fossil, inc. nasdaq: fosl lauren folkman, joseph s3. s five forces 12 ... as a jean designer maker...
TRANSCRIPT
Fossil, Inc. NASDAQ: FOSL
Lauren Folkman, Joseph Hilborn, Michaela Lindsay
Fossil, Inc. (Nasdaq FOSL)
Last Trade $53.97
Trade Time 20 Oct
Prev Day Close $53.97
1 Yr Target Est 52.57
52 wk Range $26.14-55.51
Avg Volume (3m) 758,614
P/E 18.69
Mkt Cap $3.62B
EPS 2.89
Industry: Specialty Retail Sector: Apparel & Accessory
FOSSIL at a glance:
- Global design, marketing, and
distribution company
- Sells watches, fashion
accessories, apparel, and
footwear
- Brand name recognized for
individuality, consistency,
connection with its customers
- Broad customer base and price
range ($7-$20,000)
- Very liquid company with
excellent debt management RECOMMENDATION:
DO NOT BUY
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TABLE OF CONTENTS
Company Overview 3
Segments 3
Products 4
Suppliers 5
Competitive Advantage 5
Recent News 6
SWOT Analysis 7
Competitors 8
Macroeconomic Analysis 10
Industry Analysis 11
Key Indicators 12
Porter’s Five Forces 12
Fossil in the Industry 13
Financial Ratio Analysis 14
2010 Pro Forma Income Statement 17
2011 Pro Forma Income Statement 18
Valuation Analysis 19
Recommendation 20
Appendix 21
Consolidated Balance Sheet 21
Consolidated Income Statement 22
Consolidated Cash Flow 23
Quarterly Sales 24
Percent of Sales Composite 24
Value Line Company Survey 25
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Fossil, Inc. (FOSL)
COMPANY OVERVIEW
Fossil, Inc. is a global design, marketing and distribution
company that specializes in the industry of consumer
fashion accessories. The development of the Fossil brand
began in 1984 when Tom Kartsotis decided to enter the
fashion rage of the day: watch products. Kartsotis began
production in Hong-Kong, where they manufactured 1,500
watches and shipped them backed to the United States
where he sold the watches to Dallas department stores and
boutiques. In the early 1990’s, after their phenomenal
success with watches in the U.S. market, Fossil entered
the international market and diversified their product
portfolio to included leather goods and sunglasses.1
Today their product portfolio consists of a wide range of
men and women’s fashion accessories. They distribute product offerings through a diversified
distribution network that includes department stores, specialty retail locations, specialty watch
and jewelry stores, owned retail and factory outlet stores, mass market stores, owned and affiliate
Internet sites and through its FOSSIL catalogs.
Segments:
Fossil distributes its products through the business segments of (1) the U.S. wholesale segment
(such as department stores), (2) the European wholesale segment, (3) other international whole
segments, and (4) direct to consumer segment, consisting of company owned retail stores, the
FOSSIL catalog and e-commerce activities.2 Fossil established its foundation through the watch
segment. The success of this segment allowed for expansion into fashion apparel and accessories.
The company has entered into many licensing agreements with well know fashion quality brands.
This is in large part due to Fossil’s vertical integration in launching products. In other words,
they have the ability to provide the licensor an integrated solution to design, produce, and
distribute an offering that will allow the licensor to gain a strong presence worldwide in a timely
manner.3
1 Fossil website
2 SEC Filings: 10-K Annual report
3 SEC Filings: 10-K Annual report
Headquarters: Richardson, Texas
Founded in 1984- launched by Tom
Kartsotis, a Texas A&M dropout living in
Dallas
June 1993- First IPO, selling 20 percent to
investors
Kosta N. Kartsotis
Chairman of the Board and Chief Executive
Officer
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Products:
Fossil first gained brand recognition through its watch products. Today they not only offer
proprietary and licensed watch products but also have expanded into offering various men and
women’s fashion accessories and apparel.
