What Makes Fossil Tick? (FOSL)

Fossil (FOSL)
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When Fossil (FOSL: Charts, News, Offers) tripled its net income in the U.S, Asia and Europe in mid-August, doubling analysts’ expectations, investors flocked to the stock en masse, pushing the stock for weeks straight, where it still towers near its 52-week high despite a lagging market. North American wholesale revenue rose 31%, European wholesale rose 30% and Asia Pacific wholesale rose 11%. Its net income rose to 54.5 million, up from 16.6 million just a year ago. With a market cap of 3.25 billion, it has 435 million in cash. Just what makes this watchmaker tick in the face of thickening economic pessimism?

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Stock Analysis

Most consumers think of Fossil as a watch company, but the actual Fossil-branded line includes handbags, accessories, clothes and most recently, shoes. The revenue for Fossil is divided between European, American and international wholesale and direct-to-consumer sales through online and Fossil retail stores. Fossil sells wholesale in countries where it has a physical presence and through third-party distributors in ones where it does not. In addition, it has an invisible expanded presence in manufacturing and licensing, by producing Fossil products branded as other designer labels – including DKNY, Diesel, Burberry, Marc Jacobs, Michael Kors, Emporio Armani, Columbia Sportswear, Adidas and more. Altogether, this licensing business of producing watches and other products has provided the company with approximately a third of its net sales. These agreements are set to expire in three years, and Fossil has already begun extensive negotiations to insure that these continue. In addition, Fossil has a tiered pricing system for its own brands – it began diversifying its watch line by acquiring Swiss watch makers Zodiac and Michele, in 2001 and 2004 respectively, to attract a higher-end luxury consumer that had been comparatively absent from its primary Fossil line.

Fossil’s main profit channel, watches, accounts for two-thirds of its revenue, and is the driving force behind its blowout numbers last quarter. It sells watches in four categories – luxury (Michele), licensed designer (Burberry, Emporio, Armani), digital/analog (Allude, Callaway, Trophy) and contemporary fashion (Fossil and Relic). Luxury and licensed designer watches bring in the highest margin with retail prices ranging from $1,500 to $20,000 USD for the former and $300 to $3,000 for the latter. The digital and analog brands range from $10 to $80, and its flagship Fossil and Relic brands are priced between $50 to $500 in its retail stores, and discounted up to 50% in its outlet stores. Despite this broad price spectrum due to licensing, the company’s main focus has been in aggressively building its $50 to $200 range products, to appeal to the upper middle classes worldwide. Fossil’s net profit margin has risen to 13.7%, up from 9.3% the previous year.

Fossil can be fairly compared with another fashion success story, Coach (COH: Charts, News, Offers), in many ways. Both companies use similar tiered pricing systems to maximize the consumer base, have expanded beyond their base product and have been aggressively focused on international growth to outlive a souring American retail environment.

Fossil’s continual focus on expanding its brand beyond America has been highly favorable when compared with domestically focused competitors such as Kenneth Cole (KCP: Charts, News, Offers). With a possible rebound in the Euro, an appreciating Chinese RMB and a US dollar destined to decline, Fossil is poised in a strategic position to reap the windfall of a favorable exchange rate and skyrocketing international sales. Provided that Fossil can keep its aforementioned licensed deals, and there’s not a valid reason it shouldn’t, and continue to intelligently expand vertically by integrating various facets of fashion at multiple price points, then its growth path will continue trending upwards.

In addition to impressing current shareholders with its numbers, Fossil announced a 750 million common share buyback plan at the end of August. This news, seemingly common now for cash-rich companies during a downturn, kept the bullish pressure on Fossil shares. The stock currently trades at 52-week highs in the $47-$49 range, with a forward P/E of 13.6 and a PEG ratio of 0.82. These are bullish signals that Fossil is about to break through into new levels, and any dips could be used to begin building a position in the company that will soon be crowned the Coach of the watch world.

Other News About FOSL

Fossil Fueled for More Gains – Share repurchases fan the flame.

Fossil’s triple-time: watchmaker’s 2Q up 230 pct – A recap of the spark that fueled the rally.

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