Fossil Q1 Profit Declines, Outlook Disappoints

In Industry News, What's New by Jeff PrineLeave a Comment

fossilRichardson, TX—Fossil Group Inc. reported late Tuesday that its first quarter profit was down, hit by lower operating margin, higher tax rate and interest expense. Shares of the company declined due to its weak outlook.

For the quarter ended April 5, the watch and accessories company posted net earnings of $66.3 million, compared with $72.2 million or $1.21 a share last year. On a per share basis, earnings rose to $1.22 from $1.21 a year ago, on a lower share count. That beat analysts’ estimate for $1.17 a share. (Results included an 11 cent benefit related to the acquisition of Fossil’s Spanish joint venture).

‘Mall Traffic Challenging’

Net sales were up 17% to $776.5 million from $680.9 million in the prior year. That was ahead of analysts’ forecast for $771.6 million in sales.

The company said growth was lead by its Fossil and Skagen watch brands, with net sales in watches up 17%. Jewelry sales increased significantly, while sales of leathers marginally declined.

Net sales from the North America wholesale segment increased 7%, or $19.1 million. Double digit growth in watches and jewelry products led the North American sales increase and were partially offset by a decline in leathers, the company said.

Wholesale U.S. shipments increased driven by boutiques, specialty accounts and off-price partners, while Mexico and Canada declined.

Meanwhile, global retail comps fell 2.4%, with a decrease in North America, while increases were seen in Asia Pacific and Europe.

Gross margin widened 150 basis points to 57.1% thanks to sales of higher margin products, reduced freight and other costs, and acquisitions, partly offset by promotional activity in outlet stores and reserves associated with leathers.

Operating margin fell 40 basis points to 13.5% as the company expanded its retail store and concession base, spent on infrastructure and advertising royalties, the company noted.

“We continued to expand our international footprint as we posted significant increases in both Europe and Asia and we expanded our business in the Americas, even as mall traffic remains challenging,” CEO Kosta Kartsotis said. “Our growth was driven by strong performance in watches, with both Fossil and our multi-brand portfolio delivering solid increases. Our jewelry business accelerated, more than offsetting the challenges we continue to see in the leathers business.”

Kartsotis noted that during the quarter Fossil announced “an important strategic partnership with one of the most innovative companies (Google) to support our efforts in wearable technology.”

Fossil’s forecast, however, was poorly received on Wall Street. The company said it expects second quarter earnings in the range of 90 to 97 cents a share, below analysts’ estimate for $1.16 a share. Sales were expected to rise between 8% to 9.5% to $764.5 million to $775 million while analysts expect $773.4 million.