Author: Derek Pilecki, Gator Capital
Covestor models: Small Cap, Large Cap, Long-Only Energy
Disclosure: Long FOSL in Small Cap
When Fossil (Nasdaq: FOSL) reported earnings (.pdf) on May 10th, the company continued its history of outperforming market expectations. The company reported sales growth of 36% and operating income growth of 80%. Margins expanded from 13% of sales to 17% of sales. In addition to strong margins, Fossil has a pristine balance sheet. The company carries $350 million on its balance and has zero debt. Management regularly uses the company’s excess cash to repurchase shares in the open market.
Fossil’s sales growth is driven by strong growth in Asia and resurgence in the popularity of watches as a fashion item. Fossil has been well positioned to take advantage of both of these trends through their strong distribution network and their licensing of many high end fashion brands such as Michael Kors, DKNY, Armani Exchange and Burberry. Fossil was early in identifying the consumer trend toward watches as a fashion item and prepared by introducing many different styles of watches at many different price points.
Fossil has a history of strong stewardship of shareholder’s capital. The company has steadily expanded its operations in a conservative manner. It also mostly uses excess cash on share repurchases rather than acquisitions. One driving factor in this sensible capital allocation is the strong insider ownership position by Kosta Kartsotis. Mr. Kartsotis still owns 10% of the company and gives us comfort that management will continue to act in a shareholder friendly manner.
** NOTE! Fossil is the largest holding in our Gator Small Cap Portfolio, which is available as a model portfolio on Covestor. I will be the featured Covestor model manager on a webinar this week hosted by Covestor, where I’ll discuss Fossil as well as other stocks held in several other model portfolios. The Covestor webinar is this Wednesday, May 25, 2011 at 1 pm – you can sign up for it right now, here.
Sources:
– “FOSSIL INC. REPORTS FIRST QUARTER RESULTS”, Company press release, 5/10/11
http://www.fossil.com/attachments/en_US/financials/earnings/20110510.pdf
– Yahoo Finance on FOSL: General data: https://finance.yahoo.com/quote/fosl?ltr=1 and “Major Holders” https://finance.yahoo.com/quote/FOSL/holders?ltr=1
