|Shares Out. (in M):||63||P/E||25.0x||21.0x|
|Market Cap (in $M):||7,300||P/FCF||25.0x||21.0x|
|Net Debt (in $M):||-200||EBIT||470||550|
How would you like to short a stock that missed earnings expectations, guided down for next quarter and the full year, and has ballooning inventory? That stock is Fossil, which reported its weak quarter this morning after already increasing 25% this year, traded down slightly, and has melted up since then.
At the current valuation, Fossil has a $7 billion market cap and is roughly debt free. It has grown sales substantially in the last year but these sales gains will slow for the following reason:
1) Currency will no longer be a tailwind
2) Michael Kors dedicated watch counters at department stores are mostly installed
3) Generally weaker consumer outlook
Interestingly, the company reported a 22.5% ebitda margin last quarter, down year-on-year, despite sales being up almost 20%. The lack of margin leverage to increased sales speaks to the declining power of the brand and the increasing concessions necessary to drive sales. On an LTM basis, the ebitda margin has stayed pretty steady at around 20%.
Inventory is up to a record level of turns. When viewed as the inventory versus the next quarters COGS, Fossil currently has 1.8x versus a more normal level of 1.5-1.6x. The company claims that this is because they have built up inventory to avoid disruptions from events like last year’s Japanese disaster, and also that their suppliers have suddenly increased the speed of their shipments, neither of which makes much sense.
This business was saved by the advent of the $200 watch, a price point that was well below the prior “luxury” price point of $500-$1,000, but well above their existing $75 price point. These watches frequently had bands and faces made of new materials, which were perceived as new and interesting versus stainless steel or leather. This trend is slowing, based on our due diligence, and it seems odd that a strapped consumer will keep the trend alive.
At 21x earnings, with those earnings at risk, having already missed estimates and appreciated 45% year-to-date, Fossil is currently a compelling short.