Can Fossil Group's Wearables Segment Drive Performance?

Fossil Group, Inc. (NASDAQ:FOSL) has been struggling with traditional watch segment in the past few quarters, thanks to consumers’ shift toward tech-savvy products. The company has been making investments to augment connected wearables portfolio, in order to meet the increasing demand for digitally advanced gadgets.

Let’s look into some of the factors that have been affecting the performance of the company and see if its growth initiatives can revive performance.

Dismal Business Segments Weigh Upon Stock

During the third quarter of 2017, Fossil Group’s net sales declined 6.7% from the prior-year quarter, primarily due to a 2.7% fall in watches portfolio. The downside stemmed from disappointing traditional watch performance. Management noted that increased competition and rising demand for tech-savvy watches has led to soft sales in the company’s traditional watches segment. Moreover, the company expects headwinds in this category to persist in the periods ahead.

Further, Fossil Group’s Jewelry and Leather businesses have been unfavorable for quite some time. During the third quarter, jewelry and leather business sales fell 20.8% and 18.9%, respectively. Both categories have displayed unimpressive performance on account of unfavorable consumer response. Persistent softness across these categories has caused Fossil Group’s shares to plunge 77.8% in the past year compared with the industry’s decline of 25.9%.

Bleak Gross Margin & Outlook Dent Estimates

Recently, Fossil Group has been investing highly in promotional activities, for driving sales of traditional watches and newly-launched products in connected wearables. Consequently, higher promotional expenditures have taken a toll on the company’s gross margin, which has been declining since the past year.

All these factors compelled management to slash 2017 adjusted earnings and sales view. The company expects a loss of 45 cents to earnings of 10 cents from the earlier view of earnings of 35 cents to $1.15. Consequently, the Zacks Consensus Estimate for 2017 fell from estimated earnings of 68 cents to a loss of 22 cents in the past 30 days. Further, the company anticipates net sales for the year to decline in the range of 8.5-10.5%, wider than the previously range of 4.5-8.5%.

Growth Prospects From Wearables Segment

Nevertheless, the company is eyeing considerable growth opportunities in connected wearables segment and has been adding several products to enrich the category’s portfolio. Wearables represented more than 10% of Fossil Group’s sales in the third quarter, which nearly doubled from the year-ago quarter and also marked a sequential improvement. Considering the favorable consumer response and impressive performance from some key brands, management believes that wearables can play a key role in reviving Fossil Group’s performance in the upcoming quarters.

Other initiatives to Revive Performance

Fossil Group has been trying to reduce costs through its “New World Fossil” restructuring plan. The program aims to transform the company’s fuel efficiencies, improve margins and enhance overall operating structure of the business to drive profits. The company is on track with this program and expects to curtail product costs and reduce the expense structure by approximately $100 million (on a run-rate basis) this year.

Also, the company’s renewed license agreement with Michael Kors and Emporio Armani through 2024 provides extensive opportunities for the expansion of watches and jewelry portfolio. Such agreements will also enable Fossil Group to explore other opportunities in the accessories category.

We expect that such dedicated efforts will uplift this Zacks Rank #3 (Hold) company’s performance in the quarters ahead.

Do Retail Stocks Interest You? Check These

Investors may consider other stocks from the same sector such as Home Depot Inc (NYSE:HD) , Ross Stores Inc (NASDAQ:ROST) and Zumiez Inc (NASDAQ:ZUMZ) . All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Home Depot delivered an average positive earnings surprise of 3.9% in the last four quarters. It has a long-term earnings growth rate of 13.4%.

Ross Stores pulled off an average positive earnings surprise of 6.3% in the trailing four quarters. It has a long-term earnings growth rate of 10%.

Zumiez come up with an average positive earnings surprise of 27% in the trailing four quarters. It has a long-term earnings growth rate of 18%.

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