What the Smartwatch Trend Really Means for Watch Retailers

Although smartwatches are one of the hottest wearables in the market, it doesn't appear that they will have a lasting impact on the major watch makers.

Feb 5, 2014 at 3:19PM

Wearables should prove to be one of the hottest trends of 2014. The likes of Samsung has already made a splash in the watch space. One of the names that might feel the greatest pain from this new wearable space should be Fossil (NASDAQ:FOSL), as smartwatches are expected to eat into Fossil's market share.

However, investors might still be able to make money owning Fossil. Despite the threat of smartwatches, Fossil is turning itself into more of a lifestyle brand, which will appeal to a broader consumer base.

A number of opportunities lead to more growth
Another big driver for the watch makers will be a strong Chinese economy. It's no secret that China is the world's most populous country, but what is lesser known is that it has a rapidly rising number of middle class citizens. Meaning, more Chinese citizens will have more discretionary income. That's a good thing for companies selling discretionary items in the country, such as Fossil.

Fossil opened its first Fossil flagship store in Hong Kong during late 2013. Before that, Fossil snatched up Skagen for $231 million. The move helped position the company as an international brand, giving it an even greater presence in Europe and Asia. In early 2013, Fossil acquired Bentrani Watches, a Latin American distribution business, which gives Fossil the ability to ship to more than 15 Latin American countries.

Fossil has managed to post comparable-store sales growth in each of the last 20 quarters. This comes as its international business has shown impressive growth. The company can introduce new products and tap new retail outlets to drive sales higher. In addition to additional retail outlets, there's also its direct-to-consumer business. During the first part of 2013, Fossil launched Skagen jewelry. 

Where does that leave the competition?
One of the keys is that the watch market is fairly concentrated. Fossil owns a large part of the market, with another notable player being Movado Group (NYSE:MOV). Meanwhile, Coach (NYSE:COH) is also a player in the watch market, while also selling various other handbags and accessories.

Movado is a major watch seller and is launching a variety of new products to drive its sales growth. The company is a lesser-known name than Fossil, which is why it's looking to increase its marketing efforts. This includes advertising with fashion magazines and television commercials. It's also expanding its product lines, which includes an updated version of the Cerena brand, additions to ESQ One collection, and an extension in Mesh bracelets.

Coach is one of the top handbag makers which also sells watches. However, it is seeing an increased level of competition that has kept the stock down. This includes the fact that Michael Kors is taking market share from the handbag company. As a result, Coach has seen its North American market share take a hit. Yet, what's one of the biggest opportunities for Fossil, a rising level of consumer spending, will also be a benefit for Coach.

Coach has a strong brand, and it's looking to break into the men's accessory business. Coach trades at a forward 14 times earnings, but given the less-than-robust earnings growth expectations, it trades at a price-to-earnings-to-growth ratio of 1.9. Thus, it might be worth waiting for a pullback in Coach before investing.

Bottom line
Fossil remains a solid investment despite the worry that smartwatches might cut into its market share. It offers investors a decent 32% return on equity and trades at a relatively low price-to-earnings-to-growth ratio of 1.3. Fossil looks to be a solid investment opportunity as it continues to expand internationally.

On the other hand, Coach might be even less susceptible to the smartwatch movement, yet it is facing increased competition from Kors. And Movado trades a bit more expensive valuation than Fossil, with a 1.8 price-to-earnings-to-growth ratio. Fossil looks to be the best way to get exposure to the watch industry.

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Coach and Fossil. The Motley Fool owns shares of Coach. 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.

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