Fossil, Inc. (FOSL), a fashion accessories company, reported Tuesday a decline in profit for the third quarter, hurt by stronger U.S. dollar as well as lower net sales, despite strong direct to consumer sales. Quarterly earnings per share and net sales, however, topped the market projections. Further, the Richardson, Texas-based company lifted its fourth quarter and fiscal 2009 earnings forecast, citing the positive momentum at its direct to consumer and watch segments, as well as better currency environment.
Third-quarter net income declined 3.3% to $35.28 million from $36.47 million in the year ago quarter. On a per share basis, earnings fell 3.7% to $0.52 from $0.54 last year. The company noted that the latest quarter results included an unfavorable $0.03 per share impact related to the stronger U.S. dollar.
On average, six analysts polled by Thomson Reuters expected the company to report earnings of $0.42 per share for the quarter. Analysts' estimates typically exclude special items.
Net sales for the quarter fell 6.9% to $381.36 million from $409.76 million last year, yet beat five Wall Street analysts' consensus revenue estimate of $376.88 million. The translation impact of a stronger U.S. dollar reduced quarterly net sales by about $7 million. On a constant dollar basis, consolidated net sales decreased 5.2% primarily due to an 11.5% fall in net sales from the company's wholesale businesses, partially offset by a 22.4% growth in net sales in its direct to consumer segment.
The company was projecting third-quarter earnings in the range of $0.38 to $0.42 per share, including a negative currency impact of about $0.05 per share related to the stronger U.S. Dollar, and net sales were anticipated to decrease in a range of 6% to 9%.
Commenting on the results, Mike Kovar, executive vice president and chief financial officer, stated, "Our Third Quarter results surpassed our expectations, driven by retail sales stemming from company-owned stores, a more favorable product sales mix and increased expense leverage. Although we have managed our inventories to much lower levels than last year, we remain well-positioned to benefit from any uplift in retail sales during the holiday season."
Segment-wise, Direct to consumer net sales climbed 20.8% on a reported basis, and 22.4% in constant dollars from last year, primarily due to a 21.8% increase in the average number of company-owned stores open during the quarter and constant dollar comparable store sales gains of 6.4%. This was despite the current challenging economic environment and positive retail comps in the prior year quarter. Net sales from the e-commerce businesses increased 7% in constant dollars.
Net sales in the U.S. wholesale segment were down 6.6%, mainly on a 17.1% decrease in the accessories business, partially offset by a 2.7% increase in the watch business. Net sales in the accessories business were negatively impacted by new door roll-outs in the prior year quarter associated with its jewelry and cold weather categories.
International wholesale net sales declined 14.5% on a constant dollar basis, including a 38.7% drop in combined sales to third-party distributors and the company's Spain joint venture. Wholesale net sales in Europe fell 17.9% on a reported basis, and 14.3% on constant dollars, mainly due to lower results in both the watch and jewelry categories with declines across all European markets. Excluding shipments to third party distributors, sales from the company's Asia Pacific wholesale operations grew 15.5% on a constant dollar basis.
Third-quarter gross profit fell 6% to $210.74 million from $224.18 million a year ago, while gross profit margin increased 60 basis points to 55.3% from 54.7% in the prior year quarter. Operating income decreased 10% to $57.36 million, or 15% of net sales, from $63.74 million, or 15.6% of net sales in the previous year.
In the preceding second quarter, Fossil reported a 34% decline in net income to $16.62 million or $0.25 per share, hurt by 10.6% decline in net sales to $315.86 million. On a constant dollar basis, worldwide net sales decreased 4.8%, mainly due to an 11.1% decline in net sales from the company's wholesale businesses.
Among peers, International fashion house Guess?, Inc. (GES), for the October-ended third quarter, expects earnings of $0.46 to $0.49 per share, total net revenue of $465 million to $485 million. The company has said earlier that its expectations include the unfavorable impact of a shift of European sales from the third quarter into the second quarter. The favorable impact of the shift on second quarter earnings was $0.09 per share, which was previously forecast to be $0.03 to $0.04 per share. Analysts currently expect the company to earn $0.51 per share on revenue of $ 482.57 million for the third quarter.
For the nine months of fiscal 2009, Fossil's net income decreased 24.6% to $69.22 million from $91.83 million a year ago. Earnings per share for the period fell 22.6% to $1.03 from $1.33 last year. Nine-month net sales decreased 8.8% to $1.02 billion from $1.12 billion in the previous year. The company's gross profit margin decreased to 53.6% from 54.4% last year, and operating margin fell to 10.2% from 13.2% in 2008.
Looking ahead, Kovar stated, "As a result of the positive momentum in our direct to consumer and watch segments, coupled with a better currency environment, we have raised our net sales and earnings expectations for the fourth quarter. Using the mid-point of our fourth quarter guidance, our fiscal year 2009 net sales and diluted earnings per share are expected to be near the record levels of fiscal year 2008, when normalized for taxes and impairment charges. We believe this to be a significant accomplishment in the current environment and attribute this to our diversified and innovative business model, strict inventory and expense management and the dedication and efficiency of our many employees around the world."
For the fourth quarter, Fossil lifted its earnings per share outlook to be in a range of $0.82 to $0.86, from previous guidance of $0.74 to $0.80. In the same quarter a year ago, the company had reported earnings of $0.69 per share.
At prevailing foreign currency rates, the company expects its fourth-quarter earnings forecast will be favorably impacted by about $0.17 as a result of the weaker U.S. dollar in comparison to last year. The company pointed out that its prior year results included a benefit of approximately $0.21 related to a lower effective tax rate and an unfavorable charge of about $0.11 related to trade name and store impairment.
For the quarter, Fossil currently expects reported net sales to increase in a range of 7% to 9%, with constant dollar sales increasing in a range of 2% to 4%. The company's previous forecast was that quarterly net sales growth to be in a range of flat to positive 3%.
Analysts currently expect the company to report earnings of $0.78 per share for the fourth quarter, with estimates ranging between $0.76 and $0.80 per share, while net sales are projected to be $466.82 million, representing a 0.6% growth from last year.
Fossil noted that "As the Company continues to grow its retail store base and e-commerce businesses, sales from the direct to consumer segment increase as a percentage of the total sales mix, generally benefiting profitability in the fourth quarter, at the expense of the first and second quarter when, due to seasonality, it is more difficult to leverage direct to consumer expenses against direct to consumer sales."
Further, looking ahead to the fiscal year 2009, Fossil raised earnings per share outlook to the range of $1.85 to $1.89 from previous projection of $1.63 to $1.73 per share, based upon the better-than-expected third-quarter results and its current fourth-quarter earnings per share estimate. Analysts currently expect full-year earnings of $1.71 per share.
FOSL closed Monday's regular trading session at $28.91, up $0.48, on a volume of 713,200 shares. In the past 52 weeks, shares have been trading in a range of $11.00 to $30.85.
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