In this Market Foolery discussion, the cast digs 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.

A full transcript follows the video.

This podcast was recorded on Feb. 15, 2017.

Mac Greer: Shares of Fossil down big on Wednesday [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: You didn'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 and tchotchke, if that doesn't scream huge 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 is nothing 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 seeing more of the same here. The bottom line is, retail is tough, but when you're in fashion retail and tchotchke 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 that aspirational brand that people will pay up for. So, I respect the fact that management is attempting to diversify the revenue streams somewhat. They made an acquisition a little while back to get some exposure to the connected fitness realm. I don't know that I necessarily look at that as the biggest opportunity, either. I mean, it was Misfit, I believe, is the name of the company they acquired. If you look in the release they just put out this morning, they say, "We'll double our efforts and wearables by launching over 300 SKUs, introducing new brands to the platform and enhancing engineering to enable additional functionality and more stylish and slimmer cases." 

Greer: You sound skeptical. 

Moser: Well, I think there's reason to be skeptical. We've seen what happened with Fitbit. We've seen a less than stellar response to other smartwatch products. I think it's fair to question this strategy. And I don't know that it's necessarily the solution for this company. If you look 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: And you'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 a gift 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 all and you have to convince them to put something on their wrist and they're probably not going to, a la Mac Greer. Or, you have people who are looking for, maybe, a dedicated 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, it still captures over 50% market share in the smartwatch category. And I think the Apple Watch Series 2 is really the crown jewel as far as smartwatches go. Anecdotally, it's interesting seeing Fitbit, Under Armour, and Fossil all getting crushed this quarter. Obviously, they're all in connected fitness in a different way. But, yeah, I was out at CES early January and Fossil was one of the many connected fitness wearable device companies out there. And that's just a category that's getting very crowded, and it's hard to distinguish what's different between what Fitbit, Under Armour, or Fossil are doing.

Moser: And I'll tell you, just from my experience in the golf business years ago, because part of what I did as a golf professional was run the golf shops, that's a retail business and you have to basically stock it with the stuff that people want. And there was a dynamic to it for this type of stuff. It was Brighton, 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 the shelves 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 a good 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's quite a range.

Kretzmann: Things are going to get a lot worse before they get better, if ever.