Traditional Watch Demand Soft: Bad Times Ahead For Fossil?

Fossil Group, Inc. (NASDAQ:FOSL) has been losing sheen for the last few months due to soft sales in the licensed watch portfolio, sluggish leather businesses, weak comparable store sales (comps) and a tough retail landscape. The stock is also unlikely to show any improvement in the near-term.

Fossil Group has exhibited a bearish run in the past six months plunging roughly 62.9% compared with the Zacks categorized Retail-Apparel/Shoe industry’s decline of 14.6%. The industry is currently placed at the bottom 12% of the Zacks Classified industries (233 out of 256). The stock also underperformed the Zacks categorized Retail-Wholesale sector, which gained 14.6% in the said time frame. Currently, the share price is hovering close to its 52-week low of $8.98.

Let’s delve deeper and try to find out what’s taking this Zacks Rank #5 (Strong Sell) company downhill.

Soft Watch Sales and Sluggish Leather Business

Fossil has been witnessing decline in its multi-brand licensed watch portfolio, majorly due to two factors. First, tech-enabled watches are significantly impacting the sales of traditional watches. Second, the success of the Michael Kors brand is overshadowing other brands’ performance.

Moreover, in Jan 2016, Burberry announced that it is exiting the watch business and does not intend to renew its license agreement upon its expiration at the end of 2017. Though Fossil’s connected wearables and smartwatches are expected to gain momentum, the Watches category is likely to remain sluggish due to general weakness therein.

Further, sales of leathers have persistently been weak as customer response to the assortment continues to put pressure on results. Decline in traditional watches and weak leather business also hurt sales in the Americas, Europe and Asia regions during the first quarter of fiscal 2017.

Weak Comparable Store Sales, Pressurized Margins

The company is also witnessing sluggish comparable store sales in the U.S. due to soft traffic trends owing to a tough retail landscape. This has particularly weighed on the performance of its full-price stores. While there have been a number of new entrants in the U.S., the existing brands are nearing maturation. This is raising competition.

Additionally, gross margin contracted 300 basis points in the fiscal first quarter. Higher promotional activity, primarily in the outlet stores and higher mix of lower-margin products along with unfavorable currency are also keeping margins under pressure.

Other Headwinds

Fossil remains exposed to challenges relating to the rapid changing consumer shopping behaviors as well as unfavorable foreign currency translations for its products sourced internationally. Going forward, currency rate fluctuations are expected to hinder the company’s sales and overall profitability. Fossil also remains susceptible to other economic challenges in many of its key markets.

Weak Quarterly Performance, Estimates Going Down

Analysts have become increasingly bearish on the stock over the last 60 days with estimates moving south. The Zacks Consensus Estimate for the current quarter is pegged at a loss of 35 cents, wider than the loss of 6 cents per share in the said time frame. Similarly for 2017, the Zacks Consensus Estimate declined from $1.11 per share to 90 cents, over the same time frame.

Fossil also reported weak first-quarter 2017 results, wherein both earnings and revenues lagged estimates. Adjusted loss of 35 cents also declined from earnings of 11 cents delivered in the year-ago quarter. In fact, the loss was also wider than the company’s guided range of a loss of 10–25 cents per share.

This global consumer fashion accessories maker’s net sales also declined 12% from the prior-year quarter, primarily due to currency headwinds, a fall in the company's in traditional watches sales and tough retail landscape. Notably, sales have missed the Zacks Consensus Estimate in eight out of the last10 straight quarters.

Stocks to Consider

Investors interested in the broader retail space may consider Tilly’s, Inc. (NYSE:TLYS) , The Children’s Place (NASDAQ:PLCE) and J.Jill, Inc. (NYSE:JILL) . All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

While Tilly’s has a long-term earnings growth rate of 13.0%, Children's Place and J.Jill have long-term earnings growth of 8.00% and19.8%, respectively.

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