Looking Beyond Fossil’s Quarter

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

Europe has been the major point of concern for all companies, especially in the retail space. Due to the debt crisis, retailers are witnessing low demand since customers have become increasingly calculative about their spending. Moreover, increasing costs have also been a problem for the industry players. Amongst all the retail players, luxury item providers are hit the hardest as shoppers cut down on their luxury spend and look for alternatives.

An apt example here is the luxury retailer Fossil (NASDAQ: FOSL) which is going through a similar phase of balancing both increasing costs and falling demand. It recently posted its third quarter earnings, which were mixed, and a lowered outlook which disappointed investors. But there is more to it.

A Mixed Package of Efforts

Though revenue increased 6% to $684.2 million, it failed to meet analysts’ estimates. A major pullback came in from the stronger dollar which lowered overseas revenue. Also, demand in Europe was weak leading to lower revenue from the region. However, Fossil’s strategy of acquiring Skagen, a Danish accessories company, proved to be quite beneficial contributing largely to the top line.

Another problem faced by the luxury retailer was increasing costs which made it increase product prices. This was not accepted happily by the customers as they avoided Fossil’s products leading to lower volumes.

Positives Points to Note…

Despite a tough environment in Europe and the other problems, Fossil managed its way out to perform well. Apart from the acquisition made in Europe to improve revenue from the region, the company also resorted to expansion. Its 43 new stores in Asia which were opened in the last one year were a major contributor to the rising revenue.

Also, increased focus on jewelry sales not only led to top line growth, but also enabled the retail segment to perform well. The stunning jewelry collection attracted customers into Fossil’s stores enabling direct-to-consumer segment revenue to rise 16% to $169 million. However, the price hike for the products scared away the wholesalers in Europe given the recent restricted spending habits of buyers.

Nonetheless, great demand from regions such as North America and Asia more than compensated for the weak performance in Europe. Luxury items have been faring well in North America as rich people seem to be unaffected by the small hiccups in the economy. Moreover, Fossil’s amazing collections tempt shoppers to buy watches which start from a price as low as $7. Additionally, the company’s continuous effort to expand in the Asian region has been quite fruitful since the market is largely untapped and has huge demand for luxury items.

A Strong Weapon…

A primary reason for Fossil’s growing watch and jewelry revenue is the fact that it manufactures it for Michael Kors (NYSE: KORS), a high-end retailer which sells almost everything. Michael Kors made its debut last December and has been a rocking performer. It has witnessed huge demand for its products and has posted great revenue growth since its inception. This has led to commendable growth of 116% in its stock price.

Customers are quite fond of Kors’ trendy watches and other accessories, and this demand is expected to continue. This will help Fossil witness further growth in its volumes. In fact, a person betting on Michael Kors’ future can bet on Fossil which may be following a similar trend since almost 12% of Fossil’s revenue is made up of watches made for Michael Kors’. Additionally, Fossil’s recent launch of jewelry for Michael Kors was quite successful and will prove to be beneficial going forward.

Fossil’s peer Coach (NYSE: COH) does not enjoy the benefit of making watches for a company like Kors. Its recent quarterly performance was also not as bright as Fossil’s with just 3% rise in earnings. On the other hand, Fossil witnessed a stellar jump of 17% in its bottom line. However, Coach’s new Legacy collection was a key driver of revenue growth. Similar to Fossil, even Coach witnessed huge demand in North America and Asia with China being the star performer.

The Bottom Line

A key problem which disheartened investors was the company’s lowered outlook which was mainly because of its concerns over Europe. However, Fossil has been trying to find ways to combat the effects of weak demand in the region. Its acquisition of Skagen Designs looks like a smart move which has already started bearing fruits. Moreover, its relationship with brands such as Kors, Diesel and DKNY looks good and a strong weapon in its arsenal. With retail segment already becoming better in Europe the company might also be able to overcome the wholesale segment’s shortfalls. Considering these points, Fossil looks like a strong company for the long term.

justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of Coach and Fossil. Motley Fool newsletter services recommend Coach and Fossil. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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