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Traditional Watch Weakness to Hit Fossil (FOSL) Q4 Earnings?

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Fossil Group, Inc. (FOSL - Free Report) is slated to release fourth-quarter 2017 results on Feb 13. The question lingering in investors’ minds is whether this designer and manufacturer of accessories will be able to deliver a positive earnings surprise in the quarter to be reported. Fossil has outperformed bottom-line estimates in three out of the past four quarters, with an average beat of 23.04%. Let’s see what’s in store this time.

 

Fossil Group, Inc. Price and EPS Surprise
 

Fossil Group, Inc. Price and EPS Surprise | Fossil Group, Inc. Quote

 

Factors Weighing on Fossil

Fossil has been witnessing soft sales in traditional watches for a long time now due to increased competition and rising demand for tech-savvy watches. Further, sales of leathers and jewelry have persistently been weak since past few quarters on account of soft demand. Well, these trends were clearly witnessed in the company’s third-quarter 2017 results, wherein jewelry and leather business sales fell 23% and 20% (on constant-currency basis) respectively, with declines across all three regions. Also, the company’s watch sales dropped 4% mainly due to sluggishness in the traditional category. Well, these concerns have been leading to dismal results for Fossil for more than two years now, with both the top and bottom line falling year-over-year.

Efforts to Resonate With Evolving Demand Bodes Well

Fossil has been taking significant efforts to keep pace with the rising demand for tech savvy watches, Notably, Wearables represented more than 10% of the company’s sales in the third quarter, which nearly doubled from the year-ago quarter and also marked a sequential improvement. As the wearable business is expected to grow by $36 billion by 2020, Fossil Group remains poised to enrich its wearables portfolio by adding new brands to its smartwatch line up in 2018. Powered by Android Wear, these new brands will strengthen Fossil’s current portfolio with premium brands like Diesel, Emporio Armani, Fossil, Michael Kors and Misfit. Given the favorable consumer response and impressive performance from some key brands, management believes that wearables can play a key role in turning Fossil Group’s performance around. Thus, it also plans to undertake incremental marketing spending for this category.

Final Thoughts & Q4 Expectations

While the company has considerably expanded the Connected business, efforts to clear excess inventory continues to pressurize margins. Evidently, Fossil has been witnessing lower gross margin for a year now, primarily due to soft retail margins stemming from increased promotions to drive sales (in stores and e-commerce) as well as higher mix of connected products. Management expects obstacles related to increased promotions and unfavorable mix to dent gross margin in the fourth quarter. Also, Fossil Group continues to expect a challenging retail environment for its traditional watch category, which along with margin pressure compelled it to lower its 2017 forecasts.

Expectations in Numbers

For 2017, Fossil Group now expects net sales to decline in the range of 8.5-10.5% and envisions the bottom line to lie in a range of a loss of 45 cents to earnings of 10 cents. For fourth-quarter 2017, the company expects net sales to decrease in the range of 3.5-11% and expects adjusted earnings in the range of 10-65 cents per share.

The current Zacks Consensus Estimate for the quarter under review is pegged at 39 cents, which shows a considerable decline from $1.36 recorded in the year-ago period. This estimate has remained stable in last 30 days. Moreover, analysts polled by Zacks expect revenues of $890 million, down 7.2% from the year-ago quarter.

What the Zacks Model Unveils

Nevertheless, our proven model shows that Fossil Group is likely to beat bottom-line estimates this quarter. For this to happen, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Notably, Fossil carries a Zacks Rank #3 and has an Earnings ESP of +8.42%. This makes us reasonable confident of an earnings beat.

Other Stocks With Favorable Combination

Here are some companies that possess the right combination of elements to post an earnings beat:

Ollie's Bargain (OLLI - Free Report) has an Earnings ESP of +5.32% and carries a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Molson Coors (TAP - Free Report) has an Earnings ESP of +6.51% and carries a Zacks Rank #3.

J. M. Smucker (SJM - Free Report) has an Earnings ESP of +0.84% and a Zacks Rank #3.

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