Why Should You Dump Fossil Group (FOSL) From Your Portfolio?

Shares of Fossil Group, Inc. (NASDAQ:FOSL) lost 57.5% in the last one year, comparing unfavorably with the Zacks categorized Retail-Apparel/Shoe industry’s decline of 16.0%.

Let’s delve deeper and find out what is taking this Zacks Rank #5 (Strong Sell) company down.

Why Fossil Should be Avoided

Analysts have become increasingly bearish on the stock over the past 30 days with estimates moving south. With no upward revision in the last 30 days, the Zacks Consensus Estimate for current quarter further declined from loss of 6 cents to a loss of 35 cents per share. Similarly for 2017, the Zacks Consensus Estimate declined from $1.11 per share to 90 cents, in the said time frame.

Fossil also reported weak first-quarter 2017 results, wherein both earnings and revenues were way behind estimates. Adjusted loss of 35 cents also declined from earnings of 11 cents delivered in the year-ago quarter. In fact, the loss was also wider than the company’s guided range of a loss of 10–25 cents per share.

This global consumer fashion accessories maker’s net sales of $581.8 million in first-quarter fiscal 2017 also declined 12% from the prior-year quarter, primarily due to currency headwinds, a decline in the company's in traditional watches and tough retail landscape. On a constant-currency basis, the same fell 11%. Notably, sales declined on a constant-currency basis and were in line with the company’s expectation of down 8–11.5%. Global retail comps (includes e-Commerce sales) dropped 11% year over year in the reported quarter with slump in all product categories and regions.

Gross margin declined 300 basis points (bps) to 49.8% in the quarter, mainly by reduced retail margins due to higher promotional activity and increased mix. In addition, adverse foreign currency impact and higher relative mix of off-price sales led to the decrease. Moreover, adjusted operating loss as a percentage of sales came in at 2.6% in the quarter, versus operating profit margin of 2.2% delivered in the prior-year quarter. This was primarily due to lower sales and gross margin, despite flat operating expenses on a year-over-year basis.

Of late, Fossil is witnessing soft sales in the licensed watch portfolio and sluggish comparable store sales (comps) in the U.S. due to weak traffic. The company is also facing economic challenges in many of its key international markets. Notably, the company’s sales have lagged the same in eight of the past 10 quarters.

Though Fossil’s connected wearables and smartwatches are expected to gain momentum, the Watches category is likely to remain sluggish due to general weakness therein. We note that tech-enabled watches have been significantly affecting traditional watch sales. Increased competition from new entrants in the market and volatility in sales pattern is also affecting the segment. The company continues to expect weakness in this category.

Further, sales of leathers have persistently been weak as customer response to the assortment continues to put pressure on results. Higher promotional activity, primarily in the outlet stores and higher mix of lower-margin products along with unfavorable currency are also keeping margins under pressure.

Stocks to Consider

Investors interested in the broader retail space may consider Rocky Brands, Inc. (NASDAQ:RCKY) , The Children’s Place, Inc. (NASDAQ:PLCE) and Buckle, Inc. (NYSE:BKE) . While Rocky Brands and Children’s Place sport a Zacks Rank #1 (Strong Buy), Buckle carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

While Rocky Brands posted a surprise of 42.9% in the last reported quarter, Children's Place has a long-term earnings growth of 8.00%. Buckle has posted a positive earnings surprise of 6.25% in the last reported quarter.

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