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URL:  http://boards.fool.com/fossil-fosl-21199856.aspx

Subject:  Fossil FOSL Date:  8/22/2004  1:18 PM
Author:  TMFKitKat Number:  889 of 1264

The business

Fossil designs and markets watches and accessories. Since its inception in 1984, they has grown into a diversified company offering an fashion watches under the proprietary FOSSIL, RELIC and ZODIAC brands and BURBERRY, DIESEL, DKNY and EMPORIO ARMANI. Additionally, they sell a wide range of accessories including small leather goods, belts, handbags, andsunglasses under the FOSSIL and RELIC brands, jewelry under the FOSSIL and EMPORIO ARMANI brands and FOSSIL brand apparel.

Domestically, Fossil sells its products in approximately 20,500 retail locations in the United States through a diversified distribution network that includes approximately 7,500 department store doors, such as Federated/Macy's, Sak's, Nordstroms, May Department Stores, and Dillard's for its FOSSIL brand and certain licensed brands and JCPenney, Kohls and Sears for its RELIC brand, and approximately 13,000 specialty retail locations.Fossil has a network of 98 company-owned stores, with 44 retail stores located in premier retail sites and 54 outlet stores located in major outlet malls.

They have one of the better websites for retail I have seen

www.fossil.com.

Internationally, products are also sold to department stores and specialty retail stores in over 90 countries worldwide through company-owned foreign sales subsidiaries and through a network of approximately 60 independent distributors. Products can be found in Europe, South and Central America, the Caribbean, Canada, Mexico, the Far East, Australia and the Middle East. Products are offered on cruise ships and in 22 international company-owned retail stores. Additionally, Fossil products are sold through independently-owned retail stores and kiosks in some international markets.

In 1995, they opened outlet stores at selected major outlet malls throughout the United States. The Company currently operates 54 outlet stores. These stores, which operate under the FOSSIL name, enable them liquidate excess inventory and increase brand awareness. They intend to open six to eight additional outlet stores in 2004. In 1996, they opened full priced accessory Fossil retail stores in retail malls and entertainment parks in the United States in order to broaden the recognition of the brand name. Fossil operates 26 accessory retail stores in leading malls and retail locations throughout the United States and 18 accessory retail stores in select international markets. They will open three to four additional accessory retail stores in the United States in 2004. In 2000, they began offering Fossil brand apparel through specially designed Company-owned apparel stores--18 Fossil jeans wear stores in malls and retail locations throughout the United States. The apparel stores carry the full apparel line along with an assortment of certain Fossil watch and accessory products.Three to four additional apparel stores will open in 2004. They operated 119 stores at the end of the year, consisting of 53 outlet, 26 accessory and 18 jeanswear stores in the United States and 22 stores located outside the United States. This compares to 104 stores at the end of the prior year. Fossil opened 17 new stores during the year. They expect to open 12 to 16 new stores in 2004 with at least one-half of these new store openings planned to be outlet concepts.

During fiscal years 2003, 2002 and 2001, company-owned Fossil store sales accounted for approximately 13.3%, 12.5%, and 12.5% of net sales, respectively.

Products

They occupy a niche between the high priced Rolex/Piaget and the low priced Timex/mass produced $5 off-brand digitals. Fossil competes in the range of moderately priced watches. The higher end watches are BURBERRY, EMPORIO ARMANI and ZODIAC and are generally over $150. The lower priced products between $40 to $150 are covered by the Fossil and Relic brands. A chief competitor would be Swatch. They intend to penetrate the low-priced market $5 to $40 in 2004.

In 2000,Fossil introduced a line of apparel that is distributed exclusively through company-owned retail stores and the company's website. The apparel line is focused on the casual lifestyle of 16 to 24 year old consumers and consists primarily of jeans, tee shirts, and sweatshirts featuring FOSSIL brand packaging and labeling.

Manufacturing and distribution strategy

Products are manufactured by independent contractors and by companies in which Fossil holds a majority interest. Substantially all of the company's watches are manufactured by approximately 39 factories located primarily in Hong Kong and China, except for the Swiss watches which are assembled in Switzerland. Outsourcing products allows it to achieve increased production flexibility while avoiding significant capital expenditures, build-ups of work-in-process inventory and the costs of managing a substantial production work force.

The average lead time from the commitment to purchase products through the production and shipment thereof ranges from two to three months in the case of watches, from two to six months in the case of eyewear, from three to four months in the case of leather goods, from two to four months for apparel items and from two to four months for jewelry.

Fossil owns a majority interest in a number of watch assemblers with locations in China. In addition, theymaintains close relationships with accessory manufacturers in the Far East. These relationships create a significant competitive advantage as they allow Fossil to produce quality products, reduce the delivery time to market and improve overall operating margins.

The company distributes substantially all of its products sold in the United States and from its warehouse and distribution center in Dallas, Texas.They distribute products to
international markets from warehouse and distribution centers located in Germany, Italy, Hong Kong, Australia, France, Switzerland, Japan, Singapore and the United Kingdom. In September 2003, the company opened a new 100,000 square foot distribution facility in Germany.