Proprietary watch products:
FOSSIL, MICHELE, RELIC, ZODIAC,
Licensed watch products:
ADIDAS, BURBERRY, DIESEL, DKNY, EMPORIO ARMANI, MARC by Marc
Jacobs, MICHAEL by Michael Kors
Fashion Accessories:
Proprietary brands:
o FOSSIL: handbags, small leather goods, belts, gifts, eyewear, cold weather,
footwear, jewelry, accessory jewelry
o MICHELE: handbags, eyewear
o RELIC: sunglasses, handbags, small leather good, belts, cold weather
Licensed brands:
o FIFTY-FOUR: handbags, small leather goods
o DIESEL: jewelry
o DKNY: jewelry
Licensed Optical (in agreement with Safilo Group):
FOSSIL and RELIC
NET SALES 2009: 1.5B
61%
34%
5%
Contribution to Sales
Proprietary
Licensed
Other
* Other: includes private label brands Fossil
manufactures or distributes (mainly
watches). In other words, Fossil acts as
sourcing agent by managing the
manufacturing process.
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Suppliers:
The majority of Fossil’s watch products are currently assembled by majority-owned entities in Asia and
Switzerland. Approximately 63% of their jewelry is manufactured through one of their majority-owned
entities. Other fashion merchandise are currently outsourced and manufactured to their specifications by
independent manufacturers in international locations, including China, Hong Kong, Italy, Korea, Mexico
and Taiwan. Fossil does not maintain a long-term contract with suppliers but instead rely on long-
standing business relationship with these manufacturing facilities.
COMPETITIVE ADVANTAGES
Indentify innovative fashion trends
Fossil prides itself in their ability to identify consumer preferences and fashion trends in a timely manner.
Fossil is constantly introducing new merchandise and product offerings through the use of not only their
proprietary brands but their licensing brands as well. Their in-house creative team designs products,
packaging, graphics, presentation displays and marketing materials, allowing Fossil to deliver a unique
and cohesive style and image for each of their brands.4
Wide range of consumer segments:
Fossil’s extensive range of accessory products, brands, distribution channels and price points, enables
them to target style-conscious consumers across a wide age range on a global basis.5 As Fossil continues
to expand their distribution as well as their proprietary and licensed product offerings their revenues have
become less dependent on one product or geographic region.
Breadth of distribution channels:
Their extensive channels located across the globe allow for a variety of venues for consumers to
purchase merchandise. Distribution channels include:
4 SEC Filings: 10-K Annual report
5 SEC Filings: 10-K Annual report
Key Points
Fossil finds its competitive advantage through consistently keeping up with consumer fashion trends in a timely manner
Wide reach of consumer segments: price and geographic location
$750M share repurchase program
Top competitors: Guess?, Inc., Coach, Swatch
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o Department stores, specialty retail stores, specialty watch and jewelry stores, mass market
stores, sport stores, cruise ships, airlines, owned-retail, licensed and franchised FOSSIL
stores, business to business, the internet and FOSSIL catalogs
Breadth of brands and price ranges
The majority of Fossil’s products are sold in a wide range of price, which enables them to cater to
various ages and income requirements. Within their watch collection the price ranges from $7 in
the mass-market channel to $2,395 in the luxury distribution channel6
Operating Cash Flow
Their business model has historically generated strong operating cash flows. This flow has allowed
Fossil to operate at low debt levels while funding capital expenditures, owned retail store growth, product
line expansions and common stock buy-back programs.
RECENT NEWS
Entering luxury product niche:
Fossil entered the luxury products niche when it acquired Tempus International, which does business as
Michele Watches, for about $50 million. The subsidiary launched Michele Jewelry, a collection of 18-
karat gold pieces that are sold at Neiman Marcus stores nationwide.7
Vintage Expedition (2010): launched a vintage-inspired summer clothing collection in stores in Germany
and the UK.
This launch is the first time Fossil has made a full collection of its apparel available outside the US.
$750 million share repurchase program8
On August 30, 2010 Fossil has authorized a repurchase up to $750 million of its outstanding shares of
common stock.
