UPDATE 2-Fossil says costs set to rise, forecasts profit below Street

Tue May 13, 2014 6:38pm EDT

* Sees 2nd-qtr profit/shr $0.90-$0.97 vs est $1.16

* Sees 2nd-qtr sales growth of 8-9.5 pct

* 1st-qtr profit/shr $1.22 vs est $1.17

* 1st-qtr oper expense up 19 pct

* Shares fall 8 pct after market (Adds comment from CEO, CFO, analyst)

By Devika Krishna Kumar

May 13 (Reuters) - Watches and fashion accessory retailer Fossil Group Inc forecast a much lower-than-expected profit for this quarter as costs rise.

Fossil shares fell 8 percent in extended trading after the company reported the third straight decline in quarterly comparable sales in North America, its biggest market.

The company, which has been struggling to keep up with fast-growing affordable luxury peers such as Michael Kors Holdings Ltd and Kate Spade & Co, said expense rate would be "significantly higher" in the second quarter.

The company plans to expand its print campaigns and social media presence to draw more customers to its stores, Chief Executive Kosta Kartsotis said on a call on Tuesday.

"Our biggest challenges are the retail environment here in the U.S. and jumpstarting our leathers business," said Chief Financial Officer Dennis Secor.

Sales at Fossil's leathers business - which lagged overall same-store sales in the first quarter - would be an area the company will focus on, Nomura retail equity analyst Simeon Siegel told Reuters.

Fossil sells bags, wallets and belts apart from jewellery, apparel and accessories. Its watches sell for $7 to upwards of $2,000.

The company's proprietary watch brands, such as Fossil and Skagen, have grown slower than licensed brands such as Michael Kors and Armani, said Siegel.

"They're trying to work around and ... figure out where the right distribution and target audience should be," he said.

The retailer said it expects second-quarter earnings of 90-97 cents per share and sales growth of 8-9.5 percent - implying sales of $764.5 million-$775 million.

Analysts on average were expecting earnings of $1.16 per share on revenue of $773.4 million, according to Thomson Reuters I/B/E/S.

Watch sales fell in Fossil's North American stores open for at least a year due to weak mall traffic in the first quarter ended April 5.

Global retail comparable store sales fell 2.4 percent, marking the third straight quarterly decline.

Worldwide net sales increased 14 percent to $776.5 million.

Operating expense jumped 19 percent to $338.5 million.

Net income fell to $66.3 million, or $1.22 per share, from $72.2 million, or $1.21 per share, a year ago.

Analysts expected the company to earn $1.17 on revenue of $777.6 million.

Fossil shares, which have fallen more than 11 percent in six months, closed at $112.08 on the Nasdaq on Tuesday. (Reporting by Devika Krishna Kumar in Bangalore; Editing by Joyjeet Das)

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