Sometimes companies have problems just sticking to what they know. It seems that this is the case with Fossil Group Inc (NASDAQ:FOSL), and their different divisions that are not necessarily contributing to the company’s image or profits. The truth of the matter is, Fossil Group Inc (NASDAQ:FOSL) is a great watch manufacturer, this division is growing faster than the rest, and the company needs to make the smart decision and reward their shareholders with better results.
Diversified Sometimes Is Diworsified
As Peter Lynch used to say, sometimes a company’s diversification became diworsification, because they would buy or get into a business they did not know enough about, and their results would suffer. When it comes to Fossil’s competition, they each offer a lineup of high-quality items, but Fossil Group Inc (NASDAQ:FOSL) needs to just stick to watches.
Fossil has to deal with competition from much larger companies like PVH Corp (NYSE:PVH), which owns brands like Tommy Hilfiger and Calvin Klein. The company also faces such heavyweights like Ralph Lauren Corp (NYSE:RL), and though they manufacture Michael Kors Holdings Ltd (NYSE:KORS) watches, this company also competes in other segments as well.
If you want proof that these brands all are premium brands, you only need to look at their gross margins. Fossil Group Inc (NASDAQ:FOSL)’s gross margin is the second lowest of the bunch, but still stands at 55.59%. Only PVH Corp (NYSE:PVH) carries a lower margin at 53.82%. Ralph Lauren Corp (NYSE:RL) and Michael Kors Holdings Ltd (NYSE:KORS) both command gross margins of better than 59%. When you can get margins of 50% plus in any business, you know you have pricing power.
The problem is, while each of these other companies is diversified into clothing, accessories, shoes, and other goods, Fossil essentially operates three divisions. Fossil Group Inc (NASDAQ:FOSL)’s fastest growing and largest division is their watches unit, which makes up more than 75% of total revenues. Their other two units are leathers and jewelry. The bad news for investors is, their leathers and jewelry business are dragging down the star of the show, which is Fossil watches.
Good Results Made Better
It’s not that Fossil Group Inc (NASDAQ:FOSL)’s results are terrible. In fact, the company’s current quarter was not bad at all. The company’s overall sales increased 15%, and adjusted Earnings Per Share (EPS) increased 23.66%. When you compare these results to the expectation of just 5.7% revenue growth from PVH Corp (NYSE:PVH), or the 6.6% expected revenue growth at Ralph Lauren Corp (NYSE:RL), Fossil looks very good.