I’ll readily admit that sometimes in the past I was too reliant on analysts projections. I’m a numbers person, and the numbers all seemed to add up for Fossil Inc (NASDAQ:FOSL) when I bought the shares. The company was expected to grow earnings by 16% to 18%, yet the shares traded at a multiple below that growth rate. The company was very successful selling watches, and their license to sell Michael Kors Holdings Ltd (NYSE:KORS) watches seemed like a gold mine. However, I ended up selling the shares about a year ago, because what analysts predicted, and what the company actually did, were two different things. That is exactly the situation Fossil Inc (NASDAQ:FOSL) investors are faced with today.
More Than A Timepiece
The watch industry has taken on more significance over the last few years, with a watch turning into a fashion accessory rather than just a timepiece. With big endorsers pushing the sale of brands like Movado, Tag Heuer, and others, plus celebrities showing off their timepieces, the industry is doing very well. In fact, industry experts expect about $60 billion in sales from the watch industry in 2013.
Of course this positive momentum has attracted new competition as well. Not only are companies like Fossil and Michael Kors going head-to-head, but PVH Corp (NYSE:PVH), which owns brands like Calvin Klein and Tommy Hilfiger also is raising its game in watch and accessories sales. Ralph Lauren Corp (NYSE:RL) had dedicated an entire site online to watches, calling them the “premier collection of iconic timepieces.”
The difference in these companies is their pricing. Fossil Inc (NASDAQ:FOSL) has the most accessible pricing with some watches starting at $95. PVH Corp (NYSE:PVH) and Ralph Lauren price their offerings at around $200 and up. Michael Kors is a premium watch brand with most priced at $250 or higher.
With a $60 billion industry at stake, the combined sales of Fossil, Michael Kors, Ralph Lauren, and PVH Corp (NYSE:PVH)total just $16.847 billion last year. You can see, any of these companies could increase their sales exponentially just by taking market share.
What A Great Quarter! It Was Great Right?
Given the tremendous opportunity in the watch business, you would expect Fossil to be flying high. The company that showed sales up 14% and diluted EPS jumped 34%. Maybe the most impressive was the company increased sales in all geographic regions, no small feat given the issues in Europe.
However, there are three major problems. First, Fossil reported growth in each region and specifically mentioned the acquisition of the SKAGEN brand as a key reason for this growth. Unfortunately the company did not provide results excluding SKAGEN. In the European division for instance, sales were up $17 million. SKAGEN generated $19.2 million in sales. It seems obvious that without SKAGEN’s contribution, overall sales in Europe would have declined.
A second issue is, the company’s operating margin was unusually high during the quarter and the company does not expect this to continue. In fact, the company’s current quarter 21.6% operating margin, is expected to fall to between 16.5% and 17% for 2013.
Given that 77% of Fossil Inc (NASDAQ:FOSL)’s business is watch sales, you would expect better margins. Fellow watch specialist, Michael Kors‘ operating margin is 32.2%. Ralph Lauren and PVH Corp (NYSE:PVH) are more diversified, but still managed operating margins of 16.49% and 14.26% respectively.
The third issue is, Fossil Inc (NASDAQ:FOSL) is telling investors to expect much less in the future. The question for investors is, do you believe what analysts expect, or what the company is saying?
This Is Either Sandbagging Or An Earnings Miss Is Coming
Some companies have become famous for sandbagging their estimates. This is the practice of saying sales and earnings will be worse, and then reporting figures that beat these lowered estimates.
The company says that full year sales should increase 10% to 11%, the average analyst has the sales increase for 2013 pegged at 10.6%. However, when it comes to EPS, the company suggested diluted EPS of between $5.85 and $6.15. The average analyst has EPS for 2013 at $6.08.
This $6.08 projection is, almost 4% above the company’s lowest number, and just 1.14% below their best outlook. Given that the company expects their operating margin to compress from 17.1% in 2012, to between 16.5% and 17% for 2013, it seems possible analysts are being too optimistic. Longer-term analysts are calling for better than 16% EPS growth, but in the next year the company is forecasting growth of between 8.5% and 14.1%.
Better Value Elsewhere
The real problem for investors is, Fossil shares trade for 16.3 times projected earnings, and if the company doesn’t deliver on this longer-term 16%+ EPS growth, shares could be marked down accordingly.
While Ralph Lauren and PVH Corp (NYSE:PVH) both sell for higher multiples at 21.3 and 18.4 respectively, each company has a broad portfolio of products that should lead to consistent results. In addition, Ralph Lauren at least pays a yield of 1%, something that Fossil Inc (NASDAQ:FOSL) investors don’t have to fall back on. The gem of the group is Michael Kors. The company is projected to grow EPS by 32% and sells for about 31 times earnings for 2013. With margins that are much higher than the competition, and market crushing sales growth, Michael Kors could be the way to go.
Fossil just turned in questionable sales growth, margins are expected to move lower, and an earnings miss could occur. This doesn’t sound like a company to believe in at the current time.
The article Who Do You Believe? The Company Or The Analysts? originally appeared on Fool.com and is written by Chad Henage.
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