Fossil Group (FOSL) Lags Q1 Earnings; Down On Lower View

Shares of Fossil Group Inc. (NASDAQ:FOSL) tanked more than 30% in after-market trading on May 10, after the company missed earnings and revenue estimates in the first quarter of fiscal 2016 and slashed its fiscal 2016 outlook due to economic, competitive and consumer headwinds.

In the first quarter of fiscal 2016, Fossil reported earnings of 12 cents per share, within the company’s guided range of 5 to 20 cents per share. The bottom line lagged the Zacks Consensus Estimate of 14 cents by 14.3% and plunged 84% from the prior-year figure of 75 cents per share due to a decline in sales and operating income, which offset the favorable impact of lower taxes. Adverse currency movements lowered first-quarter earnings by 8 cents.

Quarter in Detail

This global consumer fashion accessories maker’s net sales of $659.8 million in the first quarter lagged the Zacks Consensus Estimate of $668 million by 1.2%. Net sales also declined 9% from the prior-year quarter, primarily due to currency headwinds, a decline in the company's multi-brand licensed watch portfolio and challenging environment for traditional watch category. The sales decline was within the company’s expectation of 7%-10% decline. Adverse currency movements had a negative impact of $16.4 million on first quarter sales.

While Skagen brand sales showed some improvement led by product innovation and a solid performance in watches, Fossil brands sales were flat year over year as the impact of the challenging environment was offset by initiatives in branding and innovation.

On a constant currency basis, net sales declined 7%. This was within the company’s expectation of a 2–11% decline. Sales declined, on a constant currency basis, in all the three regions of Americas, Asia and Europe. Category wise, the company witnessed gains in the leather business, which grew 2% in the quarter, with the Jewelry and Watches business witnessing a decline.

The Watches business declined 8% on a constant currency basis, reflecting general weakness in the category. The company noticed that tech-enabled watches have been significantly affecting traditional watch sales. Also, the success of the Michael Kors brand has been overshadowing the performance of other watch brands.

Global retail comps declined 3% year over year during the quarter as a comparable sales increase in Europe was offset by a decline in the Americas and Asia. A comparable sales increase in leathers and jewelry was offset by a decline in watches.

Gross margin declined 250 basis points (bps) to 52.8% due to unfavorable currency impact and higher promotional activity and markdowns and higher mix of lower margin product categories. This was offset by a favorable impact of the company's price initiatives.

Moreover, operating margin declined to 2.2% in the quarter, down 550 bps from 7.7%, primarily due to lower sales and gross margin, currency headwinds and increased investment in marketing and strategic initiatives including expenses associated with the acquisition of Misfit, Inc. on Dec 22, partially offset by the benefit of lower infrastructure and store expenses.

Share Repurchase Update

During the first quarter, the company repurchased 0.1 million shares for $4.4 million at an average price of $47 per share. As of Apr 2, 2016, the company had $825 million remaining on its existing share repurchase authorization.

Second-Quarter 2016 Guidance

For the second-quarter of fiscal 2016, Fossil expects the bottom line to be in a range of break-even to 15 cents per share. This will include 20 cents of currency impact and 9 cents of charges related to the Misfit acquisition and restructuring gain of 10 cents.

The company expects net sales to decline in a range of 8% to 10% due to currency headwinds of 160 bps. The company expects operating margin in a range of 1.5% to 3% for the second quarter, which includes 120 bps negative impact from currency and 95 bps from Misfit acquisition expenses. The company expects lower gross margin and increases in strategic marketing funding and wearables to slightly offset declines in base infrastructure spending.

2016 Guidance Slashed

Fossil has lowered its sales, operating margin and earnings guidance for fiscal 2016, on the back of lower-than-expected first quarter results. The company continues to expect a challenging retail environment and pressure on the traditional watch category to persist.

The company now expects earnings in a range of $1.80–$2.80 per share, lower than the previous range of $2.80–$3.60 per share for 2016. The guidance includes negative currency impact of 87 cents per share, amortization charges of 36 cents and 24 cents of foreign tax credit benefit in 2015. This will also have 60 cents of positive impact from charges and costs incurred in 2015.

Fossil expects sales to decline in a range of 1.5% to 5%, compared with the previous range of down 3.5% to up 1%. The new guidance includes currency headwinds of 100 bps. On a constant currency basis, sales are expected to decline between 0.5% and 4%. Operating margin is likely to be in a range of 5%-7%, which includes 90 bps negative impact from currency and 80 bps related to Misfit acquisition expenses. The margin guidance is lower than the prior guidance range of 7–8.5%.

Fossil carries a Zacks Rank #4 (Sell).

Stocks to Consider

Some better-ranked stocks in the retail sector are Abercrombie & Fitch Co. (NYSE:ANF) , New York & Company Inc. (NYSE:NWY) and Shoe Carnival (LON:CCL) Inc. (NASDAQ:SCVL) . All of these hold a Zacks Rank #2 (Buy).