Citigroup analysts said that the global watch industry will generate more than $60 billion in sales in 2013. The industry is highly fragmented but dominated by a few players. There is a strong competition between companies like Fossil Inc (NASDAQ:FOSL), PVH Corp (NYSE:PVH) and Ralph Lauren Corp (NYSE:RL). Further, the industry is showing good momentum with big brands like Movado and Tag Heuer, pushing their sales and having celebrities modeling their products (think Roger Federer and Brad Pitt).
The combined sales of these companies are just $16 billion and given the $60 billion target for the entire industry, you can imagine the opportunity that these companies have to grow just by increasing their market share.
Depending on the brand you love the most you can choose any of the above companies. But I would like to present Fossil, which had an amazing recent quarter and has posted a stellar performance.
Founded in 1984 by two brothers, Fossil designs and manufactures primarily watches and jewelry as well as sunglasses, wallets, handbags, belts, shoes and clothing. Besides its namesake brand, it also makes watches for brands such as Adidas, Michael Kors Holdings Ltd (NYSE:KORS), Emporio Armani, Burberry, DKNY, Diesel and Armani Exchange.
In February 2013, it reported its 4Q results, which beat consensus estimates. Its premium quality watches proved attractive to customers leading to a 14% increase in revenue and a 21% increase in its EPS versus last year. The increase in sales was due to double-digit growth in its global watch sales. Further the company’s direct-to-consumer segment posted a 20.4% increase due to higher sales from its repositioned jewelry products. The company’s jewelry business, which has been a drag on sales (bringing down Europe’s sales by almost 25% in the third-quarter) improved modestly.
Despite currency headwinds, the gross margin increased 80bps due to fewer off-price sales, growth in its outlet channel, production efficiencies and improved product and segment mix. As a result the operating margin also increased 60bps, despite a 15% increase in operating expenses due to the addition of Skagen, store expansion and infrastructure investments in Asia.
The company is focused on growth and expansion. It plans to expand in Asia and Europe due to the strong growth numbers in the recent quarter. Further, it has also been expanding its product portfolio through partnership agreements and acquisitions, which I have mentioned below.
Its acquisition of Skagen benefited all regions, especially Europe, which grew 7.6% vs. flat growth in the previous quarter. Further, in February 2013, it signed a global licensing agreement with designer Tory Burch for watches and expects to launch by 2014. In January 2013, it also acquired the Latin American distribution business of Bentrani Watches, which will help to expand its reach in 16 Latin American countries. Also, its 2011 partnership with designer Karl Lagerfeld is expected to launch an exclusive collection of watches for men and women in 1Q13.
The most important driver of growth for Fossil Inc (NASDAQ:FOSL) will be its arrangement with Michael Kors Holdings Ltd (NYSE:KORS). Michael Kors is the star of the luxury market posting strong revenue growth due to its exemplary product mix. Its strong growth will definitely garner huge benefits for Fossil.
Coming to the numbers; based on the above Fossil Inc (NASDAQ:FOSL) expects FY13 sales to increase 10% to 11% (vs. analyst expectation of 10.6%) with EPS of $5.85 and $6.15 (vs. analyst expectation of $6.08).