Fossil Q4 Profit Narrows But Still Beats Estimates

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fossilRichardson, TX—Higher costs cut into Fossil Inc.’s fourth quarter profit but the watch and accessories company still beat estimates. And gave a positive forecast for its first quarter and full year 2014.

For the quarter ended Dec. 28, Fossil posted Tuesday afternoon net income of $148.5 million, or $2.68 a share, compared with net income of $151.1 million, or $2.51 a share, a year ago. (Fossil’s aggressive stock buyback program helped the increase too.) The figure, though down 1.7% from a year ago, still beat analysts’ estimate for $2.43 a share.

Net revenue increased 12% to $1.06 billion from $947.7 million last year, ahead of analysts’ estimate for $1.02 billion.

Wholesale business was up 13% in the United States helped by sales of watches and jewelry which offset a decline in leathergoods. Shipments increased to Canada and Latin America as well as the United States.

The company’s direct-to-consumer sales, which include 543 stores, increased 9% while global retail comp sales were down 1.3% with increases in Asia Pacific and Europe. North America was down.

Leathergoods Sales Disappointing

Net sales of watches increased 14%.

Operating margin decreased 100 basis points to 20.6% of net sales compared with 21.6% a year ago. Gross margin widened 50 basis points to 57.4%, primarily driven by a greater sales mix of “higher margin products, a favorable regional distribution mix given the growth in international markets, the acquisition of distributors in Latin America and Spain as well as foreign currency benefits from a significantly stronger euro. These benefits were partially offset by the impact of higher sales to off-price partners and promotions in its outlet stores to drive traffic during the competitive holiday period.”

“We’re very pleased with our fourth quarter results, which exceeded our expectations and concluded a successful year where we made significant progress on many of our strategic initiatives,” said CEO Kosta Kartsotis. “We leveraged our leadership position in lifestyle watches, gaining share in the growing global watch market, with many brands in our portfolio posting solid increases. The Fossil brand delivered sales growth in all regions this year and we expanded the Skagen brand globally. We extended the reach of our business in key newer markets, like China, where our business grew more than 50% for the year.”

Speaking to analysts on a conference call, Kartsotis said the company’s leather business failed to meet fourth quarter expectations. “Handbags is a very competitive category right now,” he said, noting that Fossil is working on new designs.

Fossil plans to launch Tory Burch watches in the second half of this year, beginning with select stores most the designer’s own shops.

When asked about the advent of so-called smart watches, Kartsotis hinted that Fossil may be working on its own version.

“Anything that attracts attention to the wrist is good for us, particularly with a whole generation that doesn’t wear watches,” he said. “We’re in a dialogue with tech companies.”

Looking ahead, Fossil projects first quarter earnings per share of $1.10 to $1.18 on sales increases of 12.5% to 14%. Analysts’ estimate expects $1.30 a share on sales growth of 11% to $758 million.

For 2014, Fossil forecast per share earnings of $6.90 to $7.30 on revenue increases of 8% to 10%. Analysts’ consensus is for per share profit of $7.22 and revenue growth of 10% to $3.53 billion.



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