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Fossil (FOSL) Down More Than 50% YTD: Any Scope for Revival?

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Fossil Group, Inc. FOSL has been losing investors’ confidence due to drab sales trend, stemming from sluggishness in traditional watches, leather and jewelry businesses. Traditional watch sales have been bearing the brunt of intense competition and rising demand for connected watches. Also, adverse impacts from currency fluctuations, tariffs and business exits are hurting the top line. In fact, management expects an additional impact of $5-$10 million from tariffs for 2020.

The aforementioned hurdles have exerted pressure on Fossil’s third-quarter 2019 results, wherein management slashed sales and operating margin guidance for 2019. The company expects net sales to decline in the range of 11-13% compared with the earlier expectation of 8-12% decline. This includes negative impacts of 2.5% and 2% stemming from business exits and currency movements, respectively. Further, operating margin is anticipated to be 1-1.7% compared with the prior view of 2.5-3.5%.

Fossil’s lacklustre performance has been weighing on investors’ sentiments for a while. Consequently, this Zacks Rank #5 (Strong Sell) stock has tumbled 50.3% in this year compared with the industry’s decline of 21.5%.

Let’s discuss the reasons and see if the company can overcome these hurdles.

What’s Hurting Fossil's Performance?

Fossil has been battling soft sales, which have been declining year over year for a while. Persistent softness in the company’s traditional watch category due to increased competition and rising demand for tech-savvy watches has been the prime deterrent. In the third quarter of 2019, the company’s watch sales dropped 8.6%. Further, sales of leathers and jewelry businesses have been weak since the last few quarters due to soft demand. In fact, jewelry and leather business sales fell 18.8% and 33.3%, respectively.

This apart, the company’s significant international presence keeps Fossil exposed to risks of adverse currency movements. In fact, currency woes adversely impacted net sales during the third quarter.  Moreover, the bottom line in the last reported quarter was affected by 4 cents due to adverse currency fluctuations. Going ahead, currency headwinds are likely to persist.

Any Scope for Revival?

This said, the wearables market provides Fossil the opportunity to combine fashion and technology as well as roll out exciting products to cater to consumers’ evolving needs. Notably, the company is getting the advantage of Android’s popularity and Google’s technology in its watches. Recently, Fossil launched the latest generation Gen 5 watch.

Moreover, the company expects connected watches to grow 20% annually over the next three to five years. To this end, partnerships with Qualcomm and Citizen Watch Company as well as the addition of new brands to its smartwatch line up are likely to enrich Fossil’s wearables portfolio. Additionally, the company’s focus on expanding its digital platform to meet consumers’ growing demand for online purchases bodes well.

Also, Fossil is on track with its New World Fossil plan that aims to improve margins and revenues as well as enhance and transform the overall operating structure.

While the company is undertaking several initiatives, we are yet to see if these can completely offset the aforementioned hurdles in the future. Until then, investors can count on promising picks.

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