From Star-Telegram:

By MITCHELL SCHNURMAN
schnurman@star-telegram.com

Fossil Inc. loves to use vintage images from the 1950s, and the company’s business strategy couldn’t be more retro: Want it done right? Do it yourself.

Designing, manufacturing, retailing, advertising, graphics, architecture, factories in the Far East — Fossil doesn’t just tap these specialties and resources, it owns them.

In an era of the virtual corporation, in which every service imaginable is often outsourced and subcontracted, Richardson-based Fossil has emerged as a one-stop shop for fashion and design.

It’s an expensive, labor-intensive proposition, demanding just the right eye for trends. Companies can easily grow too fast or reach beyond their competency, and when the economy turns, they’re exposed.

Not Fossil. Most of its competitors struggled last year and retreated to survival mode as the recession deepened. Fossil reset expenses early and then grabbed for market share, confident that consumers would snatch up its new designs.

The company ended the year with $1.5 billion in sales and a record $139 million in profits, continuing a string of profitability that dates to before it went public in 1993. The real rush came in the fourth quarter, when Fossil’s net income jumped 51 percent and direct-to-consumer sales (as opposed to its wholesale business) rose 22 percent.

In the past 12 months, Fossil’s stock price has almost tripled.

“In some ways, it was one of our best years,” CEO Kosta Kartsotis told analysts last month. “It was not about price, it was about putting something different into the marketplace that will get the attention of customers. You could make the case that right now our product offerings in all brands and categories are better than they’ve ever been.”

Credit Fossil’s do-it-yourself concept, its execution and a strong balance sheet with almost no debt. But at its core, Fossil is about a culture devoted to design and the Fossil brand.

Underscoring its ethos is a short line in Fossil’s SEC filings: “Senior management is actively involved in the design process.”

Fossil is best-known for making watches, the business that started it all in 1984 and still accounts for two-thirds of annual sales. Timepieces don’t sound like a growth strategy in a world teeming with smart phones and netbooks, but Fossil and others have turned them into a fashion statement.

The breadth and depth of Fossil’s watch lines, plus its sales approach, reflect the company’s ambitions. Prices range from $7 to $2,395, and they’re sold in department stores (Dillard’s, Macy’s, Neiman Marcus, Nordstrom, J.C. Penney and more), in specialty stores, on cruise ships, on airlines and in Fossil outlets. They’re also sold business-to-business, online and through catalogs.

Fossil boosted its catalog run almost 40 percent last year, to 10 million pieces, at a time when most companies pulled back from that channel.

Fossil’s proprietary watch designs accounted for $938 million in sales. The rest came from licensed brand names like Michael Kors, Marc Jacobs and Emporio Armani.

In 2006, the company licensed Adidas to move into the sports category, another nod to its growing appetite.

Fossil has moved far beyond its watch roots. It also makes clothing, handbags, jewelry, belts, sunglasses and, starting last year, women’s shoes. Expanding into new categories and leveraging the Fossil brand could double the company’s revenue to $3 billion within five years, says analyst Matthew McClintock of Barclays Capital.

If that’s not demanding enough, Fossil operates 354 retail stores, including a dozen in North Texas. The company sells throughout the world, expanding recently into China, Korea and India, and it plans to open 50 stores in 2010.

It has a big in-house media operation, churning out hand-drawn graphics, posters, packaging and sexy images from a photo staff as large as this newspaper. Fossil even has its own architects to design its stores.

The company has 150 designers, most based in the sprawling Richardson headquarters. Each product or service category has a distinct area — watches on the ground floor, apparel on one side, a large photo studio in the center and graphics spread out in its own work zone.

“Creatives are seen as an asset; they make Fossil work,” says Tim Hale, senior vice president for marketing and design, and an 18-year veteran.

Long ago, Hale developed a line of metal tins to hold watches, and the vintage packaging burnished Fossil’s image. He also started a design library now stocked with loads of 1950s-era magazines like McCall’s.

Fossil gets most of its revenue from the wholesale business, which includes department stores. But having its own outlets gives Fossil some great advantages. It earns higher operating margins on merchandise and, perhaps as important, can test products quickly.

Last year, department stores were reluctant to try new items because they were overstocked and spooked by the recession. Fossil knew it had some hot sellers, based on feedback from its stores, so it loaded up on fresh inventory.

Same-store sales increased 12 percent in the fourth quarter.

“We’re maniacs about reading sales information,” says Mike Kovar, chief financial officer. “One thing we recognize is that the consumer is always right. We try to read what they’re saying and get it out there fast.”

Fossil began by making fashionable low-cost watches, jumping into a category that Swatch had pioneered. It adopted a vintage feel, with retro-style logos and taglines like “Genuine Classics” and “Authentic Fossil.”

About three years ago, the style evolved into what Fossil calls modern vintage, a more classical look inspired by mid-20th-century designers like Frank Lloyd Wright and Charles and Ray Eames.

It’s not usual for Fossil to throw out a fashion shoot, a poster or even a product line because it’s not quite right. Everything has to fit the Fossil brand and reinforce the Fossil lifestyle, and that’s possible when all the talent is in-house.

“It’s a concerted effort to tell the story our way,” says Jennifer Pritchard, president of Fossil’s retail operations.

“You may not get a second look,” Hale adds.

At a company so focused on design and presentation, no detail is too small to leave to chance. Tucked behind the front desk in the headquarters’ foyer, there’s a reminder for Fossil’s receptionist.Picture 1