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What is driving the bull market in accessories?

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August 23, 2010 – Comments (2) | RELATED TICKERS: FOSL , COH , URBN

In a bad economy, I would think accessories would be suffering pretty hard.  However, there is a nice little uptrend on accessories.  I get shoes; this is a "mancession" and women always love shoes, but what is the force driving watches, belts, bags, etc. up?  Is it just back to school?

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#1) On August 23, 2010 at 10:34 AM, Griffin416 (99.98) wrote:

It is hard to argue that the bull market exists, but I don't really like his pic. I like COH better, the stores are always packed and it has a great track record. Why the bull market, I think, kind of like the shoe bull market descibed above. Additionally, when the economy recovers, it always has pockets of strength appearing out of nowwhere. Weakness is usually also abound too. Straight from Cramer's mouth last Thursday:

Then, when Macy's had arguably the best department store results this quarter reported last week, they emphasized that fashion watches was among their strongest sales categories. It was one of the most important points they highlighted... they did it right at the beginning of the call. People buying watches? I'm a seller... isn't the consumer supposed to be tapped out by unemployment benefits, the claims today, right? No... it gets better...

Coach, which is all about accessories, also posted a beautiful quarter thanks in part to high margin sales of chachkies like purses and wallets. And, when Urban Outfitters (URBN) delivered its terrific quarter on Monday afternoon, CEO Glenn Sank... someone who has a real eye, has given us a real ginormous 760% gain over the last 10 years...he told us that accessories were some of the best selling items of both Urban Outfitters and that division Anthropologie... it smells like a bull market to me.

Anyway, how should you accessorize your portfolio?...The best play here is... Fossil (FOSL), a company you probably know for its watches even as it's been diversifying into other accessories... watches aren't just the utilitarian objects they used to be. They don't just tell time. They're increasingly seen as the ultimate fashion statement... important accessories that need to be updated as styles change...

I know that this might seem crazy, not to mention unbelievably profligate to many of you. I mean, who needs more than one watch? Well, judging by Fossil's numbers, a lot of people. You don't have to understand the trend, you just have to recognize that it's here and it's powerful so get used to it or go listen to the conference calls to know better.

Fossil delivered a blowout quarter back on August 10th. Its 2nd Mammoth upside surprise in a row, which also got my attention, with earnings per share coming in at 58 cents. That's a 24 cent beat- 24 cents better than expected, sales up 31%, how many have I told you that actually have that growth? Very, very few... and that's year over year. It smashed Wall Street's estimates. Its operating margin... how much the company makes in each dollar of sales before paying interest on debt and taxes... 15.6%- up 850 bases points or 8.5 percentage points from the year before.

I can't believe it. Why? Higher price points. They're charging more for this kind of stuff. Forget what you hear about consumers in general because you're not going to buy a Fossil if you do. People who buy from Fossil are doing well enough to spend more on merchandise, and that's a discretionary issue, but it's working...

Even better, Fossil's forecast for the 3rd and 4th quarter were out of this world. Much higher than anything else we were looking for. And I still think that they're underpromising. Sales of Fossil brands watches... they count for half the company's revenue- up 28% worldwide. Overall, watch sales are up 39%.

Now, Fossil has its own stores. It has 201 in the U.S., 153 in the rest of the world. And the same-store sales rose 15.3% and 20.3% in U.S. stores. That's the highest same-store sale number that I've ever seen this year.

While the conference call management talked about a resurgence in the watch business, telling us, "We are seeing consistent growth across all our brands and virtually all our geographies". If we fuel that with our operating model, we are in a position to gain market share in a growing industry. That's Fossil talking. Talk about a smoking hot bull market. And I think Fossil is by far the best way to play it. Why? Because when someone buys a watch as a fashion accessory rather than just a timepiece, they want new... they want products that represent the latest style.

Unlike most of its competitors, Fossil turns its inventory over 4 times a year, creating new formulations in treatments in just 90 days. It's by far the fastest responder to new industry trends, and that's the secret behind their big gross margins and revenues. Fossil can charge more because it has what people want. The company also makes licensed watch lines for high end luxury brands like Burberry and Armani, and fashion-driven lines like Michael Kors. This is exactly what's selling.

I think we're still in the early innings of this story. Fossil now plans on aggressively adding new stores... there's been a multi-year hiatus on building stores... and they are now going to blow out the numbers... there's a lot more upside ahead. And they want to be able to capitalize on it. Plus, even though Fossil's up 32% year to date, the stock on a mobile basis is dirt cheap... 13 times earnings despite having a 17% long term growth rate. Remember, they had an accelerating growth rate. Today's pullback gave you a good chance to buy.

Don't want to buy Fossil? Alright... you want a broader exposure to accessories in general, then I'd go to Urban Outfitters. I know they're selling accessories like crazy. The company's a great incubator of new brands targeting different demographics... remember Anthropologie and my youngest daughter's favorite, Free People... Coach, too for a high end play on handbags. One that's aggressively expanding in China and seeing more growth from its men's business.

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#2) On August 23, 2010 at 10:52 AM, Valyooo (99.54) wrote:

I am with you (as usual) on COH, already bought it in real life and am up about a little on it. I set a limit order to sell at 40.25.  I can probably milk more out of it, but I don't have the patience to follow retailers for more than a 6.5% gain.

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