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Why Is Fossil Group (FOSL) Down 28.3% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Fossil Group (FOSL). Shares have lost about 28.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Fossil Group due for a breakout? 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 Posts Q3 Loss, Y/Y Revenue Decline

Fossil Group released third-quarter 2019 results, wherein adjusted loss of 15 cents per share declined considerably from adjusted earnings of 19 cents in the prior-year quarter. Also, the bottom line compared unfavorably with the Zacks Consensus Estimate of earnings of 40 cents. The metric was affected by unfavorable taxes and reduced operating profits. Further, the bottom line was negatively impacted by 4 cents due to adverse currency fluctuations.

Worldwide net sales of $539.5 million declined 11% from the prior-year quarter’s figure due to adverse currency impacts, store closures, business exits, low inventory liquidation and reduced sales in low-margin off-price channel. On a constant-currency (cc) basis, worldwide net sales fell 10% year over year. The top line also missed the Zacks Consensus Estimate of $565 million. Further, net sales were hurt by headwinds in the wholesale channel across the Americas and Europe. This more than offset sales growth witnessed in Asia.

Global retail comps declined 2% due to softness in Americas e-commerce and declines in full-price stores, which more than offset positive comps in Americas outlet stores as well as e-commerce in Asia and Europe. Based on product categories, weak comps in leather and jewelry more than offset positive comps in watches.  

Fossil’s gross margin contracted 200 basis points (bps) to 51.6%, courtesy of higher inventory valuation adjustments, foreign-currency headwinds and factory cost absorption related to lower sales volumes.

The company posted an operating loss of $9.2 million against operating income of $22.7 million in the year-ago quarter. The decline was caused by reduced sales and gross margin as well as adverse currency impacts.

Performance of Business Categories

Category wise, sales in the watches segment declined 8.6% year over year to $445 million in the quarter. Sales in the leather and jewelry businesses fell 18.8% year on year to $54 million and 33.3% to $28 million, respectively. Sales in the other businesses came in at $12 million, down 14.3% on a year-over-year basis.

Region-Wise Performance

Sales dropped 18% in the Americas to $220 million, while it declined around 16% in Europe to $174 million.

Net sales from Asia increased 9% to $143 million driven by strong watch category and e-commerce channel performance in Mainland China, India and Korea.

Other Updates

At the end of the quarter, the company had cash and cash equivalents of $147.5 million, long-term debt of $242.1 million and shareholders’ equity of $509.9 million.

The company operated 454 stores as of Sep 28, 2019, including 226 full-priced accessory, 6 full-priced multi-brand and 222 outlet stores. Out of all Fossil stores, 202 are located in the Americas, 162 are in Europe and 90 are in Asia.

2019 Guidance

For 2019, Fossil expects net sales to decline in the range of 11-13% compared with the earlier expectation of 8-12% decline. This includes negative impacts of 2.5% and 2% stemming from business exits and currency movements, respectively. The company now expects gross margin in the range of 51-52% compared with the previous expectation of 52-53%. Operating margin is now anticipated to be 1-1.7% compared with the prior view of 2.5-3.5%. Interest expenses are projected to be nearly $30 million.

Q4 Forecasts

For fourth-quarter 2019, the company expects net sales to decline 5-10%, considering the negative impacts of approximately 1.8% from business exits and around 1.6% due to unfavorable currency movements. Gross margin is predicted to be 49-51%. Interest expenses are expected to be nearly $7 million.

Growth Plans

The company is committed to transform its business to keep pace with consumers’ changing preferences. In this context, it plans to launch new products under the traditional and connected watch categories. The company also intends to increase investments in e-commerce. Management expects favorable yields from the New World Fossil 2.0 Transform to Grow initiative.

How Have Estimates Been Moving Since Then?

Estimates review followed a downward path over the past two months. The consensus estimate has shifted -53.5% due to these changes.

VGM Scores

At this time, Fossil Group has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Fossil Group has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.



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