Fossil Group, Inc. (FOSL - Free Report) has been nothing less than a gold mine for investors since the beginning of 2018. Well, shares of this renowned watchmaker more than tripled in the past six months compared with the industry’s rise of 5.7%. So, what’s boosting investors’ optimism for this Zacks Rank #2 (Buy) stock? Let’s take a look.
Wearables Offer Growth Impetus
Fossil owes much of its success to the stupendous growth in connected wearables category. In fact, the introduction of technology in watches has led the company to expand its brands and offer customers new functionality with products such as activity trackers, hybrid watches as well as smart watches. Notably, the company is benefiting from Android’s popularity and Google’s technology in its watches. Recently, Fossil launched approximately 14 new hybrid and smartwatches across several brands.
Driven by such efforts, the company’s connected watch sales almost doubled year over year in the first quarter of 2018. Also, wearables represented roughly 20% of the company’s total watch sales in the quarter, marking a steady improvement from 8% in the year-ago quarter. This along with solid marketing efforts and initiatives to enhance store experience enabled Fossil brand sales to grow 4%. Strength in wearables also propelled online sales, ultimately leading to a 5% rise in the company’s global retail comps.
As the wearable business is expected to grow by $32 billion by 2020, the company is well placed to reap benefits by adding brands to its smartwatch line-up in 2018. Progressing along these lines, Fossil plans to launch three smartwatch formats in 2018 (across owned and licensed brands). Well, the wearables market provides the opportunity to combine fashion and technology as well as introduce exciting products to cater to consumers’ evolving needs of tech-enabled advanced connected gears. Currently, the company’s wearables segment is adorned by renowned brands such as Diesel, Emporio Armani, Fossil, Michael Kors (KORS - Free Report) and Misfit.
E-commerce & Other Initiatives Bode Well
Fossil has been witnessing significant growth in e-commerce operations, backed by consumers’ growing preference for online shopping. Notably, e-commerce sales during the first quarter soared close to 50%, buoyed by growth in Europe, United States and Asia. Fossil remains keen on expanding its digital platform and meet growing demand for online transactions. To this end, the company has been making several investments to improve digital marketing for the company’s website and other online wholesale partners. Further, the success with wearables is expected to constantly bolster the company’s online sales.
Moving on, Fossil is well on track with its New World Fossil plan which helped it cut operating costs and drive gross margin in the first quarter. On the back of this initiative as well as other strategic plans, the company expects to achieve gross profit improvement of $200 million by the end of 2019. Also, it targets to achieve double-digit operating margin over the long term.
Can Fossil Offset Decline in Traditional Watches?
While Fossil’s wearables unit has been performing impressively, it does not blind us from the persistent weakness in the company’s traditional watches category. The company’s watch sales dropped 6% (on constant-currency basis) mainly due to sluggishness in the traditional category. Unfortunately, the company expects this segment to witness such pressures in 2018.
Nevertheless, Fossil’s prospects in the connected products category combined with efforts to boost e-commerce and improve margins are expected to aid the company in overcoming the aforementioned obstacles in the long run. On that note, we continue to hope that Fossil maintains its position in investors’ good books.
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