fossil_02 Fossil’s Heather Leather Watch. photography courtesy of Fossil

Fossil Inc. likes to say, “Long Live Vintage.” The tagline is a loving nod to the feel-good designs that Fossil keeps re-imagining and re-invigorating. But it’s also a subtle reminder that some simple, classic ideas are built to last. The company might as well wink and whisper, “Long live Fossil.”

If you don’t know Fossil products, take a closer look next time you’re shopping or get one of its 18 million catalogs in the mailbox. Fossil sold $1.8 billion worth of watches last year and $700 million in clothing, shoes, jewelry, and other accessories.

Watches range from no-name private labels for Wal-Mart and Target to $2,000-plus Swiss pieces at Neiman’s and Nordstrom. The sweet spot, the territory that Fossil wants to own, are watches that sell for $85 to $600. Fossil often commands a long sweep of counter space in the center of department stores—prime real estate reserved for small items that turn over fast and deliver big returns.

At its own stores in North America, Fossil generates $715 in sales per square foot, and its European outlet stores deliver $1,221. That’s roughly twice the performance of a typical U.S. specialty store.

More than half of Fossil sales are its own brands, but it also makes and markets watches and accessories that carry the names of Michael Kors, Armani, DKNY, Diesel and, starting next year, Karl Lagerfeld.

The Fossil story is already enshrined in the bootstrapper’s hall of fame. A 24-year-old college dropout, Tom Kartsotis tired of scalping tickets outside Texas Stadium and bet it all on making cheap fashion watches in Hong Kong. Older brother Kosta, then a Sanger Harris exec, helped get the line into department stores. Chief designer Lynne Stafford helped establish the retro Americana look and later married the founder. And lots of people got rich when the Richardson company went public in 1993.

But that was just the beginning. Fossil has roared on, swamping the competition and surviving the severe cycles of the global economy, fashion world, and retailing itself.

In 20 years, Fossil revenues grew from $57 million to $2.5 billion—an annual growth rate of almost 21 percent. That’s worth repeating: Fossil has sustained that huge growth for two decades. It never reported an annual loss, and operating income soared 40-fold.
This was a scalable business before the Internet popularized the concept. Built product by product, store by store, country by country—around the idea that great design, low prices, and broad distribution would carry the day.

Along the way, Fossil was transformed from a small watch company into what it calls an international lifestyle brand. That’s a fancy way of saying that people want its clothing, too, and handbags, wallets, shoes, jewelry, and sunglasses. Even Fossil’s free downloadable wallpapers are cool.

And pick your point of diversification: by product, by geography, wholesale vs. retail, licensed brands vs. Fossil.

It even has 104 outlet stores, and more on the way, because there’s a big return in liquidating your own merchandise. Same-store sales at Fossil outlets rose 26 percent last year, which makes for a winning hedge against a slowing economy.

None of this was a gimme. Watches accounted for 72 percent of Fossil revenue last year—and who knew this would be a hot sector with such staying power? Every (rare) time that sales slip, analysts complain that cellphones are finally making watches obsolete, only to have Fossil prove them wrong a little later.

Speed Bump
Fossil has helped turn watches into must-have, can-have fashion accessories. It tries to get a design edge with new materials for dials, crystals, and straps. In the early days, it created tin boxes to hold watches, a mid-century throwback that became a Fossil signature—and remains beloved today. And if watches are about the look, rather than the utility, one is never enough.

During a five-year span, Fossil sales doubled, including a $500 million increase in 2011. In two years, net income doubled. The stock also was on fire, rising 246 percent from January 2007 to January 2012, a time when the Dow and S&P 500 both lost ground.

At the end of last year, Fossil had 13,100 employees, with more than half outside the country. About 1,100 work in the headquarters in Richardson, and more than 500 at a Dallas distribution center.

For a while, it seemed that Fossil had no limit. Then it hit a speed bump, and investors went over the edge. On May 8, the stock price dropped 38 percent on 16 times the usual volume.

fossil_03 The headquarters reception area features a “watch case” wall. (Right and below) Different views of a headquarters huddle room and the company staircase. photography courtesy of Corgan Associates

Fossil disappointed investors, because first-quarter sales rose just 9.8 percent, and it also trimmed full-year forecasts. The big problem was in Europe, where sales rose just 4.7 percent. For 2012, Fossil still projected a 16 percent increase in sales, with stronger profits.

