Will Smart Watches Attract Fashion-Savvy Consumers?

The quest by consumers for affordable fashion items with luxury labels has led to the popularity of designer-label watches. Fossil (NASDAQ: FOSL  ) , which is licensed to sell watches for Burberry, Marc Jacobs, and Michael Kors, has benefited from this trend. According to the Wall Street Journal, sales of these watches have driven growth at Fossil for the past few years.

However, the robust sales of its Michael Kors' watches could be losing momentum as Fossil reported flat sales at stores open at least one year. Sales did not rise for the first time in the last 20 quarters.

In direct competition with Fossil is Movado (NYSE: MOV  ) , which is licensed to sell Coach-branded watches. Coach watches tend to be more expensive than Michael Kors, but the company is working on adding styles with lower price points. The Coach brand was one of the reasons for Movado's strong second-quarter results for fiscal 2014.

While fashion watches seek to maintain their sales momentum, smart watches have entered the picture to gain their own piece of the market. These watches have features similar to those of a smart phone and companies like Samsung  (NASDAQOTH: SSNLF  ) and Qualcomm have added them to their pipeline of products. Samsung has already unveiled the Galaxy Gear, which has voice, email, and social media features. Should companies like Fossil and Movado be concerned by how consumers will respond to this new product?

Movado's licensed brands performing well
Movado's licensed brands, which include Coach, Tommy Hilfiger, Hugo Boss, and Lacoste, have grown 50% over fiscal 2012 and fiscal 2013. Movado's licensed brands segment made up 45% of revenue in fiscal 2013. Second-quarter U.S. sales in this category rose by $6.2 million, or 39.2%, over the same period last year. Second-quarter net income was $12.5 million, or $0.48 per diluted share, compared to $8.1 million, or $0.32 per diluted share in the second quarter of fiscal 2013.

Operating margin increased 320 basis points to 12.3% from 9.1% in the second quarter of 2012. As for the strength in the second quarter, Movado gives partial credit to the repositioning of the Coach brand to the fashion-watch category. Strong sales are expected to continue -- the year-end guidance was increased to $1.90 per diluted share for fiscal 2014, up from the previous forecast of $1.80.

Fossil has a thriving global watch portfolio
Fossil's wholesale net sales in the second quarter grew 4% in the North American segment to $10.5 million. Net sales in Europe and Asia Pacific rose more sharply by 16% and 14%, respectively -- $22 million in Europe and $14.9 million in Asia Pacific. The company's multi-brand watch portfolio led worldwide sales to rise 11.4% to $72.4 million.

Net earnings for the quarter were $67.7 million compared to $57.3 million last year. Diluted EPS rose 25% to $1.15, compared to $0.92 in the second quarter last year. Fossil's full year guidance expects net sales to increase by 11% to 12%, and operating margin should range between 16.75% and 17.25%. Diluted EPS for 2013 has an estimated range of $6.15 to $6.35.

Samsung's latest baby -- the Galaxy Gear
While fashion watches look to maintain their sales momentum, smart watches are currently in an "experimental stage," according to research firm Strategy Analytics. The firm reported in the Wall Street Journal that sales for 2013 could reach 1.2 million units and rise to 7 million in 2014.

J.K. Shin, Samsung's co-CEO, believes the Galaxy Gear could become "a new fashion icon." An interesting comment from a tech executive and a sign that, despite the product's technology focus, it will probably end up competing with designer-label watches.

The Galaxy Gear features a 1.6-inch screen, a basic camera, and the ability to connect to the Galaxy Note 3 smartphone via Bluetooth. The watch will allow a user to make calls, display messages, record videos, and take photos without the need to pick up their phone. Some tech insiders consider the watch's $299 price tag to be too high; mobile technology author Brian Proffitt mentioned to Reuters he has doubts about whether or not consumers will be willing to pay that much for hands-free capabilities.

Part of the watch's success will ride on the company's ability to increase sales of the Galaxy Note. Since the Note launched in 2011, Samsung has sold more than 38 million units--that's 28 million more than Note unit sales for 2012. The release of the Galaxy Gear is also meant to separate Samsung from the popular view that it lags Apple in innovation.

My Foolish conclusion
Genevieve Bell, an Intel researcher profiled in MIT Technology Review, believes that smart watches may take some time to register with consumers. This is because the industry hasn't figured out how this latest device will improve people's lives.

I agree with her assessment that these watches won't catch on unless consumers see a clear reason why they should buy. Accessing technology on a wearable device is not as groundbreaking as when consumers were introduced to the ability to make calls and surf the Internet from anywhere.

Wearable technology could be desirable in particular situations, but mass consumer adoption, if it happens, will probably take a while -- especially at the price-point the watches are selling for. Companies like Fossil and Movado will probably not see their designer-label watch sales affected by this new "fashion" accessory anytime soon.

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