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Fossil Group (FOSL) Down 26.3% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Fossil Group (FOSL - Free Report) . Shares have lost about 26.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Fossil Group due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Fossil Q1 Loss Narrower Than Expected, Sales Decline

Fossil released first-quarter 2019 results, wherein both the top line and the bottom line surpassed the Zacks Consensus Estimate. Also, the company’s loss narrowed from the year-ago period, while sales declined year over year.

However, management reinstated its unimpressive sales outlook for 2019, as it expects currency headwinds and business exits to impede results. The company expects net sales to decline in the second quarter as well.

Q1 in Detail

Fossil reported adjusted loss of 42 cents per share, which was narrower than the Zacks Consensus Estimate of a loss of 53 cents as well as the year-ago period loss of 99 cents per share. The bottom line was negatively impacted by 8 cents due to adverse currency fluctuations. However, higher margins and lower interest expenses were positives.

Worldwide net sales of $465.3 million surpassed the Zacks Consensus Estimate of $454.3 million. Overall net sales declined about 18% from the prior-year quarter, primarily due to dismal sales in the company's watches segment in Americas and Europe. Nevertheless, the company’s sales increased in Asia. Currency negatively impacted net sales by $17.5 million.

On a constant-currency (cc) basis, worldwide net sales tumbled 15% with decrease in both traditional and connected watches. Results were largely impacted by closure of stores during the first quarter, partially offset by gain in direct business.

Markedly, the company witnessed lower watch sales in the Americas and Europe, partly offset by rise in Asia sales at cc. Traditional watches declined due to softness in America and Europe while connected watches decreased due to delay in inventory receipts, impact of store closure and reduced liquidation level. Category wise, sales declined across watches, leather and jewelry businesses.

Global retail comps declined 9%, owing to softness across all categories and geographies.

Moving on, gross margin expanded 280 basis points (bps) to 53.3%, courtesy of reduced promotions, enhanced off-price margins, favorable region and product mix from advanced margin Asia sales and margin enhancement efforts stemming from the company’s New World Fossil (“NWF”) plan.

The company posted an operating loss of $19.9 million compared to loss of $28.3 million in the year-ago period. The improvement in operating loss was backed by lower operating expenses and rise in gross margin. This was somewhat negated by lower sales and adverse currency impacts.

Performance Based on Business Categories

Category wise, sales in the watches segment declined 18% to $366 million in the quarter. Sales in the jewelry and leather businesses also fell 25% to $31 million and 22% to $54 million, respectively. Sales in Other businesses came in at $14 million.

Region-Wise Performance

Region wise, sales dropped approximately 24% in the Americas to $190 million, mainly owing to weak sales in the United States.

Sales declined around 24% in Europe to $153 million. The downside was mainly caused by weak Eurozone sales, and softness in Eastern Europe and the Middle East distributor markets. France, Germany and the U.K. witnessed maximum downsides.

Net sales from Asia slipped 1% to $117 million as improvements in China, India, Hong Kong and South Korea were countered by soft sales in Australia, Japan and Taiwan.

Other Updates

At the end of the quarter, the company had cash and cash equivalents of $271.4 million, long-term debt of $161.1 million and shareholders’ equity of $549.3 million. Additionally, it expects to incur capital expenditures of nearly $30 million in 2019.

Fossil operated 461 stores as of Mar 30, 2019, including 226 full-priced accessory stores, 7 full-priced multi-brand stores and 228 outlet stores. Out of all Fossil stores, 201 are located in the Americas, while 166 and 94 are located in Europe and Asia, respectively.

Outlook

This Zacks Rank #3 (Hold) company is committed toward transforming its business model to keep pace with consumers’ changing preferences.

For 2019, management is committed toward leveraging opportunities in the connected watch space, stabilizing sales of its traditional watches and enhancing overall efficiency. All said, Fossil is focused on expanding market share in the growing global watch space.   

2019 Forecasts

Fossil continues to expect net sales to decline 7-12% in 2019. This includes negative impacts stemming from business exits and currency movements of 2.5% and 1.5%, respectively.

The company now expects gross margin to be in the range of 52.0-53.5% compared to the previous guidance of 51.5-53.5%. Operating margin is now anticipated to be 1.5-3.0% compared to prior view of 0.5-3.0%. Interest expenses are now expected to be roughly $31 million compared to earlier guidance of $35 million.

Q2 Forecasts

For second-quarter 2019, the company expects net sales to decline 10-16%, considering the negative impacts of approximately 3% from business exits and around 2% due to unfavorable currency movements. Gross margin is predicted to be 52.5-54.5%. Interest expenses are expected to be roughly $7 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -136.84% due to these changes.

VGM Scores

At this time, Fossil Group has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Fossil Group has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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