Markets: News  

Fossil proves skeptics wrong

NEW YORK (MarketWatch) -- What a difference a few months make.

Shares of Fossil Inc. surged 32% to $91.92 Tuesday to become the best performer on the S&P 500 Index (SPX) after the watch maker assuaged worries about business slowing in Europe and Asia.

The upside reflected some short covering, analysts said. On May 8, Fossil (FOSL) tumbled 38% in its second biggest decline in history, after the Richardson, Texas-based company reported unexpected weakness in Germany and Korea, its top markets in Europe and Asia, while sales in Italy and Spain turned negative. See story on Fossil's May warning.

Come Tuesday. Fossil's second-quarter profit beat analysts' estimates. The company said sales to department stores and other customers have picked up from the first quarter across all geographies.

In Europe, wholesale sales rose 14% and increased 27% in Asia. In "strategically identified markets" of Korea, Japan and China, they jumped 29%.

Fossil's own retail and other direct-to-consumer sales rose 18% because of increased store openings. On a comparable-store basis, they rose 1.8%.

Sales of watches, excluding currency conversion impact, rose 23%.

Fossil "is still a solid growth story," said BB&T Capital analyst Scott Krasik. He added that investors had been concerned about Fossil reporting a decline in European wholesale sales, slowing Asian sales, bloated inventory and a miss in gross margins.

"None of this happened," Krasik commented.

Europe represents about one-third of its total sales while Asia about 15% to 20%, according to analysts.

Encouraging signals from Fossil also sent up shares of its rival Movado Group Inc. (MOV) by 13%.

Despite the gain, Fossil's stock was still more than a third below its all-time closing high of $138.30 on April 9. Macroeconomic issues remain an issue. The company's third-quarter forecast fell short of Wall Street expectations as it guided a sales shift to the fourth quarter. Still, on a full-year basis, Fossil lowered its outlook to a profit range of as much as $5.25 a share from its May guidance of as much as $5.40 a share.

"There is a lot of uncertainty and lack of visibility in the global marketplace," said Chief Executive Kosta Kartsotis, adding that a big part of the reduced profit target came from a stronger dollar that would hurt converted overseas sales. "We feel it's prudent for us to plan our guidance more considerably. Our brands remain strong and in high demand with consumers. Watch trends remain favorable."

Investors also looked past a corresponding reduction in full-year earnings outlook and sent Warnaco Group Inc. (WRC) , maker of Calvin Klein jeans, up 12%. The company, which also makes Speedo swimsuits and other branded items, reported a second-quarter profit that also topped expectations. It reported a 4.9% gain in Asian constant-dollar sales and an 18% surge in Latin America. However, U.S. sales declined 1.1% while European sales, also excluding the currency-conversion impact, were down 7.1%.

"The eye of the storm may be passing" for Warnaco, said ISI Group analyst Omar Saad. "Although expectations going into the quarter were low, and flat constant-currency sales growth is hardly a reason to celebrate, the fact that Europe did not get worse (as many had expected) and LatAm reaccelerated were encouraging."

PVH Corp. (PVH) , parent of the Calvin Klein and Tommy Hilfiger labels, rose 6.7%. GUESS? Inc. (GES) was up 5.4%.

"Consumers are still buying Calvin Klein jeans and Fossil watches more than we expected," said Brean Murray Carret & Co. analyst Eric Beder in an interview. "The world hasn't collapsed. This time last year, European economy was in a free fall. Customers completely pulled back on shopping, but now the shock of it was gone. People are getting that international isn't dead yet and it still has potential for upside."