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.