FOSL reported Q3 EPS of $1.09 above its revised guidance of $1.00-$1.03 following the realization that the company’s string of five consecutive quarters of 30%+ top-line growth was coming to an end. This stock has been a lightning rod since. Here are a few takeaways from the release along with an updated SIGMA for clients interested/involved in the stock:
Positive:
- Clockwork SIGMA with sales/inventory spread improving on the margin. The last two quarters reflects progress that you’d expect from a mature company and suggests a return to a positive sales/inventory spread near-term.
- Europe wholesale sales growth reaccelerated on both a 1yr & 2Yr basis. APac decelerated sequentially, but remained flat on a 2yr basis. Combined these regions account for ~40% of total sales.
- Gross margins of 55.9% came in slightly better than expected versus guidance of ‘just above 55%’ with Q4 now expected to be flat yy. There aren’t many companies in retail that are through the other side of contracting gross margins already.
Negative:
- North American wholesale and FOSL’s DTC sales (~60% of total) both decelerated sharply in Q3. Notably, e-commerce was flat in Q3 down compared to 20%+ in each of the first two quarters of F11 – putting FOSL in the ranks of JCP with an underperforming .com business. We realize that sales in the channel were up over 60% last year, but they were up over 55% in Q4 as well so it doesn’t get much easier next quarter.
- Q3 results and updated FY outlook implies the company is taking down Q4 by $0.03 despite increasing the FY outlook by $0.03 (beat Q3 by $0.06, taking Q4 down $0.03).
- FOSL is the first company to revise its outlook lower due to a stronger dollar.
Management didn’t provide its update to 2011 until the Q4 call last year so we would expect the same on the 9am call. As a former ultra-growth darling of retail, eyes will be on this one today.
Casey Flavin
Director