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Fossil Group Beats Q4 Earnings on Lower Taxes; Stock Up

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Shares of Fossil Group Inc. (FOSL - Free Report) soared around 16% in after-market trading on Feb 16, after the company handily beat earnings and revenue estimates in the fourth quarter of fiscal 2015, despite economic, competitive and consumer headwinds.

In the fourth quarter of fiscal 2015, Fossil reported adjusted earnings, excluding currency, of 1.74 per share. The bottom line surpassed the Zacks Consensus Estimate of $1.29 cents by 34.9%. Earnings, however, plunged 42% from the prior-year figure of $3.00 per share due to a decline in sales and operating income, which offset the favorable impact of lower taxes. Adverse currency movements lowered fourth-quarter earnings by 28 cents.

 

 

Quarter in Detail

This global consumer fashion accessories maker’s net sales of $992.5 million in the fourth quarter beat the Zacks Consensus Estimate of $919 million by 8%. Net sales, however, declined 7% from the prior-year quarter, primarily due to currency headwinds and a decline in the company's multi-brand licensed watch portfolio. Adverse currency movements had a negative impact of $55.6 million on fourth-quarter sales. Though sales declined in the quarter, each of the three regions of Americas, Asia and Europe posted sequential improvements. Both Skagen and Fossil brands performed well despite a challenging environment as a result of the initiatives in branding and innovation.

On a constant currency basis, net sales declined 2%. This was within the company’s expectation of a 2–11% decline. Sales declined, on a constant currency basis, in the Americas and Asia but increased in Europe. Category wise, the company witnessed gains in leather business, which grew 4% in the quarter. Jewelry business remained flat.

The Watches business declined 2% 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. On a year-to-date basis, excluding Michael Kors, the watch portfolio improved slightly on the back of newer brands in the portfolio.

Global retail comps grew 1% year over year during the quarter as a comparable sales increase in Europe more than offset a modest decline in the Americas and a flat comp in Asia. A comparable sales increase in leathers and watches was offset by a decline in jewelry. The launch of the Fossil Q assortment was well received, particularly, the smartwatch named Founder.

Gross margin declined 380 basis points (bps) to 53.0% due to unfavorable currency impact and higher promotional activity, offset by the favorable impact of the company's price initiatives and improved product costing. Gross margin rate was lower than anticipated. This was because successful in-store promotions drove sales and gross profits but lowered margin rate.

Moreover, operating margin declined to 9.0% in the quarter from 20.9%, primarily due to lower sales, higher operating expenses and a 320 bps impact from changes in foreign currencies.

Share Repurchase Update

During the fourth quarter, the company did not repurchase any shares due to the acquisition of Misfit, Inc. on Dec 22. As of Jan 2, 2016 the company had $829.3 million remaining on its existing share repurchase authorization.

2015 Results

In 2015, Fossil’s adjusted earnings, excluding currency, of $5.63 per share beat the Zacks Consensus Estimate of $4.33 cents by 30%. Earnings, however, declined 20.7% from the prior-year figure of $7.10 per share. Adverse currency movements lowered fourth-quarter earnings by $1.12.

Net sales of $3.23 billion also outpaced the Zacks Consensus Estimate of $3.16 million by 2.3%. Net sales declined 8% from the prior year.

First-Quarter 2016 Guidance

For the first-quarter of fiscal 2016, Fossil expects earnings in the range of 5–20 cents per share. This will include 23 cents of currency impact, 9 cents of charges related to the Misfit acquisition and restructuring gain of 16 cents.

The company expects net sales to decline in the range of 7% to 10%, due to currency headwinds of 230 bps. On a constant currency basis, sales are expected to decline between 4.75% and 7.75%. The company expects operating margin in the range of 1% to 2.5% for the first quarter, which includes 190 bps negative impact from currency and 90 bps from Misfit acquisition expenses.

2016 Fiscal Guidance

Fossil has provided sales, operating and earnings guidance for fiscal 2016.

The company expects earnings in the range of $2.80–$3.60 per share, down from the $4.51 per share in fiscal 2015. The guidance includes negative currency impact of 84 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 in the range of down 3.5% to up 1%, which includes currency headwinds of 140 bps. This is lesser than a decline of 8% witnessed in the fiscal 2015 sales. On a constant currency basis, sales are expected to range between a 2.5% increase and a 2% decline. Operating margin is likely to be in the range of 7–8.5%, which includes 100 bps negative impact from currency and 80 bps related to Misfit acquisition expenses.

Fossil carries a Zacks Rank #5 (Strong Sell).

Stocks to Consider

Some better-ranked stocks in the retail sector are Abercrombie & Fitch Co. (ANF - Free Report) , Express Inc. (EXPR - Free Report) and J.C. Penny Company (JCP - Free Report) . While Abercrombie & Fitch and Express Inc. sport a Zacks Rank #1 (Strong Buy), J.C. Penny holds a Zacks Rank #2 (Buy).

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