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Why Consumer-Based Companies Should Envy Fossil, Sketchers


These two companies are great plays right now. Here's why.


According to poll results released today, Americans reduced their spending in January to levels similar to early 2009; the heart of the recession.

In many cases, the poll revealed that shoppers spent even less than they did last January. Even worse, the trend looks to be continuing into February. Following a holiday season that revealed upbeat consumers (see Retails Sales Uplifting, But There's a Catch), the poll delivers a gloomy near-term industry outlook again.

But despite the persistent reluctance of consumers to spend, two brands managed to stand out this week, positing quarterly results any consumer-based company would be envious of during a recession.

Posting notable fourth-quarter and year-end results, here's a list of why both Fossil (FOSL) and Sketchers (SKX) are eye-catching consumer-goods plays right now.


  • Unlike others, Fossil generated real growth, positing sales increases on top of increases last year. The 8% constant currency revenue growth followed a 9.4% constant currency increase last year.

  • It greatly improved its liquidity position through reducing inventory and increasing cash, resulting in a 26% increase in working capital.

  • Fossil continued to expand margins, indicating that markdowns to move inventory have not been necessary.

  • Like its higher-end competitor Coach (COH), Fossil is bound to benefit from the "new normal." Throughout the recession, accessorizing has emerged into an area consumers are willing to actually spend.


  • On top of Sketchers' 30.4% sales increase this quarter, the company expects to have an upcoming stellar first quarter as well given its 40% increase in backlog.

  • It's unknown whether the new Step-Up weight loss sneakers will be a one-hit wonder like Crocs (CROX) or if they have the potential to be a long-lasting trend like Deckers' (DECK) Ugg boots. But the concept demonstrates Sketchers' willingness to innovate and continually diversify its shoe lines.

  • For the year, management achieved a 25% increase in operating profits despite overall flat sales. While profit increases cannot be sustained in this manner, the results display indicate that the company is far leaner than in past years.

Both Fossil and Sketchers have solid international presence. And while that makes them much more susceptible to currency exchange risk, it also juices up their long-term growth potential.

In addition, they have very manageable long-term debt levels and maintain cash-rich balance sheets; cash accounts for over $6 per share of each company.

Aside from the financials, Fossil and Sketchers possess solid qualitative characteristics. Both sport valuable brand names that have remained popular among consumers for many years. In fact, Sketchers was named company of the year by Footwear Plus Magazine earlier this year, even beating out shoe behemoth Nike (NKE). And they both have strong inside ownership -- 32% for Fossil and 29% for Sketchers.

Based on this week's earnings and both the near-term and long-term outlook for these individual stocks, I'm bullish on these two small-cap consumer plays.

No positions in stocks mentioned.
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