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Fossil Continues to Decline, Sluggish Watch Sales a Concern

Zacks Equity Research

Fossil Group Inc. FOSL has been disappointing investors of late due to the multiple headwinds plaguing the broader retail industry as well as continued weakness in traditional watches. If we analyze the last six months’ performance of the company, we note that Fossil’s shares have slumped 61.7% as compared with the industry’s 23.5% decline.

On the other hand, the broader Retail and Wholesale sector has gained 9.7% in the last six months. Notably, the industry is part of the top 45% of the Zacks Classified industries (118 out of the 265).

Let’s take a look at the factors that is taking the Zacks Rank #4 (Sell) company downhill.

Weak Quarterly Performance, Estimates Going Down

Analysts have become increasingly bearish on the stock over the last 7 days with estimates moving south. The Zacks Consensus Estimate for 2017 is pegged at 73 cents, down from 93 cents per share in the said time frame. Similarly for 2018, the Zacks Consensus Estimate declined from $1.11 per share to 85 cents, over the same time frame.

Fossil recently reported narrower-than-expected loss in the second quarter 2017 results, while sales lagged the Zacks Consensus Estimate. Both losses and revenues were unfavorable from the year-over-year due to decline in traditional watches sales, sluggish leather and jewelry business as well as unfavorable currency. Further, this global consumer fashion accessories maker gave a bleaker outlook. Notably, the company’s sales have lagged the Zacks Consensus Estimate in nine out of the last 11 straight quarters.

Soft Watch Sales and Sluggish Leather Business

Fossil has been witnessing soft sales in traditional watches since long time now, due to increased competition in the market. Rising demand for technology in watches have also dented the demand for traditional watches. Also, volatility in sales pattern is expected as consumer preferences evolve around the globe.

Also, the success of the Michael Kors brand is overshadowing other brands’ performance. Moreover, the announcement of Burberry exiting the watch business in Jan 2016 has also hurt the company’s business, as the brand will not renew its license agreement with Fossil upon its expiration at the end of 2017. The company continues to expect weakness in this category in the near term.

Further, sales of leathers have persistently been weak as customer response to the assortment continues to put pressure on results. Decline in traditional watches and weak leather business also hurt sales in the Americas, Europe and Asia regions during the first half of 2017.

Pressurized Margins

Fossil has been witnessing lower margins in the retail channel, primarily due to increased promotions to drive sales in the outlets and online as well as higher mix of connected products, which currently deliver lower margins. The company expects the trend to continue throughout the balance of the year.

Decelerating Growth in Key International Markets

Fossil is facing economic challenges in many of the key markets. In the first half of fiscal 2017, Americas, Europe and Asia declined due to decline in traditional watches and leathers business, primarily offset by connected watches. Modest growth in Spain was offset by declines in the UK and Middle East with both the wholesale and retail channels decreasing across the region. Growth in India and China was offset by a decline in Japan and Australia.

Other Headwinds

Fossil remains exposed to challenges relating to the rapid changing consumer shopping behaviors as well as unfavorable foreign currency translations for its products sourced internationally. Going forward, currency rate fluctuations are expected to hinder the company’s sales and overall profitability. Fossil also remains susceptible to other economic challenges in many of its key markets. The company also faces the risk of import restrictions such as antidumping or countervailing duties, tariffs or other restrictions, as most of its products are manufactured overseas.  

Fossil Group, Inc. Price, Consensus and EPS Surprise


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

Bottom Line

Though Fossil has been delivering sluggish results for a long time now, due to its factors affecting the broader retail industry, as well as continued weakness in traditional watches, we remain positive on the stock owing to its expansion in the wearable space. Keeping in mind the rising demand for technology in wrist wear, the company has planned to roll out a significant number of new wearable products in the coming months.

The company is also spending on marketing to build awareness for the new functionality available in these fashion-first technology accessories. In fact, the company remains confident that wearables have the ability to help mitigate the ongoing softness in the traditional watch category. However, whether these ongoing initiatives will be able to spark a turnaround in the company’s performance is a wait-and-watch story.

Stocks to Consider

Investors interested in the same space may consider some better-ranked stocks like J.C. Penney Company, Inc. JCP, Canada Goose Holdings Inc. GOOS and The Gap, Inc. GPS. While J.C. Penney sports a Zacks Rank #1, Canada Goose and Gap carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

While J.C. Penney has an expected long-term earnings growth of 16.0%, Canada Goose and Gap have an expected earnings growth of 47.0% and 8.0%, respectively, for the next three to five years.

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