Is Fossil Group, Inc.'s Luster Running Out of Time?

In the fast-changing world of fashion, it's hard to stay relevant. Many teen apparel retailers have experienced this, as they have seen their top lines dwindle as young consumers decide to shop elsewhere. Not only that, the rise of e-commerce means that mall traffic is generally on the decline, which makes it even more difficult to maintain sales volume. While Fossil (NASDAQ: FOSL  ) delivered an earnings beat in its most recent report, a lowered outlook sent shares skidding. Is the company becoming outdated?

All eyes on the outlook
An earnings beat isn't enough to guarantee positive stock market action following a report. Most investors seem to be paying particular attention to outlooks lately. The maker of watches and handbags reported EPS of $1.22, beating the analyst consensus by $0.04. Revenue beat as well, rising 14% year-over-year to reach $777 million versus analyst expectations of $772 million . However, it is important to note that reported net income fell 8% year-over-year .

Clearly, the EPS beat was not enough to convince investors, as a weak outlook weighed on sentiment. Versus a consensus analyst estimate of earnings of $1.16 per share for the second quarter, Fossil now expects to earn between $0.90 and $0.97 per share. Still, the company left its full-year outlook of $6.90 to $7.30 per share intact, which may now be a tough number to beat .

Let's take a look at some of the details from the report. Geographically, Asia did particularly well, with net sales increasing 23.6% driven mainly by strong demand for watches. Europe also did well with sales up 14.5%. Both of these figures are on a currency-neutral basis.

By brand, FOSSIL grew by 5% globally, with a double-digit increase in watches. SKAGEN sales were up 2%, with strong showings in Europe and Asia. According to management, the lower outlook for the second-quarter largely stems from a higher expense ratio related to investments in infrastructure and brand-building .

Losing market share?
According to analysts, Fossil is struggling to keep up with trendier and faster-growing affordable luxury companies like Michael Kors (NYSE: KORS  ) and Kate Spade (NYSE: KATE  ) . While the company does sell offerings from Michael Kors and is in fact achieving higher sales-growth rates with these licensed goods , consumers might be happier if they go to actual Michael Kors retail locations and this is costing Fossil business. Michael Kors is growing incredibly quickly, with revenue up by nearly 60% in its latest report, and still has only 9% market share in the luxury-handbag business. This growth must be coming at somebody's expense .

Kate Spade for its part just released some impressive figures. Direct-to-consumer comp store sales growth was a huge 22%, while Kate Spade segment sales were up 54%. Comparable adjusted EBITDA, which is currency-neutral and excludes Juicy Couture and Lucky Brand, more than doubled to $17 million. Moreover, with an estimated 0.4% of the global handbag market and only 170 stores, the chain has plenty of room to grow. Some analysts think Kate Spade is likely to be the next big thing in affordable luxury, comparing it to Michael Kors a while ago .

The bottom line
Fossil seems to be losing some of its shine, if its most recent figures are anything to go by. A weak outlook scared investors, sending the stock plunging. A large part of the problem is the fact that smaller, faster-growing competitors such as Michael Kors and Kate Spade are pinching away market share, and it is likely that this trend will continue. As such, Fossil will have to find ways to stay relevant in this shifting retail landscape.

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  • Report this Comment On May 22, 2014, at 11:34 AM, ElCid16 wrote:

    This may come as a surprise, but FOSL isn't a handbag company. Three-quarters of their business is selling watches.

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