Fossil Inc. (FOSL) is set to report second-quarter 2014 results after the market closes on Aug 12. Last quarter, this global consumer fashion accessories maker and distributor posted a positive surprise of 2.52%. Let’s see how things are shaping up prior to the announcement.
Factors to Consider this Quarter
Fossil brand has been driving consistent sales growth in the watch category which led to positive comparable store sales in the international markets for the past 5 years. The Skagen brand has also contributed meaningfully to the increase in watch sales since its acquisition in Aug 2012. In fact, the company has delivered positive earnings surprises in the last four quarters owing to strong results. Even with the positive results in the last few quarters, the company has provided a not-so-good outlook for the second quarter.
The company has anticipated a decline in year-over-year figures for the second quarter. Fossil expects sales to increase approximately 8% to 9.5%, softer than the prior-year sales growth of 11.4%. The company expects earnings in the range of 90 cents to 97 cents per share, lower than $1.15 per share reported last year. The company expects operating margin in the range of 10.5% to 11% for the second quarter, much lower than 15.1% margin in the second quarter of 2013.
The company has been witnessing sluggish comparable store sales in the U.S. since past few quarters due to weak traffic. Poor footfall in the stores has been impacting the business, especially at its full price stores owing to the tough retail environment. We expect the macro-economic headwinds to continue to persist for some more time. In addition, the company’s leather business has not been doing too well as the category is highly competitive and promotional in the wholesale channel.
Though the company is resorting to promotional techniques to drive traffic, we are not sure whether these would prove beneficial, as increased competition leads to giving more-than-planned discounts, which in turn results in margin loss.
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: ESP for Fossil is 0.00% as both the Zacks Consensus Estimate and Most Accurate Estimate stand at 96 cents 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 Rank #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:
Pinnacle Foods Inc (PF), with an Earnings ESP of +3.03% and a Zacks Rank #2 (Buy).
Supervalu Inc (SVU), with an Earnings ESP of +9.09% and a Zacks Rank #3.
Inventure Foods Inc (SNAK), with an Earnings ESP of +5.56% and a Zacks Rank #3
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