Fossil Inc. (FOSL) is set to report third-quarter 2014 results after the market closes on Nov 11. Last quarter, this global consumer fashion accessories maker and distributor posted a positive surprise of 2.08%. In fact, the company has delivered positive surprises in the last four quarters, with an average surprise of 7.23%.
Let’s see how things are shaping up prior to the announcement.
Factors to Consider This Quarter
Strong top-line growth driven by a double-digit increase in global watch sales has been the company’s strength over the past several quarters. Product innovation and continued momentum of the Fossil brand have also been growth catalysts.
However, though the company has been delivering positive comparable store sales (comps) internationally driven by continued strengthening of the Fossil, Skagen and Michael Kors brands, it has been posting sluggish comps in the U.S. since the past few quarters due to a volatile retail environment. The leather business has also not been doing too well.
For the third-quarter of 2014, Fossil expects sales to increase approximately 7.5% to 9%, much lower than the prior-year sales growth of 18.4% as a sluggish macroeconomic environment continues to remain a headwind.
The company expects earnings in the range of $1.77 – $1.84 per share in the third quarter, higher than $1.58 per share reported last year. Operating margin is anticipated in the range of 16.7% to 17.2% for the third quarter, lower than 17.4% margin in the third quarter of 2013.
We believe that though lower outstanding share count owing to share buybacks will continue to support earnings, higher operating expenses are expected to diminish the impact of higher sales coming from a solid portfolio of watches in the coming quarter.
Earnings Whispers?
Our proven model does not conclusively show that Fossil is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.
Zacks ESP: The ESP for Fossil is 0.00% as both the Zacks Consensus Estimate and the Most Accurate Estimate stand at $1.82 per share.
Zacks Rank #3 (Hold): Fossil’s Zacks Rank #3 when combined with an ESP of 0.00% makes surprise prediction difficult.
We caution against stocks with Zacks Ranks #4 and #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Other Stocks to Consider
Other stocks in the consumer staples sector that have both a positive earnings ESP and a favorable Zacks Rank are:
Zumiez Inc (ZUMZ) with an Earnings ESP of +3.85% and a Zacks Rank #2 (Buy).
The Kroger Co. (KR) with an Earnings ESP of +3.28% and a Zacks Rank #2.
Mens Wearhouse (MW) with an Earnings ESP of +2.30% and a Zacks Rank #3
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