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WIKI ANALYSIS
Fossil, Inc. (NASDAQ: FOSL) sells watches and other accessories such as handbags and sunglasses. The company sells goods through its own retail and online stores, as well as in many department stores such as Macy's Inc. (M) and J.C. Penney (JCP).
Fossil earned 34.4% of its sales in FY 2007 from licensing the rights to make watches and accessories with brand names such as DKNY, Emporio Armani, and Burberry. [1] Nearly two thirds of net sales came from watches. [2] Due to increased licensing and growing product lines, Fossil increased net sales by nearly $400M or 27.2% from FY 2005 to 2007.[2] Licensing has also given Fossil the power to compete at different price points, although its focus is on watches that sell from $40-$150. All of Fossil's licensing agreements will expire in the next five years and the company has started negotiations to renew them.
Although the retail industry is susceptible to U.S. Economic Cycles, 50% of Fossil's FY 2007 net sales came from outside the U.S., which helped the company grow sales 18%. [3][4] Competitors such as Kenneth Cole Productions (KCP) that have mostly domestic sales have seen their bottom line shrink as a result of economic downturns. For Fossil, international sales contribute to a favorable exchange rate and protection against lower consumer confidence in the United States.
Company Overview
Although primarily a watch company based in the US, Fossil has expanded into international markets and other areas of the fashion and accessories industry. From 1998 to 2007, revenues increased from $304.7M to $1.433B through new products and the strength of many watch licensing agreements. [5] Fossil's products are offered through several different lines including Adidas, Allude, Burberry, Christian Benet, Diesel, DKNY, Emporio Armani, Fossil, Marc by Marc Jacobs, Michael Kors, Michelle, Relic, Trophy, and Zodiac; of these, only Fossil, Michele, Relic, and Zodiac are Fossil's own brands, while the rest are licensed.
Fossil's total watch business accounted for approximately 2/3 of their net sales from FY 2005 to 2007 [2]. By using their well known brand names such as Fossil and Relic, Fossil is selling fashion accessories, eyewear, and jewelry. [6] From FY 2005 to 2007, fashion accessories contributed to 33.6%, 34.7%, and 32.8% of Fossil's net sales. [7] Fossil has also featured its apparel line through company retail stores. [6]
Fossil plans on using the Relic brand to release a line of cold weather accessories such as hats, gloves, and scarves.[8]
| Figure | 2003 | 2004 | 2005 | 2006 | 2007 |
|---|---|---|---|---|---|
| Revenue (in Millions) | $781.2 | $960.0 | $1040.5 | $1214.0 | $1433.0 |
| Operating Income (in Millions) | $109.8 | $141.5 | $109.4 | $123.3 | $186.5 |
| Operating Margin | 14.06% | 14.74% | 10.52% | 10.16% | 13.01% |
Business Segments
Fossil breaks its company down into four geographical sales segments which have all seen growth from FY 2006 to 2007.
