Is a Successful Turnaround Still in the Cards for Fossil Group Inc?

By Motley Fool Staff Markets Fool.com

In thisMarket Foolerydiscussion, the castdigs into Fossil's (NASDAQ: FOSL)disappointing quarterly report. Watches are seeing little growth, and the company is struggling to develop the brand reputation that can give it some pricing power. Its big plan is to become a fitness wearable and smartwatch company, but these Fools are far from optimistic.

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A full transcript follows the video.

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This podcast was recorded on Feb. 15, 2017.

Mac Greer: Shares ofFossil down big onWednesday [stock has declined 15% since its earnings release]. When I think Fossil ...OK, I don't really think Fossil. But if I were to think Fossil, I think watches.

Jason Moser:Youdidn't get your wife something from Fossil for Valentine's Day, Mac?

Greer:What's the story here with Fossil, Jason?

Moser:Listen,leather accessories and watches andtchotchke, if that doesn't screamhuge market opportunity, Mac,I don't know what does. This is a business that has been in a lot of trouble here for a while. This isnothing new. I was looking at this back in May of 2016 because of some revised guidance to the downside that really took its toll on the stock. I think we're seeingmore of the same here. The bottom line is, retail is tough, but when you're in fashion retail andtchotchke fashion retail,I think it's even more difficult. There's certainly no real pricing power in that market.

And Fossil is not known for thataspirational brand that people will pay up for. So,I respect the fact that management isattempting to diversify the revenue streamssomewhat. They made an acquisitiona little while back to get someexposure to the connected fitness realm. I don't know that I necessarily look at that as the biggestopportunity, either. I mean, it wasMisfit,I believe, is the name of the company they acquired. If youlook in the release they just put out this morning, they say, "We'lldouble our efforts and wearables bylaunching over 300 SKUs,introducing newbrands to the platform and enhancing engineering toenable additional functionality and morestylish and slimmer cases."

Greer:You soundskeptical.

Moser:Well, I think there's reason to be skeptical. We've seenwhat happened withFitbit. We've seen aless than stellar response toother smartwatch products. I think it's fair to question this strategy. And I don't know that it's necessarily thesolution for this company. If youlook at the top line, it's going in the wrong direction. Margins,going in the wrong direction. This is not something that just happened overnight. It's been happening over the past seven years. I think investors would be very wise to avoid this one.

Greer:Andyou're not wearing a watch. David ...

Moser:I am wearing a watch. Not a smartwatch, though.

Greer:Oh, you are wearing a watch, sorry.

Moser:This is agift from my lovely wife when I turned 40.

Greer:You're old school, though. People aren't wearing watches as much, right?

Moser:Maybe not, yeah.I think that's the challenge. You either have your watch aficionados,people who like watches,who probably aren't really going to want to wear something like that,and you have people who don't wear watches at alland you have to convince them to put something on their wristand they're probably not going to, a la Mac Greer. Or,you have people who are looking for, maybe, adedicated fitness device,and I think there are more compelling options out there. So,these guys are fighting an uphill battle.

David Kretzmann:Apple Watch can get a bad rap,but since it came onto the scene a couple years ago, itstill captures over 50% market sharein the smartwatch category. And I think the Apple Watch Series 2 is really the crown jewelas far as smartwatches go.Anecdotally, it's interesting seeing Fitbit,Under Armour, and Fossil all getting crushed this quarter. Obviously, they're all inconnected fitness in a different way. But, yeah, I was out at CES earlyJanuary and Fossil wasone of the many connected fitness wearable device companies out there. Andthat's just a category that's getting very crowded,and it's hard to distinguish what's differentbetween what Fitbit, Under Armour, or Fossil are doing.

Moser:AndI'll tell you, just from my experiencein the golf business years ago,because part of what I did as a golf professional was run the golf shops,that's a retail businessand you have to basically stock it withthe stuff that people want. And there was a dynamic to it for thistype of stuff. It wasBrighton,most of the demand there on the club side was for Brighton keychains,watches, purses, things like that. There just is no pricing in this. I mean,inevitably, it all stayed on theshelves until Christmas time when we put everything on sale. So,it's just a really difficult market,and it's not terribly shocking to see Fossil having a tough time.

Kretzmann:I wouldn't rush to see it as a buying opportunity, either. The company is still producing agood amount of free cash flow. So, on the surface, you might be inclined to see this. Maybe it'll bounce back at some point. But revenue has dropped each year since 2014, and expenses have continued to go up, so you've seen margins get crushed. What really highlights it is, the earnings per share was$7.10 in 2014, and for 2017,management is guiding for earnings per share of ($0.50) to $0.20.

Greer:[whistles] That'squite a range.

Kretzmann:Things aregoing to get a lot worsebefore they get better, if ever.

Mac Greer owns shares of Apple.David Kretzmann owns shares of Under Armour (A Shares) and Under Armour (C Shares). Jason Moser owns shares of Apple, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of and recommends Apple, Fitbit, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Fossil Group, Inc. The Motley Fool has a disclosure policy.