Fossil’s business keeps ticking ahead

Fossil Inc. conquered the fashion watch world during the Eighties and Nineties with moderately priced, stylish timepieces. Now the company known for its all-American aesthetic is rapidly expanding its international presence and entering a variety of new fashion and watch categories.

“Fossil is the Timex of today’s generation,” said Robin Murchison, an analyst with New Orleans-based investment firm Hibernia Southcoast Capital. “And the company is doing so many things, I think it will continue to gain market share.”

The company’s drive manifests itself almost across the board, from licensing to retail rollouts to product launches. Fossil jewelry, for example, is now sold in Europe, with plans to introduce it Stateside, and Fossil apparel — including jeans and tops — is being tested in company stores. Handbags have been updated and expanded to include more directional styles in fabrics such as straw, suede and velvet.

Fossil also dabbles in the designer world, producing timepieces for some of the hottest names in fashion, including DKNY, Emporio Armani and Diesel. This holiday season, the company will add to its designer stable, launching a line of watches for Burberry. In addition, Fossil is launching a new crop of watches that features special technologies that can sync with personal digital assistants and other high-tech gadgets.

On the retail front, Fossil operates 93 stores including 50 outlet units, scattered throughout the U.S., Australia, U.K. and Singapore. This year, the company plans this year to open five outlet stores as well as three accessories doors in Fair Oaks, Va., Las Vegas and Detroit, Mich.

The Richardson, Tex.-based firm is also rapidly expanding its international business by acquiring new licenses as well as some of its distribution partners. The $545 million company last fall went on an international shopping spree, acquiring Swiss watchmakers Montres Antima SA, Meliga Habillement Horloger SA and Synergies Horlogeres. Fossil in the fall also acquired the worldwide rights to the Zodiac brand. The sum paid for all four companies was approximately $7 million.

The acquisition of the three manufacturers provides the company with the design, sourcing and production capabilities necessary to manufacture and market Swiss-made watches. Currently, the bulk of the company’s products are made in East Asia. These acquisitions will allow the company to manufacture pricier watches that could be sold to independent jewelry stores — which typically balk at selling non-Swiss-made watches — where Fossil does not have a significant presence. Zodiac, Fossil’s first Swiss brand, features stylish timepieces that range from $300 to $1,000 at retail.

Fossil in April relaunched Zodiac with price points ranging from $300 to $1,000. The line includes fashion, sport and everyday styles, many in steel, for men and women.

One of the best-known names in the watch world, Fossil burst onto the scene in the mid-Eighties, at a time when fashion watches were just becoming a hot property. The company was founded by Tom and Kosta Kartsotis, two brothers originally from Albuquerque, N.M., who saw a niche for trendy styles that didn’t break the bank.

During the Nineties, Fossil solidified its position as a key department store watch resource and started to introduce other categories, including leather goods in 1992 and sunglasses in 1995. The company grew quickly, eventually going public in 1993, and it remains one of the few watch companies to successfully make the jump to Wall Street. Now sold in more than 8,000 doors, Fossil’s products continue to account for a hefty chunk of the overall fashion watch category — as much as 35 percent, according to one industry executive.

“What the company has been doing is working for them,” said Bill Baldwin, an analyst at Baldwin, Anthony & McIntyre, a Dallas-based investment firm. “They have been successful with their licensing arrangements and they still have a lot of opportunities in Europe.”

Unlike many fashion companies today, however, Fossil has grown from within. While it has a broad product array, the company has eschewed licenses for the Fossil name, choosing instead to produce all Fossil products in-house.

“We continue to develop Fossil, and we feel we have real staying power,” said Richard Gundy, president of Fossil’s watches and stores division. “We have grown organically, and we have done it by growing our existing businesses and leveraging our design and infrastructure.”

On the financial front, Fossil hit a few rough spots during the last few quarters, but it has come back in recent months. During the fourth quarter of 2001, sales grew 10.6 percent to $176.1 million from $159.3 million, while earnings improved to 59 cents a share from 57 cents, excluding charges.

For 2001, net income, excluding charges, fell to $1.49 a share from $1.71, as sales grew 8.2 percent to $545.5 million from $504.3 million. Nonetheless, Hibernia Southcoast Capital’s Murchison said the company ended the year “on a positive note.”

“2001 was a difficult year for most retailers, and Fossil was no exception,” she said. “However the company continued to execute their international initiatives and ended the year in a strong financial position.”

Watches remain the company’s key focus, accounting for about 75 of overall sales, which are expected to grow to more than $600 million this year, due in part to its many new introductions. Two years ago, the company formed a think tank to focus on the high tech watch arena, Gundy said. As part of this initiative, in late April Fossil will introduce timepieces compatible with personal digital assistant features. Data such as calendars, to-do lists and addresses from the user’s pda are downloaded to the watch through an infrared interface. The watches will retail for $145.

Other technologically advanced lines introduced include Big Tic, which has both analog and digital time displays, and Kaleido, a line of watches featuring dials that change color at the push of a button.

The company’s offerings are also getting a major infusion of hipness with a collection of watchesdesigned by Philippe Starck. The line, first introduced last year, has plastic and stainless steel straps and distinct digital modules featuring oversized numbers and is being expanded with a number of new styles for fall.

The company’s core line, carrying an average price of $65, continually gets updated, and styles on tap for fall include oversized looks and plenty of colored dials.

Overall, department stores remain the company’s core distribution channel for watches and other products, accounting for between 60 and 65 percent of sales. But specialty stores, including Watch World, and youth-oriented chains like Gadzooks, Pacific Sunwear of California and The Buckle have become more important, Gundy said. Fossil is also expanding the distribution of its Relic brand, which is priced between $50 and $85 and is sold by mass retailers, including Sears, Kohl’s and J.C. Penney.

Fossil is also continuing to expand its international business, which has been propelled by the recent acquisitions of its distributors in France and Australia. The international business accounted for 35 percent of total sales last year.

Licensing is also emerging as a major driver, due to its deals with established and up-and-coming fashion names such as Paul Frank, which is geared toward younger customers.

‘`Now that they have access to new movements, you will see Fossil go after more and more licensed businesses,” observed Murchison. “It will bring them into new distribution and help drive business.”

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