Those are hearty numbers, but Fossil is graded on a curve. One analyst wrote that the punishment didn’t fit the crime, and she reduced her projections for Fossil’s five-year growth rate to 15 percent. If that’s the fallback position, you get an idea of the strength of the business.
Sure enough, in the second quarter, Fossil reverted to form, with sales and net income growing by double digits again. Even Europe, still mired in economic crises, bought 14 percent more Fossil stuff.So Wall Street whipsawed the company again: Its stock price soared 31.5 percent, easily leading the S&P 500 members that day.
Still, it’s fair to wonder how long Fossil can produce like this, gobbling up market share at home and growing abroad. In the 2000s, when sales fell at U.S. department stores and discounters, the annual growth rate at clothing and accessories stores was 2.5 percent. But Fossil grew six times faster over the same period.

Was the first-quarter slip a sign that Fossil may finally start topping out? Or was the company just catching its breath so that, three months later, it could resume its relentless march forward?

“Huge Demand”
One analyst urged executives to look ahead over the next five years and consider whether Fossil should choose between licensed watches and its lifestyle brands. The former has grown much faster, but the latter is a great way to leverage the Fossil name.

It was a kind way of asking whether management could handle it all. “We still think there’s a bunch of runway ahead for Fossil,” CEO Kosta Kartsotis said in the conference call in May. In August, he was even more bullish: “We have a lot of opportunity to get better at what we do,” Kartsotis told analysts.

fossil_04 Fossil's Estate Varsity Duffel. photography courtesy of Fossil

By sharing distribution, marketing, retailing, and its all-important design staff, the company can expand at a discount. It can ride the Fossil brand into multiple categories for far less than operating a separate company, an efficient way to penetrate fast-growing markets in China and Korea. Asia’s middle class is about to have an epic growth spurt and, by 2020, the Pacific will have more potential Fossil customers than North America and Europe combined.

Fossil wants to be there with everything, not just fashion faves like Michael Kors. “To us it’s a very compelling business model,” Kartsotis said.

In other words, Fossil is all in, with the CEO saying it’s the early innings of a large multi-year opportunity. Rather than retreat, the company plans to open 75 stores this year. It wants to add 65 to 70 concession areas in Asia, so it will have 280 in place by year-end. Fossil manages those retail counters and pays a commission to department stores.

Changes are under way, but they’re more like an eyebrow tweeze than a makeover.  The company has about 30 percent fewer items in its catalog, so it can “tell fewer stories and tell them much better,” Kartsotis said. And the emphasis is on iconic styling, rather than fashion.
I wouldn’t know the difference between an icon and a fashion item, but I know that Fossil’s look always seems to work. Vintage style, mid-20th century inspiration, roots in authenticity—those are phrases that inform the designers’ thinking and seep into every corner of the company. Even its new headquarters in Richardson was recycled in modern vintage.

As Fossil becomes larger, it’s harder to move the needle on sales. In April, Fossil completed the purchase of Skagen Designs, a Danish watchmaker and jewelry company. It plans to “turbo-charge” the business by funneling it into the Fossil machine, which is one more way to counter a slowdown. In the second quarter, Skagen accounted for much of the sales gain in Europe.

In 2009, after the Great Recession, Fossil sales slipped 2 percent. The company stormed back the next two years, with gains of 31 percent and 26 percent. In 2001, during another recession, sales growth fell into single digits; then Fossil strung together three years of gains averaging more than 20 percent.

So Fossil has been knocked back before, but not down. In 1995, two University of Baltimore professors wrote a case study on Fossil, detailing how Tom Kartsotis came out of nowhere to build a fashion watch company. The report included the strategies laid out in the initial public offering, and the priorities then are the same today.

One more common thread: doubts about how long Fossil could maintain the pace. The company’s success, the professors wrote, had attracted attention, so it was sure to face tougher competition and plenty of imitators.

"Future growth was likely to be even more challenging than past accomplishments,” they concluded.

In 1995, they couldn’t have been more wrong. For a short time last spring, Wall Street didn’t know much better.