Fossil (NASDAQ:FOSL) reported comparable sales rose 2% in Q4 to sail the past the consensus estimate for a 6% drop. The magnitude of the sales beat isn’t seen often for a company the size of Fossil. Positive comparable sales growth in the watch category helped Fossil offset a negative comp in both the leathers and jewelry categories. Positive comparable sales in the Americas and Europe offset a drop in Asia.

Shares are rallying 65% on the news. Wow. Let us discuss a little further.

Fossil reporteda net loss for fourth quarter of fiscal 2017 of $(79.9) million compared to earnings of $49.7 million for the fourth quarter of fiscal 2016.  Diluted earnings per share were a loss of $(1.65), including tax charges of $2.20 per diluted share due to the impacts from the Tax Act combined with a valuation allowance and a restructuring charge of $0.09 per diluted share, as compared to positive earnings of  $1.03 for the fourth quarter of fiscal 2016.  Currencies, including both the translation impact on operating earnings and the impact of foreign currency hedging contracts, favorably affected the year-over-year earnings (loss) per share comparison by $0.09.

For fiscal year 2017, Fossil lost $(478.2) million compared to a gain of $78.9 million for fiscal 2016.  Diluted earnings per share were a loss of $(9.87), compared to $1.63 for fiscal 2016.  Diluted earnings  per share for fiscal 2017 of $(9.87) included non-cash intangible asset impairment charges of $7.07 per diluted share, tax charges resulting from the Tax Act and valuation allowance of $2.20 per diluted share and a restructuring charge of $0.65 per diluted share.  Currencies, including both the translation impact on operating earnings and the impact of foreign currency hedging contracts, unfavorably affected the year-over-year earnings (loss) per share comparison by $(0.01).

So why the massive rally? As we said in the opening, the comps were incredible. Global retail comps for the fourth quarter of fiscal 2017 increased 2% compared to the fourth quarter of fiscal 2016, with positive comps in the watch category partially offset by negative comps in the leathers and jewelry categories.  Positive comps in the Americas and Europe were partially offset by a decline in Asia.  For fiscal 2017, global retail comps decreased 6% compared to fiscal 2016, with declines across all regions.

While that may not seem impressive there is one key takeaway in the release which is insanely bullish. The CEO stated “In the year ahead, we expect to be a smaller yet more profitable company that is on a solid path for the future.” While overall sales will decline and the focus of the company shifts, it is going to make more money. That is what matters.

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