As former supermodel Heidi Klum is fond of saying about the fashion industry, “One day you’re in, the next day you’re out.” The same thing could be said about Wall Street — especially this week, when many investors are suffering whiplash from the stock market’s wild ride.
Consider Fossil (NASDAQ:FOSL), which designs and manufactures “vintage inspired” watches, clothing and accessories. Between Jan.1 and July 19, the stock rose nearly 85%; between July 19 and Aug. 9, it dropped 39%. On Wednesday, FOSL had recovered 3.82% to close at $85.29.
So what’s making this uber-chic brand look less well-heeled these days? Chalk it up to higher Japanese material and Chinese labor costs that led to a 5.7% dip in second-quarter earnings. Add to that substantially higher income taxes and a 5% to 6% hit from the weak dollar, and the slip was inevitable.
Except that FOSL’s second-quarter earnings released this week were pretty good. Fossil reported net income of $51.4 million (80 cents per share) for the quarter, down slightly from $54.5 million (still 80 cents per share) for the same quarter in 2010 — Fossil held EPS near steady by repurchasing some shares. Revenues rose 35% in the quarter to $556.7 million up from $412.6 million this time last year. Those results beat analysts’ consensus estimates of 75 cents per share in earnings on $536 million in revenues.
However, the company pared back its profit outlook for the full year from an expected $4.61 per share to between $4.44 and $4.50. Still, FOSL is not a stock to kick to the curb like last season’s shoes. Despite the uncertain economy, sales are expected to rise 22% to 24% during the next two quarters. Wholesale sales in North America rose 36% in the second quarter, while same-store retail sales increased 22%. The company’s catalog and Web commerce sales grew 26%.
Watch sales, which rose 32%, are a big winner — particularly elite designer names like Marc Jacobs, Armani Exchange and Michael Kors. Among other accessories, handbag sales jumped 44%. But Fossil’s biggest edge lies in its international market penetration — particularly growth in Asia.
The fundamentals aren’t bad, either. Fossil set a new 52-week high of $134.98 on July 20. At $85.29, Fossil is trading 100% above its 52-week low of $42.51 last August. With a market cap of $5.40 billion, FOSL has a price/earnings-to-growth ratio of 1.25, indicating that it’s slightly overvalued.
Debt position is good: The company has $355.25 million in total cash compared to total debt of just $9.69 million. With a return on equity of 28.07% and year-over-year quarterly earnings growth of 55.50%, Fossil has solid upside potential — so long as a double-dip recession doesn’t come along and quash the growth plans of the entire sector.
Bottom line: FOSL is a power brand with growing sales, global expansion and solid fundamentals. Its stock just happened to get mugged by bears in the broader market panic this week. The good news: This premium name can be picked up now at a discount price.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks mentioned here.
