Fossil Inc (NASDAQ:FOSL) has grown tremendously in the 29 years since its founding. Even over the past decade, the company’s revenues have more than tripled from $781 million to over $3 billion expected this year. What stood out to me when researching Fossil Inc (NASDAQ:FOSL) was the low valuation relative to the growth rate of the company, so I decided to investigate a little more and see if Fossil might be worth a look.
Fossil Inc (NASDAQ:FOSL) offers a variety of watches, sunglasses, and leather accessories. Fossil also makes custom products on behalf of various other companies and organizations through licensing agreements, such as the University of South Carolina Fossil watch that’s on my wrist as I write this. On that note, watches provide the majority of the company’s income (72%), with the rest coming from other accessories. Licensed merchandise (like my watch) made up 45% of the company’s sales last year.
Fossil’s products are mainly sold through department stores and specialty retailers, although the company does have a chain of Fossil-branded stores, and sells through several e-commerce websites.
Growth Strategy and Valuation
Still growing its footprint at a rapid pace, Fossil Inc (NASDAQ:FOSL) plans to open over 70 stores this year, with a good portion of these in international markets. The company’s strategy is to offer the most up-to-date products in regards to fashion trends, and to tailor their product offerings to each geographical region.
Fossil Inc (NASDAQ:FOSL)’s sales have increased at an average annual rate of 16.2% since 2006, which is even more impressive when you consider that this includes the financial crisis years. Also very impressive is that while increasing the sales so quickly, Fossil managed to raise its profit margins from 10.2% to 18.4% in that same time period.
Despite all of this impressive growth, Fossil trades at a relatively modest valuation of 16.9 times TTM earnings. Not only does the consensus call for 15% annual earnings growth going forward, but Fossil also has a very impressive balance sheet, which features about $300 million in cash and almost no debt.
Alterative investments to Fossil Inc (NASDAQ:FOSL) include other fashion timepiece makers such as Movado Group, Inc (NYSE:MOV) on the smaller side, and Michael Kors Holdings Ltd (NYSE:KORS) on the larger end.
One of the most well-known watchmakers in the marketplace, Movado Group, Inc (NYSE:MOV) manufactures watches under a variety of brand names including Movado, Ebel, Coach, Hugo Boss, Tommy Hilfiger, Lacoste, and others. Movado shareholders have done very well over the past several years, with shares up from a low of $4.65 after the financial crisis when anything related to luxury spending was considered poisonous, to the $30 range currently.
Despite these impressive gains, Movado trades for a relatively low 13.6 times TTM earnings. Additionally, Movado has $168 billion in cash and no debt, which is perhaps even more impressive than Fossil’s stash, considering Movado’s market cap is under $770 million (Fossil’s is $5.8 billion). So, backing out the cash, Movado Group, Inc (NYSE:MOV) trades for just 10.6 times earnings.
Michael Kors Holdings Ltd (NYSE:KORS) is a larger and more diverse company, producing a full line of men’s and women’s apparel and accessories, including a line of watches that has grown tremendously in popularity over the past few years. The company trades at a lofty valuation of over 30 times earnings; however they have the growth rate to justify this. 2013’s earnings of around $1.86 per share are projected to rise to over $3.00 by 2015. I’m hesitant to invest in Kors; simply because I’m not sure that its high growth is sustainable, meaning that they are getting too big to grow at 20% a year for much longer. More about this in a future article…
While Michael Kors Holdings Ltd (NYSE:KORS) is a bit too expensive to look enticing to me, both Fossil Inc (NASDAQ:FOSL) and Movado seem very attractive right now, even after the strong upward moves in both companies’ stocks lately. The difference is that as a smaller, less diverse company, Movado is a bit riskier and more volatile. However, the cash piles on both balance sheets look pretty nice, as do the low valuations. If you believe (as I do) that the economy will continue to improve significantly for another few years, it’s hard to go wrong with either.
The article Fashion Watches Are Growing Fast: What’s The Best Play? originally appeared on Fool.com and is written by .
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