Fossil has lowered its net sales guidance. It expects it sales to increase approximately 12% in contrast to 16% growth forecasted previously. On a constant currency basis, the company expects net sales to increase 13% compared with 18% forecasted previously. The lowered guidance is due to expectation of a decline in European wholesale businesses.

Adjusted earnings (excluding non-recurring costs associated with the acquisition of Skagen as well as certain tax benefits) for the fourth quarter are expected in the range of $2.26 – $2.29 per share. The Zacks Consensus Estimate is pegged at $2.27 per share.

For fiscal 2012, Fossil has raised its adjusted earnings per share in a range of $5.42 to $5.45 compared with the previous range of $5.29 to $5.34. The Zacks Consensus Estimate projects earnings of $5.29 per share for the full year.

Currently, Fossil, which faces stiff competition from Guess? Inc. (GES - Analyst Report), carries a Zacks #3 Rank (short-term Hold rating). We have a Neutral recommendation on the stock over the long term.

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