What’s a watch?
Watches are also a fashion accessory — specifically, one of the only such accessories that men can wear. Most men don’t wear earrings, rings, or necklaces as part of an outfit, but a watch will accompany a suit tastefully.
Glancing at your watch is more polite than taking out your phone. When someone looks at their watch, they can only be checking the time. On a phone, they could be texting, checking Facebook, or doing any number of things considered rude during a meeting.
Roughly 90% of Americans use cell phones, and only 19% wear watches. But 19% is still 42 million consumers who want a watch — and that doesn’t include the massive international market.
Fossil’s success
Fossil Group Inc (NASDAQ:FOSL) produces fashion accessories for men and women, including handbags, belts, and jewelry, and yes, watches. The company owns the brands Fossil, Michele, Relic, Zodiac, and the recently acquired SKAGEN. During the first quarter of 2013, Fossil saw earnings per share increase 25% to $1.15, beating analyst estimates of $0.93.
The most recent quarter marked one year since Fossil Group Inc (NASDAQ:FOSL)’s acquisition of SKAGEN. The company spent 2012 integrating its acquisition, and now SKAGEN has begun adding to sales and margins. Fossil Group Inc (NASDAQ:FOSL) is using the brand’s designs to expand in Europe, where SKAGEN saw double-digit increases in sales last quarter. Fossil Group Inc (NASDAQ:FOSL) recently launched a SKAGEN jewelry branch as an additional growth driver.
Internationally, Fossil Group Inc (NASDAQ:FOSL) is working to capture more of the Asian market. It’s developing infrastructure to support the growing businesses that are fueled by the growing Asian middle class. This emerging class is drawn towards watches and other accessories made by global brands. The Asian market led Fossil’s international growth with a 18% increase in sales during the most recent quarter.
Specifically in China, the company operates directly in “first tier” cities such as Beijing and Shanghai, and works with partners in to get products to the remaining second- and third-tier cities. It is important to reach those smaller cities because their demand for luxury brands is growing at a yearly rate of 8.4%, compared to 4.8% in first tier cities.
Competition
Fossil’s competitors are other watchmakers such as Movado Group, Inc (NYSE:MOV) and Swatch (OTC:SWGAY).
Movado Group, Inc (NYSE:MOV) makes fine watches for wholesale and retail markets. The company sells its watches through brand-name retail stores such as Coach, Tommy Hilfiger, and Lacoste, as well as through independent distributors. Movado Group, Inc (NYSE:MOV) recently had a good first quarter of its fiscal 2014, with sales increasing 6%, and an 18% increase in operating income to $10 million.
Swatch also sells watches and jewelry through brand-name retail stores. The company recently had impressive quarterly earnings growth of 26.8% on revenue growth of 15.1%. The company trades on over-the-counter markets and does not have as much information available.
Between Fossil and Movado Group, Inc (NYSE:MOV), Fossil has a slightly higher gross margin of 56% compared to Movado Group, Inc (NYSE:MOV)’s 54%. Fossil also has a lower PEG ratio of 1.25 versus Movado Group, Inc (NYSE:MOV)’s 1.68. This shows that Fossil is a better value for its growth rate and that it will retain more of its growing sales.
Conclusion
Fossil Group Inc (NASDAQ:FOSL)’s international growth and brand recognition led the company to crush analyst expectations during the past quarter. In the excitement of the positive earnings report, the stock price has shot up, and Fossil is now trading at 21.52 times earnings. I believe the company has a good future, but I would wait for the stock to pull back a little before buying.
The article 1 Timely Stock You Need to Watch originally appeared on Fool.com and is written by Ben Popkin.
Ben Popkin has no position in any stocks mentioned. The Motley Fool recommends Fossil. The Motley Fool owns shares of Fossil and Movado Group (NYSE:MOV). Ben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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