NEW YORK — Despite delivering robust third-quarter sales and earnings, Wall Street punished shares of Fossil Inc. as the company posted a higher inventory level while also warning that domestic sales of Fossil-branded watches would be soft in the fourth quarter.
Shares of Fossil finished Tuesday down 11.56 percent to $27.76 on the Nasdaq.
For the quarter ended Oct. 2, Fossil’s net income climbed 39.1 percent to $23.4 million, or 31 cents a diluted share, from $16.8 million, or 24 cents, in the prior year as sales jumped 22.5 percent to $236.1 million from $192.6 million.
In a statement, Mike Kovar, senior vice president and chief financial officer, noted that the firm “experienced a 70 basis points improvement in operating expense leverage, a level we haven’t seen in over two years due to significant investments we’ve been making in our brands, systems and people over that same time period.”
For the quarter, the operating margin rose to 16.1 percent from 14.2 in the same period last year while the gross profit margin jumped to 51.5 percent from 50.3 percent.
On the balance sheet, one eyesore to investors was inventory, which swelled to 32.4 percent of sales for the 39-week period ended Oct. 2 from 26.7 percent in the prior year. In dollar terms, inventory at the end of the period stood at $208.1 million, which compares to $139.2 million in the prior year.
On a conference call with investors, Kovar said the higher inventory level was due to several factors, including “new initiatives to support revenue expectations during the fourth quarter” as well as “increased levels of domestic accessories inventories to capitalize on the continued strength of the retail market during the fourth quarter.”
The fatter inventory was also due to bolstered product positions for the planned rollout of nine stores in the fourth quarter.
Another glitch to Wall Street was the domestic market for Fossil watches, which management said was not “planned up” for the fourth quarter.
Separately, the company said it inked a deal with Adidas-Salomon AG to produce and distribute Adidas-branded watches and timing products. The rollout is pegged for Jan. 1, 2006.
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Adidas watches are currently being made under a license agreement with Hong Kong-based Stelux Watch Ltd., but that deal expires Dec. 31, 2005.