Fossil sees Asia, Europe driving growth, shares soar

(Reuters) - Fossil Inc (FOSL.O), known for its watches and other fashion accessories, said it expects its strong wholesale business in the Asia-Pacific and improving performance in Europe to drive earnings this year, sending its stock up by as much as a third.

The company, whose watches sell from $7 to upwards of $2,000, said second-quarter revenue rose in both regions, helping it to report a stronger-than-expected profit and to forecast full-year earnings above Wall Street expectations.

Fossil's shares, which had fallen more than 40 percent since the company last reported results in May, were up 33 percent at $92.57 in afternoon trading on the Nasdaq. Shares of smaller rival Movado Group Inc (MOV.N) were up 12 percent.

The strong results and upbeat outlook from the "affordable luxury" brand, which boosted its market value to $5.7 billion, come as many retailers of pricier offerings are experiencing a slowdown in crisis-hit Europe and formerly hot emerging markets such as China.

"Long term, we see strong opportunities for market share gains throughout Europe as we look to expand our existing (company-owned stores base) and to take advantage of the strong appeal of the Skagen brand in the region," Chief Executive Kosta Kartsotis said on a conference call with analysts.

Fossil bought privately held Danish watch maker Skagen Designs Ltd in January to expand in Europe.

"We expect investors to be pleased that full-year guidance is near consensus considering Fossil's heavy exposure to the struggling European market," Piper Jaffray & Co analyst Neely Tamminga wrote in a client note.

The Richardson, Texas-based company expects full-year adjusted earnings of between $5.29 and $5.34 per share, above Wall Street's average forecast of $5.28 per share.

Fossil said it remained positive about its wholesale business in Asia, which grew 29 percent in the quarter, saying it was seeing strong demand for its luxury brands in the region.

"We believe the robust appetite for accessories (in Asia) coupled with the developing 'white space' is a significant opportunity for both the Fossil brand and for our multi-brand watch portfolio," a company executive said on the call, referring to largely unexplored markets.

The company's wholesale business, which accounts for about three-quarters of it its sales, sells watches and accessories such as handbags, jewelry and belts to retailers ranging from Wal-Mart Stores Inc (WMT.N) to high-end Neiman Marcus Group Inc NMRCUS.UL.

"With (Fossil's) same-store sales decelerating, we believe management's guidance is predicated on continued strength in its thus-far resilient wholesale channel," analyst Tamminga said, adding that much of the projected growth in the wholesale channel was being driven by new brands, new categories and new markets.

Apart from its namesake brand, the company also sells watches and accessories under such brands as Armani Exchange, Marc by Marc Jacobs and Michael Kors.

MARGINS HOLD

Randal Konik, an analyst at Jefferies & Co, said Fossil will face easier comparable sales in the second half as the impact of peak product costs and its investments in Asia lessen.

"The company's gross margins should continue to benefit from price increases and (a) continued mix shift to Asia and direct-to-consumer," Konik wrote, although he cut his price target on the stock to $115 from $130.

Fossil's gross margin held at 56 percent in the quarter.

Second-quarter earnings rose to $57.3 million, or 92 cents per share from $51.4 million, or 80 cents per share, a year earlier. On an adjusted basis the company earned 93 cents per share. Analysts on average had expected 78 cents per share.

Total revenue rose 14.3 percent to $636.1 million, beating the average analyst forecast of $634.9 million.

Revenue in the company's wholesale business rose about 14 percent to $481.9 million. Wholesale revenue in North America rose 17 percent to $249.8 million on improved sales of watches and its Skagen-branded products.

Revenue from the company's direct-to-consumer segment, which includes more than 400 company-owned stores, catalogs and e-commerce activities, rose 15 percent to $154.2 million.

(Reporting by Arpita Mukherjee in Bangalore; Editing by Maju Samuel and Ted Kerr)