Fossil Rocked On Europe: Consumer Names Beat Down

| About: Fossil, Inc. (FOSL)

Shares of fashion accessory company Fossil (NASDAQ:FOSL) plunged more than 37% on Tuesday after the company reported its first quarter earnings. Revenues missed and the company beat on the bottom line, but guidance was extremely light. Fossil became the latest consumer name to see a sharp drop after weak guidance, following in the recent footsteps of Deckers Outdoor (NASDAQ:DECK) and Green Mountain Coffee Roasters (NASDAQ:GMCR).

For the quarter, Fossil reported net sales up 9.8% to $589.5 million, well below analyst estimates of $617 million. However, the company did beat on the bottom line, with a profit of $0.93, which beat by a penny. Year over year gross margins declined by 40 basis points to 55.8%, and operating income declined by 10.5% to $82.9 million. Operating margins dropped to 14.1% from 17.2% in the year ago period. Fossil saw its selling and general expenses rise a bit faster than revenues, which triggered the decline in operating income.

The following quote from CFO Mike Kovar describes the company's quarter best:

While our First Quarter earnings were on target with our guidance, net sales came in slightly below our expectations. We experienced a sequential quarter improvement in sales growth from our Asia Pacific wholesale business, continued strength across our North American watch business and strong same store sales comps across our global retail base, especially when considering the strong double-digit comp performance in the prior fiscal year first quarter. However, 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.

Mr. Kovar continued that the company remains cautious on Europe going forward. However, the company does see some benefits from their expansion in Asia and their acquisition of Skagen Designs, which was effective as of April 2nd.

The revenue miss was concerning for investors, but the following guidance is the main reason why the stock plunged:

  • Second quarter net sales to be up 16%, while current estimates called for 17% growth.
  • Second quarter earnings per share to be in the range of $0.77 to $0.79, with current estimates at $0.94.
  • 2012 net sales growth of 16%, compared to current estimates calling for 16.9% growth.
  • The company lowered its 2012 earnings per share range by a dime to $5.30 to $5.40, well below the $5.56 current expected by analysts following the stock.

Fossil shares had been high flying for quite some time, but obviously, Tuesday's drop was significant. Not only did the stock plunge, but it brought down a bunch of other consumer names as well. Shares of Coach (NYSE:COH) declined by nearly 2% and were down nearly three times that amount at one point. Watch maker Movado (NYSE:MOV) took a huge hit, falling nearly 10% in Tuesday's trade. Movado also does business in Europe, and that had shares down almost 15% at one point. Apparel company PVH Corp (NYSE:PVH), formerly Phillips-Van Heusen, were down more than 3% as well. Even yoga and apparel company Lululemon (NASDAQ:LULU) declined more than 3%, and shares of that name were down almost 9% at one point.

Now, you could make the argument that most of these declined with the market, and they did to a point. However, many of these names were down two or three times the amount they settled at. Some of them were down close to or more than double digits percentage wise, and I'm not even talking about Fossil there.

But the scary part isn't just the declines. Many of these names, including Fossil, had seen huge rallies over the past 6 months. Large portions of these rallies were lost on Tuesday. Just look at the following chart. In addition to Tuesday's movement, I've included the 6-month change before and after Tuesday. I also included the retracement, basically how much of the 6 month gain had been lost.

Fossil lost more than just the 6-month gain, it is now down 17% over that time. Movado and PVH lost roughly a quarter of their gains. Coach and Lululemon lost a decent chunk of their gains. Remember too that many of these names closed well off their daily lows. The retracement values could have been even worse.

Tuesday -37.57% -9.73% -3.04% -3.28% -1.75%
6-month (bef.) 32.65% 70.80% 34.49% 14.60% 10.83%
6-month (aft.) -17.18% 54.18% 30.40% 10.84% 8.89%
Retracement -152.62% -23.47% -11.86% -25.77% -17.90%

In summary, it was not a good day for Fossil. Shares took a huge hit after revenues missed and guidance was disappointing. The company also took down several other names in the sector, some of which aren't even competitors. However, many of these names are high growth names, and as I've detailed before with GMCR and DECK, when the growth stops (or slows down more than expected), the bottom falls out.Tuesday was that day for Fossil.

As for my recommendation, I would avoid the name for a few days at least. We've seen these names have a history of extending their declines in future days, so let the stock settle down and you can evaluate it later.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LULU over the next 72 hours.