- European Wholesale (33.8% of sales): Led by a 22.9% sales increase in licensed watches in the Emporio Armani, DKNY, Diesel, and Michael Kors lines, European Wholesale grew 27.8% from FY 2006 to FY 2007. [4]
- Other International Wholesale (16.2% of sales): In other international markets, Fossil's business model of distributing its own products gives it an advantage over smaller, more local competitors by increasing operating margins. A 35.3% increase in watch sales supported mainly by Armani, DKNY, Diesel, and Burberry helped Fossil push this market to a 35.7% increase in net sales. [4]
- United States Wholesale (32.2% of sales): US Wholesale grew 4.0% with the help of a 28.9% increase in licensed watch sales by Michael Kors and Marc by Marc. [9] Domestically, Fossil also makes handbags, leather goods, belts, and sunglasses. Net sales of these accessories increased 2.7% despite losses in leather goods and belts of 15.9% and 39.9%, respectively. [9]
- Direct to Consumer (17.8% of sales): Fossil also sells their products through their own retail stores and website. A 20.4% increase in the number of stores opened during the year and a 2.3% increase in same store sales boosted this segment's net sales by 15.6%. [10] In the end of 2007, Fossil operated 244 retail stores. [10]
In FY 2007, 34.3% of Fossil's $1.433B in net sales was from licensed products and 59.5% was from proprietary sales. [2]
| Segment | FY 2007 Sales (M) | FY 2006 Sales (M) | FY 2005 Sales (M) | FY 2007 % of Sales | FY 2006 % of Sales | FY 2005 % of Sales |
| European Wholesale | 483.9 | 378.7 | 316.3 | 33.8 | 31.2 | 30.3 |
| Other International Wholesale | 233.2 | 171.8 | 142.1M | 16.2 | 14.1 | 13.6 |
| Total International Wholesale | 717.10 | 550.50 | 458.40 | 50.00 | 45.30 | 43.90 |
| US Wholesale Watch Sales | 251.40 | 239.00 | 232.50 | 17.60 | 19.70 | 22.30 |
| US Wholesale Other Product Sales | 209.20 | 203.70 | 179.20 | 14.60 | 16.80 | 17.20 |
| Total US Wholesale Sales | 460.60 | 442.70 | 411.70 | 32.20 | 36.50 | 39.50 |
| Direct to Consumer (Mil) | 255.30 | 220.80 | 173.00 | 17.80 | 18.20 | 16.60 |
| Net Sales (Mil) | 1433.00 | 1214.00 | 1043.10 | 100 | 100 | 100 |
Trends and Forces
International Markets Provide Insulation from Slumping US Economy
Since 50% of Fossil's sales are generated from international business, they are less susceptible to the weak US dollar and economic depressions compared to competitors such as Guess? (GES) and Kenneth Cole Productions (KCP) . [3] Despite the worsening US economy and a potential recession, Fossil's investment in international business has stimulated an overall 18% growth in net sales despite only a 4% growth in domestic sales. [4][9]
Longevity of Licensing Agreements
Licensing products to companies such as Adidas, Emporio Armani, Burberry, Diesel, DKNY, and Marc by Marc Jacobs contributed to 34.4% of Fossil's sales for the 2007 fiscal year. [1] All of Fossil's licensing agreements are set to expire between 2008 and 2013.[11]
Fossil plans to negotiate new terms for their licenses as they expire and they have already started talks with some companies such as Emporio Armani. [12] However, royalties are often factors of licensing agreements which take away the profitability of such licenses and threaten their renewal. [11]
Weak Dollar Helps International Sales
Fossil generally pays for products in US dollars and depends on labor and manufacturing in China. The fluctuation of the dollar versus other currencies has an impact on manufacturing costs and sales costs and Fossil uses forward contracts to control exchange risks.
Fossil has benefited from the weak dollar. From FY 2006 to 2007, 4 of the 18% increase in net sales was attributed to favorable exchange rates ($57.32M). [4] For the European wholesale segment, exchange rates attributed for 10.9% of 27.8% growth. [4]
Third and Fourth Quarter Sales Strength
Fossil is a seasonal business; the 3rd and 4th quarters combined attributed to 70% and 73% of Fossil's operating income in Fiscal years 2006 and 2007. [13] Since Fossil's products work well as gifts, the back to school and holiday shopping seasons are important for sales.
Competition and Market Share
Fossil considers the watch market to be divided into four segments based on price points. Due to their many brands and products, Fossil competes in all of these segments to varying degrees, but their primary market is in the $40-$150 watch range.
Over the last five years, Fossil has outperformed the industry average operating margin of 8.98% with a 12.14% margin. [14] Since Fossil operates in such a broad product category, they compete with many companies whose specialties do not include watches, but are in the fashion apparel/accessories industry as a whole.
