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Fossil, Inc (FOSL - Analyst Report) reported fourth quarter 2012 adjusted earnings of $2.27 per share, which exceeded the year-ago earnings of $1.87 per share by 21.4%. The results were within the management’s guidance range of $2.26–$2.29 per share and in line with the Zacks Consensus Estimate. The year-over-year upside was driven by top-line growth, positive comparable store sales and improved margins.

Quarter in Detail

Fossil’s net sales during the quarter increased 14.1% to $947.7 million, exceeding the Zacks Consensus Estimate of $933 million. On a constant currency basis, net sales increased 14.8% to $953.5 million, driven by third consecutive 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, while sales in other categories including eye-wear and leather businesses declined in the quarter.

The company witnessed growth in each of the geographic regions and delivered comparable store sales growth of 2.4%, reflecting global demand for Fossil products.

Despite currency headwinds, gross margin expanded 80 basis points to 56.9% as the company managed to grow its outlet channel, improve pricing across certain businesses, increase production efficiencies and achieve favorable product mix. Operating margin also expanded 60 basis points to 21.6% in the quarter, despite higher operating expenses.

Segment Details

Net sales from the North America wholesale segment increased 15.0% to $353.1 million on a constant currency basis, primarily driven by robust watch sales, including sales of Skagen-related products. The segment also experienced modest increases in the jewelry business.

Net sales in Europe grew 7.6% year over year on a constant currency basis to $240.5 million, driven by increases in watch sales mainly with the addition of the Skagen brand. However, sales in other categories declined due to continued sluggish economic conditions as well as the repositioning of the Fossil jewelry products.

Net sales in the Asia-Pacific segment increased 18.6% to $102.5 million on a constant currency basis, driven by increases in the company’s watch sales. Skagen-branded products contributed $4.5 million to net sales.

Direct-to-Consumer segment net sales grew 20.4% year over year on a constant currency basis to $257.4 million, primarily attributable to strong comparable store sales and increase in the average number of company-owned stores in the quarter. Growth in watches and leather businesses also fueled the sales increase, along with higher sales from the company's repositioned jewelry products.

Full-Year 2012 Results

Fossil posted adjusted earnings of $5.39 per share, up 16.9% from the year-ago earnings of $4.61 per share. The results were in line with the Zacks Consensus Estimate, but lagged the management’s guidance range of $5.42–$5.45 per share.

In 2012, Fossil’s net sales increased 11.3% to $2.86 billion, exceeding the Zacks Consensus Estimate of $2.84 billion. On a constant currency basis, net sales increased 13.5% to $2.57 billion, with sales increasing in each segment, driven primarily by the acquisition of Skagen branded products, which contributed $93.8 million to 2012 sales.

Guidance

Following strong fourth quarter and full-year 2012 results, Fossil provided a favorable outlook for 2013. Fossil expects sales to increase approximately 10% in the first quarter of 2013. The company also expects earnings in the range of 93 cents to 98 cents per share and operating margin in the range of 12.5% to 13.5%.

For full-year 2013, the company expects sales to increase in the range of 10% to 11%. The company also expects earnings in the range of $5.85 to $6.15 per share and operating margin in the range of 16.5% to 17.0%.

Our Take

We are impressed with Fossil’s acquisition of Skagen, which drove improvement in Asia Pacific wholesale business and added strength across the North American watch business. It also overshadowed the weaknesses of the European business.

Fossil has also been experiencing back-to-back increases in comparable store sales. The company is also cash rich and rewards its shareholders through share buybacks. However, higher labor costs, currency fluctuations and uncertainties in Europe continued to remain a headwind. Fossil holds a Zacks Rank #3 (Hold).

Other stocks worth considering in the consumer discretionary sector are Guess? Inc (GES - Analyst Report), Hanesbrands Inc (HBI - Analyst Report) and Michael Kors (KORS - Analyst Report), each of them holding a Zacks Rank #2 (Buy).

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