The repurchase program will help to invest appropriately in our global business to meet strategic goal of
doubling the size of the Company over the next five years
-Mike Kovar, Executive Vice-President and Chief Financial Officer
Chief operating officer, Michael W. Barnes, resigns
After 25 years at key management positions, Barnes will head to Signet Jewelers limited to take over the
position of chief executive officer. He will succeed long-standing CEO, Terry Burman, who announced
his retirement in January. Barnes’ position is to be effective November 30.
6 SEC Filings: 10-K Annual report
7 SEC Filings: 10-K Annual Report
8 Globe Newswire
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SWOT ANALYSIS
Strengths Weaknesses
Ability to identify innovative fashion
trends in a timely manner
Wide range of consumers and extensive
geographic reach
Strong relationship with licensors
Brand recognition of not only proprietary
brand but also licensed brands
In house creative team. This emphasized
constant innovative trends and distinctive
designs
Strong business relationship with
suppliers and manufactures
No long-term contracts with third party
manufacturers
High inventory levels
Sales depend heavily upon consumer
spending and condition of economic
market
Opportunities Threats
Expansion into international markets
Extending product categories of existing
brands
Fossil is able to frequently introduce new
accessory product categories within their
existing proprietary and licensed brands
Expiration of license contracts: the sales
of their licensed products account for
about 34% of their total revenue. Their
material license agreements have various
expiration dates between 2009 and 2014
Constant change in consumer fashion
trends
Keeping up with international fashion
trends
Highly competitive retail and e-
commerce consumer segment
Economic conditions
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COMPETITORS
GUESS?, INC (GES)
Headquartered in Los Angeles, CA, Guess, Inc. was initially founded
as a jean designer maker has expanded into a company that designs,
distributes and markets lifestyle collections of contemporary apparel
and accessories for men, women and children.9 Their merchandise
reflects the American lifestyle and European fashion sensibilities. In
addition to their trademark brand of GUESS, they have licensed the
brand to 653 stores outside the U.S. and Canada plus 75 operated jean
and accessory stores in Asia.
The core customer Guess targets is a style-conscious consumer
primarily between the ages of 18 and 32. They also appeal to
customers outside this core segment by offering specialty product lines that include GUESS by
MARCIANO, a more sophisticated fashion line targeted to women and men. Additionally, their line
GUESS Kids captures the segment of boys and girls ages 6 to 12.
Guess sees their core strengths as having global diversification, ultimately reducing their reliance on a
particular geographic region, and their use of multiple distribution channels.
9 SEC Filings: 10-K Annual report
$983,903
$747,242
$299,969
$97,352
Sales (in millions)
Retail Operations
European Operations
Wholesale Operations
Licensing Operations
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Coach (COH)
After being acquired by Sara Lee in 1985, Coach was able to establish itself as the leading premium
handbag and accessory brands in the U.S. They offer premium lifestyle fashion handbags and accessories
to a loyal and growing customer base and provide consumers with fresh, relevant and innovative
products.10
Now headquartered in the Greater New York City area, they strive to set themselves from competitors
through their distinctive luxury brand image. With their cost-effective global sourcing model, in which
independent manufacturers supply products, they are able bring a broad range of products to the market
rapidly and efficiently.
Swatch Group (SWGAY.PK:Swiss)
The Swatch Group Ltd., headquartered in Biel Switzerland, engages in the design, manufacture, and sale
of finished watches, jewelry, watch movements, and components worldwide. Today, it is the number one
manufacturer of finished watches in the world. It produces nearly all of the components necessary to
manufacture the watches sold under its watch brands.11
The Swatch Group offers watches in all price
categories and distributes through high to low range market channels.
One of their key competitive advantages is their emphasis on research and development to continue its
leading position in the materials and process technology in product design and manufacturing.
