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Fossil Focuses on Wearables Growth, Traditional Watches Slip

Zacks Equity Research

Amid declining sales of traditional watches, Fossil Group, Inc. FOSL is focusing on expanding its wearables category. Additionally, the company is focused on bolstering e-commerce and enhancing efficiencies through the New World Fossil Plan. Let’s take a closer look.

Strong Wearables Business is an Upside

With an expanding base of tech savvy consumers, Fossil’s wearables business is gaining traction.  Notably, connected watch sales contributed 17% to total watch sales in the first quarter of 2019. Management is committed toward expanding the wearables business. To this end, partnerships with Qualcomm and Google as well as addition of new brands to smartwatch line-up are likely to enrich the company’s portfolio. The company is launching a new smartwatch at a competitive price for the first time. The product will include Qualcomm Snapdragon Wear 3100 Platform and the redesigned Google Wear operating system. Also, the company teamed with Citizen Watch Company to boost growth in the hybrid smartwatch category.

Well, the wearables market provides Fossil the opportunity to combine fashion and technology as well as introduce exciting products. This enables the company to cater to consumers’ inclination toward tech-enabled advanced connected gears.

Other Focus Areas for Growth

Fossil is making several investments to improve digital marketing and drive online sales in the website as well as other online wholesale partners. In fact, such dedicated endeavors in the e-commerce space yielded favorable results during the first quarter of 2019. During the quarter, global direct e-commerce sales increased double digits yet again. Roughly 60% of Fossil brand’s global sales are in the direct network, with a rising e-commerce penetration. The e-commerce platform is also an important sales channel for wearables.

Additionally, Fossil is on track with the New World Fossil (“NWF) plan that was initiated in 2016. The program aims to transform the company, fuel efficiencies, improve margins, better manage revenues and enhance the overall operating structure of the business to drive profits. The company intends to achieve the targets and simultaneously enrich customers’ experience amid a difficult retail landscape.

The company has already initiated the second phase of the transformation plan. It now focuses on prioritizing consumer market and channel opportunities, optimizing revenues as well as delivering gross margin and productivity savings. Notably, the NWF plan enabled the company to reduce expenses and boost gross margin in the first quarter of 2019. On the back of this initiative, along with other strategic plans, the company expects to achieve run-rate savings of $200 million by the end of 2019.  Also, it targets double-digit operating margin over the long term.

Soft Traditional Watches & Currency Headwinds  

Fossil is witnessing soft sales in traditional watches, thanks to increased competition and rising demand for the wearables. During the first quarter, the company’s watch sales dropped 15%, due to sluggishness in the traditional watch categories along with negative impacts from business exits. Further, sales of leathers and jewelry have been persistently weak in the past few quarters due to soft demand. Well, these trends have taken a toll on the top line, which has declined year over year for more than two years.

Moreover, the company is facing adverse impacts stemming from currency headwinds. Currency fluctuations are expected to drag net sales by 2% and 1.5% during the second quarter and 2019, respectively.  

Such headwinds have weighed upon the company’s shares, which have plummeted 26.3% in the past three months compared with the industry’s decline of 19.2%.

Nevertheless, we expect this Zacks Rank #3 (Hold) stock to tide over the aforementioned hurdles on the back of advancements in the wearables arena as well as through transformation efforts under the NWF plan.

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