Fossil (FOSL)’s 40% Fall and the European Excuse

Fossil (FOSL)'s 40% Fall and the European Excuse

Fossil Inc. (NASDAQ:FOSL) was falling hard on the market this morning after a disappointing earnings report which included a warning that the rest of the year would not be as good as had previously been anticipated. The stock is down nearly 40% to 79.75 at time of writing, a drop of 45.91 from yesterday’s close.

The watch maker posted profits of 93 cents per share, slightly above the consensus estimate of 92 cents per share. The company’s sales were up from last year’s $537 million to $589.5 million for the quarter. Analysys had expected higher sales of $617.6 million. As can be seen the earnings for the first quarter of 2012, on their basic numbers alone, do not account for a forty percent drop in stock price. So what’s the problem with Fossil?

Jim Chanos At Invest For Kids: Short This Tech Company As Profits Slump

Jim ChanosAt this year's Invest For Kids conference, hedge fund manager Jim Chanos pitched a tech giant as his favorite short idea. Jim Chanos is a Wall Street legend. The president and founder of Kynikos Associates made his name shorting Enron in the 1990s. He has since identified some of the most profitable shorts in the Read More

The company’s earnings outlook for the rest of 2012 is abominable compared to estimates from analysts. The company is looking for earnings in the second quarter of 77 cents to 79 cent. analysts had previously estimated earnings of 94 cents in the next three months. Full year targets at the company range between $5.30 and $5.40 compared to estimates from analysts which were north of $5.55.

The company’s outlook is what’s worrying shareholders, and surely causing many of them to become not shareholders any longer. The company blamed its pessimistic outlook on its European business, the very same it lauded at the end of the Fiscal Year 2011. At the end of the last quarter the company had just completed its purchase of Skagen Designs, a company based in the US but owned by Danes. The firm pointed to Europe as a growing market and one that would ad much to its earnings in the coming years.

However today’s earning report admitted that a “softening macro environment toward the end of the fourth Quarter and changes in our merchandising and assortment strategies across certain categories negatively impacted both our wholesale and retail sales”. That statement should chill shareholders. No firm under proper management could be surprised by a weaker Europe at the end of this quarter.

The European softening is given as an excuse for poor performance as an exogenous factor to explain away worries. Either Europe is being used as an excuse for under performance or the company was extraordinarily naive when projecting sales in an extremely depressed region. Either way the firm’s share holders should ask question of the management. A fall of 40% is not a thing to be taken lightly. Anybody left holding the stock needs to worry.