The combined sales of these companies are just $16 billion and given the $60 billion target for the entire industry, you can imagine the opportunity that these companies have to grow just by increasing their market share.
Depending on the brand you love the most you can choose any of the above companies. But I would like to present Fossil, which had an amazing recent quarter and has posted a stellar performance.
Founded in 1984 by two brothers, Fossil designs and manufactures primarily watches and jewelry as well as sunglasses, wallets, handbags, belts, shoes and clothing. Besides its namesake brand, it also makes watches for brands such as Adidas, Michael Kors Holdings Ltd (NYSE:KORS), Emporio Armani, Burberry, DKNY, Diesel and Armani Exchange.
4Q results
In February 2013, it reported its 4Q results, which beat consensus estimates. Its premium quality watches proved attractive to customers leading to a 14% increase in revenue and a 21% increase in its EPS versus last year. The increase in sales was due to double-digit growth in its global watch sales. Further the company’s direct-to-consumer segment posted a 20.4% increase due to higher sales from its repositioned jewelry products. The company’s jewelry business, which has been a drag on sales (bringing down Europe’s sales by almost 25% in the third-quarter) improved modestly.
Despite currency headwinds, the gross margin increased 80bps due to fewer off-price sales, growth in its outlet channel, production efficiencies and improved product and segment mix. As a result the operating margin also increased 60bps, despite a 15% increase in operating expenses due to the addition of Skagen, store expansion and infrastructure investments in Asia.
Outlook
The company is focused on growth and expansion. It plans to expand in Asia and Europe due to the strong growth numbers in the recent quarter. Further, it has also been expanding its product portfolio through partnership agreements and acquisitions, which I have mentioned below.
Its acquisition of Skagen benefited all regions, especially Europe, which grew 7.6% vs. flat growth in the previous quarter. Further, in February 2013, it signed a global licensing agreement with designer Tory Burch for watches and expects to launch by 2014. In January 2013, it also acquired the Latin American distribution business of Bentrani Watches, which will help to expand its reach in 16 Latin American countries. Also, its 2011 partnership with designer Karl Lagerfeld is expected to launch an exclusive collection of watches for men and women in 1Q13.
The most important driver of growth for Fossil Inc (NASDAQ:FOSL) will be its arrangement with Michael Kors Holdings Ltd (NYSE:KORS). Michael Kors is the star of the luxury market posting strong revenue growth due to its exemplary product mix. Its strong growth will definitely garner huge benefits for Fossil.
Coming to the numbers; based on the above Fossil Inc (NASDAQ:FOSL) expects FY13 sales to increase 10% to 11% (vs. analyst expectation of 10.6%) with EPS of $5.85 and $6.15 (vs. analyst expectation of $6.08).
Concerns
Fossil Inc (NASDAQ:FOSL) is poised for growth but I would like to point to two main concerns – Europe and its margins.
The biggest concern is its low sales in Europe. As mentioned above Skagen has helped its European business to grow in the latest quarter, but it is also important to note that Skagen generated $19.2 million of the total sales. That means, without Skagen, Fossil is still experiencing a tough time in Europe.
The company posted a startling 21.6% operating margin in 4Q12, which the company itself does not expect to continue. The company has guided for the operating margin to fall to 16.5% to 17% for FY13. Given that Fossil derives the majority of its revenue from watches, it should be able to post much higher margins versus its peers Ralph Lauren and PVH Corp (NYSE:PVH) (15% and 10%, respectively).
However, I do not consider the above to be of a serious nature, because the company is taking necessary steps to mitigate them.
Competitors
As mentioned above, Fossil Inc (NASDAQ:FOSL)’s key competitors include PVH Corp (NYSE:PVH) and Ralph Lauren Corp (NYSE:RL). The difference between these companies is their pricing. While Fossil sells watches as low as $95, PVH Corp (NYSE:PVH) and Ralph Lauren Corp (NYSE:RL) sell at $200.
Ralph Lauren faced a tough patch in 2012 due to weak sales in Europe and its decision to phase out stores and boutiques operated by local partners in China, replacing them with company-run shops. It has forecasted for strong growth in the coming year based on strong demand in America and Europe as well as its e-commerce business.
PVH more than doubled its net profit in 4Q12 due to strong growth in its brands Calvin Klein and Tommy Hilfiger. It expects continued momentum in these brands with guidance in line with analyst expectations. However, it also mentioned that its recent purchase of Warnaco, which makes Calvin Klein jeans and underwear, would hurt EPS by $0.25 cents, rather than $0.35 boost it had previously expected.
Conclusion
In comparison with its peers, Fossil Inc (NASDAQ:FOSL) is a less expensive stock with a PE of 16 and has been able to post strong results in the past. It is a good industry player and its future expansion plans coupled with its strong past performance and cost management, definitely makes it a lucrative investment.
The article Watch Out for This Growth Story originally appeared on Fool.com and is written by Sujata Dutta.
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