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  1. Home
  2. / Investing

Better Than Expected Fossil Earnings Does Not Tell the Whole Story

FOSL still faces some big challenges as it attempts to 'right-size' itself.
By JONATHAN HELLER
May 13, 2019 | 12:00 PM EDT
Stocks quotes in this article: FOSL, CVU

As China trade deal (or lack thereof) issues continue to bring forth some volatility, although not as much as I would have expected under the circumstances, the earnings parade continues.

On Thursday, shares of specialty retailer Fossil (FOSL) jumped 13% after the company reported better than expected first quarter earnings, or perhaps, that could be rephrased as "bad, but not quite as bad as was previously feared." I write that line partially in jest, as I continue to be fascinated by the gyrations and oscillations of stock prices as it relates to a single quarter's earnings. The good news, to me anyway, is that it is a pretty good reinforcement that at least in some corners, markets are not as efficient as some might think.

FOSL's revenue of $465.3 million was $11.3 million ahead of consensus estimates, while the loss of 42 cents per share was better than the 64 cent loss consensus. There was some seemingly good news here, gross margins improved 280 bps, and same store sales were better than expected. But again, here is where the "better than expected" mantra does not tell the whole story. Same store sales fell 9.5%, better than the -13.5% consensus expectation. That tells us that FOSL still faces some big challenges as it attempts to "right-size" via store closings and expense reductions in what remains a difficult and still changing retail environment. Over the past year, it has shuttered 59 locations, and ended the quarter with 461.

The company has, however, continued to shore up the balance sheet. It ended the quarter with $271 million or about $5.50 per share in cash. More importantly, it reduced debt from $396 million at year-end to $227 million.

Whether FOSL has legs long-term is not the question, for me, anyway. I can't think of many specialty retailers that I'd bank on being around in 15 or 20 years. The pertinent question, at any point in time to the "dumpster divers" among us, is whether the stock is worth significantly more than its current price in the near and intermediate term. Industries in transition, such as retail, will see their stocks swing wildly, and in some cases, overreact/over-correct, and as we saw a couple of summers ago, during the "retail armageddon" which presumed death prematurely for the sector. As I've stated not so eloquently, even the most soiled one dollar bill is still worth a buck, and if you can buy it for 50 cents, you'd do that all day long. It may not be pretty, but it's still worth a dollar.

While I am pleased with FOSL's improved balance sheet, I just can't put it in the "fifty-cent dollar category" at this point, the way I could back in early 2017. I still, however, would not be surprised to see a bigger name take the company out given it's still recognizable brand name, and successful efforts to clean up the balance sheet and cut costs.

Elsewhere, in smallville, one of the very few profitable net/nets (companies trading below net current asset value) CPI Aerostructures (CVU) rose 9% on Friday after beating "consensus" estimates (just one analysts covers the name) by a penny, with earnings per share of 14 cents. CVU's stock performance has been very disappointing over the past year, so it was nice to see a solid day for a change. CVU now trades at .99x net current asset value and less than 9x next year's "consensus" estimates.

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At the time of publication, Jonathan Heller was Long CVU.

TAGS: Earnings | Investing | Markets | Stocks | Trading | Retail

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