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Factors Setting the Tone for Fossil (FOSL) in Q1 Earnings

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United Community Financial (UCFC) delivered earnings and revenue surprises of 0.00% and -1.25%, respectively, for the quarter ended September 2018. Do the numbers hold clues to what lies ahead for the stock?

Fossil Group, Inc. FOSL is slated to release first-quarter 2018 results on May 8. This designer and manufacturer of accessories has outperformed the Zacks Consensus Estimate in three of the past four quarters, the average beat being 36%. Let’s see what awaits this quarterly release.

Factors Influencing the Quarterly Results

Top & Bottom-Line Story Dreary

Fossil has been witnessing soft traditional watch sales for long due to increased competition and rising demand for more advanced versions.Sales of leather and jewelry have also persistently declined over the past few quarters on account of sluggish demand. These trends were reflected in the company’s fourth-quarter 2017 results, wherein jewelry and leather business sales fell 9% and 14% (on constant-currency basis), respectively, owing to declines across all the broad geographical market regions. Also, watch sales dropped 3% mainly due to sluggishness in the traditional category.

Well, these concerns have been leading to dismal results for more than two years, with both the top and the bottom line declining year over year. For first-quarter 2018, the company expects net sales decline of 6-12%. Moreover, analysts polled by Zacks expect revenues of $539.4 million, down 7.3% from a year ago.

Fossil Group, Inc. Price, Consensus and EPS Surprise

 

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

The Zacks Consensus Estimate for first-quarter bottom line is pegged at a loss of $1.05, wider than the loss of 35 cents reported in the year-ago quarter. Notably, the estimate has remained stable in the last 30 days.

Will the Margin Debacle Continue?

Fossil has been witnessing lower gross margin for a year now, primarily due to a weak retail margin stemming from increased promotions to drive sales (in stores and e-commerce) as well as higher mix of connected products. In the fourth quarter, gross margin contracted 230 basis points to 48.7% due to lower margins from connected products and increased product valuation reserves.

Lower retail margins from greater promotional activity, unfavorable currency impact and increased off-price sales dented the gross margin. Prior to this, gross margin had contracted 580 bps, 140 bps and 300 bps in the third, second and first quarter of 2017, respectively.

However, for first-quarter 2018,management anticipates gross margin in the range of 50-52%, reflecting a marginal improvement from the year-ago quarter’s 49.8%.It seems that the company is well on track with its New World Fossil plan which helped cut costs by $95 million in 2017, positioning it well to achieve the profit improvement target of $200 million by the end of 2019.

Key Catalysts

Fossil has been taking significant efforts to keep pace with the rising demand for technologically advanced watches. Notably, wearables represented more than 20% of the company’s sales in the fourth quarter, marking a steady improvement on a year-on-year and sequential basis.

As the wearable business is expected to grow $36 billion by 2020, Fossil is poised to improve its wearables portfolio by adding new brands to its smartwatch line-up in 2018. Powered by Android Wear, these brands will add premium brands to Fossil’s portfolio like Diesel, Emporio Armani, Fossil, Michael Kors and Misfit.

Given the favorable consumer response and impressive performance by some of the key brands, management believes that wearables can play a key role in turning Fossil’s performance around. Thus, it plans to carry out incremental marketing investments in this category.

Fossil is keen on expanding its digital platform and meet consumers’ growing demand for online purchasing. Toward this end, the company has been making several investments to improve digital marketing and drive online sales, both for the company’s website as well as other online wholesale partners.

In fact, such dedicated endeavors in the e-commerce space bore favorable results in the fourth quarter of 2017. E-commerce sales during the period rose as much as 31%. The e-commerce platform has also served as an important sales channel for wearables. Further, management is optimistic regarding the company’s expansion plans in the smartwatch and other digital offerings category and expects such moves to bolster online sales.

What the Zacks Model Unveils

Nevertheless, our proven model shows that Fossil is likely to beat bottom-line estimates this quarter. 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.

Notably, Fossil has a Zacks Rank #3 and an Earnings ESP of +4.58%. This makes us reasonably confident of an earnings beat.

Other Stocks With Favorable Combination

Here are some companies that possess the right combination of elements to post an earnings beat:

Urban Outfitters, Inc. URBN has an Earnings ESP of +0.62% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Nordstrom, Inc. JWN has an Earnings ESP of +8.97% and a Zacks Rank #2.

Abercrombie & Fitch Co. ANF has an Earnings ESP of +5.30% and a Zacks Rank #3.

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