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Factors You Must Note Ahead of Fossil's (FOSL) Q4 Earnings

Zacks Equity Research

Fossil Group, Inc. FOSL is slated to come up with fourth-quarter 2018 results on Feb 13. This renowned manufacturer of watches and other accessories has a robust earnings surprise history, as its bottom line has outperformed the Zacks Consensus Estimate considerably over the trailing four quarters. Let’s see how the company is positioned ahead of the upcoming quarterly results.

Fossil Group, Inc. Price and EPS Surprise



Fossil Group, Inc. Price and EPS Surprise | Fossil Group, Inc. Quote

What to Expect?

The Zacks Consensus Estimate has remained stable in the past 30 days at $1.27, which reflects significant growth from the year-ago quarter figure. However, the consensus mark for revenues is $810 million, depicting a drop of 12.1% from revenues recorded in the year-ago quarter.

Will Soft Traditional Watch Sales Linger?

Fossil has been witnessing soft sales in traditional watches for a long time now due to increased competition and rising demand for technologically-advanced watches. Further, sales of leather and jewelry have persistently been weak on account of soft demand. Well, these trends persisted in second-quarter 2018, wherein jewelry and leather business sales fell 11.5% and 11.9% (on constant-currency basis) respectively, with declines across most geographical regions. Also, the company’s watch sales dropped 10.7% (on constant-currency basis), mainly due to sluggishness in the traditional category and shutting down of underperforming stores. Management earlier projected traditional watch category to remain challenged in 2018, particularly the wholesale business. In fact, Fossil’s sales have been declining year over year for more than two years now, owing to continued softness in the traditional watch category, and exit of Burberry and Adidas licensed brands. Evidently, Fossil’s sales dropped 11.6% year over year to $608.8 million in the third quarter.

To keep up with changing consumer trends, Fossil has been well-focused on expanding in the growing wearables space. Well, the wearables market provides Fossil the opportunity to combine fashion and technology, and come up with exciting products to cater to consumers’ evolving needs of tech-enabled advanced connected gears. Fossil recently launched approximately 14 new hybrid and smartwatches across several brands. Driven by such efforts, the company’s connected watch sales jumped almost 30% year over year in the third quarter of 2018. Also, wearables represented roughly 18% of the company’s total watch sales in the quarter, marking a steady improvement from 13% in the year-ago period. As the wearables business is expected to grow $32 billion by 2020, Fossil’s efforts to expand bode well. Fossil is also well on track to expand its digital platform and meet consumers’ growing demand for online purchasing. To this end, the company has been making several investments to improve digital marketing and drive online sales, both for the company’s website and other online wholesale partners. The e-commerce platform has also served as an important sales channel for wearables.

Though these upsides and Fossil’s various licensing deals bode well, we believe it may take time for these efforts to completely offset the softness in the aforementioned categories. The company earlier projected net sales to decrease 7-9% in 2018. Now, Fossil expects net sales to decline 10-16% during the fourth quarter. Clearly, these factors make us apprehensive about Fossil's top line in the quarter to be reported.

New World Fossil Plan to Provide Cushion?

Fossil is on track with its New World Fossil Plan, which aims at fuel efficiency, improving margins and enhancing the overall operating structure. The company intends to achieve these targets while simultaneously enriching customers’ experience amid a difficult retail landscape. The company has initiated the second phase of the transformation plan. It now focuses on prioritizing consumer market and channel opportunities, revenue optimization, delivering gross margin and productivity savings. On the back of this initiative and other strategic plans, the company expects to achieve gross profit improvement of $200 million by the end of 2019. For 2018, the company anticipates $60 million improvement in profit backed by expansion in gross margin and reduced SG&A expenses. These factors should aid Fossil’s bottom line in the impending quarter.

What the Zacks Model Unveils

Our proven model doesn’t show a beat for Fossil this earnings season. For this to happen, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Though Fossil carries a Zacks Rank #2, its Earnings ESP of 0.00% makes surprise prediction difficult.

Stocks Poised to Beat Earnings Estimates

Here are some companies you may want to consider, as our model shows that these have the right combination of elements to post earnings beat:

Five Below FIVE, a Zacks #2 Ranked stock, has an Earnings ESP of +0.45%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Costco Wholesale Corporation COST, a Zacks #3 Ranked company, has an Earnings ESP of +2.46%.

Burlington Stores BURL has an Earnings ESP of +0.40% and a Zacks Rank of 3.

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