10
SEC Filings: 10-K Annual report 11
Swatch Group website
$2,309
$722
$108 $252 $180
Sales (in millions) N. American stores/Internet
Coach Japan
Coach China
U.S wholesale
Coach International (wholesale)
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MACROECONOMIC ANALYSIS
The on-going struggle of the global economy to fully recover from the economic recession is leading
central banks around the world to make monetary policy decisions, and the Federal Reserve is no
exception. The Federal Reserve’s continued quantitative easing – or efforts to increase the money supply
by buying government securities – is aimed at weakening the dollar against major foreign currencies such
as the Yen, the Euro, and the Pound12
. As the dollar moves lower, US-produced goods become more
attractive to foreign consumers, while domestic consumers watch their purchasing power grow ever-
weaker.
For Fossil, this means that international sales will increase as the American watch and accessory-maker’s
prices become more attractive for foreign customers, but domestically, consumers will experience a
decrease in purchasing power through devaluation of the dollar. Recognizing the difficult economic
conditions of the moment (which are not likely to dramatically improve any time soon), Fossil is focused
on innovative product design and diversification of its product lines to encourage consumer
consumption13
.
To rejuvenate the economy and reduce the near 10%
unemployment rate, the Federal Reserve has
implemented monetary policy efforts to increase the
money supply and maintain low interest rates. The
desired effect is increased domestic consumption.
However, the current situation of low interest rates is
discouraging foreign investment in the United States and
contributing to the slow economic rebound.
Fossil, along with other specialty retail stores, has felt the
effects of these macroeconomic conditions evidenced by lagging consumer confidence, which the
Conference Board’s reports improved in August but retreated in September14
.
12
The Wall Street Journal (Fed Viewed As Trying To Devalue The Dollar) 13
Fossil 10-K 2009 14
The Conference Board Consumer Price Index
What the company says: In uncertain market conditions, Fossil continues to focus on:
Opportunities outside of the US where they face less competition and more profitable
operating metrics
Diversification of risks by being present in over 100 countries during the recession
Tempered growth plans with reduced expense until the economic climate improved
Differentiation of products, compelling branded product offerings, and executing promising
growth opportunities
Innovative products that allow Fossil to compete in a full-price manner with an otherwise
highly promotional environment
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INDUSTRY ANALYSIS
Fossil is part of the specialty retail industry that offers a variety of products ranging from apparel for men
and women to footwear and fashion accessories. Due to its cyclical nature, the retail industry as a whole
was highly affected by the recession but is making a slow recovery15
. As consumers might see it, the
recession provided an opportunity for retailers to re-evaluate expenses, redesign products, and streamline
operations in order to increase the value of their products. Companies that recognized the need to attract
the more selective, price-conscious consumers refocused their corporate strategy on product
differentiation and value pricing. Companies that have come out of the recession stronger than their
competitors have successfully executed such strategies16
. As the Value Line chart below displays, the
quick reaction by certain companies to respond to changing consumer demands is reflected in slightly
more positive prospects for 2010.
Value Line Industry Profile
2010 est’d 2009 2008 2007
Sales ($ mil) 172,500 163,189 225,730 222,668
Operating
Margin
12% 11.6% 9.7% 10.6%
Net Profit 7,600 7,457.3 8,646.2 11,015.1
Rtn on Shr
Equity
15% 15.1 16.1 19.8
Avg Annual P/E ---- 14.8 17.2 18.7
The Sector
Due to the sheer size of the retail industry, analysts break the industry down further into specialty retailers
and more specifically, apparel and footwear sectors. The apparel and footwear sectors in the US are large,
mature, and highly fragmented, meaning many competing companies vie for market share17
. These
competitive conditions make it difficult to grow market share, especially under the constant challenge of
anticipating consumer preferences. The competition in the market is enhanced by low barriers to entry,
but it is important to note the difficulty retailers face in maintaining market share once they have entered
the market.
The Unemployment Rate
The near 10% unemployment rate in the US has dampened consumer propensity to consume, or consumer
confidence. Despite these macroeconomic concerns, however, the industry is experiencing some
positives: according to Standard & Poor’s Industry Analysis, retailer inventories are no longer declining
sharply (meaning they are more in line with consumer demand), retail markdowns are easing, which is
causing gross margins to recover, and retail chains have reduced their fixed costs by exiting marginal
retail locations in 2009.
