Texas-based Fossil Inc. (FOSL) reported robust second-quarter earnings of 80 cents per share, substantially beating the year-earlier earnings of 25 cents and the Zacks Consensus Estimate of 33 cents. The better-than-expected results were mainly attributable to strong sales of watches in the U.S., Asia and Europe.
Total revenues increased more than 30% year over year to $412.6 million in the reported quarter, surpassing the Zacks Consensus Estimate of $381 million. The results were driven mainly by strong worldwide increase in watch sales, as well as growth in the jewelry category in North America and Europe.
Gross profit rose nearly 42% year over year to $236.9 million and gross margin was 57.4% in the quarter compared with 52.9% in the year-ago period. The result was attributable to the increase in the higher-margin watch products.
As a percentage of net sales, operating expenses decreased to 41.8% in the second quarter compared to 45.8% in the prior-year quarter.
Operating income jumped approximately 186% year over year to $64.3 million in the second quarter while operating margin climbed 850 basis points to 15.6%, due to the increased total revenue, gross margin expansion and lower operating expenses as a percentage of sales.
North American wholesale revenue increased nearly 38% to $155.9. However, on a constant currency basis, North American revenue grew 37.0%, driven by innovative products and continuous improvements in the fashion watch category.
European wholesale revenue rose about 22% year over year to $107.7 million. On a constant currency basis, European revenue increased 30.0%, driven by slight improvements in the economic environment and resurgence in the fashion watch category.
The Asia-Pacific wholesale business jumped nearly 37% year over year to $46.4 million in the quarter, while on a constant currency basis, revenues increased 28.8%, driven by solid increases in watch and leather categories across the broader region.
Overall, wholesale business revenues climbed nearly 32% year over year to $310.0 million in the second quarter. The company experienced robust demand for its private-label watches at mass-market outlets during the quarter.
Direct-to-consumer revenues increased approximately 27% (up 28% on a constant currency basis) to $102.6 million, fueled by an 8.4% hike in the number of company-owned stores as well as a 15.5% comparable-store sales increase. E-commerce revenues increased 44.2% on a constant currency basis.
Fossil exited the quarter with cash and cash equivalents of $443 million, inventory of $297.5 million and debt of $7.9 million. During the quarter, Fossil repurchased 293,000 shares of common stock for $11.2 million. Subsequent to the end of the second quarter, the company completed its $20 million share repurchase authorization and announced an additional $30 million authorization, which it expects to complete by the end of 2010.
Fossil expects its third-quarter net sales to increase in a range of 25% to 27% and earnings per share (EPS) to range between 68 cents and 72 cents. The EPS guidance includes 2 cents of unfavorable currency impact related to the strengthening of the U.S. dollar since the third quarter last year.
For the fourth quarter, Fossil expects net sales in a range of 14% to 16% and EPS to range between $1.12 and $1.18. This EPS guidance includes 6 cents per share of unfavorable foreign currency translation. Consequently, the fiscal 2010 EPS will range between 3.13 and $3.23.
We remain impressed with the company’s second-quarter results and believe that Fossil has the opportunity to increase its revenues with the enhancement of its core Fossil brand and expansions in its direct business as well as product categories.
However, mounting competitive pressure within accessory, apparel and footwear product categories of existing companies is a cause for concern. Hence, we maintain our Neutral recommendation for the stock.