Dwindling traditional watch business is tarnishing Fossil Group, Inc.’s FOSL performance, and thereby weighing on investor sentiments. Shares of the company have slumped 59.8% in a year’s time, underperforming the industry’s decline of 36.3%. Moreover, continued weakness in other business areas, such as leather and jewelry, and licensed brand exits are major concerns.
The company has been struggling with the traditional watch business due to increased competition and rising demand for wearables. During the first quarter of 2019, the company’s watch sales dropped 18% due to sluggishness in the traditional watch category along with negative impacts from business exits.
Further, sales of leather and jewelry have been persistently weak due to soft demand. Well, these trends have taken a toll on the company’s top line, which has declined year over year for more than two years.
Unfavorable currency movements, business exits, store closures and supply-chain hurdles for connected products are likely to serve as headwinds in 2019. In fact, Fossil expects net sales to decline 7-12% in the year. For the second quarter, the company expects net sales to decline 10-16%, owing to negative impacts of approximately 3% from business exits and around 2% from unfavorable currency movements.
Any Hopes of a Turnaround?
Fossil’s wearables business is gaining traction, courtesy of an expanding tech-savvy consumer base. Notably, connected watch 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, and addition of new brands to the smartwatch line-up are likely to enrich the company’s portfolio.
Fossil is also making several investments to improve digital marketing and drive online sales. In fact, well-chalked plans in the e-commerce realm yielded favorable results during the first quarter of 2019, wherein global direct e-commerce sales increased double digits. 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 progressing well with the New World Fossil (“NWF") plan. The company has initiated the second phase of the plan, which entails prioritizing consumer market and channel opportunities, optimizing revenues, and 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 and other plans, the company expects to achieve run-rate savings of $200 million by the end of the year.
All said, we expect these aforementioned growth efforts to help this Zacks Rank #3 (Hold) stock get back on the growth trajectory in the near term.
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