It’s been a long time since I wore a watch. Why would I need one when I have a cell phone that tells me the time? However, plenty of people wear watches as a fashion accessory and they’re buying them from Fossil (NASDAQ:FOSL). Fossil has brought new life to a product category that I thought would go the way of the dinosaurs. Does that mean the stock similarly accessorize your portfolio?
Fossil sees itself as a fashion accessories company rather than a time keeper. It sells men’s and women’s fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, footwear, cold weather accessories and apparel.
Fossil has been growing steadily. For example, in the last year its sales reached $2.2 billion, up 31% from a year earlier, and its net income grew 83% to of $275 million. Fossil’s market capitalization is $7.1 billion — up a head-slapping 185% in the last year.
Fossil’s recent first-quarter results were way ahead of expectations. Its profit of 86 cents a share blew away the Zacks consensus estimate of 66 cents. Fossil’s sales were up 35.1% to $537 million, reflecting strong double-digit sales growth across all of operating segments — including watch sales, growth in the jewelry category and the expansion of leather categories.
In short, Fossil is creating value for consumers and that is being reflected in its booming financial results in a global economy that is not quite as robust. But is Fossil also doing its part for shareholders? In a nutshell, yes. After all, it’s producing positive EVA Momentum, which measures the change in “economic value added” (essentially, profit after deducting capital costs) divided by sales. In 2010, Fossil’s EVA momentum grew 7%, based on 2009 revenue of $1.5 billion, and EVA rising to $112.7 million from $5.9 million.
But the stock is somewhat expensive — trading at a price-to-earnings-to-growth (PEG) ratio of 1.34 (where 1.0 is considered fairly valued). Fossil’s P/E is 27.42 on earnings expected to climb 20.4% to $5.55 a share in 2012.
Since the stock is a bit expensive, I would consider whether to buy this stock after a broad market correction. Events in Greece could easily provide such an opportunity. But global gloom is not slowing down Fossil’s financial performance so far.
Peter Cohan has no financial interest in the securities mentioned.
