Fossil (FOSL) Shares Decline Nearly 40% on Weakened Guidance

Shares of watch and accessory maker Fossil (FOSL: Charts, News) plunged nearly 40% on Tuesday after it steeply cut its guidance for the rest of the year. With that one day loss, Fossil has given up all its gains since the beginning of the year. The Richardson, Texas-based company provided weak guidance for the current quarter, expecting earnings between 77 to 79 cents per share on a 16% rise in revenue.

Analysts had expected earnings of 94 cents per share on a 17% increase in revenue. For the full year, Fossil decreased its earnings outlook by 10 cents to a range between $5.30 and $5.40 per share. Analysts were expecting Fossil to earn $5.65. Revenue is now expected to increase 16%, missing expectations for 17% growth. The company attributed its lowered expectations to weakness in Europe and Asia.

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Fossil's alarming guidance cast a long shadow over its otherwise solid first quarter earnings. The company reported a first quarter profit of 93 cents per share, or $58.1 million, a 4.2% increase over the prior year quarter. Its revenue rose 9.8% to $589.5 million. Retail same-store sales increased by 7.7%. Direct-to-customer sales, which includes its e-commerce arm, grew 18%. Its wholesale segment, which provides Fossil products to a wide range of retailers such as Neiman Marcus, Nordstrom (JWN: Charts, News), Target (TGT: Charts, News) and Wal-Mart (WMT: Charts, News), posted a sales increase of 7.5%. Although its numbers appeared strong, CEO Kosta Kartsotis expressed dismay with its first quarter earnings. "During the first quarter we were unfortunately not firing on all cylinders," stated Kartsotis.

Fossil also manufactures watches which are licensed to well-known brands such as Michael Kors (KORS: Charts, News), Burberry, (DKNY: Charts, News), Diesel, Armani and many others. Its licensing model is similar to the one used by Italian eyewear manufacturer Luxottica (LUX: Charts, News), which licenses its eyewear to a wide range of designer labels.

Although Europe and Asia were considered attractive markets several years ago, fueling Fossil's stock meteoric rise on an Apple-style (AAPL: Charts, News) growth trajectory, fears of another European crisis and Chinese slowdown have weakened forecasts. A weakened Euro has also hurt Fossil's top and bottom lines in the troubled region. "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." stated Fossil CFO Mike Kovar.

Across all segments, gross margin slid slightly from 56.2% to 55.8%. Fossil's stock climbed from $12 per share in March 2009 to an all-time high of $139 a month ago.

Fossil's forward-looking earnings were also adversely impacted by decreased sales of its jewelry and eyewear products. During the quarter, Fossil decreased its distribution of eyewear in the United States, and shuttered its optical frame operations completely in Europe, where it faces stiff competition from local brands. For the full year, Fossil still anticipates a declining Euro and the threat of contagion to weigh on the stock.

Despite current troubles, Fossil continues to expand its range of products. Last month, the company acquired Skagen Designs for $225 million in cash and 150,000 Fossil shares. This complements its 2001 acquisition of high-end watchmaker Zodiac. Both subsidiaries are expected to widen the spectrum of Fossil's brand appeal.

Shares of Fossil are now attractively valued fundamentally, trading at 12 times forward earnings with a 5-year PEG ratio of 1.1. This suggests that the shares may be bottoming out, although at its current rate of decline, the stock is a likely target for short sellers.

Other News About FOSL
Fossil Shares Plummet As Questions About Growth Arise
Fossil shares give up the year's gains in a single day.
Fossil outlook disappoints, shares plummet
Is Fossil's growth story over? Other Stocks in the News
Luxottica Group Exec Insights: Western Europe, Wholesale Order Patterns
Luxottica could keep succeeding in Europe despite the downturn.
Yahoo CEO Apologizes For Resume Deception But Refuses To Leave
Yahoo CEO Scott Thompson attempts to weather the PR storm.

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Published on May 10, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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