15
S&P Industry Survey 16
Value Line Industry Profile 17
S&P Industry Survey
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Key Indicators:
Consumer confidence, as measured by the Conference
Board, fell 4.7% in September indicating consumer’s
continued concern over shaky housing and financial
markets.
GDP, the broadest measure of economic activity in a
country, is an indicator for the apparel and accessory
industry because changes in real GDP reflect expansions or
contractions of the economy, and retail sales will follow
GDP trends. Standard & Poor’s projects a 2.8% growth
rate in 2010 and 2.5% in 2011, indicating a slight, but
positive outlook for future economic activity.
Real disposable personal income influences the level of consumer spending and indicates the health of
the retail industry because as incomes rise, consumers are likely to increase spending. In 2009 real
disposable person income rose 1% and Standard & Poor’s projects a 3.2% increase in 201018
.
Interest rates affect managers’ business decisions. The Federal Reserve has maintained interest rates at
record-low levels of 0%-0.25% since December 2008 in an attempt to encourage businesses to invest.
Standard & Poor’s is projecting a flat rate of 0.2% for 2011.
Porter’s Five Forces:
1) Supplier Power
Low – suppliers tend to have little power in the apparel industry due to intense global
competition
2) Threat of Substitutes
High – accessories are easily interchangeable, and other devices that are carried regularly
by Fossil’s prospective customers, such as cell phones, tell time
3) Barriers to Entry
Low – it is not difficult to enter the retail industry, but it is very difficult to maintain a
position due to the competitive nature of store location and importance of vertical supply
and distribution organization
4) Buyer Power
High – consumers have access to lots of information on line and are demanding the best
value for their money, and success in the industry depends on successfully appealing to
consumer preferences
5) Rivalry
High – the specialty retail industry greatly depends on brand recognition and loyalty
18
S&P Industry Survey
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Fossil in the Industry:
√ Fossil maintains good relationships with few suppliers to more effectively manage its production
centers
√ Fossil manages a vertical distribution chain and good relationships with international distributors to
increase its distribution efficiency and effectiveness in reaching international markets
- The threat of substituting a Fossil watch with some other accessory is high, especially because Fossil
markets its watches as accessories; however, the company is highly dedicated to innovative design and
markets each one of its products as a unique accessory
Considering the competitive nature of the specialty retail industry and the overall negative state of the
economy in recent history, Fossil has competed well in its market. Comparing the company’s five-year
price performance to that of the apparel and accessory industry, as well as that of the market, it is evident
that Fossil has reacted well to the economic downturn and recovered quicker than most of its peers19
.
Performance During
Past:
Fossil, Inc. Apparel & Accessories DJ US Total Market
Index
3 Months 36.31% 21.02% 7.97%
6 Months 30.18% 6.45% -1.35%
Year-to-Date 50.10% 27.03% 6.56%
2 Years 150.99% 72.90% 20.37%
5 Years 226.52% 25.95% 3.98%
19
The Wall Street Journal Industry Comparison
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FINANCIAL RATIO ANALYSIS20
21
Liquidity: Average
FOSL GES COH SWGAY.PK Peer Average
Liquidity 2009 2008 2007 2006 2009 2009 2009 2009
Current Ratio 3.86 3.69 2.96 2.60 2.66 3.04 4.36 3.35
Quick Ratio 2.86 2.28 2.07 1.58 1.95 2.25 2.15 2.12
Cash Ratio 1.68 0.86 0.96 0.63 0.74 1.74 1.33 1.27
Liquidity ratios measure a firm’s ability to meet its maturing obligations. Fossil is a highly liquid company. Fossil would have no problems
meeting any of its short term debt. Current assets averages close to three times its current liabilities over the past four years. Not only has Fossil’s
liquidity been solid over the past four years, but it has also been improving every year since 2006. Fossil’s liquidity is now better than the average
liquidity of its competitors.
