Fossil Group Inc(NASDAQ:FOSL 22.7% Discount)

Austin Partridge | Charlene Shu | Michael Tian | Himanshu Gaur | Megan Tran-Olmsted

Background & Thesis

Background &

Thesis

Company Overview

Industry Overview

Risks & Mitigants

Financial Valuation

Investment Thesis

Kors watch brand stronger than perceivedLimited impact from smart watchesStrong growth in foreign markets

①②③

Company Overview

Background &

Thesis

Company Overview

Industry Overview

Risks & Mitigants

Financial Valuation

Upwards Mobility

Multi-faceted Growth International Growth

Europe growth higher relatively

Acquisitions create foreign presence

Wholesale retail cuts physical location

expenses Partnerships with well known

brandsAffordable relative to timepiece industry

International brand rapid growth

Background &

Thesis

Company Overview

Industry Overview

Risks & Mitigants

Financial Valuation

SWOT AnalysisStrengths: • Low expenses due to large

online and wholesale retailer presence

• Price range hits sweet spot for consumer needs

• International market presence

Weaknesses: • Main source of revenue is in

one product• Competitive market • Strengthening of dollar

Opportunities: • Founder Q – line of connected

accessories• Emergence in international

markets via mergers and acquisitions

• US brands to EMEA and EMEA brands to US

Threats: • Apple presence in

smartwatch industry• High reliance on single brand

– Michael Kors• Younger generation has less

interest

Background &

Thesis

Company Overview

Industry Overview

Risks & Mitigants

Financial Valuation

The Billion Dollar Share Buyback

2010 •$750 million share repurchase enacted •Goal: Double company size in 5 years

2014 •Upgraded to $1 billion share buyback program•2014 Q3 Report EPS $.14 higher than expected

?? •Incentivizes and rewards shareholders•Trust in company future

Background &

Thesis

Company Overview

Industry Overview

Risks & Mitigants

Financial Valuation

North America: 10.68% ↑Europe: 25.15% ↑Asia: 17.97% ↑

Revenue Breakdown - Region

North America Europe Asia 0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1083.5

697

361.5

1216.6

828.1

396.7

1213.1

931.2

440.7

Wholesale Revenue By Global Region

201220132014

Rev

enue

(M

illio

ns)

Background &

Thesis

Company Overview

Industry Overview

Risks & Mitigants

Financial Valuation

Revenue Breakdown - Product

2011 2012 2013 20141500

1750

2000

2250

2500

2750

1843.9

2141.5

2513.1

2736.5Watch Revenue

Reve

nue

(Mill

ions

)

78%

12%

8%2%

Revenue by Product

Watches Leather Jewelry Other

Background &

Thesis

Company Overview

Industry Overview

Risks & Mitigants

Financial Valuation

Management

2000 – Kosta Kartsotis, CEO

2012 – Dennis Secor, CFO

$0 SalaryEffective Leadershi

p

Former Guess CFO

Global Focus

Industry Overview

Background &

Thesis

Company Overview

Industry Overview

Risks & Mitigants

Financial Valuation

LOW

Porter’s Five Forces

Barriers to Entry

Industry Dynamic

Porter’s Assessment

Rationale

Bargaining Power of Buyers

MEDIUM

Intensity of Rivalry MEDIU

M• Traditional watches

threatened• Tech giants like Apple hold

majority in smartwatch industryThreat of

Substitutes LOW • Low quality counterfeits• Luxury goods are not replaced

by technological advancementsBargaining

Power of Suppliers

LOW • Exclusive manufacturing contracts

• Suppliers hard to replace, but cannot survive without Fossil

• Decreasing brand loyalty• Offset by high switching costs

between smartwatches

• Easier branding techniques such as social media marketing and leveraging influencers

Background &

Thesis

Company Overview

Industry Overview

Risks & Mitigants

Financial Valuation

2013 2014 2015P 2016P 2017P 2018P 2019P0

102030405060708090

100

Global Watch Market Size

Global Watch Market

24%

11%9%

9%

47%

US Fashion Watch MarketFossilCasioTimexMKOther

16.4%

8.5%6.3% 6.0%

4.7% 4.0% 3.7%2.6% 2.5%

Global Market Share

6% CAG

R

Worldwide watch market is increasing despite growing smartwatch popularity.

Fossil leads US in watch market, third worldwide.

Background &

Thesis

Company Overview

Industry Overview

Risks & Mitigants

Financial Valuation

Foreign GrowthForeign demand is increasing

Demand for timepieces has not declined in recent years due to increased foreign demand, particularly in China.

Growth in spite of smartphones

Risks & Mitigants

Background &

Thesis

Company Overview

Industry Overview

Risks & Mitigants

Financial Valuation

Risks & Mitigants

Decline in Kors brand popularity could carry over to diminish popularity of Kors watches

Michael Kors Smart Watches

Long-term impact of smart watches unknown

Daniel Wellington

Increasingly lower barriers to entry could cut into Fossil’s market share

Financial Valuation

Background &

Thesis

Company Overview

Industry Overview

Risks & Mitigants

Financial Valuation

Fossil Urban Outfitters

Coach Columbia Guess Kate Spade0

5

10

15

20

25

30

35

Price/Earnings

Fossil Guess Urban Outfitters

Coach Columbia Kate Spade0

5

10

15

20

25

EV/EBITDA

Comparable Companies

Background &

Thesis

Company Overview

Industry Overview

Risks & Mitigants

Financial Valuation

Comparables AnalysisCompany Ticker Forward P/EUrban Outfitters URBN 14.43xCoach COH 16.48xColumbia COLM 21.39xGuess GES 22.4xKate Spade KATE 31.42x   Fossil FOSL 10.12x

