Fossil, Inc. (FOSL) catches the shorts off-guard with strong 2Q report

Posted Aug 12th 2008 9:42AM by Elizabeth Harrow
Filed under: Major Movement, Earnings Reports

Fossil, Inc. (NASDAQ: FOSL), the maker of watches and trendy apparel, surprised the Street this morning with stronger-than-expected second-quarter earnings. The retailer multiplied the positive momentum by boosting its full-year forecast. This double dose of good news has sent shares of Fossil more than 8% higher in early-morning trading.

For the recently concluded quarter, net income soared 71% to $25.1 million, or 36 cents per share, while net sales jumped 15% to $353.2 million. The results exceeded Fossil's own forecast, provided in May, for a profit of 29 cents per share on sales growth of 12% to 14%. Analysts had even more modest expectations, with the consensus calling for a profit of 25 cents per share on $346.9 million in revenue.

Digging deeper into the second-quarter figures, gross margin rose from 49.1% to 53.9%, thanks to cost-cutting initiatives and inventory management. Same-store sales climbed 5.7%, while direct-to-consumer sales surged 25%. Domestic watch sales grew by 2.3%, and international wholesale sales rose 20% (or 9.5%, excluding currency fluctuations).

For 2008, Fossil said it now expects full-year earnings of $2.27 to $2.30 per share, up from its previous guidance of $2.16 to $2.22 per share. In the third quarter, the company expects to rake in a profit of 53 cents per share, three pennies shy of the current consensus estimate.

Today's bullish news may have been just the catalyst needed to spark a short-squeeze rally. Heading into the report, more than 14% of FOSL's float was dedicated to short interest. At the stock's average daily volume, it would take 6 trading days for all these bearish bets to be repurchased. In other words, there should be no shortage of sideline cash to fuel Fossil's earnings-inspired gains.

Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the weekly video series Option Basics on SchaeffersResearch.com.

Tags: earnings, FOSL, Fossil, inthenews, retail, short selling, shorts, ShortSelling