While Apple (AAPL 0.64%) shareholders and fans eagerly await the release of the Apple Watch, Fossil Group (FOSL -1.43%) investors might be dreading that moment now slated for early 2015. That's because Fossil is highly dependent on sales of its watches. In the age of wearable technology, Fossil could be facing a dangerous scenario in which its most important product becomes obsolete. Obviously, Fossil can't afford to let this happen, and it's stepped up in a major way to assure it has a place in the world of wearable devices.
Here's why Fossil is still a strong company, and is on track to remain a major competitor even if smart watches take over the world.
Fossil has a plan
Fossil is a highly profitable, well-run business. Sales grew 10% last quarter, year over year, and earnings per share jumped 24%. Fossil increased sales across every operating segment, including watches, leathers, and jewelry. It might be easy to scoff at these numbers, because Fossil hasn't yet faced the release of the Apple Watch, which is scheduled for next year. And it's also true that Fossil is particularly at risk from smart watches, because traditional watches comprise 77% of Fossil's total revenue.
However, Fossil's industry leadership position is a signal that it won't just let its business be stolen away. Management has a plan for survival in the smart watch world. Fossil in September revealed a partnership with chip maker Intel Corporation (INTC -0.38%) to develop its own line of smart watches. The two companies will collaborate to identify and pursue opportunities in wearable technology. Fossil management hopes to produce a smart watch that leverages both its own brand strength in the existing watch industry as well as capitalize on Intel's dominance in the chip and processor industries.
This comes on top of a similar partnership Fossil announced with Google earlier this year. While nothing definitive has come out of that arrangement yet, it's nevertheless a good sign that Fossil is casting as wide a net as possible to pursue multiple opportunities. It's a hopeful sign that management is committed to innovation within the fashion industry.
Use the smartphone model as your guide
Eventually, I see the smart watch industry unfolding similarly to the current smartphone dynamic. Apple will continue to dominate at the high end, as it always has. I believe Apple's vision for its watches will be the same as its strategy for phones, which is to produce the best products, not necessarily the most products. Apple will most likely continue to reap the most profits from the smart watch industry. But that doesn't mean there isn't a place for competitors in watches at lower price points. Other companies in the smart watch business, such as Fossil and Intel, could easily carve out a slice of the pie for themselves. If wearables technology catches on, there should be more than enough room for multiple players.
Apple's reluctance to produce cheaper devices to lure in additional customers leaves the door open for competitors in the wearables space. Fossil hasn't brought a product to market yet, and it's going to take time. But there's a lot of potential for Fossil, particularly when it comes to sales of watches internationally. Fossil grew sales in North America last quarter by 6%, but sales in Europe were up 15% thanks to growth of watches and jewelry in the high teens, and up 11% in Asia-Pacific, thanks to double-digit growth in watches. Fossil's brand penetration, specifically in watches, is strengthening with each passing quarter in new markets.
The bottom line for investors is not to write off Fossil just yet. It would be easy to assume Fossil is dead in the water, based on fears that smart watches will soon make Fossil obsolete. But those fears are overblown. Fossil is in the early stages of partnering up with Google and Intel to develop Fossil-brand smart watches. If the technology is adopted as many expect, Fossil will most likely continue to be a major player.
