Fossil Shares Plunge As Europe Woes Hurt Business

05/08/2012| 05:22pm US/Eastern

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--Fossil sees more softness in Europe

--Company missed on color trend

--Shares fall 38%

(Contains additional information throughout, including a new top.)

 
   By Karen Talley 
   Of  
 

Jewelry and accessory maker Fossil Inc. (>> Fossil, Inc.) said the weak European economy has hurt sales, a revelation that removed more than a third of the company's market value Tuesday and rattled shares of other retailers.

Fossil--which designs watches, jewelry, handbags, belts and clothing--said its same-store sales fell 5% in Europe because of the weaker euro; the tough economic environments in Italy and Spain; and a repositioning of products, including the exiting of the optical-frames business in Europe and the pulling back of Fossil's eyewear products to U.S. department stores.

In addition, the company admitted it was hurt by raising prices on low-end products, a move it quickly changed, and not having enough spring color in its watch and accessory offerings.

"During the first quarter, we were unfortunately not firing on all cylinders," Chief Executive Kosta Kartsotis said on a conference call.

Fossil, which has seen its annual revenue double over the past five years, posted a 4.2% rise in first-quarter earnings, provided second-quarter guidance below Wall Street expectations and lowered its full-year earnings projections. The outlook surprised investors because it included the company's recently completed acquisition of watch maker Skagen Designs in April for $231.7 million.

"Momentum slowed for Fossil as European economic dismay, negative comps for the key Korean market and the repositioning of the Fossil-branded jewelry led to lower-than-expected top-line result," said Eric Beder, retail analyst at Brean Murray Carret & Co.

The results and outlook sent shares plunging, with the stock falling $47.25, or 38%, to $78.52. The decline wiped out the stock's entire 2012 gain of $46.41, or 59%, before Tuesday.

Other retailers with either significant exposure to Europe or a luxury bent also fell. Guess Inc. (>> Guess?, Inc.) lost 5.5% to $26.50, Michael Kors Holdings Ltd. (KORS) dropped 5.3% to $41.75, Saks Inc. (>> Saks Inc) declined 4.4% to $10.23, Ralph Lauren Corp. (>> Ralph Lauren Corp) lost 3.2% to $163.38, Coach Inc. (>> Coach, Inc.) fell 1.8% to $70.80, and Tiffany & Co. (>> Tiffany & Co.) retreated 1.5% to $64.75.

"There's a pretty big distinction to be made here," Caris & Co. analyst Dorothy Lakner said, noting that weakness in Europe is not new for other companies as it is for Fossil, "where Europe sales rose 18% in 4Q and 27% for all of 2011."

For the year ahead, the company anticipates economic softness to continue in Europe. Fossil cut its full-year per-share earnings outlook by 10 cents, now projecting $5.30 to $5.40 a share, and raised its sales guidance to a 16% increase from its February forecast of 15% sales growth. Analysts polled by Thomson Reuters were expecting earnings of $5.56 a share on 17% revenue growth.

The company also offered a weak outlook for the current quarter, expecting per-share earnings between 77 cents and 79 cents on 16% sales growth. Analysts surveyed by Thomson Reuters had expected 94 cents a share on a 17% sales increase.

For the first quarter, Fossil reported a profit of $58.1 million, or 93 cents a share, up from $55.8 million, or 86 cents a share, a year earlier. Sales rose 9.8% to $589.5 million. Its February projection was for per-share earnings of 90 cents to 92 cents a share on 15% sales growth, below analysts' estimates at the time.

Retail same-store sales rose 7.7%. Direct-to-customer revenue increased 18%, while wholesale sales were up 7.5%. Fossil's wholesale customers range from high-end sellers like Neiman Marcus Group Inc. and Nordstrom Inc. (>> Nordstrom, Inc.) to low-price retailers like Target Corp. (>> Target Corporation) and Wal-Mart Stores Inc. (>> Wal-Mart Stores, Inc.).

First-quarter sales of Fossil jewelry were down on a comparable-store basis "as we are in the middle of a repositioning that cost us some sales, especially in Europe," Kartsotis said.

Despite the news Tuesday, some observers remain bullish on the company. "Fossil's business model is far from broken, with a powerful fleet of licensed brands, and remains a double-digit growth story over the longer term," Brean Murray's Beder said.

-By Karen Talley, Dow Jones Newswires; 212-416-2196; karen.talley@dowjones.com

--Melodie Warner contributed to this article

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