Asset Management: Average
FOSL GES COH SWGAY.PK Peer Average
Asset Management 2009 2008 2007 2006 2009 2009 2009 2009
Total Asset
Turnover
1.21 1.46 1.28 1.42 1.60 1.26 0.70 1.19
Fixed Asset
Turnover
7.29 7.64 7.70 7.08 0.90 5.45 3.71 3.35
Asset management ratios are used to show how efficient a company is at using its assets to generate profits. Total asset turnover has remained
fairly consistent over the past four years averaging 1.34x. In 2009, Fossil had a slightly better total asset turnover than the average of its
competitors, however the fixed asset turnover for Fossil in 2009, 7.29x, was more than double the competitions average and was the best out of all
competitors.
20
Fossil Inc. 2007-2009 Annual Reports 21
GES, COH, SWGAY.PK 2009 Annual Reports
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Debt Management: Above Average
FOSL GES COH SWGAY.PK Peer Average
Debt Management 2009 2008 2007 2006 2009 2009 2009 2009
Debt Ratio 4.92% 6.89% 5.92% 2.69% 36.99% 33.86% 22.39% 31.08%
Debt/Equity 6.48% 9.31% 8.61% 3.81% 41.90% 51.20% 28.84% 40.64%
Times Interest
Earned
936.74 350.92 218.88 34.43 68.40 NA 53.72 40.71
Cash Flow/Debt 6.45 2.29 3.84 5.82 1.02 0.92 0.64 0.86
Debt management ratios measure a firm’s capacity to meet short and long term debt obligations. Looking at the table, it is obvious that Fossil has
superior debt management compared to its competition. The debt ratio of 4.92% means that only a small fraction of Fossil’s assets are financed by
debt. The times interest earned is 936.74x, this is due to the small amount of interest that Fossil is paying. Fossil also exhibits high cash flows to
debt. This is a sign of financial strength and a good indicator of proper debt management. Overall, Fossil exhibits strong financial ratios in debt
management.
Profitability: Slightly Below Average
FOSL GES COH SWGAY.PK Peer Average
Profitability 2009 2008 2007 2006 2009 2009 2009 2009
Gross Profit Margin 54.57% 53.76% 51.78% 50.16% 41.26% 71.90% NA 56.58%
Operating Margin 13.7% 13.0% 13.0% 10.2% 16.50% 30.09% 16.66% 21.08%
Net Profit Margin 9.32% 8.96% 8.97% 6.39% 10.79% 19.30% 14.07% 14.72%
ROA 11.30% 13.05% 11.45% 9.10% 17.25% 24.31% 14.09% 18.55%
Profitability ratios demonstrate how well management is making investment and financing decisions. Looking at the table, Fossil seems to be
below average compared to its competitors. However, looking at Fossil’s profitability ratios over the past four years, it becomes apparent that
Fossil has been improving on a consistent basis. For example, Fossil’s gross profit margin increased from 50.15% in 2006 to 54.57% in 2009. We
expect Fossil’s profitability ratios to continue to improve over the next few years.
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DuPont Analysis: Below Average
FOSL GES COH SWGAY.PK Peer Average
DuPont 2009 2008 2007 2006 2009 2009 2009 2009
Net Profit Margin 9.32% 8.96% 8.97% 6.39% 10.79% 19.30% 14.07% 14.72%
Total Asset
Turnover
1.21 1.46 1.28 1.42 1.60 1.26 0.70 1.19
Equity Multiplier 1.32 1.35 1.45 1.42 1.61 1.51 1.29 1.47
ROE 14.90% 17.61% 16.65% 12.88% 27.73% 36.75% 12.76% 25.75%
When looking at the DuPont Analysis, it is clear that Fossil is performing below the industry average. Fossil’s net profit margin was 5% below the
peer average in 2009. Fossil also had the lowest net profit margin among its peer competitors. Total asset turnover was slightly better than the peer
average, but Swatch drug the peer average down. Fossil had lower asset turnover than both Guess and Coach. The ROE was far below the peer
average ROE of 25.75%. However, Net profit margins have increased every year since 2006. ROE increased from 2006 to 2008 and experienced a
decrease in 2009 that can be attributed to the recession and lower consumer spending.
