Fossil Group (FOSL, Financial) designs, markets and distributes consumer fashion accessories. Founded in 1984, Fossil offers men’s and women’s fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, soft accessories and select apparel.
The company produces approximately $3.5 billion in annual revenue through more than 400 retail locations, 4,000 wholesale locations and 13,000 employees worldwide. And, right now, the stock is 2 points off a year low and a full 33 points lower than the Peter Lynch Earnings Line.
It generates more than $500 million in operating profit from $2 billion in assets and have grown sales and earnings at impressive and consistent rates. While the new Omega Globemaster limited-edition sells for $44,000, a typical Fossil watch sells for around $150, giving it the ability to reach the mass market. Fossil generates over $750 in sales per square foot at its U.S. stores, and its European outlet stores deliver $1,221. That’s more than twice the performance of a typical U.S. specialty store.
While past performance is not (and should not be) an indicator of future results, looking solely at what Fossil has accomplished over the last 10 years has to impress an investor.
FOSL in 2005
- Sales: $1.04 billion
- Profit: $76 million
- Book: $7.41
- ROE: 14.4%
- P/E: 21
FOSL in 2010
- Sales: $2.03 billion
- Profit: $255 million
- Book: $16.05
- ROE: 25.4%
- P/E: 18
FOSL in 2015
- Sales: $3.5 billion
- Profit: $348 million
- Book: $17.58
- ROE: 37.6%
- P/E: 10
This has led to a 231% rise in share price, handily beating the S&P 500. Now that the stock is trading down $40 year to date, it could be a great time to ease into this position.
The risk
Apple (AAPL, Financial) poses a small (albeit real) risk to all watchmakers, of which there are many. The Apple Watch could potentially do what the iPhone did to Blackberry (BBRY, Financial) to low end makers like Fossil, Swatch, Casio, Movado and Citizen. However, compared to the others in the industry, Fossil seems to have mastered their market, being conservatively financed, and only paying 43% of its earnings on CapEx.
Do they have a moat? No. They have a unique brand that will continue to require close watching by the investor that buys the stock. Yet, with analyst numbers reaching into the 100 million range by 2020 for the smartwatch market, Fossil will still have over 7.6 billion people to sell it’s affordable brand to at that point.
The reward
From a purely numbers perspective, and using the GuruFocus 4-star predictability rating as an 80% chance they will meet the future growth rates, I think it’s fair to say the company’s earnings could more than double in the next decade. And, if they continue the current buybacks, an investor today could own upwards of 30% more of the company by 2025, putting the EPS in around $20 and a price in the $200 range at the current multiple.
Now, I realize that is a long time to wait and that is based on past financial maneuvers; however, in the interim, barring a drastic move upwards in Interest rates by the Fed causing higher savings rates and lower market prices, it would not be unheard of for FOSL to stabilize and bounce back toward 100. I’m not a technical analyst, yet with the Relative Strength Index, or RSI, which measures momentum on a scale of zero to 100, a stock is considered to be oversold if the RSI reading falls below 30, and FOSL is at 21.6.
The gurus
Few guru investors own FOSL, but they include Robert Olstein (Trades, Portfolio) (120,000 shares), Joel Greenblatt (Trades, Portfolio) (922,542 shares), and Ron Baron (425,000 shares).
