Fossil Downgraded on Macroeconomic Concerns

Mar.25.11 | About: Fossil, Inc. (FOSL)

We recently downgraded our long-term recommendation on Fossil, Inc. (NASDAQ:FOSL), a global design, marketing and distribution company that specializes in consumer fashion accessories, to Neutral with a price target of $85.00. Fossil also holds a Zacks #3 Rank, which translates into a short-term Hold rating, and correlates with our long-term recommendation.

We remain concerned about the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn the company’s growth and profitability.

Fossil, competes with numerous manufacturers, importers and distributors who may have significantly greater financial, distribution, advertising and marketing resources. Primary competitors include distributors that import watches, accessories and apparel from abroad, U.S. companies that have established foreign manufacturing relationships and companies that produce accessories and apparel domestically.

We believe Fossil’s in-house team of dedicated designers and product specialists enable the company to stay ahead of the emerging lifestyle and fashion trends to bring its customers innovative and unique products.

The objectives of its designers and brand specialists are to immerse themselves in their assigned brands and product areas, identify their customers' preferences, interpret global fashion trends and develop style-right offerings to generate volume purchasing.

However, due to high exposure to international markets, Fosil remains prone to currency fluctuations. The weakening of foreign currencies against the U.S. dollar may require the company to either raise prices or contract profit margins in locations outside of the U.S. A rise in price may have a direct impact on the demand.

Given the pros and cons, we prefer to be Neutral at this stage.