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What's in the Works for Watchmakers Fossil and Movado?


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Fossil has been the watchmaker that keeps on ticking higher mainly thanks to its partnership with upscale powerhouse Michael Kors Holdings .  But Fossil recently reported US weakness in watch sales. Add in a warning for lower holiday traffic, and it's no surprise the stock recently came off 52 week highs. However, the company noted the strength of the Michael Kors license sales on its third quarter earnings.

Fossil reported a 0.5% U.S. same-store sales decline. CEO Kosta Kartsotis said, "In the United States, traffic remains a headwind, and there are concerns about consumer confidence as we go into the holiday season. That can certainly impact our business and our near-term expectations."

Fossil surprised on third quarter earnings per share ($1.58 vs. $1.36 expected) and revenue ($810 million vs. $772.46 million expected) in addition to margin expansion of 160 basis points to 57.4%. Analysts were disappointed by Fossil's guidance calling for lower than expected growth and the worrying US weakness. This followed Macy's comments that watches were weak on its last two earnings calls, as fellow Fool Prabhat Sandheliya pointed out.

Friends or frenemies?
Past the holiday season and US noise, Michael Kors may buoy Fossil in the longer term. The strength in Michael Kors cannot be denied and the strength of Fossil's products for Michael Kors was mentioned several times on the call. Together they are making a big move into men's watches and Kartsotis expects strong sales particularly in Asia for their men's watch collaboration.

However, Fossil is boldly expanding its leather accessories, directly competing against the powerful Michael Kors brand and in Asia, no less. Asia is part and parcel of the bullish thesis on Michael Kors.

However, as fellow Fool Andres Cardenal reports, Michael Kors lags behind Tiffany and Coach in sales per square foot. Possibly to hedge its bets against any future demand decline for Michael Kors brands, Fossil is cozying up to three other designer brands: Karl Lagerfeld, Emporio Armani, and Tory Burch. Fossil launched the Karl Lagerfeld jewelry and watches line early this year, and CEO Kartsotis predicts it will be ready for a "prime time" position  a few years down the road.

Emporio Armani Swiss watches are launching with expanded Asian distribution in 2014, but it's the much anticipated Tory Burch collaboration, debuting in 2014, that could jet-fuel Fossil shares. Tory Burch is privately held, but it is a major competitor to Michael Kors.

Springing forward
Whether it will be new designer brands or Michael Kors that keeps the momentum going forward for Fossil, Kartsotis strongly hinted about another catalyst down the line: smartwatches.

As far as smart watches go, as you know, we've done those for a number of years. It's really quite fascinating to see all the interest in it. And as far as we're concerned, anything that gets people to wear watches on their wrists is good for us. There's a whole generation of people that grew up with cell phones and never worn a watch, so we can inspire them through branding and storytelling or through technology to wear watches. 

Kartsotis expects batteries to get smaller and smartwatches to become less clunky as they explore opportunities in wearable tech. A Michael Kors or Tory Burch brand smartwatch would be a very hot ticket for the status-conscious fashionista.

Are the inner workings in good repair?

FOSL Chart

FOSL data by YCharts

Fossil's share price appreciation hasn't been as impressive as partner Michael Kors' since Michael Kors debuted in December 2011, but over four years Fossil's total return is 737%. The stock trades at a trailing earnings multiple of 19.81.

Rival Movado Group has its own licensing business with Coach, Hugo Boss, Lacoste, and Tommy Hilfiger, and reported a 27% rise in the sales of these licensed brands on its 2014 third quarter earnings call. Its namesake Movado brand timepieces take No. 1 in market share in the US luxury watch business with price points of $500-$1,500, and globally Coach watches were "trending at 25% plus in sales." 

However, both companies will need to keep an eye on Tiffany. The upscale jeweler announced it will offer its own Tiffany brand of watches soon. With strong performances in Asia for Tiffany and Michael Kors Holdings, and increasing opportunity for Fossil in the region, it was surprising to hear Movado CEO Richard Cote characterize Asia as,"a little bit challenging."

Movado offers a 0.7% yield at a 22 trailing earnings multiple, and EPS has grown an amazing 77.4% in the last year. Its net profit margin of 12% compares favorably to Fossil's 12.40%. Movado reported $160 million in cash with no debt at the end of the third quarter.

Despite having the highest trailing earnings multiple of these companies at 32, Michael Kors has been quite the performer and it has the highest net profit margin of 19.20%. Michael Kors also has no debt.

MOV Total Return Price Chart

MOV Total Return Price data by YCharts

A tough call
If you think Asian economies are trending higher consider Michael Kors or Fossil with their bold joint expansion plans. If you think there's an upswing due for the U.S. you could buy Movado, which is already growing U.S. share, especially if you think Coach is undervalued.

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The article What's in the Works for Watchmakers Fossil and Movado? originally appeared on Fool.com.

AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Coach and Fossil. The Motley Fool owns shares of Coach. 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.

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