$40-$150 Watch Middle Market
Fossil's primary business in the middle market which comprises $40 to $150 watches; in FY 2006, over 53.4% of their watch revenues were from brands selling in this price range. [15] In this market, Fossil's competitors include:
- Anne Klein II is a woman's fashion brand that is part of the Jones Apparel Group (JNY). Although they do sell watches, they are more recognized as an apparel and footwear brand. Jones Apparel Group (JNY) posted $3.84B of revenue in 2007 and a -0.7% operating margin. [16]
- Guess? (GES) is most famous for its jeans and apparel but they also make fashion accessories. Their watch collection has been around for over 23 years. Guess is also beginning to move into the $200-$1500 watch market with it's GC watch collection. [17] Despite having 2/3 of its business based in the United States, Guess has increased its revenue 28.4% in 2007.[18][19] Guess generated $1.75B of revenue in 2007 with a 17.66% operating margin. [20]
- Kenneth Cole Productions (KCP) is considered an "affordable luxury" line of apparel, footwear, and accessories. It is essentially a domestic company with 97% of sales income generated in the United States. Consequently, Kenneth Cole has struggled in light of the US economy. [21] In 2007, it reported a 4.71% loss in net revenue compared to 2006. [22] In 2007, KCP reported $510M in revenue with a 0.96% operating margin. [22]
- Swatch (The Swatch Group) is a Swiss company that specializes in watches but also sells electronics and other products. In 2006, their watch and jewelry segment was the most successful with 3,723 million Swiss Francs (~$3,642M) worth of net sales and an operating margin of 19.8%. [23]
Fossil's DKNY, Diesel, Fossil, Marc by Marc Jacobs, Michael Michael Kors, and Relic lines compete in this segment of the watch market. [24]
Fossil had a 12% market share in the global fashion watch market in 2007. [15]
References
- ↑ 1.0 1.1 Fossil (FOSL) Form 10-K FY 2007 "Risk Factors" Page 22
- ↑ 2.0 2.1 2.2 2.3 Fossil (FOSL) Form 10-K FY 2007 "Products" Page 9
- ↑ 3.0 3.1 3.2 3.3 Fossil (FOSL) Form 10-K FY 2007 "Results of Operations" Page 43
- ↑ 4.0 4.1 4.2 4.3 4.4 4.5 Fossil (FOSL) Form 10-K FY 2007 "Fiscal 2007 Compared to Fiscal 2006" Page 44
- ↑ 5.0 5.1 MorningStar Financial Statement (FOSL)
- ↑ 6.0 6.1 Fossil (FOSL) Form 10-K FY 2007 "Apparel" Page 8
- ↑ Fossil (FOSL) Form 10-K FY 2007 "Fashion Accessories" Page 11
- ↑ Fossil (FOSL) Form 10-K FY 2007 "Other Products" Page 12
- ↑ 9.0 9.1 9.2 Fossil (FOSL) Form 10-K FY 2007 "Fiscal 2007 Compared to Fiscal 2006" Page 45
- ↑ 10.0 10.1 Fossil (FOSL) Form 10-K FY 2007 "Fiscal 2007 Compared to Fiscal 2006" Page 46
- ↑ 11.0 11.1 Fossil (FOSL) Form 10-K FY 2007 "Risk Factors" Page 23
- ↑ Fossil (FOSL) Form 10-K FY 2007 "Intellectual Property" Page 20
- ↑ 13.0 13.1 Fossil (FOSL) Form 10-K FY 2007 "Selected Quarterly Financial Data" Page 53
- ↑ Reuters: Fossil, Inc.
- ↑ 15.0 15.1 Cowen and Company: Fossil Report
- ↑ Jones Apparel Group (JNY) Form 10-K FY 2007 "Selected Financial Data" Page 28
- ↑ Watch Facts: Guess Watches
- ↑ WikInvest: Guess? (GES)
- ↑ Guess? (GES) Form 10-K FY 2007 "Selected Financial Data" Page 27
- ↑ NASDAQ: Guess Financial
- ↑ WikInvest: Kenneth Cole Productions (KCP)
- ↑ 22.0 22.1 Kenneth Cole Productions (KCP) Form 10-K FY 2007 "Selected Financial Data" Page 26
- ↑ The Swatch Group 2006 Annual Financial Report
- ↑ Fossil (FOSL) Form 10-K FY 2007 "Industry Overview" Page 7
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