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PRO FORMA INCOME STATEMENTS
FOSSIL, INC.
CONDENSED CONSOLIDATED PRO FORMA INCOME STATEMENT
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
For Year End December 31st, 2010
Half 1 -Actual Q3-Est. Q4-Est. FY-Estimate
Net sales $ 805,789 $ 418,185 $ 549,901 $ 1,773,875
Cost of sales 349,485 188,183 247,456 798,244
Gross profit 456,304 230,002 302,446 975,631
Operating expenses:
Selling and distribution 254,047 129,637 170,469 549,901
General and administrative 86,648 41,818 54,990 177,388
Total operating expenses 340,695 171,456 225,460 727,289
Operating income 115,609 58,546 76,986 248,343
Interest expense 117 79 104 337
Other income (expense)—net 2,771 - - 2,771
Income before income taxes 118,263 58,625 77,091 251,451
Provision for income taxes 24,008 19,933 26,211 85,493
Net income 94,255 38,693 50,880 165,957
Less: Net income attributable to noncontrolling interest
3,863 558 558 4,979
Net income attributable to Fossil, Inc. $ 90,392 $ 38,135 $ 50,322 $ 160,979
Total Outstanding Shares 68,278 68,278 68,278 68,278
Earnings per share: $ 1.34 $ 0.56 $ 0.74 $ 2.36
2010 Pro Forma Income Statement: The pro forma income statement above forecasts Fossil’s financial
performance for the second half of 2010. The Half 1 column shows actual performance by Fossil over the
first six months of the year. The Q3 and Q4 columns are estimations of the company’s operating results.
We based our estimations for Q3 and Q$ off of previous year breakdown of quarterly earnings by percent.
We then took the actual earnings in Q1 and Q2 and divided them by the percent we felt was appropriate.
For Q1 we used the average of 21.5%. Q2’s average percent of sales was 21.4%, but we felt that the sales
for Q2 seemed a little high so we assigned a 24% for our estimate. We then took the estimated net sales
from both quarters’ percent and averaged the two estimates to arrive at our estimate of $1,773,875 net
sales for 2010.
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FOSSIL, INC.
CONDENSED CONSOLIDATED PRO FORMA INCOME STATEMENT
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
For Year End December 31st 2011
Pessimistic Most Likely Optimistic
10% 14% 18%
Net sales $ 1,951,263 $ 2,022,218 $ 2,093,173
Cost of sales 878,068 909,998 941,928
Gross profit 1,073,194 1,112,220 1,151,245
Operating expenses:
Selling and distribution 604,891 626,887 648,883
General and administrative 195,126 202,222 209,317
Total operating expenses 800,018 829,109 858,201
Operating income 273,177 283,110 293,044
Interest expense 371 384 398
Other income (expense)—net 2,771 2,771 2,772
Income before income taxes 276,318 286,266 296,214
Provision for income taxes 93,948 97,330 100,713
Net income 182,370 188,935 195,501
Less: Net income attributable to noncontrolling interest 5,471 5,668 5,865
Net income attributable to Fossil, Inc. $ 176,899 $ 183,267 $ 189,636
Weighted Average Shares Outstanding 68,278 68,278 68,279
Earnings per share: $ 2.59 $ 2.68 $ 2.78
2010 Pro Forma Income Statement: For the 2011 pro forma income statement, we created a growth
matrix to analyze past growth rates. We took all of the growth rates from the growth matrix and found a
mean growth rate of 10%; however we feel that the recession that occurred in 2008-2009 depressed the
mean growth rate of net. We decided to set our most likely at 14% because we felt that the mean growth
rate for net sales was depressed by the recession and Fossil has shown good sells growth in the first half
of the year. We decided to set our optimistic net sales growth to 18%. This is because Fossil outperformed
analyst’s expectations in Q2 of 2010. We also are optimistic that the economy will continue to recover
and as a result consumer spending will increase. For pessimistic growth we estimate 10%. We feel 10% is
an appropriate estimation because the growth average was depressed by negative growth due to the
recession in 2008. If the economy does not recover at a desirable pace, consumer spending would not
increase and as a result growth would not be as great.
