Fossil revenue miss Street on weak jewelry sales in Europe

Tue Nov 6, 2012 1:20pm EST

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(Reuters) - Fossil Inc (FOSL.O) cut its current-quarter sales forecast after reporting weaker-than-expected revenue for the third quarter as its strategy to nudge up prices for jewelry failed to resonate with distributors in Europe.

Fossil is in the process of repositioning its low-priced jewelry line to be more in sync with the "affordable luxury" image it has cultivated for its watches and handbags.

The fashion accessories maker cut its fourth-quarter revenue growth estimate to 12 percent from 16 percent.

Shares of the company, which sells fashion jewelry under its namesake and licensed brands such as Diesel, DKNY, Emporio Armani and Michael Kors, were down 13 percent on Tuesday afternoon.

The contribution of Europe to the company's wholesale revenue fell to 32 percent in the quarter from 35 percent for full-year 2011.

Within the European wholesale business, jewelry sales dropped 25 percent compared to a year ago.

"We are not expecting improvements in our performance in Europe wholesale for the fourth quarter," Chief Executive Kosta Kartsotis said on a post-earnings conference call.

Citi Investment Research analyst Oliver Chen reckons the company's new jewelry products are now priced 15 to 20 percent higher.

Fossil currently prices its jewelry products between $24 and $600, according to a regulatory filing by the company.

"The switch (in jewelry business) is causing disruption in (Fossil's) ability to sell their products to the wholesellers," Chen told Reuters.

The lackluster results and forecast follow Fossil's upbeat outlook in August when it signaled a recovery in demand in crisis-hit Europe, and bet on the strong appeal of its Skagen brand.

Fossil bought privately held Danish watch maker Skagen Designs earlier this year to expand in Europe.

The brand contributed $9.8 million to sales in the quarter. Excluding Skagen, European wholesale sales fell 5 percent.

Fossil, like many retailers of pricier offerings, is experiencing a slowdown in Europe and formerly hot emerging markets such as China as consumers cut down on discretionary spending and look for cheaper alternatives.

Fossil's outlook mirrored that of rival Estée Lauder Cos Inc (EL.N), which last week scaled back the top end of its full-year forecast as it expects weakness in Europe to continue.

The company, whose watches sell for as little as $7 to upwards of $2,000, said gross margin for the third quarter was largely flat at 55.8 percent, compared with 55.9 percent a year earlier.

Net income attributable to Fossil rose to $76.8 million in the third quarter, or $1.26 per share, from $69.6 million, or $1.09 per share, a year earlier.

On an adjusted basis, the company earned $1.28 per share. Analysts on average had expected earnings of $1.16 per share, according to Thomson Reuters I/B/E/S.

Richardson, Texas-based Fossil said revenue rose 6.4 percent to $684.2 million, well below the $713.1 million analysts had estimated on average.

A stronger U.S. dollar reduced sales by about $22.2 million, the company said.

Fossil's shares, which have risen 17 percent this year, were down 12 percent at $82.18 on the Nasdaq.

(Additional reporting by Ranjita Ganesan, Siddharth Cavale and Arpita Mukherjee in Bangalore; Editing by Supriya Kurane and Sreejiraj Eluvangal)

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