Weather was the major point of concern for all companies, especially in the retail space. Due to the cold winters, retailers witnessed low demand since customers preferred staying at home in the harsh weather. Moreover, increasing costs has also been a problem for the industry players. Amongst all the retail players, luxury item providers are hit the hardest as shoppers cut down on their luxury spend and look for alternatives.
An apt example here is the luxury retailer Fossil (FOSL, Financial) which is going through a similar phase of balancing both increasing costs and falling demand. It recently posted its first quarter earnings, which were mixed.
A Mixed Package of Efforts
Revenue increased 14% to $776.5 million, over last year, as revenue from most of the regions increased. A major pullback came in from the stronger dollar, which lowered overseas revenue. However, Fossil’s strategy of acquiring Skagen, a Danish accessories company, proved to be quite beneficial contributing largely to the top line.
Another problem faced by the luxury retailer was increasing costs, which made it increase product prices. This led to a lower net income of $66.3 million compared to $72.2 million last year.
Positives Points to Note
Despite a tough environment in Europe and the other problems, Fossil managed its way out to perform well. Apart from the acquisition made in Europe to improve revenue from the region, the company also resorted to expansion. Its new stores in Asia opened in the last one year were a major contributor to the rising revenue.
Also, increased focus on jewelry sales not only led to top line growth, but also enabled the retail segment to perform well. The stunning jewelry collection attracted customers into Fossil’s stores, enabling direct-to-consumer segment revenue to rise 18% to $195 million.
Luxury items have been faring well in North America as rich people seem to be unaffected by the small hiccups in the economy. Moreover, Fossil’s amazing collections tempt shoppers to buy watches which start from a price as low as $7. Additionally, the company’s continuous effort to expand in the Asian region has been quite fruitful since the market is largely untapped and has a huge demand for luxury items.
A Strong Weapon
A primary reason for Fossil’s growing watch and jewelry revenue is the fact that it manufactures it for Michael Kors (KORS, Financial), a high-end retailer which sells almost everything. Michael Kors made its debut in December 2011 and has been a rocking performer. It has witnessed a huge demand for its products and has posted great revenue growth since its inception.
Customers are quite fond of Kors’ trendy watches and other accessories, and this demand is expected to continue. This will help Fossil witness further growth in its volumes. In fact, a person betting on Michael Kors’ future can bet on Fossil which may be following a similar trend since almost 12% of Fossil’s revenue is made up of watches made for Michael Kors’. Additionally, Fossil’s recent launch of jewelry for Michael Kors, was quite successful and will prove to be beneficial going forward.
Fossil’s peer Coach (COH, Financial) does not enjoy the benefit of making watches for a company like Kors. Its recent quarterly performance was also not as bright as Fossil’s. However, Coach’s new Legacy collection was a key driver of revenue growth. Similar to Fossil, even Coach witnessed a huge demand in North America and Asia with China is the star performer.
The Bottom Line
Fossil has been trying to find ways to combat the effects of higher input costs, which is affecting the bottom line. Its acquisition of Skagen Designs looks like a smart move which has already started bearing fruits. Moreover, its relationship with brands such as Kors, Diesel and DKNY looks good and a strong weapon in its arsenal. Considering these points, Fossil looks like a strong company for the long term.
