Fossil Q2 Report Shows Rebound

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Natalie watch from Fossil’s fall collection

Richardson, TX—After a sales miss in its first quarter, Fossil rebounded Tuesday with a better-than-expected 12% increase in profits as sales accelerated across regions and in its wholesale division.

For the quarter ended June 30, Fossil posted net earnings of $57.3 million, or 92 cents a share from $51.4 million, or 80 cents a share, a year earlier. On an adjusted basis the company earned 93 cents a share.

Net revenue climbed 14% to $636.1 million helped by the company’s acquisition of Skagen Designs which added a $25.2 million life in sales. In total, watch sales rose 17% and leathergoods were up 8%.

Those figures easily surpassed analysts’ average estimate for earnings of 78 cents a share on sales of $635.9 million.

Noting the better-than-expected performance, Mike Kovar, executive vice president, chief financial officer, noted: “Across each of our geographical segments we experienced acceleration in wholesale sales growth in comparison to our first quarter of 2012. Constant dollar sales of watches worldwide increased by 23.2% and included contributions from almost all major brands, including Skagen. In Asia, we saw constant dollar sales grow by 27.2% demonstrating the success of our investments in this opportunity and the heightened consumer demand for Fossil and our multi-brand watch portfolio.”

Revenue from Fossil’s wholesale division rose about 14% to $481.9 million. Its North American wholesale revenue jumped 18.2% on a constant currency basis, primarily driven by increase in the watch and jewelry sales volumes and leathergoods. Excluding the sales related to Skagen-brand products, the division reported net sales growth of 14.7%

‘Watch Trends Remain Favorable’

Net wholesale sale in Asia-Pacific leaped 27.2% on a constant currency basis, driven by increases in the company’s watch sales especially in China, Japan and South Korea.

In Europe, wholesale net sales grew 14% on a constant currency basis. The increase came on the back of increased watch shipments. Sales to third party distributors contributed to the sales growth, but a repositioning of Fossil-brand jewelry had a negative impact on jewelry sales.

Fossil’s Direct-to-Consumer segment, which includes more than 400 stores, catalog and e-commerce, net sales grew 17.7% on a constant currency basis, “primarily due to profits in the comparable store sales and increase in the average number of company-owned stores in the quarter.”

Fossil’s gross margin held at 56% in the quarter.

Share of Fossil surged 32% to $91.92 on Tuesday after the company’s strong performance—and marked a turnaround from its first quarter when its stock fell upon worries about declining sales in Europe, a big inventory load and a miss on gross margin.

Fossil “is still a solid growth story,” said BB&T Capital analyst Scott Krasik who noted the market reacted as if none of first quarter mishaps had happened.

For the third quarter, Fossil expects earnings of $1.15 to $1.17 a share on an 11% revenue increase. Analysts’ consensus expects $1.37 a share.

Moreover, Fossil’s new full year earnings forecast for adjusted earnings between $5.29 to $5.34 a share, down from $5.30 to $5.40 a share, still managed to be in line with analysts’ estimates for $5.28 a share.

“There is a lot of uncertainty and lack of visibility in the global marketplace,” said Kosta Kartsotis, Fossil’s ceo, told analysts, noting a stronger dollar could hinder overseas sales. “We feel it’s prudent for us to plan our guidance more considerably. Our brands remain strong and in high demand with consumers. Watch trends remain favorable.”



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