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Fossil (FOSL) Loss Narrows Y/Y in Q1, Sales Deteriorate

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Fossil Group Inc. FOSL released first-quarter 2018 results after the closing bell yesterday, wherein both the top and bottom line came ahead of the Zacks Consensus Estimate for the third straight time, and comparable store sales (comps) also increased year over year. However, the company which reported a loss in the first quarter, saw its top line decline year over year.

Nonetheless, Fossil’s focus on expanding its wearables portfolio and improving its traditional watch business has been instilling positive sentiment among investors. Evidently, Fossil has seen its stock gain more than double in the past six months, surpassing the industry’s 11.9% growth. In fact, this Zacks Rank #3 (Hold) stock rallied 12.8% during yesterday’s trading session itself, somewhat reflecting investors’ optimism regarding the company’s first-quarter outcome that actually didn’t come handy.

 


 

Well, Fossil’s shares lost 2.2% in the after-market trading session.

Q1 in Detail

Fossil reported a loss of 99 cents per share, which was narrower than the Zacks Consensus Estimate of a loss of $1.05 as well as the year-ago period loss of $1.00 per share. The bottom-line improvement came on the back of positive currency movements to the tune of roughly 2 cents.

 

Fossil Group, Inc. Price, Consensus and EPS Surprise
 

 

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

 

Net sales of $569 million surpassed the Zacks Consensus Estimate of $539 million. Overall net sales declined about 2% from the prior-year quarter, primarily due to sluggishness in the company's traditional watch portfolio. However, Fossil progressed quite well in the digital space across all regions, as its e-commerce sales surged 49% in the quarter – including stupendous growth in Asia.

On a constant-currency basis, sales tumbled 7% during the quarter, with soft watch sales across Americas and Europe. Underlying weakness in the company’s traditional watch category across all geographies, along with soft leather and jewelry business also marred the top-line performance.

Nevertheless, connected watch sales remained robust, almost doubling year over year. This, along with solid marketing efforts and initiatives to enhance store experience helped Fossil brand sales to grow 4% in the quarter.

Global retail comps rose 5% year over year, courtesy of positive comps in the watch and leather businesses, which was partly countered by sluggish comps at jewelry. Region-wise, Americas and Asia delivered favorable comps, whereas Europe remained disappointing.

Gross profit dipped 0.6% to $287.7 million. However, gross margin expanded 70 basis points (bps) to 50.5%, courtesy of favorable currency fluctuations and margin enhancement efforts stemming from the New World Fossil initiative. This was partly negated greater sales mix of low-margin connected products and increased off-price sales volumes to reduce inventories.

Operating expenses declined 5.6% to $316 million, thanks to cost savings from the New World Fossil initiative and reduced store costs stemming from many store closures. The company posted an operating loss of $28.3 million, which improved from the year-ago figure of a loss of $45.3 million owing to lower operating costs.

Performance Based on Business Categories

Category-wise, sales in the watches segment remained almost flat (down 6% on constant-currency basis) to $448 million in the quarter. Sales at Jewelry and leather businesses also went down 13% (down 20% on constant-currency basis) to $42 million and 5% (down 9% on constant-currency basis) to $69 million, respectively.

Region-Wise Performance

Region wise, sales dropped 10% (down 11% on a constant currency basis) in the Americas to $249 million owing to sales decline in all three categories, with some respite from higher sales of connected watches.

Sales improved 3% in Europe (down 8% on a constant-currency basis) to $202 million. Constant-currency decline was mainly led by weakness in distributor markets in Eastern Europe and the Middle East, along with a moderate fall in Eurozone sales. Sales remained soft across all three categories.

Net sales from Asia grew 9% (up 3% on a constant-currency basis) to $118 million, thanks to strength across all sales channels. Sales growth was mainly witnessed in India, China and Malaysia, countered by dismal performance from all other regions, particularly Japan.

Other Updates

At the end of the quarter, the company had cash and cash equivalents of $229.9 million, long-term debt of $335.5 million and shareholders’ equity of $526.6 million.

During the quarter, the company made capital expenditures worth $4 million, while it made incremental net borrowings of $22 million. Capital expenditures are anticipated to be roughly $25 million in 2018.

Fossil operated 512 stores as of Mar 31, 2018, including 250 Full price accessory stores, 12 Full priced multi-brand stores and 250 Outlet stores. Out of all Fossil stores, 224 are located in America with 183 and 105 in Europe and Asia, respectively.

The company also announced Puma as its new licensed watch brand, which is likely to strengthen the company’s portfolio. The company plans to start distributing Puma watches in 2019.

Outlook

Management remains focused on its strategic initiatives directed toward speeding up business evolution and positioning Fossil for long-term growth. Although the company continued with soft sales, it remains well on track with its goals of boosting growth in its wearables portfolio; utilizing scale to curtail supply-chain expenses; increasing digital capacities and continuing with business transformation through the ongoing New World Fossil plan.

Management believes that such efforts, along with constant focus on innovations in the traditional watch space places the company well for growth and stability in future. However, the company expects traditional watch category to remain challenged in 2018, particularly the wholesale business. Also, the positive impact from favorable currency movements is expected to recede with time.

All said, Fossil Group now expects net sales to decline in the range of 12-5%, compared with 14-6% projected earlier. The company still expects gross margin in a range of 51-53%, reflecting 200-400 bps expansion from the year-ago period, thanks to New World Fossil plan, greater connected margins and favorable currency. Operating margin is envisioned in a range of 0.5-4.5%, in comparison to the prior range of flat to 4%. Further, Fossil expects interest expense of approximately $50 million and adjusted EBITDA in a band of $175 million to $225 million, up from $150 million to $200 million projected earlier.

For second-quarter 2018, the company expects net sales to decrease in the range of 11-4%. Gross margin is anticipated in the range of 51.5-53.5%.

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