Backlog

At the end of 2003, Fossil had unfilled customer orders of approximately $72.1 million compared to $43.9 million and $57.4 million for fiscal years 2002 and 2001.

Property

They lease all retail space. They own five properties including corporate headquarteres and warehouses. The lease obligations can be considered as a form of debt.


All share and per share price data has been adjusted to reflect three-for-two stock splits effected in the form of a stock dividend paid on August 17, 1999 and June 7, 2002. This data has not been adjusted to reflect the three-for-two stock split declared on March 12, 2004, to be effected in the form of a stock dividend to be paid on April 8, 2004 to stockholders of record on March 26, 2004.

Income statement

2003 2002 2001 2000 1999
gross margins 54% 53% 52% 52% 52%
operating margins 14% 14% 14% 19% 21%
net margins 9% 9% 8% 11% 12%
growth revenue 18% 22% 8% 20% --
growth gross 21% 24% 7% 20% --
growth operating 14% 25% -18% 7% --
growth net 16% 35% -22% 8% --
growth COGS 14% 19% 9% 21% --
growth SGA 22% 22% 20% 29% --
growth EPS diluted 15% 31% -18% 10% --
growth EPS cont operations 15% 31% -14% 4% --
tax rate 38% 39% 40% 41% 41%

**Net margins increasing over 2001
**Growth has slowed since 2002 but is still high
**Decreasing tax rae due to mix of overseas sales and lower rates in foreign countries
**Domestic watch sales increased 2.4% primarily as a result of a 5.5% increase in sales of FOSSIL watches and a 17.3% increase in sales of licensed brand watches. These sales gains were partially offset by decreases in RELIC watches and by the discontinuance of the EDDIE BAUER private label watch line.
**Operating expenses increased approximately $53 million during 2003 and, as a percentage of net sales, increased to 37.3% during 2003 compared to 35.9% for the prior year. Included in 2003 operating expenses is approximately $13 million in additional costs related to the translation impact of stronger foreign currencies into U.S. dollars and approximately $7 million related to operating expenses of businesses acquired in 2002. The remaining $33 million increase in operating expenses during 2003 primarily reflects increases in:

1)personnel and other costs associated with new business initiatives primarily related to the Company's Swiss watch, EMPORIO ARMANI jewelry and tech watch businesses for which there have been minimal revenue contributions to-date

2)advertising costs

3) depreciation and amortization expense.

**Increased operating expenses, as a percentage of net sales, were partially offset by improved gross profit margins resulting in operating profit margin of 14.1% of net sales compared to 14.5% of net sales in 2002. Operating income for the year included approximately $15 million of additional income as a result of the effects of stronger foreign currencies.

**Sales from company-owned retail stores worldwide increased 25.3% during the year as a result of a 14.4% increase in the average number of stores opened during the year and comp-store sales gains of 10.6%. Double-digit comp store growth during the year was attributable to better in-store merchandising and visual presentation and lower quantities of discounted merchandise available in comparison to the prior year that resulted in higher average selling prices during 2003.

**In 2003, 2002 and 2001, domestic department stores accounted for approximately 43.1%, 49.3%, and 53.3% of the net sales, respectively. In addition, in the same periods, the 10 largest customers represented approximately 20%, 25%, and 39% of net sales, respectively. No customer accounted for more than 10% of the net sales in fiscal years 2003, 2002 and 2001.

**Foreign operations include a presence in Australia, Canada, the Caribbean, Central and South America, Europe, the Far East, and the Middle East. Payment from its foreign distributors is in United States currency. During 2003, 2002 and 2001, international and export sales accounted for approximately 43.6%, 38.1%, and 34.5%, of net sales.

**During 2003, 2002 and 2001, company-owned FOSSIL store sales accounted for approximately 13.3%, 12.5%, and 12.5% of net sales, respectively.

Balance Sheet

2003 2002 2001 2000 1999
current ratio 3.4 3.1 2.5 3.0 3.0
quick ratio 1.2 0.9 0.6 0.9 1.2
AR growth 41% 17% 18% 22%
DSO 56.9 47.5 49.5 45.5 44.7
inventory days 128.5 141.2 143.3 122.2 114.9
growth in payables -18% 55% 16% 54%
growth in inventory 4% 17% 28% 29%
CCC 157.9 150.5 163.3 140.2 138.0
ROE 16% 17% 17% 25% 27%
ROA 12% 12% 11% 18% 19%
ROIC 16% 17% 16% 25% 26%
debt/equity 0.7% 0.7% 6.1% 2.3% 2.6%
debt/capital 1% 1% 6% 2% 3%
book value 6.0 4.8 3.8 3.2 2.6
cash/share $2.26 $1.61 $0.99 $1.17 $1.26
NC WC 158.2 131.3 111.8 95.4 69.3
change in NC WC 26.9 19.5 16.4 26.1 69.3
payable days outstanding 27.5 38.2 29.4 27.5 21.7


**Accounts recei