Why I'm Positive On Fossil's Long-Term Outlook

| About: Fossil, Inc. (FOSL)

For two decades Fossil Group Inc (NASDAQ:FOSL) has been designing and marketing specialized consumer fashion accessories. Its product line reckons high-end fashion watches and jewelry, handbags and other leather goods including belts, soft accessories as well as clothing and sunglasses. Fossil itself has pretty average brand equity, but this company actually makes watches for heavy duty fashion brands like Armani, Tory Burch and Michael Kors.

The Fossil stock made quite a stir in the market when its second quarterly revenue and earnings per share (NYSEARCA:EPS) came better than analysts had forecasted. The "unexpected" EPS numbers pushed the company stock up 19.61% on August 6 as price soared from $107.73 on August 5 and ended the next day (August 6) at $128.86. Oliver Chen, a Citi Group analyst correctly forecast Fossil's target price back in May, 2013 at $125.

The irony was that on August 5, Barclays downgraded Fossil and its stock had just witnessed 6% fall before the second quarter earnings were released. Anyone following the stock price pattern of Fossil knows that this is not the first time this company has done better than expected in quarterly earnings. For the last few years, Fossil has produced more than a few spikes upwards and ranged downwards, after making the headlines. Unfortunately, last week was no exception to this pattern, as Fossil's stock price has been trending down since the highs of 128.86 on August 6.

Even after the spike on August 6, the Fossil stock is actually trading at a bargain comparing to major competitors in the high-end luxury goods space. For example, P/E ratio for Michael Kors Holdings Ltd (NYSE:KORS) is 36 and that for Ralph Lauren (NYSE:RL) is 22.62. Fossil's P/E ratio of 21 is way below the industry average.

Although Fossil's fundamentals are suggesting a good deal for investors, it is hard to forecast how its stock will perform in the near future in an industry that has been experiencing a paradigm shift in the recent years. As emerging economies in the far-east (e.g., China) are developing a taste for high-end retail goods, the war on the high street is moving away from the home shore. Established international brands such as Ralph Lauren are already leveraging these markets, and some other western brands such as Tory Burch are truly taking off. Good news for Fossil investors is that it just made a licensing deal with Tory Burch, which has a huge long-term potential for international success. (It's no surprise that Coach (NYSE:COH) made an offer to buy Tory Burch for over US$ 2 billion!)

For a 7 billion dollar company, Fossil's CEO Mr. Kosta Kartsotis might be a mystery man (he doesn't have any publicly available photo of himself). Following the footsteps of other successful CEOs, he doesn't take any salary, and he's obsessed with maximizing shareholder value. This clue is a good signal to potential investors who are wondering whether Fossil will travel north in the long term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.