The Wristwatch: Reports of My Death Are Greatly Exaggerated!

BA is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

For well over a decade, many have been declaring the watch industry dead. Apparently, watches have not gotten the memo that they're an extinct species. I know mine haven't – they're face up and ticking – and, given the sales at Fossil (NASDAQ: FOSL), it seems multitudes of their brethren also missed that memo.

Let's dispute the "cell phones will kill the watch industry" argument. Then, we'll dig into Fossil's and its competitors' numbers. 

Point 1: Watches are accessories, not solely utilitarian objects

Watches do more than just tell time – they add a touch of personality to outfits. This point applies to both genders, but it’s more relevant to men. Women have more jewelry and overall accessory choices available to them. Men don't have many (socially acceptable) ways to add a splash of individuality. 

Point 2: It’s easier to glance at your wrist than to pull out a phone

It’s easier, not to mention less conspicuous, to glance at your wrist to check the time, rather than pull out your phone (from a pocket or bag). 

Point 3: Some watches are “hardier” than phones

Taking a phone, especially a smartphone, places where it could get wet -- a run in drizzly weather, for instance -- can be dicey. These are the domains of hardier watches, often sport watches. 

In a picture...

Cell phone penetration in the U.S. (and much of Western Europe tracked similarly) went from about 10-13% in 1995 to roughly 50% in 1998-1999 to about 95% today. 

If cell phones were displacing watches to any notable degree, surely watch-centric Fossil would have had a tough time starting around the late 99s when about half the population had cell phones. 

FOSL data by YCharts

Caveat regarding smart watches 

We're entering the age of wearable tech, and Apple is expected to come out with an iWatch. If these devices prove successful, I do think traditional watch sales could be somewhat affected. They would put a dent in Point No. 2 above -- it would be just as easy to glance at a computing device on your wrist as a traditional wristwatch. 

So, this factor needs to be watched (pun intended).

Fossil

Fossil designs and sells primarily watches, but also leather goods, jewelry, and other items. Here's how its last quarter broke out by product line and division:

based on Fossil's Q1 earnings report

It sells products under its own brands, including Fossil, Relic, Skagen, Michele, and Zodiac. Michele is its fine watch brand; these watches are made in Switzerland and are mostly priced at $2,000 and above. Zodiac is its men's Swiss adventure watch brand, which dates back to the 1800s. Watches run in the $300-$1,000 range. Fossil and Relic are its contemporary fashion watch brands, and are priced from about  $50 to the mid-$200s. Skagen – a Danish brand Fossil acquired in 2012 -- has offerings in the $70 to mid-$200s range.

It also sells products under licensed brands, including AdidasMichael Kors – the hot "it" brand -- Armani, Burberry, Diesel, DKNY, Karl Lagerfield, and Marc by Marc Jacobs.

Fossil's management is known for its smart acquisitions. Unlike some competitors, it offers watches in price niches from moderate to pricey, and in a wide array of styles from sporty to glam to streamlined elegance.

Swatch (NASDAQOTH: SWGAY.PK)

Switzerland's Swatch designs, manufactures, and sells watches, jewelry, and watch movements and electronic components. Earlier this year, it announced a $1 billion deal to acquire Harry Winston Diamond's watch and jewelry brand.

It has some top brands. However, given its size -- $29.9 billion market cap to Fossil's $6.3 billion -- Fossil has more growth potential. 

Movado (NYSE: MOV) 

Movado designs and sells fine watches. It sells watches under the Movado, Coach, Concord, Ebel, ESQ, Scuderia Ferrari, Hugo Boss, Juicy Couture, Lacoste, Movado, and Tommy Hilfiger brands. 

Though it's struggled in the U.S. recently, Coach will always be a classic when it comes to handbags and other leather goods, in my opinion. Overall, however, Movado's lineup is No. 3 among this group. 

"Time" for the numbers

Company

Trailing P/E

Fwd P/E

5-Yr PEG

3-Yr Avg Rev Growth (%)

3-Yr Avg EPS Growth (%)

Net Margin (ttm) (%)

ROE (ttm) ($)

Debt/Equity (mrq)

Fossil

18.2

15.2

1.2

22.7

39.3

12.1

30.9

.1

Swatch

17.4

--

--

14.9

27.6

20.5

18.5

0*

Movado

15.8

15.7

1.6

10.1

N/A

11.5

14.5

0

Advantage

   

Fossil

Fossil

Fossil

Swatch

Fossil

 

Sources: Yahoo! Finance & Morningstar; * close to nil. Data to July 5. 

Fossil is the stand-out. Its nearly 31% ROE is outstanding. ROE is a measure of how efficiently a company uses investors' money to generate profit. Over the 5-year period to July 5, for instance, Fossil's stock returned 285% to Movado's 89% and the S&P 500's 29% (Swatch has only traded for three years) .

Its 12% margin is solid for this line of business. It's just that Swatch's margin is unusually high. 

Analysts estimate Fossil's EPS will increase 21.3% this year, 13.7% next year, and an average of 15% over five years. Swatch's EPS is expected to increase about 2,200% this year -- but that's due to the Harry Winston brand acquisition. Its 2014 and 5-year EPS growth is estimated at 11% and 1.1%, respectively. 

Movado's EPS is estimated to increase 75%, 25%, and 12%, respectively, this year, next year, and over five years. This year and next year are high because Movado had negative EPS in 2010 and 2011 and is back on track. Its five year number is lower than Fossil's. 

While one quarter is just one quarter, it's still a negative that Movado's revenue increased just 6% in its most recent quarter. Granted, EPS increased 23%, but there's only so far margin expansion can take a company. Fossil's revenue and EPS rose 15.5% and 30.1%, respectively, in its most recent quarter. 

Takeaway

Fossil appears a moderately attractive holding for long-term investors. The company has an exceptional ROE and management known for its acquisition prowess, plus it regularly beats analysts' estimates.

However, the success of smart watches, particularly Apple's rumored in-the-works iWatch should be monitored. Smart watches could cut into some traditional watch sales.  

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BA McKenna has no position in any stocks mentioned. The Motley Fool recommends Fossil. The Motley Fool owns shares of Fossil and Movado Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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