However, if you compare Fossil to Michael Kors Holdings Ltd (NYSE:KORS), the numbers start to work against the company.
While it’s true that Michael Kors Holdings Ltd (NYSE:KORS) sells more than just watches, this is the key product that Fossil licenses from the company. With Kors’ overall sales jumping by 57%, you can imagine the popularity of the brand is helping drive Fossil’s sales as well. In fact, Fossil not only saw growth in North America and Asia, but the company’s wholesale revenue increased 14% in Europe as well. Given the well-known economic issues in the region, these results are very good.
That being said, the breakdown of where the company’s growth came from is telling. Fossil’s fastest revenue growth came from watches, with a 22.61% increase. By comparison, jewelry didn’t do badly, with a 7.91% increase in sales, but leathers reported a 1.15% decline. Given that Fossil is expected to grow earnings by 15% over the next few years, imagine how analysts’ expectations would change, if the company rid itself of these slower growing divisions.
What Would Be The Result?
Fossil currently sells for a forward Price/Earnings (P/E) ratio of 16.74, which is a premium to its expected growth rate of 15% of about 112%. Their two larger competitors, Ralph Lauren Corp (NYSE:RL) and PVH Corp (NYSE:PVH), also sell for a premium to their growth rates. However, Ralph Lauren sells for about 180% of its expected growth, and PVH Corp (NYSE:PVH) sells for 131% of its growth rate. By contrast, Michael Kors Holdings Ltd (NYSE:KORS) actually carries a forward P/E that is just 84% of its expected growth rate.
While I could easily make the argument that investors consider buying Kors’ stock instead of Fossil, it’s not that simple. Fossil is less of a pure play on luxury items, and some investors aren’t comfortable relying on high-end goods to drive sales. In addition, Fossil retired over 4% of their outstanding shares in the last year. Fossil also carries about $90 million in net cash and investments.
While Fossil’s balance sheet looks stronger than PVH Corp (NYSE:PVH), with a debt-to-equity ratio of 0.68, it doesn’t rate as highly as Ralph Lauren Corp (NYSE:RL) or Kors. Kors has over $400 million in net cash and investments, and Ralph Lauren Corp (NYSE:RL) carries well over $1 billion. Since Fossil’s management has shown a willingness to reward shareholders, it’s possible that the proceeds from a sale of the leathers and jewelry business could be used for further share repurchases. In addition, the company’s growth rate would certainly increase, as this quarter alone, their revenue would have move up from 15% growth to 22% growth.
Fossil is a great company hiding inside of a good one. If the company took the bold step to spin off or sell their leathers and jewelry business, this stock would be a bargain. Until that time, Michael Kors Holdings Ltd (NYSE:KORS) has better margins, more cash, and a much higher growth rate. The opportunity is available, and if Fossil eliminated its slower growing divisions, investors could watch as the stock takes off.
Chad Henage has no position in any stocks mentioned. The Motley Fool recommends Fossil. The Motley Fool owns shares of Fossil. Chad is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Watch Out for This Company originally appeared on Fool.com is written by Chad Henage.
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