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COGS: To arrive at our cost of goods sold, we looked at the percentage of COGS to net sales for each of
the past four years. We saw that COGS was a decreasing percentage of net sales. For this reason, we
assigned COGS 45% of net sales.
Operating Expenses: We looked at the percentage of the different operating expenses as a percent of
net sales. For selling and distribution expenses we assigned a 31% of net sales rate and for general and
administrative we assigned a 10% rate.
Income Tax Expense: We assigned a tax rate of 34% to be on the conservative side.
Shares Outstanding: We used the most recent quarter’s number of shares outstanding.
VALUATION
P/E Valuation: For our valuation we chose to do a P/E valuation. We multiplied our 2011 pro forma
earnings per share for each of the scenarios to arrive at the different estimates for price per share. We then
weighted the pessimistic, most likely, and optimistic scenarios at 15%, 65% and 20% respectively. We
weighted the optimistic more heavily than pessimistic because of Fossil’s efforts to expand and we feel
that the economy is in a state of recovery and should only improve from here. Fossil’s out performance
of analyst expectations for sale in Q2 of 2010 also leads us to believe that the outlook for Fossil is more
optimistic than pessimistic. We based our P/Es for pessimistic, most likely, and optimistic based on
historic values for Fossil’s P/E multiples.
2011 P/E Valuation
Pessimistic Most Likely Optimistic
EPS $ 2.59 $ 2.68 $ 2.78
P/E 15 19 23
Price Per Share $ 38.86 $ 51.00 $ 63.88
Probability 15% 65% 20%
Weighted Average Price
$ 51.75
Current Price $ 55.63
Margin of Safety -7%
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RECOMMENDATION
We believe that Fossil is a strong company with a lot of upside. They have above average debt
management and have great cash flows. We believe there is great potential for Fossil in the future. We
believe that Fossil is a great company. However, the stock price for Fossil has been on a tear the last two
months rising from $44.15 on August 20th to $55.63 on October 21
st. We believe this is due to Fossil
greatly outperforming expectations in Q2 and as a result we are worried about being late to the party. For
this reason, we are recommending a do not purchase for Fossil at this time.
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APPENDIX A
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APPENDIX B
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APPENDIX C
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APPENDIX D – QUARTERLY SALES
Net Sales per Quarter (In Thousands)
Mar Jun Sep Dec FY
2007 304.8 306.5 358.6 463.1 1433
2008 356.2 353.2 409.7 464.1 1583.2
2009 323 315.9 381.4 527.8 1548.1
2010 393.2 412.5
Net Sales Percentage Per Quarter
% Mar % Jun % Sep % Dec FY
2007 21.3% 21.4% 25.0% 32.3% 100.0%
2008 22.5% 22.3% 25.9% 29.3% 100.0%
2009 20.9% 20.4% 24.6% 34.1% 100.0%
Average 21.5% 21.4% 25.2% 31.9%
APPENDIX E – GROWTH MATRIX
Growth Matrix
2005 2006 2007 2008 2009
2005 16.4% 17.2% 14.9% 8.2%
2006 18.0% 14.2% 8.4%
2007 10.5% 3.9%
2008 -2.2%
Median 12.3%
Mean 10.0%
APPENDIX F – HISTORICAL P/E MULTIPLES
Historic Price Multiples
2006 2007 2008 2009 1st Half 2010 Average
P/E 17.3 17.5 13.7 11 19.47 14.88
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APPENDIX G – PERCENT OF NET SALES COMPOSITE
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APPENDIX H - VALUELINE