Though Fossil Group Inc. FOSL comprehensively beat earnings in the first quarter of 2015, revenues missed the consensus due to significant currency headwinds. The company maintained its fiscal 2015 guidance. However, it expects currency woes to continue.
In the first quarter of 2015, Fossil reported adjusted earnings (excluding restructuring charge of 16 cents) of 91 cents per share, beating the Zacks Consensus Estimate of 64 cents by 42.2% and the company’s guided range of 73 – 83 cents per share.
Earnings however declined 25.4% from the prior-year earnings of $1.22 per share as favorable sales growth and a lower share base were more than offset by higher operating expenses. The company’s expenses rose in the quarter owing to the company's strategy to increase marketing and brand building activities in 2015. Higher store and infrastructure investments made in 2014 also resulted in higher expenses. However, currency pulled down first quarter earnings by 13 cents.
Quarter in Detail
This global consumer fashion accessories maker reported net sales of $725 million in the first quarter, which missed the Zacks Consensus Estimate of $747 million by 2.9%. Net sales declined 7% from the prior-year quarter due to currency headwinds and an extra week in the prior-year quarter. The sales decline was within the company’s guided range of decline of approximately 5.5% to 7.5%. Currency had a negative impact of $45.2 million on first quarter sales, while an extra week in the last year quarter led to a sales decline of $45 million.
On a constant currency basis and excluding the additional week in the year-ago quarter, net sales increased 5%, reflecting sales growth in all the three regions of Americas, Europe and Asia. On a constant currency basis and excluding the additional week in the year-ago quarter, the company also witnessed significant gains in jewelry, which grew 30% in the quarter. The Leather business gained 4%, while watches grew 3% in the quarter. The company also experienced growth in the multi-brand global watch portfolio as well as in the Fossil and Skagen brands.
Gross margin declined 180 basis points (bps) to 55.3% as unfavorable currency impact and higher promotional activities more than offset the favorable impact of regional distribution mix and price initiatives.
Moreover, operating margin declined 580 bps to 7.7% in the quarter due to a significant increase in operating expenses, ahead of management’s expectation of 6% to 7%.
Second-Quarter 2015 Guidance
For the second-quarter of fiscal 2015, Fossil expects adjusted earnings in the range of $1.18 to $1.29 per share, excluding 27 cents of currency impact and 11 cents of restructuring charges. The guidance is above the Zacks Consensus Estimate of 66 cents per share.
The company expects organic sales growth in the range of 4% to 6%, which excludes currency headwinds of 650-700 bps. The company expects adjusted operating margin in the range of 11.5% to 12.5% for the second quarter, which excludes 250 basis points negative impact from currency and 100 bps from restructuring charges.
Fiscal Guidance
Fossil expects adjusted earnings in the range of $7.00 – $7.60 per share, excluding currency impact of $1.20-$1.40 per share and restructuring charges of 35 cents. The guidance is well above the Zacks Consensus Estimate of $5.58 per share.
Fossil expects organic sales growth in the range of 3% to 7%, which excludes currency headwinds of 500-600 bps and 125 bps impact of an extra week in fiscal 2014. Adjusted operating margin is likely to be in the range of 15.2% – 16% in 2015, which excludes 250-300 basis points negative impact from currency and 70 bps from restructuring charges.
Fossil carries a Zacks Rank #4 (Sell).
Stocks to Consider
Some better-ranked diversified retail wholesalers include Citi Trends Inc. CTRN, American Eagle Outfitters, Inc. AEO and Express, Inc. EXPR. All of them sport a Zacks Rank #1 (Strong Buy).
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