Fossil, Inc. (FOSL) has been cutting costs and inventory as it rides out the rough retail environment. The company surprised on second quarter Zacks Consensus Estimates by 25% and is optimistic for the remainder of the year.

Even though there was an earnings surprise, sales fell 10.6% to $315.9 million from $353.2 million in the year ago period which reflected the difficult economic environment for retailers.

Sales declined 11.1% in the wholesale businesses but increased 21.1% in the direct to consumer segment, which includes the company’s Internet site.

Rest of the Year Outlook

The company is more bullish on the fourth quarter, the holiday shopping season, than the third quarter where it will be easier for it to capitalize on gains from the Internet site.

Third quarter earnings per share are forecast between 38 and 42 cents and sales are expected to be in the range of negative 6% to negative 9%.

This range was under the Zacks Consensus Estimate of 47 cents, so third quarter estimates have fallen to 42 cents in the last 30 days to get in line with the company’s guidance.

Fourth quarter sales are projected at flat to up 3% and the earnings per share forecast calls for 74 to 80 cents. This was higher than Zacks Consensus Estimate which has since popped 10 cents to 78 cents as a result.

The full year Zacks Consensus Estimate has also moved higher by 9 cents to $1.70 per share.

Value Fundamentals

Fossil was a Zacks #1 Rank (strong buy) when I last reviewed it on Oct 2, 2008. It is now a Zacks #2 Rank (buy) stock. The company is more expensive than last October, when it was trading at 10.9x forward earnings. It now trades at 14.9x.

The company still has an excellent 1-year return on equity (ROE) of 14.47%. Fossil also is trading with a PEG ratio of 0.92.

Fossil designs fashion accessories Incorporatedluding handbags, belts, jewelry, sunglasses and watches under its own brand, Fossil. It also produces watches through licensing agreements with Burberry, DKNY, Marc by Marc Jacobs and Michael Kors. Watches are its bread-and-butter product.

Zacks Investment Research
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