There were lots of positives that Fossil announced in their recent earnings call. The biggest driver of the jump in their share price was that they signed a renewal contract with Michael Kors (MK). This is significant for the company because MK has been a huge driver of sales, especially in the US, but is also now taking large strides to expand internationally. The contract was set to expire at the end of 2015 which left investors very worried since MK has recently been about 22% of Fossil's sales. This contract renewal is a very positive sign that addresses one of the biggest risks that faced the company.
Aside from renewing this contract Fossil still reported a great quarter in sales. This was needed after a lackluster 2nd quarter which saw US sales growth drop down to 2% and a 410-basis-point drop in operating margins. The third quarter showed a return to growth in the US with wholesale sales increasing 6%. This 6% is significant because Fossil Group already has a significant market share of watches in the US with over 40% of the market. While US growth will be small compared to internationally, there is still room to grow in jewelry and handbags.
Where the company has expected large growth is in Europe and Asia, and this quarter they delivered with Europe wholesale increasing 15% and Asia-Pacific increasing 11%. Also Direct-to-consumer sales increased 11% due to store expansion internationally which was slightly offset by a decline in the US.
Overall Fossil had a great quarter with the renewal of the Michael Kors contract and addressing some issues when it comes to operating margins as well as sales growth in the US. One of the soft spots for the quarter was their sales growth in China. Although it still grew double digit in sales it was less then expected considering how large their sales growth has been there of late, with growth being as high as 50% in 2013. They attribute this to a softening retail environment but are still working to grow their infrastructure in China since it has is a large growth potential for the company. Fossil currently has a small market share in China which is a bigger watch market then the US that is only expected to grow.