It has been about a month since the last earnings report for Fossil Group (FOSL). Shares have added about 21.9% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Fossil Group due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Fossil's Q2 Loss Narrower Than Expected, Sales Beat
Fossil released second-quarter 2019 results. Fossil reported an adjusted loss of 4 cents per share against adjusted earnings of 17 cents in the prior-year quarter. However, the figure was narrower than the Zacks Consensus Estimate of a loss of 7 cents. The bottom line was negatively impacted by 6 cents due to adverse currency fluctuations. However, lower interest expenses provided some cushion to the bottom line.
Worldwide net sales of $501 million surpassed the Zacks Consensus Estimate of $496 million. Overall net sales declined about 13% from the prior-year quarter, primarily due to dismal sales in the company’s watches segment in the Americas and Europe. Nevertheless, the company’s sales increased in Asia. Currency negatively impacted net sales by $14 million.
On a constant-currency (cc) basis, worldwide net sales decreased 11% year over year. Sales were down in Europe, with the U.K. declining the most. Distributor markets performance in Eastern Europe, the Middle East and Germany was also poor. Global retail comps declined 4%, owing to softness across all categories and geographies. Sluggishness in retail stores more than offset strong e-commerce comps.
Fossil’s gross margin contracted 70 basis points (bps) to 52.9%, courtesy of foreign-currency headwinds, negative impact from factory cost absorption and royalty expenses related to lower sales volumes. On the flip side, favorable region and product mix from advanced margin Asia sales stemming from the company’s New World Fossil (“NWF”) plan and reduced off-price sales mix were positives.
The company posted an operating income of $1.7 million compared with $1 million in the year-ago period. The improvement was due to lower operating expenses. This was somewhat negated by lower sales and adverse currency impacts. The company also stated that the figure was at the higher end of its expectations.
Performance Based on Categories & Regions
Category-wise, sales in the watches segment declined 11% to $413 million in the quarter. Sales in the jewelry and leather businesses also fell 23% to $53 million and 37% to $21 million, respectively. Sales in Other business came in at $14 million.
Region-wise, sales dropped approximately 20% in the Americas to $223 million, mainly due to reduced sales in off-price channels. Sales declined around 16% in Europe to $147 million. The downside was mainly caused by weak Eurozone sales and softness in Eastern Europe and the Middle East distributor markets. Germany and the U.K. witnessed maximum downsides.
Net sales from Asia increased 11% to $126 million as improvements in China and India continued. These apart, sales in Hong Kong were also a major driver. Emporio Armani traditional watches recorded double-digit growth. Further, Fossil watches witnessed decent growth, with increased sales in both the connected and traditional watch categories.
At the end of the quarter, the company had cash and cash equivalents of $226.6 million, long-term debt of $162 million and shareholders’ equity of $539.6 million. Additionally, it expects to incur capital expenditures of nearly $30 million in 2019.
The company anticipates top-line challenges to continue due to store closures and business exits. However, it expects this impact to gradually decrease in the second half of 2019.
For 2019, Fossil expects net sales to decline 8-12%. This includes negative impacts of 2.5% and 2% stemming from business exits and currency movements, respectively.
The company now expects gross margin to be 52-53% compared with the previous guidance of 52-53.5%. Operating margin is now anticipated to be 2.5-3.5% compared with the prior view of 1.5-3.0%. Interest expenses are still projected to be roughly $31 million.
Q3 & Q4 Forecasts
The guidance includes strengthening of the dollar. For third-quarter 2019, the company expects net sales to decline 6-13%, considering the negative impacts of approximately 2.5% from business exits and around 1.8% due to unfavorable currency movements. Gross margin is predicted to be 52-54%. Interest expenses are expected to be roughly $8 million.
For fourth-quarter 2019, the company expects net sales to be down 5% to up 1%, considering the negative impacts of approximately 1.8% from business exits and around 1% due to unfavorable currency movements. Gross margin is predicted to be 50-53%. Interest expenses are expected to be roughly $8 million.
How Have Estimates Been Moving Since Then?
Estimates review followed an upward path over the past two months. The consensus estimate has shifted 158.07% due to these changes.
At this time, Fossil Group has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Fossil Group has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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