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Fossil Down 42% in 6 Months: Is There Room for Recovery?

Zacks Equity Research

Fossil Group, Inc. FOSL is in troubled waters for a while now, owing to its dismal sales trend that is largely accountable to sluggishness in the traditional watches, and leather and jewelry businesses. These hurdles persisted in the recently reported fourth-quarter 2018 results, following which Fossil’s shares tumbled close to 11%.

Moreover, this Zacks Rank #4 (Sell) stock has lost nearly 42% in the past six month, wider than the industry’s decline of 25.8%. Nevertheless, Fossil is undertaking strong measures to expand in the growing wearables category. Let’s see if the company’s efforts can aid revival in the near term.

What’s Pulling Fossil Down?

Fossil has been battling soft sales, which have been declining year over year for more than two years now. Continued softness in the company’s traditional watch category, and several business and licensed brand exits led to the decline. Markedly, in the fourth quarter, worldwide net sales declined nearly 15% year over year. On a constant-currency (cc) basis, worldwide net sales tumbled 13%. Results were largely impacted by lower promotional discounts and unfavorable pricing in the United States, and persistent softness in Europe, owing to political and economic hurdles, among other factors. In fact, sales declined across all categories.

Fossil has been witnessing soft sales in traditional watches for a long time now due to increased competition and rising demand for tech-savvy watches. Further, sales of leathers and jewelry have persistently been weak since past few quarters on account of soft demand. In fourth-quarter 2018, sales of jewelry and leather businesses fell 29% and 20%, respectively. Also, the company’s watch sales dropped 13% mainly due to sluggishness in the traditional category, store closures, and various license brands and business exits.

Well, unfavorable currency movements, business exits, store closures and supply-chain hurdles for connected products (in early 2019) are likely to serve as headwinds in 2019. This year, Fossil expects net sales to decline 7-12%. This includes negative impacts stemming from business exits and currency movements of 2.5% and 1.5%, respectively. For first-quarter 2019, the company expects net sales to decline 16-22%, as it is likely to face these headwinds strongly in the said time frame.

Can Growth Efforts Mitigate Hurdles?

Fossil has been committed toward expanding in the wearables category, which gives it ample opportunities to strengthen brand reach and enrich consumer experience. Notably, Fossil recently launched approximately 14 new hybrid watches and smartwatches across several brands. Further, connected watch sales constituted 21% of Fossil’s total watch sales in the fourth quarter of 2018. Apart from this, the company is focused on expanding its digital platform and meeting consumers growing demand for online purchasing. During the fourth quarter, global direct e-commerce sales increased double digits yet again in the Americas and Asia.

Though these drivers are likely to provide some cushion to Fossil’s performance, we believe that these efforts may take time to completely offset the softness in the aforementioned categories.

Looking for Retail Stocks? Check These

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