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Fossil Shares Drop on Guarded Guidance

First-quarter sales and profits beat estimates as watch sales rise 17.2%.

Shares of Fossil Group Inc. retreated in after-hours trading Tuesday following disappointing guidance issued in conjunction with better-than-expected first-quarter results.

This story first appeared in the May 14, 2014 issue of WWD.  Subscribe Today.

For the three months ended April 5, the Richardson, Tex.-based watch and accessories firm reported net income of $66.3 million, or $1.22 a diluted share, 8.2 percent below the $72.2 million, or $1.21, reported in the first quarter of 2013. The first-quarter result was 5 cents a share better than the $1.17 in earnings per share expected, on average, by Wall Street analysts. Year-ago results included an 11-cent benefit related to the acquisition of the company’s joint venture in Spain.

Revenues also beat analysts’ estimates, growing at a 14 percent clip to $776.5 million versus year-ago sales of $680.9 million and analysts’ estimates for sales of $771.6 million. With a greater percentage of sales coming on higher-margin products, gross margin expanded 150 basis points to 57.1 percent of sales.

 

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The company said that wholesale revenues were up 13 percent and direct-to-consumer sales up 18 percent despite a 2.4 percent decline in comparable sales as increases in Asia-Pacific and Europe were offset by comp declines in North America. Sales of watches rose 17.2 percent, to $601.4 million, while leather sales were down 3 percent to $99.7 million and jewelry sales rose a third to $56.5 million.

“Our growth was driven by strong performance in watches, with both Fossil and our multibrand portfolio delivering solid increases,” said Kosta Kartsotis, chief executive officer. “Our jewelry business accelerated, more than offsetting the challenges we continue to see in the leathers business.”

During a conference call with analysts, Kartsotis said the launch of Emporio Armani watches at the Baselworld exhibition was met with “very favorable reviews” and that the company remains on track for the fall launch of Tory Burch watches.

Shares fell 5 percent, to $105.83, in after-hours trading, after a 0.6 percent decline, to $111.45, in regular trading. Second-quarter guidance for EPS of between 90 and 97 cents was below the Wall Street view of $1.16, and full-year guidance for EPS at between $6.90 and $7.30, versus the $7.20 analysts’ estimate, appeared cautious to investors impressed by the company’s first-quarter “beat.”

Kartsotis told analysts questioning the conservative tone that moneys freed by margin improvement would be used to expand Fossil’s retail footprint and for “expanding our print media campaigns and our digital and social media presence.”