) -- Is


(FOSL) - Get Report

, the maker of watches and other accessories, a short seller's dream?

Short interest, the percentage of outstanding shares that investors are betting will fall, is just over 9%, the same as it was before the company raised 2012 guidance in mid-February. Short interest typically declines after positive news as investors grow more bullish.

Going into the last quarter's release, investors were worried about Europe and the implications from the decline in the euro. On top of that, the company had just announced the acquisition of Skagen Designs, a Dutch maker of watches, jewelry, sunglasses and clocks mainly for the European market, as the European financial debt crisis mounted.

Despite those concerns, the stock had appreciated more than 30% in six weeks, making a short position understandable. Adding fuel to the fire, Brean Murray downgraded the stock.

Then the shares popped another 15% the day the company reported earnings, and three more downgrades followed.

So where is the opportunity? Gross profit margins and the Skagen acquisition are the answers. Margins have been under pressure for some time now given higher labor costs overseas and increased commodity costs. Pressure from commodities will ease in the second half of the year, and the company is implementing price increases. And there's been an improvement in the euro -- up 4% since reaching a low in January. Combine all that with a better mix of exposure to the higher-margin international segments, and you have improving profits.

The Skagen acquisition is expected to close at the end of this month, yet few Wall Street analysts have included the impact from the deal in their models. Ike Boruchow, equity research analyst at


(JPM) - Get Report

, says Skagen can add $0.45 to $0.50 to 2013 earnings, which would warrant upside to the stock price that isn't being accounted for. Boruchow says "numbers could move materially higher and business could potentially inflect in the second half of the year," driven by gross margins.

Also adding to the Fossil story is the above-average square-footage growth management is planning -- at 13% to 14% annually. That compares to an average growth rate of 3% to 4% in the specialty retail space overall, and is in line with other high-growth retailers like


(LULU) - Get Report


Rue 21


. Throw in the success of the

Michael Kors


license, which generated about $300 million in revenue last year and management expects that to grow to $550 million in the next few years through international expansion and product expansion (into jewelry), and everything's looking up.

It's certainly a compelling story, but, still, the stock is up 67% this year.

And there's increased competition in the mid-tier watch segment. While many analysts say watch sales have much more room to grow, there has been a proliferation of watches coming from well-known designers and lesser-known clothing companies. That has Brian Sozzi, chief equities analyst for NBG Inc., concerned.

"I'm not sure 20% operating margins are sustainable on Fossil due to increased competition and the cost outlook overseas," he says.

It might not be the time to buy shares of Fossil, but if the company does delivers on margins and the Skagen acquisition, the disconnect with the short sellers will close and those betting against the stock will get squeezed out.


Written by Lindsey Bell in New York.

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Lindsey Bell


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