Thursday, June 23, 2011

Will Investing in Fossil Revive Your Portfolio?

It's been a long time since I wore a watch. Why would I need one when I have a cell phone that tells me the time? Well, there are plenty of people that wear watches as a fashion accessory and they're buying watches from Fossil (NASDAQ: FOSL). Fossil has brought new life to a product category that I thought would go the way of the dinosaurs. Does that mean it will put pep in your portfolio?

Fossil sees itself as a fashion accessories company rather than a time keeper. It sells men's and women's fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, footwear, cold weather accessories and apparel.

It operates globally through different channels -- wholesale, retail stores (department stores, specialty retail locations, specialty watch and jewelry stores, owned retail and factory outlet stores, and mass market stores), web sites, and third-party distributors.

Fossil has been growing steadily. For example, in the last year its sales reached $2.2 billion, up 31% and its net income of $275 million was 83% higher than the year before. Fossil's market capitalization is $7.1 billion -- up a head-slapping 185% in the last year.

Fossil's first quarter 2011 results were way ahead of expectations. Its 86 cents a share earnings were 30% ahead of Zacks Consensus Estimate of 66 cents. Fossil's sales were up 35.1% to $537.0 million reflecting strong double-digit sales growth across all of operating segments and major businesses -- including watch sales, growth in the jewelry category and the expansion of leather categories.

In short, Fossil is creating value for consumers and that is being reflected in its booming financial results in a global economy that is not quite as robust. But is Fossil also doing its part for shareholders? In a nutshell, yes. After all, it's producing positive EVA Momentum, up 7% -- from 2009's EVA of $5.9 million to 2010's EVA of $112.7 million and 2009 revenues of $1.5 billion.

But the stock is somewhat expensive -- trading at a Price/Earnings to Growth (PEG) ratio of 1.34 (1.00 is a reasonable PEG). Fossil's P/E is 27.42 on earnings expected to climb 20.4% to $5.55 in 2012.

Since the stock is a bit expensive, I would consider whether to buy this stock after a broad market correction. Events in Greece could easily provide such an opportunity. But global gloom is not slowing down Fossil's financial performance.


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