Should You Buy This Fashion Company

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

Fossil’s (NASDAQ: FOSL) stock price has been quite volatile for the last one month. The company’s share price gained in early October post Citigroup analyst Oliver Chen’s upgrade. However it gave up all those gains after the recent earnings report.

I am bullish on the company’s prospects and would recommend buying it keeping in mind the following factors:  

Growth in Asian Markets 

With an increasing middle class population throughout Asian (Japan, China and Korea) there lies a huge untapped market for Fossil. It has already laid down its plans to capture the Asian market by developing infrastructure and manufacturing facilities. Revenue from the Asian markets now contributes 14% and is expected to grow 30% within next 3-4 years. Its strategy of targeting the gap between premium range and lower range products will boost its revenue in the long run. It is launching a series of Swiss products (like Burberry watches for $1,000) to target this segment. This expected demographic shift is further supported by CLSA analyst Barbara who believes that China will have ~250 million people by 2015 to enter into the middle class segment. 

New stores: 

Fossil is planning to open 50 new stores by the end of 2012, half of which will open in international markets. Globally, Fossil is operating with 413 stores (Sep12) and is planning to open its company owned outlets, which will increase its reach in the direct to consumer segment.

 Other positive catalysts which makes it a buy: 

1.  Fossil sell part of its products under the Michael Kors Holdings Ltd (NYSE: KORS) brand, which is expected to have yearly sales of $4.4 billion by 2017 (1.47 billion 2012).

2.  Its 51% stake in Swiss Technology Productions (STP) has increased its production capacity. With this additional capability, it is better positioned to target growing demand of luxury watches in markets like China.

3.  Along with the majority stake in STP, its acquisition of Skagen is set to become another growth driver in the long run. Skagen’s considerable presence internationallly (European and emerging Asian markets) will help Fossil to expand its brands. Given its strong and established distribution channels and its marketing expertise  it will serve a ready market for Fossil.

4.  Fossil’s multiple expansion layouts with brand extension and its dominant market share

5.  Excellent EPS growth, reasonable debt to equity levels (0.10), and a notable ROE makes it an attractive investment.

While Fossil’s long term fundamentals look intact, its major competitors, Guess (NYSE: GES) and Swatch Group, do not seem to pose a threat to its business. Operating margins of Guess have declined from17% in 2009 to 15.5% in 2012.  Also, its sales declined 6% YoY last quarter against Fossil’s sales growth of 15% Y/Y. Swatch Group is also not doing too well. Its stock declined ~10% in stock since introduction of EUR-CHF floor of 1.20 in September.

Summing up all growth fundamentals, Fossil has a strong business model and diversification across geographies and brands positions it better than its peers, which should lead to higher revenues. With expected growth of over 15% and low forward P/E of 13.79x, the stock definitely appears to be a good buy.

ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of Fossil and Guess?. Motley Fool newsletter services recommend Fossil and Guess?. 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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