Fossil invades the Web and claims new territory

November 4, 2011  

By Jeff Johnson
jwjohnson@smu.edu

Fossil, Inc., an American watch and apparel maker gone global, closed the fiscal second quarter with a 4 percent decline in net income.

Net income fell to $54 million compared to last year’s net income of $56 million from a combination of economic factors.

“While there are many positive developments and milestones achieved during the second quarter, we also began to see the impact of higher production cost into our overall gross profit margin.” said Kosta Kartsotis, Fossil’s chairman of the board and chief executive officer during the second quarter 2011 earnings call.

Fossil has seen a 35 percent increase in net sales compared to a year earlier but it also has seen a faster increase in cost of sales, up 39 percent.

Fossil acknowledged recent economic troubles in the United States but expected a weaker dollar to help increase net income.

“We would not expect to be immune to consumer spending cut backs,” said Kartsotis. “We remain optimistic and confident about our growth potential over the next several years.”

In an e-mail, David Lei, a professor in the Cox School of Business, suggested cost for most U.S. companies have been on the rise regardless of inflation because of rising energy costs, rising commodity prices, and temporary shortages of semiconductors used to power Fossil watches. Fossil has experienced unexpected production delays and cost since Japan’s devastating earthquake led to factory meltdowns and global shortages in various technologies.

Fossil also cited an unforeseen increase in Chinese labor costs.

Despite it all, Fossil has seen a 39 percent increase, $400 million, in watch sales and a 35 percent increase, $92 million, in leather sales, staples of its brand.

According to Mike Kovar, executive vice president chief financial officer and treasurer, during the second quarter 2011 earnings call increases can be attributed to not raising its brand prices while improving on its staples, “chic” watches and “trendy” leather goods.

However, he admitted that strategy inevitably increased production and labor costs.

“Labor and material cost are running higher than our previous expectations for 2011,” Kovar said.

Fossil expects to continue focusing on improving merchandise quality but will revisit its future pricing strategy.

“We expect 10-K margins to be more in line with last year,” said Kovar. “The impact of newness, a higher mix of direct to consumer sales and higher margin Asian-Pac wholesale sales is expected to partially offset ongoing labor and material increases.”

Looking forward to the end of the fourth quarter, Fossil has made plans to open around 58 new stores and close 20 existing locations while redesigning the remaining Fossil brand stores.

With strong overseas market growth during the second quarter, Fossil is optimistic about its e-commerce and plans to expand its web empire into countries like France, Italy, Austria and Japan by the end of the year.

The bottom line: To offset rising cost and increase net income, Fossil, Inc. is taking on new territory and expanding its e-commerce with improved merchandise.

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