Fossil Q2 Profit Falls but Beats Forecast, Cautious on Outlook

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Fossil's Fall Magalog

Richardson, TX—Shares of Fossil Inc. plunged the most in more than five years in trading earlier today after the watch and accessories company forecast lower earnings for its fiscal year than analysts had expected.

Fossil said today that its second quarter income fell 5.7% to $51.36 million from $54.49 million in the previous year. Quarterly earnings per share remained flat at 80 cents on lower share count.

 Production Costs Increased 32% So Far This Year

Second quarter revenue continued to be strong, rising 34.9% to $556.7 million, up from $412.56 million in the preceding year, mainly due to sales growth in watches and leathergoods, in addition to a $26.9 million currency exchange due to the weak U.S. dollar. On a constant dollar basis, worldwide net sales rose 28.4%.

Comparable store sales rose 22% globally, while direct-to-customer revenue increased 26%. Wholesale sales in North America jumped 36%. Fossil reported that all of its watch brands experienced double-digit increases as sales grew 32.1% to $92.5 million. Leathergoods sales increased 30.4% to $20.7 million in the second quarter.

While the figures exceeded analysts’ average estimates that expected profit of 75 cents a share on estimate sales of $536.1 million, Fossil’s shares fell—along with many others—as the company said its production costs are increasing and it faces uncertainty about retail sales in the second half.

For third quarter, the company expected earnings of $1 to $1.03 a share on net revenue growth between 22% and 24%. But that’s below analysts’ average estimates which expected a profit of $1.23 on a 19% jump in sales, to $626 million.

Moreover, Fossil lowered its fiscal full year forecast by 4 cents from its previous forecast in May. For the year, the company now sees earnings of $4.44 to $4.50 a share. Analysts average estimates forecast $4.63.

Its gross margin fell to 56% from 57.4% as labor and other costs increased. Mike Kovar, chief financial officer, told analysts today that the company’s labor rates at the company’s China-based factories increase 32% so far this year.

‘Cannot Overlook Recent Negative Economic Events’

Despite impressive sales gains, Fossil executives are cautious about the second half.

“We certainly cannot overlook the recent negative economic events taking place,” Kosta Kartsotis, ceo, said on a conference call with analysts. “Even though we continue to experience very favorable trends across our brands and geographies, we would not expect to be immune to consumer spending cutbacks.”

Fossil’s share may have also been affected by the general downturn in stock prices since last Friday. Until now, Fossil has enjoyed double-digit year-over-year percentage revenue growth for the past five quarters with average increases of about 34.5%.

In May, Fossil rose to the highest price since its 1993 initial public offering after raising its earnings forecast.

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