High-end retail has been going through some major competitive changes lately, and Fossil Group (FOSL +0.73%) has had to fight harder to sustain its position within the industry. With the holiday season behind it, Fossil had hoped to start 2017 on a positive note, with efforts to seek ways to recover from tough conditions and restore growth.
Coming into Tuesday's first-quarter financial report, Fossil investors were under no illusions that the retail company would be able to avoid sales declines or losses. But the extent of Fossil's poor performance was surprising, and investors now have to wonder whether a recovery can truly occur this year. Let's take a closer look at Fossil Group and what its results mean for its future.
Image source: Fossil Group.
Fossil again disappoints
Fossil Group's first-quarter results showed how the company is still struggling under the current conditions in the industry. Net revenue dropped 12% to $581.8 million, which was an even steeper decline than the 10.5% drop that most of those following the stock had been looking to see. The retailer reversed a year-ago profit with a net loss of $48.2 million, which worked out to $1 per share. Even after making some adjustments for one-time items, adjusted losses of $0.35 per share were still wider than the consensus forecast among investors.
Taking a closer look at Fossil's numbers, one interesting piece of news was that the impact of the strong dollar was much less significant during this quarter than we've seen in the recent past. Just $0.03 per share of downward pressure on earnings came from currency impact, according to Fossil, and sales would still have dropped by 11% in constant currency terms.
From a fundamental standpoint, Fossil is still in an extremely difficult situation. Global retail comparable sales figures were down 11% compared to the first quarter of 2016, accelerating from their pace of decline last quarter, and Fossil said that all of its product categories and all of its regions weakened. In the Americas, sales performance was the worst, falling 17% as declining demand for traditional watches outpaced the growth in connected watch sales. Leathers and jewelry were also under pressure, and the U.S. market drove the decrease across the region.
Meanwhile, Europe and Asia managed to hold up slightly better. European sales fell 7%, with currencies responsible for more than half of the drop. Leathers were the weak product on the continent, and drops in the U.K. and the Middle East outweighed growth in Spain. In Asia, sales were down 5%, with a flat jewelry segment unable to offset declines in leathers and watches. Weakness was concentrated in Japan and Australia, and growth in India and China wasn't enough to offset those declines.
Again, heavy promotions weighed on gross margin, costing the company three percentage points and taking the figure below 50%. Restructuring costs hurt operating income.
What's ahead for Fossil?
CEO Kosta Kartsotis was realistic in his assessment of how the quarter went for Fossil. "Our results for the first quarter, while largely in line with our expectations, continue to reflect a challenging retail environment and a watch category undergoing significant change," said Kartsotis. The CEO pointed to the need to capitalize on technology to keep up with the evolution of connected watches while still maintaining a fashion and high-end brand element to its offerings.
Fossil's guidance for the near future didn't inspire much confidence. Second quarter adjusted losses are likely to be between $0.23 and $0.40 per share. Net sales will once again decline by between 8% and 11.5%. Fossil also made revisions to full-year 2017 guidance, including revenue declines of 1.5% to 6% and an adjusted bottom line to be between $0.80 and $1.50 per share. That's down from the $1 to $1.70 per share in adjusted earnings that the company had expected previously.
Fossil investors were not happy with the results, and the stock quickly dropped 20% in after-hours trading following the announcement. Without more aggressive measures to boost its performance, shareholders appear to be losing hope that Fossil will be able to find a way to compete more effectively in the key watch category.
