UPDATE 3-Fossil Q2 profit tops Street, sees weak Q3; shares fall

* Q2 EPS $O.25 vs est $0.20 * Q2 Rev $315.9 mln vs est $321.5 mln * Sees weak Q3

* Raises FY EPS view on Q4 expectations

* Shares fall 13 pct (Recasts; adds details, analysts' comments)

By Mihir Dalal

BANGALORE, Aug 11 (Reuters) - Fossil Inc (FOSL.O) posted a higher-than-expected second-quarter profit and raised its full-year earnings view, but saw falling revenue in key segments and warned that a stronger dollar will weigh on third-quarter results.

Shares of Fossil, known for its namesake watches, slumped as much as 13 percent before paring some losses to trade down $3.12 at $24.60 Tuesday afternoon on Nasdaq.

"The market's reaction may be signaling a lack of confidence in (a fourth-quarter) upside being realized in what will be a very competitive holiday shopping season," Wall Street Strategies analyst Brian Sozzi said by mail.

The company, which also sells jewelry, leather goods, belts, sunglasses and apparel, raised its full-year profit outlook to $1.63 to $1.73 a share on expectations of improved sales in the fourth quarter. Fossil had previously guided for full-year earnings of $1.50 to $1.70 a share.

However, for the third quarter, the company forecast a profit of 38 cents to 42 cents a share, below analysts' expectations of a 48-cent profit in the period. Sales are expected to decline 6 percent to 9 percent in the period.

Analyst Sozzi said investors may also be worried by soft wholesale sales, which is the primary distribution channel for the company's merchandise.

In the second quarter, Fossil, whose products are sold in over 90 countries, saw revenue dragged down by a 25 percent fall in its international wholesale sales, which account for more than 40 percent of its overall revenue. Overall sales fell 11 percent to $315.9 million.

"In the global wholesale channel our customers continued to order conservatively, choosing to reduce their inventory levels in a challenging selling environment," Chief Executive Kosta Kartsotis said on a conference call with analysts.

Chief Operating Officer Mike Barnes added that Fossil's reluctance to sell to credit-challenged customers and bankruptcy proceedings of one of its principal customers in Germany also hurt sales.

PROFIT TAKING

S&P Equity's Jason Asaeda said, "People might just be taking profit because the stock has performed fairly well since March, and they might be a little bit concerned for the second half of the year."

The stock has risen 135 percent since the beginning of March.

To contend with the declining sales climate, Fossil has undertaken several recent measures to contain costs, including selective layoffs, and salary reductions for all executive officers and senior vice-presidents.

In the second quarter, however, gross profit margin declined 100 basis points to 52.9 percent, hurt mainly by a stronger U.S. dollar, which reduced margins by about 270 basis points.

Net income in the quarter fell to $16.6 million, or 25 cents a share, from $25.1 million, or 36 cents a share, a year ago.

Analysts on average were expecting a profit of 20 cents a share, before items, on revenue of $321.5 million. (Additional reporting by Abhishek Takle in Bangalore; Editing by Deepak Kannan, Anthony Kurian)