Fossil Gains 69% In 3 Months: Is Wearables The Only Driver?

Fossil Group, Inc. (NASDAQ:FOSL) , which was long shunned by investors owing to persistent softness in traditional watch category, has made quite a comeback. The company, which lost close to 70% in 2017, has rallied a whopping 69% in the past three months against the industry’s decline of 8.2%.

So what made the renowned watch and accessories brand turn around? Well, the company’s wearables category has actually been contributing significantly. While Fossil is gaining from several other factors as well, strength in wearables seems to be its major driver, given consumers’ accelerated shift toward tech-savvy watches.

Wearables Helps Fossil Tread Growth Trajectory

To tap in on the rising demand for advanced gadgets, Fossil has been investing heavily to broaden its connected wearables portfolio. The wearables market provides the opportunity to combine fashion and technology and launch innovative products to meet consumers’ evolving needs of tech-enabled advanced connected gears. Moreover, the company is getting the advantage of Android’s popularity and Google’s technology in its watches.

Clearly, Fossil’s transition to connected wearables and smartwatches has reaped results. The growing demand for advanced gadgets is reflected from the fact that Fossil’s connected products have almost doubled in the past two years, reaching close to $300 million in size. In fact, wearables represented almost 20% of the company’s total watch sales in the fourth quarter of 2017. That’s not it.

Growth in the wearable’s category aided Fossil’s overall watch category to improve by more than 10 percentage points during the quarter. Additionally, the strong performance of wearables drove online sales, leading to a 2% rise in the company’s global retail comps during the quarter, while the watch category alone depicted comps growth of 5%.

Notably, Fossil launched around 14 new hybrid and smartwatches across several brands during the second half of 2017The company is gearing up to enrich wearables portfolio by adding new brands to its smartwatch line-up in 2018 as the wearable business is expected to grow $32 billion by 2020.

E-commerce & New World Fossil — Other Keys to Fossil’s Success Story

Other than the marked success of its wearables category, Fossil has also been riding on solid focus on enhancing e-commerce operations, as well as its “New World Fossil” plan. Talking of e-commerce, the company has been making several investments to improve digital marketing and drive online sales, both for the company’s website as well as other online wholesale partners. In fact, such dedicated endeavors helped e-commerce sales surge 31% during the fourth quarter. The e-commerce platform has also served as an important sales channel for wearables.

Moving to New World Fossil, the company began this restructuring program back in 2016. The program aims to transform the company, fuel efficiencies, improve margins and enhance the overall operating structure of the business to drive profitability. Fossil intends to achieve these targets while simultaneously enriching customers’ experience amid a difficult retail landscape. Markedly, the company is well on track with its New World Fossil plan which helped it cut costs by $95 million in 2017, keeping it well-placed to achieve its profit improvement target of $200 million by the end of 2019.

What’s Ahead?

Unfortunately, Fossil has long been suffering from sluggish traditional watch business and persistent weakness in the leather and jewelry categories. These factors and strained gross margins acted as major dampeners on the company’s fourth-quarter top and bottom lines. Though management continues to expect a challenging retail environment for its traditional watch category in 2018, we expect the aforementioned factors (particularly strong wearables sales) to help this Zacks Rank #3 (Hold) company to offset these hurdles.

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