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Fossil Group Performance Hurt by Low Traditional Watch Sales

Zacks

Fossil Group, Inc FOSL has been performing unfavorably for quite some time now. Rising demand for digitally advanced products have caused a radical setback in the company’s traditional watch sales. As a result, Fossil Group has been facing economic challenges in some of its key markets in Europe, Asia and the Americas.

Fossil Group’s weak performance during the first half of 2017, has led the company to slash earnings and sales guidance for the year. It now expects net sales to decline in the range of 4.5-8.5%, wider than the previous range of 1.5-6.0%. Further, it projects 2017 adjusted earnings in the range of $0.35-$1.15 per share, as compared with previously expected range of $0.80-$1.50. Consequently, the Zacks Consensus Estimate for 2017 went down 5 cents to reach 68 cents in the past 60 days. The same for the third quarter has also declined 13 cents to an estimated loss of 12 cents.

Consequently, the company’s shares have plunged 50.2% in the last six months, wider than the industry’s decline of 12.5%.


Let’s now look deeper into some of the factors that have been affecting the performance of this Zacks Rank #4 (Sell) company.

Sluggish Performance in Traditional Watches & Other Categories

Fossil Group’s traditional watches remained persistently weak owing to intensifying competition and evolving consumer preference toward smartwatches and connected wearables. Performance of a number of brands in this category has been overshadowed by the growing popularity of the Michael Kors KORS brand. Moreover, the expiration of Fossil Group’s licensing agreement with Burberry by the end of 2017 is also expected to dent traditional watch sales.

Fossil Group has been trying to achieve a turnaround in its watch category by adding new products under its smartwatches and connected wearable’s portfolio. However, the segment is yet to yield significant revenues for offsetting the declines witnessed in traditional watches.

Additionally, the company’s leather and jewelry businesses have also been depicting weaknesses lately owing to low consumer response. Fossil Group has also been taking very less efforts to improve the sales of these businesses.

Stressed Margins

Of late, Fossil Group has been investing highly in promotional activities, for driving sales of its traditional watches and newly-launched products in connected wearables. However, such efforts have not been able to revive the company’s top-line, thereby leading to lower margins. The company expects margins to remain stressed through the rest of the year. For 2017, it anticipates adjusted operating margin in the range of 2-3.5%, lower than the previously anticipated adjusted operating margin range of 3-4.5%.

Other Headwinds Impacting Performance

Although licensing agreements with renowned brands such as Michael Kors, Emporio Armani and Diesel have aided in expanding the company’s portfolio, they have been contributing less toward revenues. Fossil Group’s global retail comps have also declined during the first and second quarters of 2017 following declines in all major product categories and regions.

Owing to greater disadvantages associated with the stock, Fossil Group currently carries a Zacks Rank #4 (Sell) and is not a suitable pick for investors.

Done With Fossil Group? Check These Trending Retail Stocks

Investors may consider better-ranked stocks from the same sector such as Burlington Stores Inc BURL and The Children's Place Inc PLCE, both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

Burlington Stores delivered an average positive earnings surprise of 17.7% in the trailing four quarters. It has a long-term earnings growth rate of 16.2%.

The Children's Place came up with an average positive earnings surprise of 16.3% in the trailing four quarters. It has a long-term earnings growth rate of 9%.

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