Shares of watch retailer Fossil, Inc. (NASDAQ:FOSL) are set to edge higher on robust watch demand and strong global growth ahead, especially in Asia.
Fossil is a global designer, marketer and distributor of watches, jewelry and other fashion accessories. The company manages a diverse brand portfolio with Fossil, Michele, Relic and Zodiac brands. Additionally, the company licenses third party brands such as Diesel, DKNY, and Adidas. The company operates internationally, generating about 50 percent of sales in the U.S, more than 30 percent in Europe, and in excess of 10 percent in Asia Pacific.
Fossil has dominant market share in the moderate priced watch category with stellar international growth potential. The company's vast market share is one of its best attributes. Fossil is vertically integrated along its supply chain and has a diverse horizontal network of license partners, giving it a competitive advantage against peers to dominate the middle market watch arena.
"Given these strong market characteristics, we like to compare FOSL's stock dynamics to other category killer names like Intel in semiconductors," Jefferies analyst Randal Konik wrote in a note to clients.
Meanwhile, the recent Skagen acquisition follows other recent expansions including the Karl Lagerfeld license partnership, whose watches will be launched in the first quarter of 2013.
"We believe FOSL's superior management team and top notch design/distribution capabilities will continue to attract further partners which should prove to be very lucrative over the long term," the analyst noted.
Fossil is expected to benefit from the watch cycle, which is still in the early innings as the current cycle started in late 2009, and the analyst expects it to last 3-5 years. This would be similar to other fashion crazes such as handbags, low profile footwear that gained momentum during the last decade. With innovative new designs/materials and compelling brands, significant opportunity still lies ahead for Fossil.
"The beauty of the watch cycle is that it is based on a need for fashion rather than function (meaning more frequent purchases) and we like the addressable market of both men and women," Konik added.
The analyst, who has a "buy" rating on Fossil shares, said he expects upward EPS revisions to resume in 2012 as costs are leveraged and the margin structure elevates.
"With margins and returns likely headed higher, we think EPS beats, the multiple expands, and the stock rises over the coming quarters," said Konik, who raised the price target on Fossil shares to $160 from $125.
In fiscal 2011, Fossil said its net income increased 15.5 percent to $294.7 million from $255.2 million last year. Earnings per share increased 22.3 percent to $4.61 from $3.77 a year-ago. Net sales grew 26.4 percent to $2.6 billion from $2.0 billion the prior year.
Shares of Fossil have gained 65 percent in the past one year and have been trading between $69.57 and 134.98. They touched a new 52-week high on Wednesday at $134.99 and closed up $1.56, or 1.19 percent to $132.18.