Fossil Q1 Sales Miss, Lowers Outlook on European Uncertainty

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Richardson, TX—Shares of Fossil took a 42% dive in early trading today after the watch and accessories company missed its first quarter sales estimate and cut it full year forecast due to weakness in its European markets.

For the quarter ended March 31, Fossil reported an 8% increase it its net profit to $58.1 million, or 93 cents a share, up from $55.8 million, or 86 cents, a year earlier.

Net sales 9.8% to $589.5 million. At its retail stores, comparable store sales were up 7.7%. Direct-to-customer revenue increased 18% while wholesale sales were up 7.5%. Gross margin narrowed to 55.8% from 56.2%.

While Fossil’s earnings were a penny more than analysts’ average estimate, the company missed their sales estimate of $618.1 million. Moreover, Fossil’s first quarter sales were lower than its own forecast for 15% growth.

Although the company said it posted “sequential quarter improvement” in sales in its wholesale Asia Pacific business and in North American watch business, Mike Kovar, chief financial officer, said that in Europe “a softening macro environment toward the end of the first quarter and changes in our merchandising and assortment strategies across certain categories negatively impacted both our wholesale and retail sales in that region.”

“While we are cautious about the European economy and its impact on our financial results, we remain confident that continued strength in watch sales, same store sales and square footage growth in our retail business, the continued rollout of concessions in Asia Pacific and the integration of Skagen Designs, Ltd., the purchase of which was effective April 2, will result in double-digit sales and earnings growth for fiscal 2012,” Kovar added.

Slower Sales in Europe Causes Concern

Nonetheless,  Fossil lowered its full year earnings forecast by 10 cents, now expecting $5.30 to $5.40 a share. Analysts’ average estimate is for $5.65 a share. The company did raise its sales forecast to 16% from its previous forecast for 15% sales growth. For its second quarter, Fossil forecast earnings of 77 to 79 cents a share, below analysts’ estimate for 94 cents.

By category, Fossil said global watch sales contributed the most to sales, 13.7% or $50.9 million, while leathergoods were up 15.8% to $14.3 million. But these sales volume gains were “partially offset by a 25.6%, or $4.6 million, decrease in eyewear sales and a 4.8%, or $2.0 million, decrease in sales in the jewelry category”

Net sales of Fossil branded products increased by 5.4% “with double-digit growth in watches and leathers, being partially offset by decreases in eyewear and jewelry sales.”

Additionally, the stronger U.S. dollar resulted in a $7.3 million decrease due to currency exchanges.

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By region, North America wholesale grew 9.3% to $19.2 million on top of a 33.9% increase in the prior year quarter. “The increase was primarily attributable to sales volume gains in the company’s watch and jewelry businesses of 13.8%, or $19.6 million, and 33.5%, or $2.0 million, respectively, partially offset by a 25.2%, or $2.2 million, decline in eyewear sales.” Its North American business got a boost, too, from the rollout of the Michael Kors jewelry line.

Wholesale orders in Europe rose rose 4.7%, or $7.1 million, on a constant dollar basis. A 6.5% or $6.9 million sales growth was due to an increase in watch shipments and $3.9 million for an increase in leathergoods. These increases were partially offset by a $3.3 million decrease in the company’s jewelry business due to a repositioning of Fossil brand jewelry.

Asia Pacific wholesale net sales increased 18.8%, or $12.1 million, on a constant dollar on top of a 57.4% increase a year ago. The increase was primarily the result of a 20.1%, or $11.4 million, increase in watch sales and a 27.4%, or $1.1 million, increase in leathergoods, the company said.

Fossil reported that it has 215 concessions in Asia Pacific with a net 38 net concession in the last year. Sales at those concessions were up 28.8%, with comp sales decreasing 1.1% due to a weaker economy in South Korea which accounts for more than 50% of its Asia Pacific concessions.

According to analysts, Fossil’s slowed down sales in Germany and Korea, as well as lowered sales in Italy and Spain raised alarms with investors who are closely watching the uncertainty over the Eurozone debt crisis.

“There’s obviously concern that this is just the first of downward earnings revisions,” said BB&T Capital analyst Scott Krasik. “The prospect with the additional downward earnings has investors spooked. Until we get second-quarter results and some clarity, there’s no catalyst. The headline in Europe is going to continue to be directionally negative.”



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