Fossil Takes Another Hit, Hopes Multiyear Plan Will Bring a Rebound

By Markets Fool.com

Watch maker Fossil Group (NASDAQ: FOSL) worked hard to build a high-quality reputation in the luxury retail market, and that served it well when the global economy was booming. That has changed now, though, and coming into Thursday's third-quarter financial report, Fossil investors once again had to deal with expectations for shrinking sales and earnings. Fossil did indeed post results that continued the discouraging trend lower for key financial measures, but the company hopes its multiyear profit improvement initiative will help it turn the tide.

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Let's take a closer look at how Fossil Group did and what's ahead for the watch maker.


Image source: Fossil Group.

Fossil can't get back on track

Fossil Group's third-quarter results were mixed in the eyes of most investors. Net revenue dropped 4% to $738 million, far from attractive, which was a little worse than those following the stock had expected. Net income plunged by more than two-thirds to $17.4 million, and that produced earnings of $0.36 per share. That was down sharply from year-ago levels, but it was still better than the consensus forecast among investors of $0.31 per share.

Taking a closer look at the numbers, Fossil can no longer fairly blame much of its difficulties on currency issues. Even after adjusting for translating foreign revenue and profits into U.S. dollars, adjusted sales were still down 4%. In fact, although a weak euro hurt Fossil's European performance, a strong yen actually helped its Asian results. Global retail comparable sales were down 3%, with only the Asian market posting positive comps. European comparables were flat, while the Americas saw declines.

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Once again, Fossil's weakest performance overall was in the Americas. Sales dropped 8% there, with the U.S. performance in particular bringing down the entire region. In Europe, sales also fell 7%, with Western European markets like France, Germany, and the U.K. holding back strong results in the Middle East and Eastern Europe. Asia was the strong performer of the group, posting 12% sales gains. Japan was actually relatively weak in the region, but South Korea, India, and China did well.

Looking at categories, Fossil experienced a reversal from past quarters. The typically weak watch segment actually held up the best, with sales falling only 2%. By contrast, leathers did the worst, with an 11% decline, and jewelry also posted double-digit percentage losses.

CEO Kosta Kartsotis didn't spend much time dwelling on the past. "With our third quarter behind us and our results in line with our expectations," said Kartsotis, "we've entered the fourth quarter well positioned with our new wearables in the marketplace, and by all measures, they're off to a great start." The CEO also noted that integration of the Misfit acquisition has gone well, putting Fossil in a better position to move forward and make a greater impact on wearable technology.

What's ahead for Fossil?

Still, Fossil knows it has to do a lot of work to take full advantage of future opportunities. Kartsotis described a new multiyear plan he believes will "reinvent Fossil Group" by envisioning "a comprehensive plan that will evolve our model and the way we work, the way we develop product, and the way we bring our products to market." Fossil expects the program to connect more directly with customers and increase efficiency while taking advantage of the company's size in the market.

Of more immediate importance was Fossil's guidance for the remainder of the year. The company said it expects sales to finish down 3% to 5%, producing adjusted earnings of $1.80 to $2.30 per share after adding back about $0.60 per share in restructuring costs. More immediately, Fossil's fourth-quarter results should include sales performance of between negative 2% and positive 4%, with adjusted earnings of $1.07 to $1.57 per share incorporating $0.38 per share from restructuring. Those earnings figures are considerably lower than the consensus forecast among investors, although it's not immediately clear how much investors might have incorporated one-time factors into their projections.

Fossil investors weren't entirely comfortable with that news, sending the stock down almost 3% in after-hours trading following the announcement. With so much riding on a long-term plan, it could take years for investors to see if Fossil can actually engineer a lasting turnaround.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Fossil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.