Can Fossil Be Rescued in Europe?

Shares of Fossil (NASDAQ:FOSL) fell more than 30 percent on Tuesday morning after the company, feeling the pressure of Europe’s uncertain economic situation, turned cautious on its outlook for the ongoing quarter as well as the full fiscal year. The company, which sells watches, jewelry, leather goods, and sunglasses, cut full-year earnings estimate to between $5.30 and $5.40 per share from $5.40 to $5.50. Analysts were estimating earnings of $5.56 per share on average. For the current quarter, which ends in June, the company said it expects profit between 77 cents and 79 cents per share, short of analysts’ average of 94 cents per share.

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“In Europe, a softening macro environment toward the end of the first quarter and changes in our merchandising and assortment strategies across certain categories negatively impacted both our wholesale and retail sales in that region,” chief financial officer Mike Kovar said in a statement. The company remains “cautious” about the European economy, Kovar added.

While Europe’s weakening economy has been hurting Fossil the most, integration costs associated with its acquisition of the Danish Skagen Designs are also likely to outweigh any gain to operational earnings in the ongoing quarter. In longer term, though, Skagen is expected to give Fossil increased brand exposure in Europe and in emerging markets of Asia Pacific, Eastern Europe, and the Middle East. Growth in Asia and sales in North American have already been fairly healthy. It is also likely to be helped by cross-selling with Skagen, as well as make use of its acquisition’s already established supply chain.

In the first quarter, net income increased 4 percent to $58.1 million, or 93 cents per share, from $55.8 million, or 86 cents per share, beating average expectations of 92 cents per share. Revenue also rose, 10 percent to $589.5 million from $537 million, but missed Wall Street’s estimate of $618.1 million. Gross margin for the quarter fell to 55.8 percent from 56.2 percent.

Wholesale revenue in Europe was almost flat at $152.9 million, while that from North America rose 8.8 percent to $225 million. Fossil’s wholesale customers include high-end sellers such as Neiman Marcus and Nordstrom (NYSE:JWN), as well as low-price retailers like Target (NYSE:TGT) and Wal-Mart (NYSE:WMT). Fossil had also spent $231.7 million on buying Skagen in January.

Shares of the company had risen more than 50 percent since the beginning of the year until the close on Monday, but were down to $41.10 or 32.68 percent at 84.67 early on Tuesday.

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