Fossil Inc. (FOSL) reported results for the first quarter 2011 on May 10, 2011. Earnings shot up by 62.3% to 86 cents per share from the year ago period. The earnings were also well above the Zacks Consensus Estimate of 66 cents.
Revenue Details
Worldwide net sales during the quarter grew 35.1% to $537.0 million reflecting strong double-digit sales growth across all of the company's operating segments and major businesses, as compared to the year-ago quarter. Strong increases in watch sales, growth in the jewelry category and the expansion of leather categories globally primarily pushed up the quarterly sales.
Further, the translation impact of a stronger U.S. dollar during the quarter increased the Company's reported net sales by approximately $5.9 million in comparison to the corresponding quarter of the prior fiscal.
Segments
Net sales from the North America Wholesale segment increased 33.9% to $52.2 million, driven by innovative product offerings and resurgence in the overall fashion watch category.
European wholesale net sales grew 34.4% year over year to $38.7 million. The resurgence of the fashion watch category and the reviving European economy led to a strong double-digit growth in the quarter.
Net sales in the Asia-Pacific Wholesale segment increased 57.4% to $22.2 million driven by increases in the company’s watch and leather categories across the region. Company-owned retail concessions also boosted the region’s increased mix of sales.
Direct-to-Consumer segment net sales grew 28.1% year over year to $24.8 million and the company’s e-commerce Business segment revenues grew 26.7% year over year.
Margins
Gross margin for the quarter grew 40 basis points (bps) to 56.2% versus 55.8% in the prior-year quarter. The upswing in gross profit margin was fuelled by favorable impact of a weaker U.S. dollar coupled with an increase in sales mix of higher margin Asia Pacific-based sales and increased gross margins achieved in the company's outlet stores.
However it was partially offset by an increase in the cost mix of sales of lower margin sales to third party distributors and a sales mix decrease from the company's Direct-to-Consumer segment in comparison to the year-ago period.
Cash and Balance Sheet
The company had cash, cash equivalents and securities of $355.3 million compared to $458.2 million at the end of the prior year. During fiscal 2010, the company invested approximately $94.5 million to repurchase approximately 1.2 million shares of its common stock.
Guidance
Concurrent with the earnings release, the company provided its outlook for fiscal 2011 and second quarter 2011. For the second quarter of 2011, net sales are expected to increase in a range of 28% to 30% while earnings are expected to be in the range of 70 cents to 73 cents.
Fossil expects fiscal 2011 net sales growth in the range of 21% to 23%, with a major portion of the increase in the first half of the year.
For fiscal year 2011, the company expects diluted earnings per share to increase in the range of $4.44 to $4.54, which include a 12-cent favorable currency impact based on weaker U.S. dollar.
Recommendation
We are encouraged by Fossil’s in-house team of dedicated designers and product specialists who help steer the company ahead by following emerging lifestyle and fashion trends to bring innovative and unique products to its customers. However, stiff competition from Guess? Inc. (GES) and difficult macroeconomic conditions are matters of concern.
We currently have a Zacks #3 Rank on Fossil shares, which translates into a short-term Hold rating.


 

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