  MultiplePrice Estimate (@EPS of $5.09)

High 31.42x $159.92 Mean 22.9x $116.56 Low 14.43x $73.44

Background &

Thesis

Company Overview

Industry Overview

Risks & Mitigants

Financial Valuation

Revenue Projections2010 2011 2012 2013 2014 E2015 E2016 E2017 E2018 E2019 E2020

Net SalesNorth America 779.2 967.5 1083.5 1217 1213 1,189.03 1,236.59 1,273.69 1,299.16 1,312.16 1,325.28 % Growth 24.2% 12.0% 12.3% -0.3% -2.0% 4.0% 3.0% 2.0% 1.0% 1.0%EMEA 768.2 992.4 1058.5 1225 1354 1434.51 1506.24 1532.43 1578.40 1589.63 1621.42% Growth 29.2% 6.7% 15.7% 10.5% 5.9% 5.0% 1.7% 3.0% 0.7% 2.0%

StoresNorth America 191 212 247 273 296 305 317 327 333 336 340% Growth 11.0% 16.5% 10.5% 8.4% 3% 4% 3% 2% 1% 1%EMEA 166 186 226 270 297 312 327 341 351 361 369% Growth 12.0% 21.5% 19.5% 10.0% 5% 5% 4% 3% 3% 2%

Revenue Per StoreNorth America 4.08 4.56 4.39 4.46 4.10 3.90 3.90 3.90 3.90 3.90 3.90 % Growth 12% -4% 2% -8%EMEA 4.63 5.34 4.68 4.54 4.56 4.60 4.60 4.50 4.50 4.40 4.40% Growth 15% -12% -3% 0%

Total Wholesale 1547.4 1959.9 2142 2442 2567 2623.54 2742.83 2806.12 2877.57 2901.78 2946.70% Growth 26.7% 9.3% 14.0% 5.1% 2.2% 4.5% 2.3% 2.5% 0.8% 1.5%

Background &

Thesis

Company Overview

Industry Overview

Risks & Mitigants

Financial Valuation

DCF2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Revenue203069

0256730

2285750

8325997

1350969

1 3586997 3750090 3836627 3934311 3967420 4028828% Growth 26% 11% 14% 8% 2.2% 4.5% 2.3% 2.5% 0.8% 1.5%

COGS 875526112811

6125096

5139828

5150851

9 1554605 1625289 1662794 1705131 1719480 1746094% Revenue 43.1% 43.9% 43.8% 42.9% 43.0% 43% 43% 43% 43% 43% 43%Gross Profit

1155164

1439186

1606543

1861686

2001172 2032393 2124801 2173833 2229181 2247940 2282734

SG&A 738190 915270105216

7121815

4133870

5 1485017 1552537 1588364 1628805 1642512 1667935% Revenue 36.4% 35.7% 36.8% 37.4% 38.1% 41% 41% 41% 41% 41% 41%EBITDA 416974 523916 554376 643532 662467 547376 572264 585469 600376 605428 614799

DA 40560 51925 65536 81936 95931 71740 75002 76733 78686 79348 80577% Revenue 2.0% 2.0% 2.3% 2.5% 2.7% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%EBIT 376414 471991 488840 561596 566536 475636 497262 508737 521690 526080 534223

Taxes 119320 144157 137963 173419 171467 148398 155146 158726 162767 164137 166677% EBIT 31.7% 30.5% 28.2% 30.9% 30.3% 31% 31% 31% 31% 31% 31%NOPAT 257094 327834 350877 388177 395069 327237 342116 350011 358922 361943 367545

Add:DA 40560 51925 65536 81936 95931 71740 75002 76733 78686 79348 80577Less:CAPEX 46500 109900 112400 95200 94800 96348 106816 106168 104860 106888 109427Less:DNWC -85900 -44100 -42800 -77500 -8500 -49172 -42194 -41831 -41647 -34835 -39839UFCF 337054 313959 346813 452413 404700 351801 352496 362406 374396 369238 378534PV 325784 302286 287801 275335 251460 238726

Background &

Thesis

Company Overview

Industry Overview

Risks & Mitigants

Financial Valuation

DCFWACC 7.99%Cost of Equity 9.38%rfr 2.25%mrr 10%β 0.92

%Equity 83.30%Cost of Debt 3.40%%Debt 16.70%Tax Rate 30.31%

Implied ValuationEV/EBITDA Multiple 4.87Terminal Value 2994072Discounted Terminal Value 2039031Enterprise Value 3720423Net Debt 510000Shares Outstanding 48150Implied Share Price 66.68$ Current Share Price 54.32Implied Discount 22.70%

3x 4x 5x 6x 7x6% 1.6% 19.2% 36.7% 54.3% 71.9%7% -2.9% 13.8% 30.6% 47.3% 64.1%8% -7.2% 8.7% 24.7% 40.7% 56.7%9% -11.3% 3.9% 19.2% 34.5% 49.8%10% -15.2% -0.6% 14.0% 28.6% 43.2%

Background &

Thesis

Company Overview

Industry Overview

Risks & Mitigants

Financial Valuation

Conclusion

Kors watch brand stronger than perceivedLimited impact from smart watchesStrong growth in foreign markets

①②③

Background & ThesisQuestions?