Fossil Group Inc. (FOSL) reported fourth-quarter 2013 earnings of $2.68 per share, which beat the Zacks Consensus Estimate of $2.46 per share by 8.9%. Earnings also increased 7% year over year from $2.51 per share and surpassed management’s guidance range of $2.26-$2.46 per share. Higher top-line, increased operating income and lower share count boosted earnings in the quarter, partially offset by increased interest expense and a higher tax rate.
Quarter in Detail
On a constant currency basis, Fossil’s net sales during the quarter increased 11.4% year over year to $1.062 billion, exceeding the Zacks Consensus Estimate of $765 million. Sales growth rate also far exceeded management’s expectation of a 6%-8% increase on the back of continued growth in watch portfolio, driven by Fossil and Skagen brands.
The company’s net sales comprise wholesale net sales (including North America wholesale, Europe wholesale, Asia Pacific wholesale) and Direct to consumer sales (including company-owned retail stores, e-commerce sales and catalog activities).
Worldwide net sales, on a constant currency basis, increased 12.0% to $781.8 million for the fourth quarter, reflecting sales growth across all geographic regions. This sales increase was driven by 14% growth in the multi-brand global watch portfolio. The Fossil brand grew 4% primarily driven by increases in both watches and jewelry, while Skagen sales were down 4% in the quarter. Sales of jewelry increased significantly, while leather sales declined slightly due to limited launch of leather products. A comparatively weaker U.S. dollar contributed $0.6 million to the company’s sales in the reported quarter.
Gross margin increased 50 basis points (bps) to 57.4% driven by a favorable distribution mix owing to growth in international markets, greater sales of higher margin products, the acquisition of distributors in Latin America and Spain as well as foreign currency benefits from a stronger euro. These benefits were partially offset by the impact of higher sales to off-price partners and higher promotional activity to drive traffic during the holiday season. Operating margin however declined 100 bps to 20.6% due to higher operating expenses in the quarter.
Segment Details
Net sales from the North American wholesale segment increased 13.1% year over year on a constant currency basis to $401.1 million, primarily driven by sales of watches and jewelry, partially offset by a decline in sales of leather products. Wholesale shipments increased in the United States, Canada and Latin America.
Net sales in Europe grew 13.8% year over year on a constant currency basis to $264.9 million, driven by double-digit increases in watch and jewelry categories, partially offset by a modest decline in leather. Strong performance in Germany, Spain and U.K. boosted sales during the quarter, while sales declined in Italy.
Net sales in the Asia-Pacific segment increased 12.7% on a constant currency basis to $115.8 million, driven by double-digit increases in the company’s watch and jewelry sales. China and Japan contributed significantly to the sales gain during the period.
Net sales in Direct-to-Consumer segment grew 8.8% year over year on a constant currency basis to $280.0 million, primarily attributable to global retail store sales growth, partially offset by a decrease in same store sales. Same store sales of jewelry and watch categories improved in the quarter, while leather products declined slightly.
Full Year 2013 Results
In fiscal 2013, Fossil’s earnings increased 17% to $6.56 per share and beat the Zacks Consensus Estimate of $6.32 per share by 3.8%, despite currency headwinds. Earnings also surpassed management’s guidance range of $6.15-$6.35 per share. The upswing was driven by higher operating income and lower share count, partially offset by increased interest expense and a higher tax rate.
On a constant currency basis, Fossil’s net sales increased 11.9% year over year to $3.261 billion in fiscal 2013. However, sales missed the Zacks Consensus Estimate of $3.537 billion and management’s expectation of 12%-12.75% increase, owing to a volatile retail sales environment.
Other Financial Updates
During the fourth quarter, Fossil bought back 1.0 million shares at a total cost of $120.9 million. In full year 2013, Fossil bought back 5.3 million shares at a total cost of $574.8 million. As of Dec 28, 2013, Fossil had $494 million left under its share repurchase plan.
During the quarter, the company opened 18 stores, bringing the company-owned store count to 543 at year end.
2014 Guidance
Fossil issued guidance for first quarter and full year 2014, which includes one extra week. The company expects 2014 earnings in the range of $6.90 – $7.30 per share, up 5.2% to 11.3% from $6.56 in full year 2013. Fossil expects sales to increase in the range of 8.0% to 10% in full year 2014. Operating margin is likely to be in the range of 16.5% to 17.0%.
First Quarter 2014 Guidance
For first-quarter 2014, Fossil expects sales to increase approximately 12.5% to 14.0%. The company expects earnings in the range of 99 cents to $1.07 per share, excluding 11 cents benefit related to the acquisition of the remaining interest in its Spanish joint venture. The company expects operating margin in the range of 12.25% to 13.0% for the first quarter.
Other Stocks to Consider
Fossil carries a Zacks Rank #3 (Hold). Other diversified retail wholesalers worth considering include Christopher & Banks Corporation (CBK), Foot Locker Inc (FL) and Finish Line Inc (FINL). While Christopher holds a Zacks Rank #1 (Strong Buy), Foot Locker and Finish Line hold a Zacks Rank #2 (Buy).
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