Fossil Group (FOSL) Down 10.5% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Fossil Group (FOSL). Shares have lost about 10.5% in that time frame, outperforming 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 catalysts.

Fossil Posts Q4 Loss, Sales Decline Y/Y

Fossil Group reported drab fourth-quarter 2019 results with the top and the bottom lines declining year over year. Increased promotional activities coupled with inventory write-down weighed on profitability in the reported quarter.

Quarterly results were also hurt by sluggish performance in older generation connected products and continued weakness in the department stores. Also, soft consumer feedback, owing to competitive pricing for value-oriented products, remains a concern.

However, strength in Gen 5 (its recent-generation display product) and Hybrid HR product, solid double-digit growth in Asia and sturdy third-party e-commerce growth provided some cushion to the company.

Q4 in Detail

Fossil reported an adjusted loss of 6 cents per share against adjusted earnings of $1.01 in the prior-year quarter. The bottom line was negatively impacted by a penny due to adverse currency fluctuations.

Worldwide net sales of $711.6 million declined 10% from the prior-year quarter due to dismal performance in traditional wholesale channels and older-generation connected watches. Also, store closures and business exit hurt sales by 160 basis points (bps). On a constant-currency (cc) basis, worldwide net sales fell 9% year over year. The top line also missed the Zacks Consensus Estimate of $725 million.

Further, global retail comps declined 3% in the reported quarter. The company witnessed a high-single-digit decline in full-price comps. Increased promotions and currency headwinds dented retail margins. Apart from these, e-commerce in the Americas remained drab, owing to the lower-than-expected performance of older-generation connected products.

Fossil’s gross margin contracted 970 bps to 43.3%, courtesy of one-time non-cash costs of $38 million related to higher inventory valuation adjustments, increased promotional activity, and elevated costs such as freight and tariff. This was partly offset by gains from the New World Fossil 2.0 program and solid growth in Asia.

The company posted an operating loss of $0.9 million against operating income of $67.3 million in the year-ago quarter. The decline was caused by the underperformance of older-generation smartwatches, higher promotions and inventory write-down.

Performance of Business Categories

Category wise, sales in the watches segment declined 9% year over year to $578 million in the quarter. Sales in the leather and jewelry businesses fell 9% year over year to $78 million and 16% to $43 million, respectively. Sales in the other businesses were $13 million, down 7% on a year-over-year basis.

Region-Wise Performance & Other Financial Updates

Sales dropped 16% and 11% to $317 million and $241 million in the Americas and Europe, respectively. Meanwhile, the metric grew 10.4% to 4149 million in Asia.

Further, the company had cash and cash equivalents of $200 million as of Dec 28, 2019. Also, long-term debt and shareholders’ equity were $179 million and $503.8 million, respectively.

The company operated 451 stores as of Dec 28, 2019, including 221 full-priced accessory, seven full-priced multi-brand and 223 outlet stores. Out of all Fossil stores, 199 are located in the Americas, 161 are in Europe and 91 are in Asia.

2020 Guidance

Management issued guidance for 2020, wherein it expects a 4.5-11.5% decline in net sales. This includes the negative impacts of 1.3% and 0.5%, stemming from business exits and currency movements, respectively. However, it estimates the additional week in the current year to favorably impact 2020 sales by 50 bps.

The company envisions gross margin of 50.5-51.5%, suggesting a modest year-over-year expansion. Favorable channel mix, better-connected margins and gains from New World Fossil 2.0 are likely to aid margins. However, increased promotions and tariff headwinds will likely persist.

Moving on, the company projects core sales in Asia to continue rising in double digits. Meanwhile, softness in wholesale in the Americas and the AMEA region is likely to persist. The global direct-to-consumer channel is expected to witness modest growth. Category wise, the jewelry business is estimated to get back on track, while leathers and watches will foresee slight declines.

Q1 Forecast

For first-quarter 2020, the company expects a 3.5-10% decline in net sales, considering the negative impacts of 2.5% from business exits and 1.3% due to unfavorable currency movements. Gross margin is predicted to be 47-49%.

The guidance is inclusive of the impact of the coronavirus outbreak on the company’s global business performance. Fossil expects to get back to production in the next few weeks on the back of solid inventory along with adjustments in sourcing and assembly sites. No supply-chain disruption is anticipated to occur in the next several months, except for that in China, Hong Kong, Macau, South Korea, and Travel Retail businesses, which accounted for 10% of global sales in the reported quarter.

Growth Plans

Amid such tough conditions, the company remains committed to transforming its business to keep pace with consumers’ changing preferences. In doing so, it is making efforts to deploy more resources toward the direct-to-consumer platform, increase its connected product offerings and strengthen its foothold in the Asia region. Keeping in these lines, Fossils intends to introduce connected LTE product in 2020. Apart from this, it remains poised on expanding in the CE and telecom space, and lowering its connected presence.

Further, the company successfully completed its first New World Fossil Program, 1.0 in 2019, generating $200 million of benefit in gross margin and operating expenses. Encouragingly, it launched the New World Fossil 2.0 Transform to Grow initiative, which is aimed at improving the gross margin and lowering operating expenses over the next three years. Keeping in these lines, it realized cost savings of $50 million in 2019.

Going into 2020, management expects additional gains of $65 million from the initiative. Out of this, $15 million is projected to be related to gross margin improvement, while the remaining $50 million is likely to be witnessed from reduced operating costs.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -97.37% due to these changes.

VGM Scores

At this time, Fossil Group has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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.